Community Bank System Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2023

There are 8 speakers on the call.

Operator

Welcome to the Community Bank System 4th Quarter and Full Year 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 and fees that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's in the Annual Report and Form 10 ks filed with the Securities and Exchange Commission. And may be a question and answer session.

Operator

Please also note that this call is being recorded today. Today's call presenters are Mark Chernisky, President and Chief Executive Officer and Joseph Suterres, Executive Vice President and Chief Financial Officer. They will also be joined by Dimitar Karavanov, Executive Vice President and Chief Operating Officer for the question and answer session. Gentlemen, you may begin the call.

Speaker 1

Thank you, Joe. Good morning, everyone, and thank you for joining our year end conference call. We hope everyone is well. Earnings for the quarter were very good. In fact, our best quarter ever ex reserve releases last year.

Speaker 1

We reported record revenues, record PPNR and record GAAP EPS ex acquisition expenses. Loan growth was very strong across all our Portfolio is up 12% annualized over the Q3 and the deposit base remains sound with respect to retention and rate. Joe will comment further on the quarter, but it was a good one. Looking at the whole of 2022, we likewise had a record year, not just

Speaker 2

financially, but for our commercial mortgage

Speaker 1

and installment lending businesses as well. But for our commercial mortgage and installment lending businesses as well. Investments we made over the past 18 months, particularly in our commercial and mortgage businesses have proven fruitful. The commercial business grew organically 18% in 2022. The mortgage business was up 7% and the installment business grew at 28%.

Speaker 1

Our non banking businesses also had significant organic growth, but were negatively impacted by the market and the results of the company's earnings were up 17%. Our Wealth business, which is entirely levered to the market, was only down 4% against the market that was down 19.5% and our benefits business, which is about half levered to the market actually grew 1%. So these businesses had a fabulous year despite the market and at this point are a coiled spring for the future. Looking ahead to the remainder of the year, we expect to execute well across all of our businesses. A significant focus will be on funding.

Speaker 1

We have $800,000,000 of overnight borrowings, which is not ideally where we want to be when we also have $5,000,000,000 in lower yielding securities. We will continue to invest in digital and rationalize analog as we did this past year with the consolidation of 12 retail branches, bringing the total over the past 3 years to 15% of our total network. Excluding acquisitions, we have fewer FTEs than we did in 2021. We implemented new commercial and cash management platforms. Our operation teams are working to implement workflow automation that is expected to save up to 60,000 hours of manual effort.

Speaker 1

So we are focused across the company on technology solutions for our customers and for our operating efficiency. Lastly and most important, we have the best talent this company has ever had and so we'll continue to get better in everything we do, particularly as we also now have the products, technology and service capacity and compete very effectively with the larger banks across our markets. This has created significant new organic market opportunity for us that we have not previously possessed. In summary, it was a great quarter, it was a great year. We're exceptionally well positioned and we look forward to 2023.

Speaker 1

Joe? Thank you, Mark, and

Speaker 3

good morning, everyone. As Mark noted, the company's 4th quarter earnings results were solid with fully diluted GAAP earnings per share of 0.97 and fully diluted operating earnings per share of $0.96 GAAP earnings per share were up $0.17 or 21.3 percent over the Q4 of 20 21, while operating earnings per share were up $0.15 or 18.5 percent over the same period. The improvement in operating results was largely driven by a significant improvement in the company's net interest income and a decrease in weighted average shares outstanding between the period, offset in part by a small decrease in non interest revenues and increases in operating expenses, the provision for credit losses and income taxes. On a full year basis, fully diluted GAAP earnings per share were down $0.02 per share or less than 1%, while operating earnings per share were up $0.09 or 2.6 percent despite a $23,600,000 or $0.34 per share increase in the provision for credit losses and a $15,400,000 or $0.22 per share decrease in PPP related revenues. Adjusted pretaxpreprovisionnetrevenue or adjusted PPNR per share, which excludes from net income the provision for credit losses, Acquisition related expenses, other non operating revenues and expenses and income taxes was $1.29 in the Q4 of 2022, up $0.20 or 18.3 percent over the prior year's Q4.

Speaker 3

Adjusted PPNR per share was also up of $0.04 or 3.2 percent over the linked 3rd quarter result of $1.25 On a full year basis, adjusted pretax pre provision net revenue was up $0.50 or 11.7 percent from $4.28 in 2021 to $4.78 in 2022. The company recorded total revenues of $175,900,000 in the Q4 of 2022. This was up 16 point $3,000,000 or 10.2 percent over the prior year's Q4 and establish a new quarterly record for the company. Net interest income increased $16,500,000 or 17.2 percent over the prior year's Q4 due to market interest related tailwinds, strong loan growth and investment security purchases between the periods, while non interest revenues decreased $200,000 to 0.4%. The company's average interest earning assets increased $905,500,000 or 6.5 percent, of 3.02% in the Q4 of 2022.

Speaker 3

Net interest income was also up 1 point and over the linked 3rd quarter results, while the tax equivalent net interest margin decreased 1 basis point. Although interest Expense was up $8,800,000 over the prior year's Q4. The company's average cost of funds was up just 24 basis points from 9 basis points in the Q4 of 2021 to 33 basis points in the Q4 of 2022. Given a 425 basis point cycle to date increase in Federal funds rate, this represents a total funding beta of 6%. Similarly, the company's average cost of deposits for the quarter remained low at basis points representing a cycle to date deposit date of 2%.

Speaker 3

The $200,000 or 0.4 percent decrease in non interest revenues Between the comparable annual quarters was driven by a $2,600,000 or 5.6 percent decrease in the financial services business revenues offset in part by a $2,400,000 or 14.5 percent increase in banking non interest revenues. Despite organic customer growth in in 2022 employee benefit services revenues were down $1,400,000 or 4.5 percent due to a decrease in asset based and employee benefit trust and custodial fees. Wealth Management Insurance Services revenues were down $1,200,000 or 7.5 percent due to primarily to challenging investment marketing conditions. The increase in banking non interest revenues was driven by an increase in deposit service fees. The company reported $2,800,000 in the provision for credit losses in the 4th quarter, reflective of strong loan growth and a weaker economic forecast.

Speaker 3

This compares to a $2,200,000 provision for credit losses recorded in the Q4 of 2021. On a full year basis, the The company reported $14,800,000 in the provision for credit losses, reflective of $1,440,000,000 of loan growth in 2022, The Almiras Savings Bank acquisition and weaker economic forecast. By comparison, the company recorded an $8,800,000 net benefit in the provision for credit losses in 20 21 due to an improving economic outlook as the country rebounded from the pandemic. The company reported 105 $900,000 in total operating expenses in the Q4 of 2022 compared to $100,900,000 of total operating expenses in the prior year's Q4. The $4,900,000 or 4.9 percent increase in operating expenses was driven by increases in salaries and employee benefits, data processing and communication Expenses, occupancy and equipment expenses and other expenses offset in part by lower acquisition related expenses.

Speaker 3

The $1,000,000 1.6 percent increase in salaries and employee benefits expense was driven by increases in merit related employee wages, acquisition related additions to staff and higher payroll taxes, offset in part by lower incentive compensation and employee benefit related expenses. The $800,000 or 5.8 percent, 5.9 percent increase in data processing, communication expenses with Digital Companies continued investment in with customer facing and back office digital technologies between the comparable periods. Occupancy and equipment expense increased $900,000 or 8.9 percent due due to inflationary pressures, the Elmira acquisition in the Q2 of 2022, offset in part by branch consolidation activities between the periods. Other expenses were up $3,400,000 or 31.7 percent due to the acquisitions and general increase in the level of business Activities between the periods, including business development, marketing expenses and travel related expenses. In comparison, the company reported $108,200,000 of total operating expenses in the Q3 of 2022.

Speaker 3

The $2,300,000 2.2 percent sequential decrease in quarterly operating Expenses was largely attributable to a $2,100,000 decrease in salaries and employee benefits. The effective tax rate for the Q4 of 2022 was 22%. The company's average earnings and assets increased $905,500,000 or 6.5 percent over the prior year from $13,960,000,000 in the Q4 of 2021 to $14,870,000,000 in the Q4 of 2022. This included a $1,290,000,000 or 26.5 percent increase in the average book value of the investment securities and a $1,410,000,000 or 19.3 percent increase in average loans outstanding, partially offset by $1,790,000,000 decrease in average cash and equivalents. Average deposit balances were up $348,400,000 or 2.7 percent over the same period, which included 522 point and $3,000,000 of deposits acquired in the Elmira acquisition.

Speaker 3

On a linked quarter basis, average earning assets increased $254,600,000 or 1.7 percent, while average deposits decreased $154,400,000 or 1.2 percent. Ending loans increased 200 and $55,800,000 or 3.1 percent during the Q4 and $1,440,000,000 or 19.5 percent over the prior 12 month period. Exclusive of $437,000,000 of loans acquired in connection with the 2nd quarter acquisition of Elmira, ending loans outstanding increased 990 $8,700,000 or 13.5 percent over the prior 12 month period. During the Q4, the company originated over $560,000,000 of new loans at a weighted average rate of just under 6%. Comparatively, the book yield on the company's loan portfolio was 4.39% during the 4th for the quarter.

Speaker 3

Asset quality remained strong in the 4th quarter. At December 31, 2022, non performing loans were 33 point $4,000,000 or 0.38 percent of total loans outstanding. This compares to $32,500,000 or 0.38 percent of total loans outstanding at the end of the linked quarter for 2022 $45,500,000 or 0.62 percent of total loans outstanding 1 year earlier. The decrease in non performing loans as compared to the prior year's Q4 was primarily due to the reclassification of certain pandemic impacted hotel loans from non accrual with respect to accruing status. Loans 30 days to 89 days delinquent were 0.51 percent of total loans outstanding at December 31, 2022, up from 33 basis points at the end of the Q3 of 2022 and 38 basis points 1 year earlier.

Speaker 3

The company recorded $3,300,000 or 4 basis points annualized of net charge offs during 2022. The company's regulatory capital ratios remained strong in the 4th quarter. The company's Tier 1 leverage ratio was 8.79%, which significantly exceeded the well capitalized regulatory standard of 5%. In addition, the company's net tangible equity and net tangible assets ratio Reached 56 basis points during the quarter from 4.08 percent at the end of the 3rd quarter to 4.64% at the end of the 4th quarter. During the Q4, the company reclassified certain U.

Speaker 3

S. Treasury securities with a book value of $1,420,000,000 and a market value of $1,080,000,000 from its available for sale investment securities portfolio to its held to maturity investment securities portfolio. While the reclassification had no economic, Earnings or regulatory impact enables the company to be more effectively manage overall capital levels if interest rates rise above year end and financial results in the coming quarters. The company continues to maintain a strong liquidity profile. The combination of the company's cash and cash and equivalents, borrowing capacity at the Federal Reserve Bank, borrowing availability at the Federal Home Loan Bank and unimplied investment securities Provide the company with approximately $4,900,000,000 of immediately available source of liquidity at the end of the 4th quarter.

Speaker 3

The company's loan to deposit ratio at the end of the 4th quarter was 67.7 percent, providing future Opportunity to migrate lower yield investment security balances into higher yield loans. During 2023, the company anticipates receiving over and $600,000,000 of investment security principal cash flows to support its funding needs. Looking forward, we are encouraged by the momentum in our business. The company generates strong organic loan growth over the prior 6 quarters. Asset quality remains solid and the loan pipeline is robust.

Speaker 3

In addition, New business opportunities in the Financial Services businesses remain strong. In 2023, we'll remain focused on new loan Generation managing the company's funding strategies in a rapidly changing interest rate environment, while continuing to pursue accretive low risk and and strategically valuable merger and acquisition opportunities. Thank you. Now I'll turn it back to Joe to open the line for questions.

Operator

And our first question here will come from Alex Twerdahl with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning guys.

Speaker 3

Good morning, Alex. Good morning, Alex. Good morning, Alex.

Speaker 2

First off, just wanted to ask about what you guys are seeing or maybe expect to see over the next couple of months with respect to deposits. I know the Q1 typically sees some inflows from municipal deposits. I'm just curious if you're Expecting similar levels to what we saw last year and kind of if you have any sort of line of sight on to other expected deposit flows, so we can and sort of manage expectations for that relative to borrowings and loan growth, etcetera.

Speaker 4

Sure. Alex, it's Timitar. You're right. Typically, in the Q1, we get some seasonal inflows in our deposit base. It's usually a couple of $100,000,000 With that said, I think we're kind of in an unprecedented time on the funding side, and we started seeing that kind of late in the summer, early in Q4, and it's accelerated, I think, for everybody in the industry.

Speaker 4

When You're against the Federal Reserve with an infinite balance sheet who has decided to take out liquidity. We all got to take notice of that. So with that said, I think I'm not sure we're going to be netting up in the Q1. We hope we will, but We're putting in place other strategies to make sure that we are able to manage our funding. So as we sit here today, I would personally probably bet on closer to flatten up in terms of our deposit base.

Speaker 2

Okay. And then within the deposit base, last tightening cycle, you guys did a spectacular job keeping Your call to deposit is lower. I'm just curious if there is a change in customer mentality just given how quickly rates have risen. And I think certainly many of us have noticed it and are doing it in our personal accounts. I'm just curious if How we should think about the deposit costs and sort of the customer behavior that you guys are seeing over the next couple of quarters?

Speaker 3

Alex, this is Joe. I would just say that when you look at our the composition of our deposit base, about 75% of our Deposit base is in deposits that are not typically rate sensitive. That's not to suggest that some of that some of those funds could not be drawn out into higher yielding type assets. But relative to the rest of the industry, I think that our deposit base It's very core, but there's kind of a larger sort of picture here with respect to what Dimitar referenced on the Fed and and what's happening to the money supply. But generally speaking, I think we'll outperform.

Speaker 3

But yes, I would expect that our Funding beta will increase over the next couple of quarters. There's always a bit of a delay Between the Fed changes and then ultimately changes in the funding costs for financial institutions including us. In some of the rate moves that the Fed made were in the 4th quarter and those Fully haven't been fully baked into all of the financial institutions cost of funds. So I think there will be some increase in the Funding beta over the coming quarters.

Speaker 2

Got it. And then just kind of sorry, go on.

Speaker 1

No, it's Mark. The only thing I would add just as it relates to funding overall in the first quarter to first half of the year we'll have $400,000,000 or $500,000,000 of the securities portfolio maturing at fairly low yields, which we will likely use to pay down our overnight borrowings with a probably 300 basis point delta on cost. So just so that's reasonably significant in the context of what the funding side of our balance sheet will look like headed here over the next two quarters.

Speaker 2

Okay. And then I think in your prepared remarks, Mark, or maybe it was Joe, you talked about managing the company's funding strategies. Is that what you're referring

Speaker 3

Yes, I think there's 2 pieces, which is that, The maturing securities, but also just generally trying to be strategic in terms of identifying markets Where

Speaker 1

we can pick up deposits? It's really deposit strategies. We've got $5,000,000,000 of securities. Are there any strategies around that, which makes sense for us to think about? So there's a number of elements to our thought process around funding strategies here, which We're thinking about.

Speaker 2

Okay. And then just the other question that I had is, you guys talked about, deteriorating Economic or macroeconomic outlook, yet the ACL dropped by 2 basis points. I was hoping maybe you could just put that into context and explain The moving parts of the A. C. L.

Speaker 2

And why it actually declined given the commentary that the macro outlook is deteriorating.

Speaker 3

Yes. Alex, this is Joe. I can take that question. So there's a couple of components in our CECL model. One is kind of the loss history.

Speaker 3

The other is the Economic outlook, which we referred to in the press release. The 3rd piece is also what's been trending internally in terms of non performing assets and classify and criticize assets and delinquency. And we tend to look at kind of a 4 quarter trailing Average on those non economic qualitative factors, simply to smooth out, if you will, any sort of seasonal aspects around the portfolio. And effectively as we rolled the quarter forward, those 4 quarter trailing metrics improved. We dropped effectively the Q4 of 2021 where there were a little higher NPAs and Risk ratings were a little bit higher on the classified and criticized and effectively that improved.

Speaker 3

So that was the offset to the

Speaker 2

Thank you for taking my questions.

Speaker 1

Thanks Alex.

Operator

And our next question will come from Manuel Neves with D. A. Davidson. Please go ahead.

Speaker 5

Good morning, gentlemen. My name is Mokshaath filling in for Manuel. I have a few questions to ask. What are your loan growth expectations for next year? And in terms of mix, would it be more commercial weighted?

Speaker 5

Just wanted some color on that.

Speaker 4

It's Dimitar. So I think we've been talking about mid single digit growth rate for our business kind of on a go forward basis, Clearly, it's going to be a slower economic environment, so that's the expectation at least. So maybe we're a tad below mid single digits rather than

Speaker 5

a tad up.

Speaker 4

But we're still kind of in that probably 4% to 6% range expectation in terms of loan growth. As it relates to mix, right now, the commercial pipeline is pretty good. The car business is doing well. Mortgage is slowing down the same way with everybody else. So if we we've been kind of running at a fifty-fifty mix in general.

Speaker 4

Maybe it's a little bit more commercial this year, but that's a very early guess. So it could easily be counted fifty-fifty.

Speaker 5

Thank you for that. And in terms of NIM trajectory near term, given there's pressures on funding. What's your outlook going forward?

Speaker 3

So we did flatten a bit in Q4 versus Q3. However, the net interest income did increase, which is kind of in line with our expectations we talked on the Q3 conference call. However, as we look forward, I think in the Q1, you could see potentially us go a bit backwards in In terms of the NIM, just because of the increase in funding costs and on NII, we potentially go backwards. We lose effectively 2 days of Net interest income on a short quarter in the Q1. With that said, as Mark was referring to in the second quarter, we start to see some Significant cash flows off the securities portfolio, and so the expectation that we would also typically have some seasonal loan growth kicking in the Q2.

Speaker 3

So based on what we can see now assuming funding is somewhat stabilized, we would expect Some expansion in kind of through the second and third quarters of next year. And obviously, the 4th quarter is a way out, but the expectations are we'd See increasing net interest income kind of in the back half of the year.

Speaker 5

Thanks for that. One last question and then I'll hand it over. You talked about the securities books. What is the duration of the security books at the end of the quarter and does that timeframe correlate with the recapture of AOCI?

Speaker 3

Yes. So the duration is just under 7 years on a combined basis when you look at the total securities portfolio, Which is kind of in line with where it was when we talked about it in the prior quarter. And what was the I'm sorry, the second part of the question?

Speaker 5

Does that timeframe correlate with the recapture of ALCI?

Speaker 3

Yes, to an extent, if I'm following the question. But in fact, what we did and we reclassified The securities that roughly $1,000,000,000 in market value securities into HCM is really to We also have about $1,300,000,000 in municipal deposits that require pledging, require securities. And so we're effectively required to hold securities for a long period of time to secure those and deposits. And in effect, the amounts that we reclassified are similar to the amounts that we typically

Speaker 4

And maybe if it's helpful just to add to that, the duration of the AFS The portfolio today is just about 5 years, which is what we're going to predominantly use for our balance sheet remixing going forward as we transition from securities into loans. So we've got those 5 year duration cash flows and I There's about $4,000,000,000 of securities in that bucket.

Speaker 6

Okay. Thank you for that.

Operator

And our next question will come from Matthew Breese with Stephens. Please go ahead.

Speaker 1

Good morning.

Speaker 2

Good morning, Matt.

Speaker 1

Good morning, Matt. Good morning, Matt. Good morning, Matt. I wanted to continue on the securities discussion. You had mentioned that you expect, I think, $400,000,000 to $500,000,000 of securities maturing in the first half of the year.

Speaker 1

What does that schedule look like for the back half of the year? And could you give us some frame of reference for on that mix shift over the next call it 12 to 24 months where you want to bring that securities portfolio down to as a

Speaker 3

percentage of assets. Yes. Well, Matt, this is Joe. So the expectations for the full year on the Securities is about $600,000,000 We just happen to have a significant amount of that, about $350,000,000 or so coming off kind of in the middle of the 2nd quarter, dollars 400,000,000 in the first half of the year, but the total is about 600,000,000 I think over time, we certainly would like to see our transition from a securities largely Securities concentrated average or earning assets based to one of loans. I think we now have the organic growth components that we need.

Speaker 3

We tooled up and so over We'd like to see that roughly $5,000,000,000 portfolio to move down to on a relative basis to move down. We'd like to see As a loan to deposit ratio that trends up, right now, I think about 67%, ideally, we'd be more balanced at 75% to 80% loan to deposit ratio. So I think that will just trend over time and you'll see kind of on a relative basis the securities book drop.

Speaker 1

Okay, understood. And how much of the securities portfolio is unencumbered or tied to municipal deposits where you have to keep in Portion and Securities.

Speaker 3

Yes. Just bear with me one second, Matt. I have those numbers here.

Speaker 1

Would you like me to go on while you look for that?

Speaker 3

Yes, go ahead, Matt. Yes, I actually have those available. I just need to Take them out.

Speaker 1

Perfect. So just would love a sense for indirect auto. Obviously, there's a lot of just and inbound questions and scuttle around deteriorating consumer health. Could you just remind us of FICO's there and whether or not you're seeing any sort of deterioration underneath the hood, pardon the pun.

Speaker 4

Sure. Matt, this is Dimitar. So our portfolio on the car business is average FICO of $7.50 roughly, and that's where the originations continue to be. We're writing business now kind of in the 7% range On a gross basis, so that's kind of 6 net. So it's still pretty good business.

Speaker 4

We have seen in terms of credit Normalization, I would call it. Still, I would call it normalization towards the lower end of the historical averages. So we've been averaging losses there kind of between 25 and 35 basis points. Historically, we're kind of right about the lower end of that. Again, the FICO is a very strong debt to income of the portfolio and new originations 27%.

Speaker 4

So we feel pretty good about the credit profile. I think as we've disclosed previously, 80% is used cars. Our loan to values are less than the average for the industry. We write based on the actual dealer invoice, not based on the inflated sometimes markups that we've seen over the past couple of years. So we feel pretty good about that.

Speaker 4

Are we going to normalize a little bit more towards the midpoint of the 25 to 30 basis points, 35 basis points in losses probably? Is it still great business at the rates we're writing it? Yes, it is. So that's kind of how we look at it right now.

Speaker 1

Okay. Understood. Thank you. Next one was just in regards to fee income. Joe, I'm sorry, Mark, I think you had mentioned that There's some new business opportunities within Financial Services.

Speaker 1

So I was curious, wholesale, just kind of thoughts on fee income in 2023, More specific commentary on employee benefits, wealth insurance and then for those opportunities, just curious what you meant in terms of or Is there more robust pipeline in terms of deals or organic opportunities that you could talk about? Yes. I'll just kind of briefly let I'll let Dimitar jump into it further. But if you look at the summary financial results, it doesn't look like those businesses had a tremendous Here with the exception of insurance as I said that was up 17% in revenues. The Wealth business was down a little bit against a market that's down almost 20.

Speaker 1

The benefits business, which is half lienward to the market as I said, was up even though the market was down 20%. So the organic performance of those businesses In 2022, might have been the best year we've ever had. They all grew organically and some of them grew a lot. But it got clouded by the market because they're on different levels levered to the market. So There's a lot of momentum in those businesses right now, which I think is going to continue.

Speaker 1

And I'll let Dimitar provide any further commentary he might

Speaker 4

Want to add to that? Yes. I think that's a pretty good summary. I would just say if you kind of think about historical growth rates in those businesses in the high single digits, If the market recovers, we feel very confident we're going to get there. If the market kind of stays where it is, We think we're still going to have a pretty decent year.

Speaker 4

It might not be high single digits, but low to mid single digits is definitely achievable because, again, we put on A lot of new units and clients, especially in the second half of the year, and we did not get the benefit of most of those. So, we feel pretty good about the outlook barring the market going down another 20%.

Speaker 1

Got it.

Speaker 3

And Matt, this is Joe. With respect to your prior question And about unplugged securities, about $3,200,000,000 at the end of the year. We also have blanket Availability of the Federal Home Loan Bank that's secured by our mortgage portfolio, which is about another $1,100,000,000 And then we also have some Securities pledge at the FRB, which creates another $500,000,000 So that's how we get to kind of $4,900,000 but $3,200,000 of which is the It's the unpledged. Got it.

Speaker 1

Okay. Last one was, I saw this the calculated tangible book value in the earnings release a bit higher, and the one component I don't have is the deferred tax liability. So I was curious what that updated balance was and if there was any meaningful change quarter over quarter.

Speaker 3

So I'll break it down at the end of the year, Matt. So on a Book value basis, the available for sale securities portfolio, about $4,700,000,000 about 500,000,000 In the held to maturity portfolio, about $1,100,000,000 At the time, we did the The book value is about $1,420,000,000 just about $340,000,000 effectively in gross. Market value adjustment on that held to maturity portfolio and about 24%, 25% of that is effectively in a deferred tax asset of about $80,000,000 so leaving behind effectively net AOCI of about $250,000,000

Operator

Our next question will come from Chris O'Connell with KBW. Please go ahead.

Speaker 7

Hey, good morning.

Speaker 3

Good morning, Chris.

Speaker 7

I may have missed it in the opening comments, but was there any commentary regarding The overall expense outlook for 2023 and I guess if not, can you guys talk a little bit about that?

Speaker 3

Yes, Chris, we've had a this is Joe. We've had a history of kind of low single digits, call it 3% on Operating expense increases year over year. Obviously, the market has changed. There's been stronger kind of, call it, wage related And other inflationary elements that do make their way into our expense base, our operating expense base. So we kind of think that mid single digits is a more realistic expectation excluding acquisitions on a going forward basis, just because of those kind of wage and other sort of inflationary pressures.

Speaker 3

With that said, Mark alluded to in his comments All of the back office type efficiencies that we're investing in. That will take a while for that to really get the efficiencies Our efforts here are to kind of control those operating expenses on a longer term basis through automation and efficiency.

Speaker 7

Got it. That's helpful. And circling back to some of the deposit discussion from earlier, I think if I read your commentary right, near term expectations where for deposits to remain somewhat flat versus up. Is that inclusive of the muni flows? Or do you expect kind of ex the municipal deposit fluctuations that there could still be some downward for sure in the near term on the overall deposits.

Speaker 4

Chris, it's Dimitar. I think we would expect in the Q1 to be Net up on municipal deposits and net down on personal deposits and commercial deposits, Where that ultimately ends up on a net basis is a guess. Funding is the biggest question for everybody this year. So We don't know. We're planning for certainly lower than historical experience on the deposit side, probably lower than some of our bottom quartile experience, Frankly, if you look over 10 years where we've been.

Speaker 4

So with that in mind, hence the comment that historically, We would have been up in the Q1, and this quarter, we're unlikely to be up as we sit here today.

Speaker 7

Great. That's all I had for now. Thanks for taking my questions.

Speaker 3

Thank you, Chris.

Operator

Our next question here will come from Eric Zwick with The Hefty Group. Please go ahead.

Speaker 6

Thank you. Good morning, guys.

Speaker 3

Good morning, Aaron. Good morning.

Speaker 6

Just one more topic here on my list that wasn't discussed in earlier questions or comments. Just looking at the tax rate, my notes are right from last year, About a year ago, you were expecting a tax rate of kind of 22.5% to 23.5%. It looks like you came in below that this year. So one first question, just curious if If you utilize any kind of tax strategies throughout the year that brought it in lower, the mix of revenue was just different and the second part of the question would be what's a good expectation for 23 at this point.

Speaker 3

Yes. Chris or excuse me, Eric, with respect to On a going forward basis, I still think that plus or minus 0.5. Around $22,000,000 is probably a reasonable Helpful for the overall rate. We do have municipal securities book, municipal loans that keep the effective Tax rate down a bit. So I wouldn't expect much change over 2023 or really the You show our current tax rate unless there's a change in the tax code.

Speaker 6

Great. Thanks. I appreciate it. That's all for me.

Operator

With no remaining questions, this will conclude our question and answer session. I'd like to turn the conference back over to Mr. Truninski for any closing remarks.

Speaker 1

Thank you, Joe. Thanks everyone for joining the call and we will Talk to you again after the end of the Q1. Thank you.

Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your

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Earnings Conference Call
Community Bank System Q4 2022
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