Community Bank System, Inc. (NYSE:CBU) Q1 2023 Earnings Call Transcript

Community Bank System, Inc. (NYSE:CBU) Q1 2023 Earnings Call Transcript April 25, 2023

Community Bank System, Inc. misses on earnings expectations. Reported EPS is $0.11 EPS, expectations were $0.91.

Operator: Welcome to the Community Bank System First Quarter 2023 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. Please note this conference is being recorded. Today’s call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer.

They will be joined by Dimitar Karaivanov, Executive Vice President and Chief Operating Officer, for the question-and-answer session. Gentlemen, you may begin.

Mark Tryniski: Thank you. Good morning, everyone, and thank you for joining our first quarter conference call. certainly, has been an eventful quarter for the industry. I typically comment on earnings first, but it feels like I should start with the balance sheet. First off, the events of the weekend of March 10 had virtually no impact on us beyond the minimal level of customer inquiries. We proactively reached out to our larger consumer commercial and municipal customers with no movement at all in those deposits or relationships. Total deposits were actually up almost $100 million during the quarter, mostly CDs, with the mix otherwise being remarkably consistent. Our uninsured deposits are 17% of total deposits, and our average consumer and commercial account balances are 12,000 and $60,000, respectively.

We have no broker or wholesale deposits of any kind. We did need to move rates in the quarter, which raised our deposit funding costs up to 31 basis points. And as of the end of March, our full cycle deposit beta is 5%. Joe will speak further on this topic, but we have $4.7 billion of immediately available liquidity. Loan growth in the quarter was solid at $173 million, mostly business and auto lending, and asset quality remains exceptional. Earnings for the quarter were lower than we expected due mainly to expenses and the elimination of some retail fees, both of which Joe will discuss further. But year-over-year, we delivered greater net interest income and record revenues from our nonbanking businesses, which continued to grow despite capital market conditions.

Looking ahead, we think our funding and liquidity are really well positioned, and we have another $350 million of treasury securities maturing next month that will be additive to margin and earnings. We have one of the best deposit bases of any bank in the U.S. Our lending businesses are all executing really well, and we expect that to continue. Credit quality remains exceptional and our lending portfolios are highly diversified and highly granular, and our nonbanking businesses continued to grow despite market conditions. So, I think we are extremely well positioned for the future and expect our formats to reflect that regardless of the operating environment. Joe?

Joseph Sutaris: Thank you, Mark, and good morning, everyone. As Mark noted, fully diluted GAAP earnings per share were $0.11 in the quarter. This compares to a fully diluted GAAP earnings per share of $0.86 in the first quarter of ’22 and $0.97 in the linked fourth quarter of 2022. During the company strategically repositioned its balance sheet by selling available-for-sale investment securities with a market value of $733.8 million, the proceeds of which were used to pay down expensive overnight borrowings to provide the company with greater flexibility to manage balance sheet growth and deposit funding. In connection with the repositioning the company recognized a pretax realized loss on sale of $52.3 million, resulting in a $0.75 per share after-tax loss on the sale.

Excluding the loss on the sale of investment securities, acquisition-related expenses and gain on debt extinguishment, the company’s fully diluted operating earnings per share for the quarter was $0.86. This compares to $0.87 of fully diluted operating earnings per share in the first quarter of 2022 and $0.96 in the linked fourth quarter. The $0.01 decrease in operating earnings per share on a year-over-year basis was driven by a decrease in banking-related noninterest revenues, an increase in the provision for credit losses and higher operating expenses, partially offset by increases in net interest income, and financial services business revenues and decreases in income taxes and fully diluted shares outstanding. $0.1 per share decrease in operating earnings per share on a linked quarter basis was largely driven by an increase in operating expenses and lower deposit service fees.

First quarter 2023 adjusted pretax pre-provision net revenue per share, which is a non-GAAP measure as defined in our earnings release of $1.16 was up $0.04 as compared to the first quarter of 2022 and down $0.13 compared to fourth quarter of 2022. The company recorded total revenues of $124.5 million in the first quarter of 2023, a decrease of $36 million or 22.4% from the prior year’s first quarter. The decrease in total revenues between the periods was primarily driven by the previously mentioned loss on sale of during the quarter. Total operating revenues, which excludes net realized and unrealized securities gains and losses, and gain on debt extinguishment, were $176.6 million in the first quarter of 2023, an increase of $16.1 million or 10% from the prior year’s first quarter, driven primarily by an increase in net interest income.

Comparatively, total revenues were down $51.4 million or 29.2% from the fourth quarter of 2022 results, but up $0.7 million or 0.4% on an operating basis. The company reported net interest income of $111 million in the first quarter of 2023. This was up $16.2 million or 17% over the prior year’s first quarter. The company’s tax equivalent net interest margin increased by 47 basis points from 2.73% in the first quarter of 2022 to 3.20% in the first quarter of 2023. The tax filing yield on average interest-earning assets was up 82 basis points over the prior year’s first quarter, while the average cost of funds increased 35 basis points over the same period. Comparatively, the company’s net interest margin increased 18 basis points on a linked quarter basis, while net interest income decreased $1.2 million due in part to a lower day count in the quarter.

Excluding the impact of a loss on sold investment securities and the gain on debt extinguishment, noninterest revenues decreased $0.1 million between the comparable annual quarters, a $1.1 million increase in insured services revenues in the quarter offset by a $0.6 million decrease in banking-related revenues, a $0.2 million decrease in employee benefit services revenues and a $0.4 million decrease in wealth management revenues. The decrease in banking-related noninsurance revenues was driven by a decrease in debit interchange revenues and overdraft occurrences as well as the recent implementation of certain deposit fee changes, including the elimination of non-sufficient funds and available fund fees. Despite the organic growth in the employee benefits services in the place search business, excuse me, and Wealth Management businesses, revenues were down due to market-related headwinds.

On a linked-quarter basis, noninterest revenues, excluding the loss on the sale of securities and gain on debt extinguishment increased $1.9 million or 2.9%. And an increase in revenues in all three of the financial services businesses totaling $4.4 million or 10% was partially offset by a $2.6 million or 13.6% decrease in banking-related noninterest revenues. During the first quarter of 2023, the company recorded a provision for credit losses of $3.5 million, driven by a weaker economic forecast combined with $172.9 million increase in outstanding. Comparatively, the company recorded a provision for credit losses of $0.9 million during the first quarter of 2022 and $2.8 million in the fourth quarter of 2022. The company reported $114 million in total operating expenses in the first quarter of 2023 compared to $99.8 million in total operating expenses prior year’s first quarter.

The $14.2 million increase in operating expenses was primarily attributable to a $9.8 million increase in salaries and employee benefits and a $4.2 million increase in other expenses. The increase in salaries and employee benefits expense was driven by increases in merit, severance, and incentive-related employee wages, including minimal wage-related compression on the lower end of the company’s PayScale, acquisition-related and other additions is happening, higher payroll taxes and higher employee benefit-related expenses. Other expenses were up due to an increase in insurance costs, including larger FDIC insurance expenses higher professional fees, business development travel, and marketing expenses, along with incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition in the second quarter of 2022.

In comparison, the company reported $105.9 million of total operating expenses in the fourth quarter of 2022, an $8.2 million or 7.7% increase in total operating expenses between the fourth quarter of ’22 and the first quarter of 2023 was largely attributable to a $7.4 million 11.5% increase in salaries and employee benefits $0.7 million, or 5% increase in other expenses. For the remaining three quarters of 2023, management anticipates that total operating expenses, excluding any future acquisition activities, will remain generally in line with first quarter levels. Set another way on a full year — full calendar year-over-year basis, the company anticipates total operating expenses to increase between 5% and 9%. The effective tax rate for the first quarter of 2023 was 16.9%, down from 21.4% in the first quarter of 2022.

excluding the impact of tax benefits related to stock-based compensation activity. The effective tax rate was 21.4% in the first quarter of 2023, down from 22.3% in the first quarter of 2022. The company’s total assets were $15.26 billion at March 31, 2023, representing a $369.9 million or 2.4% decrease from one year prior and a $579.7 million or $3.7 million decrease from the end of the fourth quarter of 2022. The book value of average interest-earning assets decreased $662.1 million or 4.5% during the first quarter due primarily to a decrease in the average book value of the investment securities, partially offset by higher average loan balances. At the end of the quarter, the book value of interest-earning assets was $14.03 billion, comprised of $8.90 billion of loans, $5.02 billion investment securities, and $28 million of cash equivalents.

Ending loans increased $1.56 billion or 21% over the prior year and $172.9 million or 2% during the quarter. The increase in ending loans year-over-year was driven by increases in all loan categories due to net organic growth in the Elmira acquisition. Increased loans outstanding on a linked quarter basis was driven by a $102.3 million or 2.8% increase in business lending at $70.7 million, a 1.4% net increase in the company’s consumer loan portfolios. The company’s liquidity position remains strong. The company’s funding base is largely comprised of core noninterest-bearing demand deposit accounts and interest-bearing checking, savings, and money market public accounts with customers that operate reside, or work within our branch footprint.

At March 31, 2023, the company’s readily available source of liquidity totaled $4.69 billion, including cash and cash equivalent balances net of float of $109.7 million, $1.54 billion of funding availability at the Federal Reserve Bank discount window, $1.84 billion of unused borrowing capacity at the Federal Home Loan Bank of New York and $1.2 billion of unpledged investment securities that could be pledged as collateral for additional borrowing capacity. These sources of immediately available liquidity represent over 200% of the company’s noninsured deposits and net of collateralized deposits, which are estimated at $2.3 billion. The company’s ending total loans were up $98 million from the end of the fourth quarter or approximately 1%. And deposit base is well diversified across customer segments comprised of approximately 63% consumer balances, 25% business balances, and 12% municipal balances and broadly dispersed with average consumer deposit account balance of $12,000 in average business deposit relationship of approximately $60,000.

The company’s cycle-to-date deposit beta is 5%, reflective of a high proportion of noninterest-bearing deposits, which represent 30% — over 30% of total deposits and composition and stability of the customer base, while the cycle-to-date total funding beta, 7%. At the end of the quarter, 74% of the company’s total deposit balances were in checking and savings accounts and the weighted average age of the company’s non-maturity deposit accounts is approximately 15 years. The company does not currently have any brokered or wholesale deposits on its balance sheet. The company’s loan-to-deposit ratio at the end of the first quarter was 68.5%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans.

In addition, during the remaining three quarters of 2023, the company anticipates receiving over $600 million of investment security crystal cash flows to support its funding needs. At March 31, 2023, all the companies and the bank’s regulatory capital ratio significantly exceeded well-capitalized standards. More specifically, the company’s Tier 1 leverage ratio was 9.06% on March 31, 2023, with substantially exceeds the regulatory well-capitalized standard of 5%. The company’s net tangible equity to net tangible assets ratio was 5.41% on March 31, 2023, up 77 basis points from the end of the fourth quarter of 2022. During the first quarter, the company repurchased 200,000 shares of its common stock pursuant to its port-approved 2023 free stock repurchase program.

And, March 31, 2023, the company’s allowance for credit losses totaled $63.2 million from 0.70% of total loans outstanding. This compares to $61.1 million or 0.69% of total loans outstanding at the end of the fourth quarter of 2022 and $50.1 million or 0.68% of total loans outstanding at March 31, 2022. During the first quarter of 2023, the company reported net charge-offs of $1.5 million or 7 basis points of average annual loans annualized. This compares to 3 basis points of annualized net charge-offs in the first quarter of 2022 and 9 basis points in the quarter of 2022. At March 31, 2023, nonperforming loans totaled $33.8 million or 0.38% of total loans outstanding, loans 30 to 89 days for delinquent or 0.35% of total loans outstanding at March 31, 2023, down from 0.51% at the end of the fourth quarter of 2022.

We believe the company’s strong liquidity profile, capital reserves, core deposit base, asset quality, and revenue profile provide a solid foundation for future opportunities. Looking forward, we are encouraged by the momentum in our business. The company continued to organically grow its loan portfolios and asset quality remains strong. The company’s granular Main Street focused deposit base and strong liquidity profile are expected to support future growth in our banking business. In addition, new business opportunities in the financial services businesses remained strong. Thank you. I will now turn it back to Daniel to open the line for questions.

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Q&A Session

Operator: . The first question comes from Alex Twerdahl from Piper Sandler. Please go ahead.

Alex Twerdahl: Good morning. First off, can you just elaborate a little bit on what you did with the NSF fee this quarter and whether or not that $16.2 million is the right run rate for deposit service fees over the remainder of the year?

Joseph Sutaris: Yes. So late in the fourth quarter and also, I guess, really kicking in, in the early part of the first quarter. We made some changes, particularly on NSF and unavailable fund fees. Our expectation on a full-year basis is that we’ll effectively reduce overall deposit service fees by $6 million to $8 million. Also, in the first quarter, Alex, we just have lower occurrences of overdraft fast, and just typically deposit service fees are down a bit in the first quarter as compared to the fourth quarter. So, that run rate that we have in the first quarter is potentially just slightly below expectations for the next three quarters because typically, the first quarter is a little bit slower in terms of debit interchange and overdraft occurrences. But on an annualized run rate basis, we expect the changes will effectively reduce fees by $6 million to $8 million.

Alex Twerdahl: Okay. Thank you. And then can you give us a little bit — you said $600 million of cash flows from the securities portfolio over the course of the year. I think Mark mentioned $350 in May. Can you give us the timing of the remainder of that as well as expectations for deposits? I know municipal deposits tend to come in the first quarter, how much we expect to flow out in the second quarter and whether or not — what your kind of seeing underlying there that maybe just to give us a little bit more expectations for overall liquidity management over the next couple of quarters?

Joseph Sutaris: Yes. So, the $350 million, as Mark mentioned, matures in the middle of May. So, we do expect that, that’s a treasury security, so it’s going to happen. We have another $150 million in mid-August, also treasury security. Those two pieces comprise the lion’s share of the $600 million, the other, call it cash flows come out happen throughout the year, basically mortgage-backed security principal repayments. On a blended basis, those two treasury securities are coming off at about a 2.5% yield. So, we do expect to be able to redeploy those proceeds to either pay off overnight borrowings. Should we see some drift down in the deposit base or potentially that could be redeployed into long growth if that opportunity is there?

So, we do expect some, call it, NII pickup net interest income pickup on maturities, Alex. With respect to deposit flows, we typically do see an increase in municipal flows in the first quarter. As we talked about tax collection cycles in New York State, that typically is a couple of hundred million dollars on a net basis in the quarter, and we do typically see those flow out. throughout most of the second quarter. And then we kind of sometimes trip down a bit in the third quarter. Another $100 million or so, and then tax collection occurs in September again for the — districts, and we see kind of a lot of that restore in going into the late part of the third quarter and into the fourth quarter. With respect to IPC deposits, I think we’re just sort of seeing the results of kind of the overall M2 supply, which are reflective of the M2 money supply going down.

And I think the entire industry is seeing flow out of the deposit balances. And I think that’s kind of what we’ll probably have across the industry and potentially to us as well.

Alex Twerdahl: Great. Thanks for taking my question.

Operator: The next question comes from Steve Moss of Raymond James. Please go ahead.

Steve Moss: Good morning. Maybe just starting on loan pricing here and loan growth, good loan growth in the quarter. Just curious what are the yields you’re seeing these days? And let’s just start there.

Dimitar Karaivanov: So, Steve, it’s Dimitar. In the first quarter, we blended to about 6.3% yield on originations. I think if you look at — by various buckets, as we sit here today, commercial is kind of in the mid-to high 6s in the auto business were 7% right now. In mortgage, obviously, it depends on what happens with aggregate rates but that has been kind of in the 6% to 6.5% range. So, we have not seen much movement. I think in the second quarter so far, with that said, there were a couple of interest rate but one hike in the first quarter that we didn’t get the full benefit of because it was at the end of March, and potentially a lot of hike next week. So, some of the loans that we have tied to Prime should drift up. So — but kind of that range 6s, I think, is a decent proxy for Q2.

Steve Moss: Okay. That’s helpful, Dimitar. And then in terms of just the margin, you have a lot of balance sheet movement here during the current quarter and obviously, upcoming with the treasuries maturing. Just kind of curious, maybe you have a spot margin at quarter end, and kind of how you’re thinking about margin trends for the second and third quarters?

Joseph Sutaris: So, we actually, Steve, the month of March was our highest net interest income our existing month on record. So, we kind of saw a peak NII at the end of the quarter. So, if you think about the catalysts for NII for the balance of 2023. And really, if you look at kind of the second quarter because it’s a little bit difficult to make the call relative to the third and fourth quarter because of the potential funding costs. But if you look at the next quarter, we had the securities maturity of $350 million, which that’s maturing at about $240 million. So that’s going to be led in titer loans or to pay off overnight borrowings. We have a couple of extra days of interest-earning days in Q2, which is helpful as well.

We also have all replacements, right? So, we have about $350 million that’s maturing. And if that’s just replace it, we don’t simply we don’t grow we just replace what’s coming off. We’re picking up about 175 basis points on the replacement yields. So that’s a catalyst for NII. As Dimitar mentioned, we also have an increase in prime that really didn’t catch, if you will, in the first quarter, which we’ll see that in the second quarter. In the next 90 days or so, we have about $850 million of loans that are going to reprice. There’s another roughly $1 billion beyond that. The balance of the first 90 days, there’s about $850 million that’s going to reprice. So that’s helpful. And then, of course, there’s potential for additional loan growth in the quarter.

So, this catalyst on the interest income side, obviously, the question around the cost of funds and cost of deposits remains to be seen. And I would just say that we do have a really strong core deposit franchise. But the rate increases were so rapid in 2022, there’s going to be some necessary increases in funding costs in 2023 as we sort of catch up to some of the changes that were made on prime and Fed funds and the short end of the curve. So, I think there’s going to be a little bit of catch-up. In other words, I don’t believe that our deposit beta will stay at 5% for the full cycle, it’s simply going to accelerate. And I think it has. And I think the whole industry has seen that happen in the last couple of quarters.

Steve Moss: Right. Okay. That’s helpful. And then just on expenses here. Just on the drivers of the increase in compensation expense here. I hear you guys on the full year, relatively stable versus this bounce. Maybe just a little bit of color. I’m not sure if I missed it. Thanks.

Joseph Sutaris : Yes. So, Steve, probably could have spoken, I guess, more directly about first quarter results on the last quarter’s conference call. But our typical pattern is to see a significant increase in expenses in Q1 and part of that is we provide our merit increases across the board in Q1. Other companies might feather them out throughout the year. We typically do it in the first quarter. Along with that comes higher bank expenses, we had some severance expenses in the quarter around salaries. We did have wage pressures, particularly on the lower end, which — there’s a compression component to that, which pushes up the lower end of our pay scale. So, some of that effectively is, I’ll call it, embedded in the future run rate on salaries, but there’s also components that effectively are higher in the first quarter.

So, our expectation is that all-in on operating expenses that we would expect the next three quarters to be line with first quarter, most of our increase is absorbed in the first quarter. We also have some other expenses around just facilities costs, given our climate like in the first quarter that typically we don’t see in the following quarters. So, there’s a couple of items that contribute to just a higher OpEx line in Q1, but we do expect that basically off for the balance of the year. If you look at a full year-over-year basis on operating expenses, our expectations are somewhere between, call it, 5% and 9%, full year ’23 basis versus a full year ’22 basis.

Operator: The next question comes from Daniel Novas of DA Davidson. Please go ahead.

Unidentified Analyst : Hey, good morning, gentlemen. Filling in for Manuel today. I have a few questions on loan growth outlook and pipeline. So first up, just loan growth outlook of mid-single digit still hold from last quarter, especially after the balance sheet repositioning, has there been a change of mindset. Just want some color on that, please?

Joseph Sutaris : Yes. I believe that our expectations are the same, which is mid-single digits for loan growth what I think is a favorable change for us is just a competitive dynamic, which driven by the environment, a number of our peers are tougher spot, strong balance sheet perspective and their ability to service customers. So, we’re seeing higher quality opportunities at substantially better rates than maybe what we expected at the beginning of the year. I don’t think that we expect to do a lot more than will be communicated before, but I think better quality of better rates is what we’re striving for right now. So that guidance is still intact.

Unidentified Analyst : Great. Thanks. Could you also talk about your pipeline? And also, some color on your auto portfolio, any credit issues or anything like that, that we need to be aware of?

Dimitar Karaivanov : Sure. So, on the pipeline, if you look at our commercial pipeline, still very strong, a little bit lower than they were kind of at the end of the fourth quarter, as we would expect, given the market environment but still very strong compared to our historical. And again, that is a reflection on competitive dynamics and our retooling of the company over the past 18 months in terms of capabilities and people. On the mortgage side, similarly, I think we’ve communicated that we spent a lot of time and efforts, and money in retooling our go-to-market strategy. That’s paying off dividends. In fact, last week’s mortgage applications were higher than a year ago’s week, which is a nice change in trend, given everything that’s happening in the mortgage market.

So, our, kind of efforts there paying us as we expected that portfolio will grow as well. Auto is a little bit more of a wildcard from quarter-to-quarter. We probably didn’t expect the stronger growth in the first quarter as we got in that portfolio. But again, writing the same type of credit, 750 average FICO very appealing loan to values and better rates virtually every month. So, like I said, we’re roughly at 7%. So that risk reward and that paper right now is pretty good. As it relates to asset quality, maybe kind of starting backwards from auto our charge-offs this quarter were about 30 basis points, which is right in the historical range of our loss experience in auto. Again, this is 755 Fico super prime paper basically. We expect that it’s going to be somewhere in that range for the rest of the year.

Mortgage, virtually no charge-offs, very little below historical averages. We expect that to maybe normalize. Again, we’ve been talking about normalization for a while. We’re planning for that. You’re seeing us provision a little bit more ahead of that. But so far, no stresses on the consumer side. And commercial, I mean, we’re basically at 0 in terms of losses right now. We had a recovery in the prior quarter, I believe. So, the going is pretty good. We’re very vigilant around it. We ask ourselves multiple times a week what’s happening with credit, we’re proactively staying in front of our borrowers. But right now, credit quality is as good as we would want it to be.

Unidentified Analyst: Great. Thanks for taking my questions.

Operator: The next question comes from Matthew Breese of Stephens Inc. Please go ahead.

Matthew Breese : Good morning, everybody. I was hoping to start on deposit costs, get a sense for where we exited the quarter in terms of overall deposit costs. And Joe, I know you’d mentioned that expectations are not for a full cycle, 5% deposit beta, but would love some thoughts or color around where you think you might end up?

Joseph Sutaris : Sure, Matt. So, we did exit the quarter with deposit funding costs 38 basis points. So, we have seen some acceleration in terms of deposit costs increasing. With respect to margin in NII, I think expectations is that we’ll see — we have a couple tailwinds for Q2. So, I would expect that we’re going to see a better outcome in Q2, albeit maybe a marginally better outcome, and then in Q4, we’ll see. But in terms of a full cycle beta, it’s not unreasonable to expect that if we have a 500-basis point increase on the short end of the curve, that ultimately, our deposit beta is 23% of that or more when we’re through the full cycle full cycle beta, which I think would significantly outperform the industry. But I think those expectations are not unreasonable.

Dimitar Karaivanov : Yes. Okay. To add to that, if you look at — I mean, we look at all of our peers reporting and kind of across the country, I think if you had a list of betas and deposit costs right now, we would back up on a very short list. So, we expect that we’ll continue to be on that short list going forward. If you look at the underlying dynamics, the — a lot of the personnel deposits are basically remixing into cities. They’re not necessarily leaving the bank. They’re just remixing into cities the commercial deposits, you’ve seen some drawdowns there for people using cash projects, pay taxes, which happens kind of in the first part of the year. So that’s been a little bit more of the negative drawdown that doesn’t stay with us.

But as businesses money over the year. Hopefully, those balances are going to grow. And then on the public side, we’ve talked about the seasonality. So, it’s a little bit hard to figure out what the ultimate through the cycle cost is, but there’s a lot of moving pieces to it. And as Joe said, it’s not going to be 5%. We hope it’s less than 20%. But we’re trying to be as proactive as we can and continue to be on the very short list of banks with extraordinary deposit bases in the United States.

Matthew Breese : Understood. There’s 200,000 shares repurchased for the quarter. Obviously, like so many other banks in the industry, the stocks down a bit, but your capital levels are improving, and it seems like fingers crossed with the repositioning some of the worst of the AOCI stuff is behind us. Share repurchases on the radar in a more aggressive fashion than we’ve seen you do historically.

Joseph Sutaris : Yes, Matt, I wouldn’t say terribly more aggressive than we’ve done historically. We typically try to at least repurchase the shares that are issued in our equity plans. So, I would — for the balance of the year, maybe $0.5 million or less in terms of total shares, that would be repurchased over a 200,000 ounce, potentially another $300,000 throughout the year. I mean that could change later in the year, but right now, that’s — I think would be on the high end of our expectations.

Matthew Breese : Okay. Maybe just turning to M&A. Obviously, it feels like the banking industry is everybody is a bit inward focused right now. But do you have expectations that M&A picks up in the back half of the year on the back of all this? And how do you feel about your ability to participate in that? And would you.

Mark Tryniski : Yes, I think it’s hard to handicap right now, what the remainder of the year brings just current uncertainty in the environment, not just industry uncertainty, but macro uncertainty as well as it relates to just overall interest rates and GDP and inflation, all those kinds of things that can just affect how people think about M&A. So, I think it’s relatively quiet right now for the most part, we’re certainly always interested in partnering with other organizations that have value assets to us. I think that the recent events in the industry would suggest that there’s going to be a separation between companies with good balance sheets and more challenging balance sheet. We certainly wouldn’t be motivated to partner with someone that would dilute the quality of our balance sheet, but also our strategy hasn’t changed at all in terms of high-value M&A opportunities.

I will say that we’re focusing a fair bit on the non-banking businesses. we think there’s — continues to be really good opportunity is a significant part of the strength of our company and our future in terms of strategic capital allocation. So, we’re pretty active on the non-bank space. again, on the bank side, it’s been relatively subdued. We continue to have conversations with other banks that we have potential interest in. But I think the environmental uncertainty makes it very difficult right now. I mean, you start the valuations are down across the industry, including us. And it just makes I think putting a deal together that much more difficult, principally from the seller’s perspective in terms of expectations around valuation. So, we continue to be interested, strategy hasn’t changed.

We’re really trying to focus heavily on the non-bank side of the businesses where we have critical mass wealth, we have critical mass and benefits. We have critical mass and insurance. we’ll continue to invest in those businesses potentially at even a faster pace in terms of capital allocation than the banking segment.

Operator: The next question comes from Eric Zwick of Hovde Group. Please go ahead.

Unidentified Analyst : Hey, good morning guys. Mark on for Eric today. I think most of my questions have already been answered, but just a quick one, and apologies if I already missed it. But did you have an average price per share on the buyback this quarter?

Joseph Sutaris : Yes, it was just about $54.

Unidentified Analyst: Okay, great. Thanks, I appreciate it.

Operator: The next question comes from Chris O’Connell of KBW. Please go ahead.

Chris O’Connell : Good morning. I appreciate all the color you guys have given around kind of NII and the impacts from securities maturing over the next couple of quarters here. Given you guys have a good amount of aim to kind of defend the margin into 2Q and 3Q, I mean how are you guys thinking about where the eventual margin begins to settle out as we get toward 4Q or year-end post some of those kind of balance sheet opportunities?

Joseph Sutaris : Yes, Chris, that’s — I mean, it’s a difficult question to answer because it really comes down to the funding beta. I think we have a pretty good line of sight on sort of what happens on the asset side. apart, given our loan growth and call it the replacement rate of maturing loans the funding side is a bit of the wildcard. I mean right now, we’ve had about $13.5 billion in funding between deposits and borrowings. And the question is, does that go up 10, 20 or 30 basis points throughout the year. And I think that’s — as we get deeper into Q2 and into Q3, we’ll kind of see where the market settles out. But that’s a pretty tough call for Q4. I would not expect that the industry will see, I’ll call it, significant margin expansion by Q4.

In fact, I probably would think the industry might actually drift down in terms of margin by Q4. But I think we might do a little bit better than the industry given our locking base. So, I’m not sure we can make a call on Q4 at this point.

Chris O’Connell : Got it. And for the borrowings, you guys have kind of on balance sheet right now. Is that mostly overnight? If not, what is the duration of those? And just noticed maybe due to timing or whatever, but the yield is fairly low on those — or the cost is pretty low on those borrowings for the quarter? Or was that just kind of a timing issue?

Joseph Sutaris : Yes. We have — at the end of the quarter, we had about 50 — I think it was $58 million in overnight borrowings. Well, Chris, we also carry typically over $300 million in customer repurchase agreements, there are class of as borrowings, they’re more akin, quite frankly, to deposits. And most of that’s in our Vermont New England footprint a fair number of municipal customers, some commercial customers. But for the most part, we kind of look at that portfolio as something more akin to deposits. So, it’s a bit more rate sensitive than demand deposits, but also wouldn’t match necessarily ordinate borrowing costs. So, a fair amount of our borrowings are tied up in customer repurchase agreements.

Chris O’Connell : All right. That makes sense. And for the CDs that you guys are putting on, what are the rates that those are coming out?

Dimitar Karaivanov : So, Chris, on the CD side, I think we’re right around 4% right now on kind of probably published in blended rates in some markets a little bit lower and some markets are little bit higher.

Chris O’Connell : Okay, thanks. And then just — I know you guys touched on it earlier, but I mean is there any areas that you guys are starting to see any types of credit stress or that you guys are kind of pulling back on that growth that is starting to concern you within your overall markets? Or is the outlook kind of still cautiously optimistic here for the near-term future?

Dimitar Karaivanov : Chris, I wouldn’t say any sort of stress. I would say we’re just being a little bit more vigilant around the sectors you would typically think about, like commercial real estate resets and ability to stress test for rates. With that said, the new paper that’s coming in, you could argue if you’ve got 1.3, 1.4 coverage on rates in the seventh pretty good stress test on day one for those customers. But we’re looking at those that are resetting a little bit tighter, paying a little bit closer attention to the indirect paper as well. Again, right in the middle of historical ranges. We don’t necessarily expect that to change much, but we’re just being a little bit more vigilant around trends and making sure that we’re not seeing anything worse on which we’re not right now.

Chris O’Connell : Great. And last one for me. Just what’s a good go-forward tax rate?

Joseph Sutaris : Similar, Chris, between 21.5% call it, low 22s, so 22.5% — 21.5%, 22.5% is probably a fair range to expect on a go-forward basis.

Chris O’Connell: Great. I appreciate the time. Thanks for taking my questions.

Operator: This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Tryniski for closing remarks.

Mark Tryniski : Thank you. Nothing more from our end. Thank you all for joining us, and we’ll talk again after the end of Q2. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.