Community Bank System Inc

NYSE:CBU

Earnings Call Analysis

Community Bank Q3 Earnings Reveal Stability Amid Challenges

During the third quarter of 2023, Community Bank maintained stable revenues of $175.4 million, consistent with previous quarters, despite macroeconomic turbulence. However, earnings saw a decline with fully diluted GAAP and operating earnings per share down to $0.82, an $0.08 and $0.09 drop from the previous year and the second quarter, respectively. This decrease was primarily due to an increase in operating expenses, up by 7.7% year-over-year, and lower net interest income, which fell by 1.4% compared to the second quarter. Nevertheless, total assets grew to $15.39 billion, while loans increased by 10.6% over the last year. The resultant deposit base remained well-diversified and stable, with a low deposit beta of 13%, indicating strong customer loyalty and resilience against interest rate fluctuations.

Sturdy Liquidity and Strong Capital Ratios Foster Growth Opportunities

The company demonstrates a robust liquidity profile with sources of readily available funds totaling $4.81 billion in the third quarter, a significant increase from $4.23 billion in the previous quarter. This financial resilience is underpinned by a diverse mix of assets, including cash, unpledged securities, and unutilized borrowing options. With a low loan-to-deposit ratio of 72.5%, there is potential to strategize and move funds from lower-yielding securities to higher-yielding loan investments. Particularly noteworthy is the maintenance of strong capital ratios, with the Tier 1 leverage ratio standing at 9.44%, well above the regulatory standard of 5%.

Optimism for Loan Growth and Branch Optimization

Management anticipates organic loan growth to continue, fostered by cooling funding cost pressures. This optimism is envisioned to enhance net interest income in the coming quarter. Concurrently, the company is undertaking staff optimization at its retail branches to mitigate operating expenses, with expected one-off severance costs ranging from $1 million to $1.5 million to reflect in the fourth quarter results.

Leadership Transition with a Focus on Continuity

The CEO, on the brink of retirement, acknowledged the trust of investors and the organization's steadfast focus on shareholder value. With confidence in the impending leadership and strategic positioning, the company is expected to stay on a trajectory of growth and success.

Expansion Strategy and Market Penetration

The company will advance its penetration in major markets, with a strategic plan to open approximately 12 to 15 new locations over the next 18 months, supported by a self-funding initiative designed to streamline the retail network and boost market productivity. Prior branch consolidation efforts have not adversely impacted the deposit base quality.

Sustainable Expense Management and Moderate Loan Growth Outlook

Expense growth is projected to lie close to 8% on a full-year run rate basis, with a future expectation to normalize to mid-single-digit increases year-over-year. The progress in loan portfolios exhibits signs of potential moderation, especially in commercial and mortgage sectors, with the current quarter unlikely to replicate the record highs observed in preceding quarters.

Improving Net Interest Income and Market-Related Revenues

The firm has seen deposit costs start to plateau, with anticipation of expansion in net interest income in the fourth quarter, though margin expansion appears uncertain. Moreover, new loans carry a yield north of 7%, which, combined with funding costs in the high 4% range, suggests a substantial spread. Employee benefit services have demonstrated growth despite market volatility, with the potential to maintain revenue levels if market values stabilize.

Earnings Call Transcript 2023-Q3

[Operator]

Good day and welcome to the Community Bank's 2023 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Dimitar Karaivanov, Chief Operating Officer of Community Bank. Please go ahead.

[Dimitar Karaivanov, executive]

Thank you, Marliese, and good morning, everybody. Welcome to our conference call for the third quarter of 2023.As Mark noted in the press release, the company's revenue performance was strong in the quarter. In fact, our revenue has been quite consistent over the past 5 quarters, regardless of all the macroeconomic and banking industry noise. This is a great example of the diversification of our business and the focus on lowering volatility for our investors. On the flip side, this quarter we had expense pressures that were above our expectations as well. Some of those are transient. Some of those are due to the general inflation pressures, which should abate and some are function of the continuous investments in the company.Over the past 24 months, we have invested in our organic capabilities across all of our businesses, and those investments run through the P&L. These organic investments are contributing to the growth in our outstandings in the banking business. The revenue performance in our benefits, insurance and wealth businesses and position us even better for the future.Our businesses are strong and healthy, supported by a strong balance sheet. As of the end of the quarter, our funding and liquidity are up compared to the beginning of the year. Our cycle-to-date deposit beta is 13%, and our Tier 1 leverage capital is almost double the well-capitalized standard. That is in spite of the turmoil in the banking industry this year.With that, I will pass it on to Joe.

[Joseph Sutaris, executive]

Thank you, Dimitar. Good morning, everyone. As Dimitar noted, the company's earnings results were down a bit in the third quarter. Fully diluted GAAP earnings per share were $0.82 in the quarter which were $0.08 lower than the prior year's third quarter and $0.07 lower than the linked second quarter results.Fully diluted operating earnings per share and non-GAAP measures defined in the press release were also $0.82 in the quarter, $0.08 per share lower than the prior year's third quarter and $0.09 per share lower than the linked second quarter results. The $0.08 decrease in operating earnings per share on a year-over-year basis were primarily driven by higher operating expenses.The $0.09 decrease in operating earnings per share in a linked quarter basis was driven by a decrease in net interest income and increases in the provision for credit losses in operating expenses, offset in part by an increase in non-interest revenues and a decrease in income taxes.Reflective of our diversified revenue business model, the company's total revenues in the third quarter of $175.4 million were generally consistent with the prior year's third quarter total revenues of $175.6 million and the linked second quarter total revenues of $175.3 million. These results were driven by decreases in net interest income between the comparable periods due to higher funding costs but were largely offset by increases in non-interest revenues.The company recorded net interest income of $107.8 million in the third quarter of 2023. This was down $1.5 million or 1.4% on a linked-quarter basis and $2.6 million or 2.4% on a year-over-year basis. The third quarter result was consistent with our expectations of a sideways outcome for a few quarters as funding cost increases outpace loan portfolio-related rate and volume improvements.The company's total cost of funds in the third quarter of 2023 was 88 basis points as compared to 67 basis points in the linked second quarter. The 21-basis point increase in funding costs in the quarter outpaced a 12 basis point increase in earning asset yields, resulting in an 8 basis point decrease in the company's fully tax equivalent net interest margin from 3.18% in the second quarter to 3.10% in the third quarter.The year-over-year increase in noninterest revenues totaling $2.3 million or 3.6% was driven by a $2.1 million or 7.6% increase in employee benefit services revenues, a $0.8 million or 6.9% increase in insurance services revenues and a $0.4 million or 5.8% increase and wealth management services revenues, offset in part by a $1 million or 5.3% decrease in banking service revenues.The increase in employee benefit services revenues was driven by conversion of new business and a significant year-over-year increase in total participants under administration, along with a modest increase from market appreciation. The increase in insurance services revenues are reflective of a strong premium market, organic expansion along with acquired growth between the periods.The increase in wealth management services revenues are reflective of a slightly more favorable investment market conditions, which drove an increase in assets under management. The decrease in banking noninterest revenues are reflective of the company's implementation of certain deposit fee changes, including the elimination of nonsufficient and unavailable funds fees on personal accounts late in the fourth quarter of 2022.Reflective of an increase in loans outstanding and a stable economic forecast, the company recorded a provision for credit losses of $2.9 million during the third quarter. Comparatively, the company recorded a $5.1 million provision for credit losses in the third quarter of the prior year and $0.8 million in the linked second quarter of 2023.The company reported $116.5 million in total operating expenses in the third quarter of 2023 compared to $108.2 million of total operating expenses in the prior year's third quarter. The $8.3 million, 7.7% increase between the periods was mainly driven by higher compensation employee benefits expense, data processing communication expenses, business development and marketing and other expenses.The $4.5 million 6.8% increase in salaries and employee benefits expense was primarily driven by merit and market-related increases in employee wages, higher employee medical expenses and certain executive retirement expenses. The $1.3 million or 9.1% increase in data processing and communication expenses reflective of the company's continued investment in customer-facing and back-office digital technologies.Business development and marketing expenses increased $1 million or, 28% due to the company's investment in digital initiatives and higher levels of targeted advertisements intended to generate deposit inflows.Other expenses were up $1.5 million or 23.1%, primarily due to increase in insurance expenses and nonservice-related components of net periodic pension credit.Total operating expenses were up $3.5 million or 3.1% on a linked-quarter basis largely driven by a $2.7 million, a 3.9% increase in salary and employee benefit expenses and a $1.2 million 8.3% increase in data processing and communication expenses. The effective tax rate for the third quarter of 2023 was 21.2%, down from 22% in the third quarter of '22 and 21.4% in the linked second quarter. The company's total assets were $15.39 billion at September 30, 2023, representing a $208.2 million or 1.3% decrease from 1 year prior and a $278.3 million, a 1.8% increase from the end of the second quarter of 2023.Ending loans increased $279.3 million or 3% during the quarter and $906.5 million or 10.6% over the prior year. The increase in loans outstanding in the third quarter was driven by an $81.2 million or 2.1% increase in the business lending portfolio, and $198.1 million or 3.7% increase in the company's consumer loan portfolios.The increase in ending loans year-over-year was driven by organic loan growth in the company's business lending portfolio totaling $420.5 million or 12% and growth in all 4 consumer loan portfolios totaling $486 million or 9.6%.The company's ending total deposits were up $159 million or 1.2% from the end of the second quarter. Interest-bearing deposits increased $233.6 million or 2.6% during the quarter, while noninterest-bearing deposits decreased $74.6 million or 1.9%.On a year-to-date basis, ending total deposits were up $18.5 million or 0.1%. The company's deposit base is well diversified across customer segments comprised of approximately 61% consumer balances 26% business balances and 13% municipal balances and broadly dispersed with an average consumer deposit account balance of approximately $12,000, an average business deposit relationship approximately $60,000.The company's cycle-to-date deposit beta is 13%, reflective of a high proportion of checking and savings accounts, which represents 70% of total deposits and the composition and stability of the customer base. The weighted average age of the company's no-maturity deposit accounts approximately 15 years, and the company has not currently carry any broker or wholesale deposits on its balance sheet. The company cycle to date, interest-bearing deposit beta is 18% and the total funding beta is 15%.During the quarter, the company secured $300 million in term borrowings at the Federal Home Loan Bank of New York at a weighted average cost of 4.69% to fund continued loan growth.The company's liquidity position remains strong, readily available sources of liquidity, including cash and cash equivalents funding availability at the Federal Reserve Bank's discount window, unused borrowing capacity at the Federal Home Loan Bank of New York and unpledged investment securities totaled $4.81 billion at the end of the third quarter, which is up from $4.23 billion at the end of the second quarter.During the third quarter, the company pledged additional loan collateral to Federal Reserve Bank to further enhance its borrowing capacity. These sources of immediately available liquidity represent over 200% of the company's estimated uninsured deposits, net of collateralized and intercompany deposits. The company's loan-to-deposit ratio at the end of the third quarter was 72.5%, providing future opportunity to migrate lower-yielding investment security balances into higher-yielding loans.At September 30, 2023, all of the companies on the bank's regulatory capital ratios significantly exceeded well-capitalized standards. More specifically, the company's Tier 1 leverage ratio was 9.44% at the end of the third quarter, which substantially exceeded the regulatory well capitalized standard of 5%. The company's net tangible equity and net tangible assets ratio, a non-GAAP measure was 4.81% at the end of the third quarter as compared to 5.34% at the end of the second quarter and 4.08% 1 year prior.During the quarter, the third quarter, the company repurchased 100,000 shares of its common stock at an average price of $51 per share pursuant to its board-approved 2023 stock repurchase program. At June 30, 2023, the company's allowance for credit losses totaled $64.9 million or 69 basis points of total loans outstanding. This compares to $63.3 million or 69 basis points of total loans outstanding at the end of the second quarter of 2023 and $60.4 million or 71 basis points of total loans outstanding at September 30, 2022.During the third quarter, the company recorded net charge-offs of $1.2 million or 5 basis points of average loans annualized. Annualized net charge-offs on a year-to-date basis are also 5 basis points.At September 30, 2023, nonperforming loans totaled $36.9 million or 39 basis points of total loans outstanding. This is up from 36 basis points at the end of the second quarter and 38 basis points 1 year prior.Loans 30 to 89 days delinquent were 51 basis points of total loans outstanding at September 30, 2023, up from 47 basis points at the end of the second quarter of '23 and up from 33 basis points 1 year prior.Overall, the company's asset quality remained strong and stable in the quarter. We believe the company's strong liquidity profile, regulatory capital reserves, stable core deposit base, historically strong asset quality and revenue profile provide a solid foundation for future opportunities and growth. Looking forward, we are encouraged by the momentum in our business and prospects for continued organic loan growth.We believe funding cost pressures are abating, providing the company an opportunity to increase net interest income in the fourth quarter. In addition, new business opportunities in the company's financial services businesses remain strong.As noted in our press release, the company has taken actions to optimize the customer service staffing levels in its retail business which are expected to contain branch-related operating expenses for the next few quarters, estimated severance and related expenses of $1 million to $1.5 million will be incurred and reflected in the fourth quarter results.Thank you. Now I'll turn it back to Marliese to open the line for questions. Excuse me, I will turn it over to Mark to make a few comments. My apologies.

[Mark E. Tryniski, executive]

Thank you, Joe. Good morning, everyone, and thanks for joining the call today. Given my impending retirement in a couple of months, I won't be commenting on the quarter, but I did want to make a couple of brief comments before we answer questions.First, to our investors. Thank you for your trust and confidence in us and our company over so many years. All that we do is done through the lens of shareholder value with the objective of providing above-average returns with below average risk, and that will continue to be our primary operating priority.To our analysts, thank you for your engagement, effort and understanding of our company and always doing your best with imperfect information. I would also like to thank our Board of Directors for their trust and confidence in me over the past 17 years. It's been a privilege and the joy of my professional life to lead this company and work with such an engaged, caring and shareholder-focused board.Finally, to our employees. Thank you for all you have done and will continue to do to make this a great company and for your efforts, pride and passion in serving our customers, our communities, our shareholders and each other. You are truly the lifeblood of this organization.Community Bank System is incredibly well positioned for the future. We have 4 tremendous businesses and the best leadership and operating teams we have ever had. I have absolute confidence in Dimitar and I'm very much looking forward to watching the continued progress and success of the company under his capable leadership.Thank you, everyone, and best wishes to all of you for personal and professional prosperity.

[Joseph Sutaris, executive]

I will now turn over to Marliese for questions.

[Operator]

[Operator Instructions] And our first question comes from Nick Cucharale from Hovde Group.

[Nicholas Cucharale, analyst]

Best wishes to you, Mark. So you touched on it in the release and in your remarks, but can you provide more detail on the de novo initiatives? What markets are you targeting? And at this point, do you have a sense for how many locations you plan to open as you reoptimize the branch network?

[Dimitar Karaivanov, executive]

Sure, Nick. It's Dimitar. So we're embarking on a continued organic growth in all of our larger markets. So we entered them commercially, and we've been in them to some degree, on the retail side for a number of years now. But on the tail of our success on the commercial business, we're going to be expanding on the retail side as well, kind of in earnest in Buffalo, Rochester, Syracuse, Lehigh Valley, PA, Southern New Hampshire, probably a little bit in the Capital District as well. So those are kind of the areas we're looking at. It varies by market in terms of how many locations and what we're going to be opening. But right now, I think in the next 18 months or so, we can pencil in about 12 to 15 locations across those markets might be a couple more depending if we find the right locations.At the same time, as Joe noted, we are reconfiguring our existing network and staffing levels. And the purpose of all of this is for this initiative to be self-funding in many ways and just provide us with a much better -- much more productive, I would say, go forward retail presence.

[Nicholas Cucharale, analyst]

That's great color. Maybe just a related follow-up. Can you help us think about the overall expense run rate going forward? And how much of this quarter's elevation is likely to persist?

[Joseph Sutaris, executive]

Yes. So with respect to expenses, as I think Dimitar mentioned, there are some which we anticipate as being sort of transient, some of which are really reflective of our investment in the organic growth machine over the last couple of years and some of which was related to, I'll call it, wage-related inflationary pressures that we had to endure, if you will, in 2022. So our full year expectation for '23 versus '22 is, as I think we've said earlier, somewhere between 5% and 9% looks like it's trending to something closer to 8% for -- on a full year run rate basis. But the expectation is that we would settle back into something kind of in the mid-single-digit run rate increase year-over-year on a full year basis. There's always a bit of volatility quarter-to-quarter. Sometimes it's just a timing, if you will, in a particular quarter. And obviously, this quarter was a little bit harder hit with some transient expenses than we've had in the past. But our expectation, I think, for 2024 is kind of mid-single digits on operating expense increases on a full year basis.

[Nicholas Cucharale, analyst]

That's very helpful. And then lastly for me, just given the strong loan growth and an increase in borrowings this quarter, can you share with us your thought process and appetite for executing another securities restructure?

[Dimitar Karaivanov, executive]

I think, Nick, at this point, given where rates are and what we have left in the portfolio, the math is pretty challenging. We're looking at that in the sense of is it a positive net present value transaction. So if we are accelerating cash flows and at the end of the day, we're all better off by getting our money sooner than later, we would consider it, which is what we did earlier this year. As a reminder, we sold roughly 3-year tendered securities, and we're getting the cash flows back in 2 years. So we've got essentially a year worth of positive value on that transaction. That's when the 10-year was in the 3s. And I think given where the 10 year is today and kind of the front end of the curve as well, those numbers just don't pencil out.

[Operator]

And our next question is coming from Steve Moss from Raymond James.

[Stephen Moss, analyst]

Steve. Mark, congratulations on retirement. Best wishes. I just wanted to follow up on the loan side of things here. A very strong quarter for growth. Could we see this pace continue for another quarter? Or can we see some moderation here just given the extra move in rates even in the last couple of weeks here?

[Dimitar Karaivanov, executive]

I think, Steve, if you look and you break it down by portfolio, the commercial pipeline is still strong, but not as strong as it was at the end of the second quarter. So you'll probably see a bit of a pullback there. Mortgage is going to be seasonally a little bit weaker as well in the fourth quarter. And I think the same applies for auto in the sense that right now, that flow and kind of what we're charging there is a little bit less. So I think it's still going to be a very strong quarter in terms of growth, but I don't think it's going to be close to this past quarter, which was close to a record for us in terms of total loan growth.

[Stephen Moss, analyst]

Right. And curious, Dimitar, what rates are you guys seeing for loan yields that you're putting on the books?

[Dimitar Karaivanov, executive]

I think the blended rate for the third quarter was $7.20.

[Stephen Moss, analyst]

Okay. And then just on the deposit pricing moderating here. Just curious, Joe, you seem to imply a further slowdown in interest-bearing deposit costs. Just any incremental color you can give around the pace of slowdown or kind of where you think deposit costs could shake out in the next couple of quarters?

[Joseph Sutaris, executive]

Yes. So we did experience a little bit of a slowdown in costs in Q3 versus Q2. And I think on the Q2 call, we used the word abate, that we expected those pressures to abate a bit. We are seeing some evidence of that. It's not -- we still are seeing increasing costs. But kind of our expectations is that our belief is that we maybe have crossed over into positive territory. In other words, we hit the trough on net interest income in Q3, at least that's our expectations and that we would start to sort of come out of that, if you will, in Q4 and hopefully through 2024. Obviously, the wildcard in the deck is just deposit funding, it's kind of held in well for us. I mean we're kind of flat on a full year basis, which is okay. But if we see a turn in the tide, obviously, if you flip from what is roughly a little under 100 basis points in terms of your deposit funding costs and you're going to flip in a borrowing position, that could change. But right now, we believe we are -- we have kind of hit the crossover point or the trough in the third quarter and then we should see some NII expansion in Q4, not necessarily margin expansion.As Dimitar mentioned, the new loans went on at a little north of 7%. We took down some funding kind of in the high 4s. That generated about a 250 basis point kind of, I'll call it, marginal spread, if you will, on the new volume. So that's not going necessarily be additive to NIM on a go-forward basis, but it should be additive to net interest income.

[Stephen Moss, analyst]

And then on the employee benefit services, good quarter from a revenue standpoint. Quite a bit of crosswinds here, especially in the last couple of months. Just curious you're seeing year-over-year growth, but maybe do we come off those highs, just given what we've seen in the bond market and some volatility we're having in equities here?

[Joseph Sutaris, executive]

Yes. I think, Steve, I think it's hard to predict that line too much because, as you know, it is tied to market values. And if you look at the aggregate portfolio, it's a retirement business. So we do not surprisingly kind of resemble a 60-40 type of split. So there is a fair amount of bonds that are trading at a lower value today than they were during the third quarter. With that said, we have also continuing the organic momentum. So if you -- if there's a bit of a pullback in that line, I don't think it's going to be that big. And in fact, if asset values stabilize, I think we could have as good of a quarter in the fourth quarter.

[Operator]

And we will proceed now with the question from Alexander Twerdahl from Piper Sandler.

[Alexander Roberts Twerdahl, analyst]

And again, I'll reiterate, congrats to you, Mark. It's been a pleasure working with you over the last decade or so and certainly wish you all the best in the next chapters of your life.

[Mark E. Tryniski, executive]

Thanks, Alex.

[Alexander Roberts Twerdahl, analyst]

I wanted to ask about this branch optimization program. And you guys have a top-in-class deposit profile, and I always sort of assumed or associate that with the branch network and sort of what you have built from a legacy standpoint, how do you think through the branch optimization and closing branches and then opening into new markets without painting the quality of the deposit profile.

[Joseph Sutaris, executive]

So Alex, to give you some color in the past 4 or 5 years, we've consolidated close to 50 branches. Some of those acquired, some of them our own. So we've already had a fairly sizable number of branch closures, which has not really impacted the quality of our deposit base. And clearly, as we move into the larger markets, we're going to have different strategies for winning market share in deposits. And there's going to be a trade-off between volume and rate in the larger markets. They're more competitive. With that said, if you just think about the quantum of what we are doing here on a 200 branch network and $13 billion of deposits, 15 branches, let's call it, at whatever number you want to assume they get to in a larger market, which should be fairly good is not going to meaningfully change the quality of our aggregate blended deposit base, which we believe will continue to be one of the best in the country.

[Alexander Roberts Twerdahl, analyst]

Okay. And then maybe you said it earlier and maybe I missed it. But just in terms of the time frame, it sounds like you're closing a bunch of branches this quarter that's going to result in some severance in 2023? And then how long before some of these markets get up and running and I guess does that wind up? I guess back to the expense question, can you just sort of lay out sort of exactly what that means over the next couple of years, I get your sort of high-level guidance for next year, but just kind of specifically associated with this program.

[Dimitar Karaivanov, executive]

Yes. So I think the way to think about the expenses of the expansion is and the timing of it one, the timing varies because you got to sign leases. We've been at this for a few months. So we've got a number of locations identified. Most of them are just remodeling our existing branches, the large banks abandoned that we're going to be going into. But still, you have leases, you have to redo the branch a little bit or the location. You have to hire people, and then you open the branch. So you're talking about 9 months of a process if you were to start today in most cases. In some cases, there is more work to be done. So that's why we think of it over kind of an 18-month period. And in that time frame, I think what our expectation is, is that everything else that we're doing with the branch network and the existing retail business, including what we did this quarter, is going to offset the cost for a net 0.

[Alexander Roberts Twerdahl, analyst]

Okay. And then it seems based on the markets and sort of the expansion that you mentioned earlier, that you're going into, it seems like a pretty clear signal that organic has now maybe officially maybe with a quarter or 2 ago, officially overtake an M&A as sort of the primary growth mechanism for community. Is that a fair characteristic?

[Dimitar Karaivanov, executive]

I think the fair characteristic is that it will be a mix going forward. And as we've communicated, would just be less reliant on M&A. And that's why you're going to see some of these expenses every once in a while pop up a little bit more unusual in a given quarter because we're now investing through the P&L versus investing through the balance sheet. And I think given where rates are today, given the time that the regulators take from a bank approval transaction kind of time line perspective, the math on the M&A side is just harder. And we frankly can't wait for that in order to grow our company. So we need to find ways to follow our success, which has been great on the commercial side, and now we're going to follow it on the retail side, and that doesn't preclude any M&A happening throughout that period because in taking of the markets we're looking at to expand in opening 3 or 4 or 5 branches in any of those markets is not going to be the end game for us. So we're going to continue to be looking for M&A in all of our markets, but it just will be a complement to what we're doing organically as opposed to the only way of growth going forward.

[Operator]

And our next question comes from Chris O'Connell from KBW.

[Christopher O'Connell, analyst]

And congratulations, Mark and on the retirement and best wishes on the next chapter.I wanted to start off to see what your thoughts are on the insurance business and given recent per transactions in the market, whether that's something that you would ever consider selling? And if so, just what your thoughts are in terms of the cost and benefit analysis and what goes into that thought process?

[Dimitar Karaivanov, executive]

Chris, well, our thoughts are to turn this in extremely valuable business. Roughly at 5.4x revenue seems to be the going multiple these days and $45 million of revenue. It's a very, very valuable business, which, as a reminder, is not reflected anywhere on the balance sheet the same way with our benefits business or wealth business.So as it relates to the value to us and to our shareholders, that is the value. And we look at our company as a precious collection of businesses that work in different ways through an economic cycle. I mentioned in the beginning that our revenue has been essentially the same right around $175 million over the past 5 quarters. And just think about what's occurred through that time frame. You had NII expanding way up. You had NII contracting way down. And you had market values contracting, then going sideways, then going up, now contracting again. And our revenue has not budged.If we were just in one of those lines of businesses, we will have a much tougher time sustaining that revenue and the low volatility and the predictability of our company. So we think that it adds tremendous value in the insurance business, the benefits business, the wealth business, it match tremendous value to the banking business and tremendous value to the aggregate company. So we just think it's really valuable.

[Christopher O'Connell, analyst]

Okay. Got it. I mean -- and just to be clear, I mean, is it something that you -- I mean, obviously, you guys see a lot of value with it internally. Is it something that you have explored or looked into? Or is it -- or is the value so high to you on an organic basis that you think is more valuable in-house?

[Dimitar Karaivanov, executive]

We have not because we like to focus on keeping our most valuable businesses to our company and our investors. And we don't think that we can replace that kind of business nor could we buy it again. So it's something that we have that is precious, and we intend to grow it, which we have done pretty successfully. That was a $20 million business when we acquired it in 2016. And I think it's on track for well over double that this year.

[Christopher O'Connell, analyst]

Great. Appreciate the color. And then on the $300 million of the FHLB that you guys locked in at 469, what was the maturity or duration on that?

[Joseph Sutaris, executive]

Yes. So Chris, this is Joe. It's about, call it, a 3.5-year average life. We locked in some amortizing advances and some fixed components effectively that matched the effective average life of the loans that we booked generally. And it also bridges us to some of the securities cash flows in some of the out years.

[Christopher O'Connell, analyst]

Okay. Great. And on the remainder of the borrowings on balance sheet, which I believe are customer repurchase agreements, what was the rate on those this quarter?

[Joseph Sutaris, executive]

Precisely, Chris, they tend to run in the close to some municipal book largely and it's kind of in the 2s from an overall cost perspective. Some of that is operating accounts and some of that is more, call it, rate-sensitive repurchase agreements but they're all with our customers, which I think is important. Internally, we look at that as it's more akin to a customer deposit. It just happens to be set up in a repurchase structure.

[Christopher O'Connell, analyst]

Got it. And then lastly, can you just remind us as to what the securities cash flows are coming on off at in Q4 and then into 2024 as well, please?

[Joseph Sutaris, executive]

Yes. So securities cash flows are pretty nominal in Q4 about $17 million, $18 million. So just a couple of sort of trickling amortizing payments. And in 2024, it's about $60 million. And if you recall, Chris, when we did the repositioning, we brought forward 2024 and 2025 cash flows because the inverted curve and the opportunity that we have. So effectively, what is remaining for 2024 cash flows are basically amortizing cash flows off of our MBS portfolio largely.

[Christopher O'Connell, analyst]

Great. And do you have just what the duration of the AFS and the HCM book is right now?

[Joseph Sutaris, executive]

Yes. So the AFS duration is about 6 years. and the HTM duration is about 11 years.

[Operator]

And we proceed with the question from Matthew Breese from Stephens.

[Matthew Breese, analyst]

And Mark, congrats on a long and successful career and best wishes to you in retirement.

[Mark E. Tryniski, executive]

Thanks Matt.

[Matthew Breese, analyst]

On the question front, first, I was hoping you could touch on the auto book. There's some data points out there just showing kind of gradually deteriorating conditions, delinquencies. And I was curious if you're seeing any signs of that on your end? And how should we be thinking about charge-offs within this book?

[Dimitar Karaivanov, executive]

I think, Matt, as a reminder, our book is prime and super prime essentially. The average FICO is 750, you're looking at values, debt-to-income levels that are kind of in the 30s, 20s and 30s and the credit performance over multiple cycles has been outstanding. So if you actually look at our charge-offs year-to-date, and Joe can correct me here, but I think it's in 20s.

[Joseph Sutaris, executive]

Yes, 17, 18.

[Dimitar Karaivanov, executive]

Yes, basis points. So frankly, better than we expected and, frankly, better than our historical averages. So we continue to believe that the historical average of kind of 35 basis points, plus or minus 5% is a number that we expect in terms of loss rates on that paper. But we continue to be surprised so far about the strength of our type of borrowers. And we are well aware of the kind of the subprime delinquency rates, which I think are at an all-time high as it relates to auto, but we just -- those are not our customers.

[Joseph Sutaris, executive]

And just for a little additional color there is, if we look at kind of the delinquency 30 to 89 days, it's been pretty flat for about 5 quarters. It does fluctuate from quarter-to-quarter. And if you actually go back to kind of our kind of normalized loss rates pre -- on a pre-COVID basis, they were kind of in the mid-30s. And as Dimitar said, A and B paper, great paper, and they've been running about half of that.So if we normalize the expectations are kind of the mid-30 basis points, 40 basis points of net charge-offs, which is -- will be half of the -- we expect that's going to be half of the industry average.

[Matthew Breese, analyst]

Got it. All right. I appreciate all that color. Just another one. Loan growth remains very solid, Dimitar, like you said near record levels this quarter. And I know we've talked a lot about hiring on your end. That said, I was hoping you could discuss the overall economic vibrancy across your markets and whether beyond just added lending capacity, you're seeing improving trends on the ground? And if there's any markets you'd highlight in particular.

[Dimitar Karaivanov, executive]

Yes. I mean broadly, our markets remain in very good shape literally in every category. Some of it is the customers with traffic in and some of it is the market. And there's been a bit of an uptick in Upstate New York in terms of investments and activity. Certainly, we're seeing it in Central New York quite a bit, and that's not really just micron-related. In fact, very little of it is Micron-related right now. But our markets are strong across the board. Northeast PA is doing very well as well. New England remains one of the best markets in the country as it relates to credit. So it is very positive.We're not seeing a lot of cracks. We are seeing some of our borrowers putting down more money they need to in order to make numbers work with higher rates, but they have money to do so. The cash levels and our commercial borrowers remain strong. And certainly, we're not seeing much in the way of challenges on the consumer side.

[Matthew Breese, analyst]

Understood. Great. Okay. And then, Joe, you had mentioned that you expect NII upside from here, but potentially some NIM compression. I was curious to what extent you expect near-term NIM pressure and where might we see that point of stability as you look out?

[Joseph Sutaris, executive]

Yes, it's a good question, Matt. As I mentioned, the -- if deposits hang in there, which, so far, they seem like they are for us, they're fairly stable. We kind of believe we hit the crossover point for net interest income in Q4.The margin side of it, obviously, for we -- I think our margin for the quarter was $3.10. New business is going on at 250 something. The next cycle of loan growth is if we can lock in 250, we'll probably take that. But obviously, it's going to negatively impact margin.But our expectation really is that we will just sort of start to come out of the trough in Q4. Just as we kind of looked at kind of as we exited the quarter, we started to see kind of that dynamic change a bit as the increases on loan interest income. We're sort of outpacing the funding cost increases. I'm not sure that's obviously a couple of months. So it's not quite a trend yet, but our expectations are that, that trend will continue and that we'll see expansion in Q4.I don't know what rate the rate environment will be in Q1 of next year or Q2 of next year. But assuming that the rate environment is comparable to what it is now, I think our expectation is that we would just continue to see some potential expansion in NII. Again, just to be aware, some of it is dependent on the stability and growth of the deposit base.

[Matthew Breese, analyst]

Okay. Got it. And then last one for me, just going back to the whole tangible common equity discussion and well aware your kind of views on the tangible common equity to tangible assets ratio. It's just that the market seems to be reacting a bit to it. And I'm curious if that -- it does have an impact or changes your thinking around capital adequacy as measured by tangible current equity tangible assets?

[Dimitar Karaivanov, executive]

It does not change our view on capital adequacy, which remains well, well above the regulatory capital levels that are required for a well-capitalized institution. It doesn't change how we run the business. It doesn't change our ability to service customers. As you can see, our balance sheet is in tremendous shape.And again, as we just touched on it a couple of minutes ago, the amount of value in our company that is not reflected anywhere in that one single number is just huge. We talked about the value of the insurance business. You can take that and multiply it by 3 for the value of the benefits business. Then you've got the wealth business. So looking at just one number that reflects only one most lever of the balance sheet as well is to us not a way to economically run the business.The other thing I would just point out is that I don't know how anyone can run a business based on that ratio, given that if you think about what's occurred in the past 2 or so years, we've done nothing but make money for our shareholders. And we have not given out a huge amount of money or done a huge amount of buybacks or diluted ourselves in any other way.The point here is that we've continued to add retained earnings to the balance sheet. And the starting point for that ratio was quite a bit higher. So we've done nothing but make money and that ratio changes every quarter. So that's why it's hard for us to really manage a business based on external market factors.

[Operator]

And we have a follow-up question from Chris O'Connell.

[Christopher O'Connell, analyst]

Next question. I was wondering, you had a little bit more share repurchases this quarter. You have plenty of in the plan before year-end. Is that something that you intend to continue to do in the fourth quarter?

[Joseph Sutaris, executive]

Yes. So Chris, I would say potentially, yes, and probably continue to be fairly nominal in terms of the grand scheme of our outstanding shares and even within the repurchase authority, which was 2.7 million shares for 2023. Obviously, with the valuation down, it makes some sense now to repurchase, getting repurchasing some shares probably slightly above what otherwise would be equity plan pretty well. So we've just generally tried to keep our share count flat.There's an opportunity to take it down a bit just because of where the price is. But we're not intending to embark on a large repurchase plan here in at least this quarter. We'd like to keep a little powder dry for other opportunities. And that's -- so we'd rather kind of lean into growth more than we would to buy back our own shares.

[Christopher O'Connell, analyst]

Got it. And just on the cash buildup liquidity build this quarter with the locking and the borrowings here. Is that something that you expect to kind of right size itself fairly rapidly next quarter back towards the levels that you've been in the past few quarters? Or do you think some of that will stick around and kind of come in over time or just stay flat depending on how loan growth shakes out.

[Joseph Sutaris, executive]

Yes. So Chris, we -- I think we finished the quarter a little over $200 million in cash equivalents. We do have a bit of a seasonal pattern in Q3 and Q4 in tax collection. My expectation is that typically, I'll say, into Q1, less so, but into Q2, we start to see some of that drift down a bit. But right now, we expect that those kind of cash equivalents could carry some of the loan growth into Q4, and then we'll have to reassess in Q1.But our expectation on a longer-term basis is that as we continue to lean into loans and grow loans and if deposit growth does not keep pace with that over the next couple of years, we're going to continue to probably lever up on some term funding until we get bridged to our securities cash flows in '26 and '27.

[Christopher O'Connell, analyst]

Great. And then just last touch up one for me. Can you just remind us as to -- I believe there's some seasonality in the insurance business into the fourth quarter where it comes down a bit. Can you just remind us of the typical magnitude there.

[Joseph Sutaris, executive]

Yes. It does vary a bit, Chris. But typically, the renewal periods are January 1 and July 1. So that usually results in a little higher run rate in Q1 and Q3. That's just typical insurance renewal period. So typically, we drift down a little bit in Q2 and Q4. And I'm not sure I can peg an exact number, but it could be down $1 million or $2 million in a quarter and then back up in the subsequent quarter. But the longer-term run rate, which I think Dimitar indicated is about -- it's about $45 million right now. And the markets are hard for insurance premiums, and that translates into higher commission levels. So our expectations around just kind of the -- absent any sort of acquisitions is that the organic growth rate on commissions is -- we have a pretty solid outlook on that into 2024.

[Operator]

And this concludes our question-and-answer session as well as this conference. Thank you very much for attending today's presentation. You may now disconnect.