Community Bank System, Inc. (NYSE: CBU) Q4 2021 earnings call dated Jan. 24, 2022
Corporate Participants:
Mark E. Tryniski — President & Chief Executive Officer
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Joseph F. Serbun — Executive Vice President & President Of Retail Banking
Analysts:
Alexander Twerdahl — Piper Sandler Companies — Analyst
Russell E. T. Gunther — D.A. Davidson & Co. — Analyst
Matthew M. Breese — Stephens, Inc. — Analyst
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
Erik Zwick — Boenning & Scattergood, Inc. — Analyst
William Wallace — Raymond James & Associates — Analyst
Presentation:
Operator
Good morning and welcome to the Community Bank System Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 and that are based on current expectations, estimates and projections about the industry, market 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 in Form 10-K filed with the Securities and Exchange Commission. 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 Joseph Serbun, Executive Vice President and Chief Banking Officer, for the question-and-answer session.
Gentlemen, you may begin.
Mark E. Tryniski — President & Chief Executive Officer
Thank you, Chad. Good morning, everyone, and thank you for joining our year end conference call. We hope that everyone is well. Our earnings for the quarter were very good and right in line with our expectations. We delivered record revenues and nearly record PPNR per share which was up 6% over the 2020 quarter. Joe will comment further on the quarter. But I would like to add that ex-PPP we had solid growth in both our commercial and our retail portfolios, which were up 8% annualized for both Q3 and Q4. Looking at the whole of 2021, we had a really good year.
Obviously, the results were favorably impacted by reserve releases and PPP, but carving those out, we still delivered solid earnings and absorbed nearly all of the margin erosion, which is not been insignificant. Deposit growth for the year was 15% with both customer count and average balances contributing. Loan growth for the entire year, ex-PP, was 5% with commercial flat and consumer up 8%. The strength of our financial services businesses continuous. For the year, revenues were up 12% and pre-tax earnings up 20% over 2020, resulting in significant margin expansion.
Also, during the year, we closed down two benefits acquisitions and five smaller insurance businesses. The acquisition of Elmira Savings Bank we announced in September is progressing well and we expect to close on that transaction in Q2. Elmira is a $650 million asset bank with 12 offices across the Southern Tier and Finger Lakes regions of New York State. It’s a very nice franchise with a very good mortgage business that we expect will be $0.15 per share accretive on a full-year basis, excluding acquisition expenses so a very productive, low-risk transaction.
Looking ahead to the remainder of the year, we have significant energy and operating momentum right now in both our banking and non-banking businesses. Margin continues to be a headwind, but earning asset growth, the strength of our financial services businesses and credit are tailwinds. We have begun to focus and invest in our commercial and retail businesses to improve organic execution to include people, systems and products. We will continue to invest in our digital channels and rationalize our analog channels as we did this year with the consolidation of 15 retail branches.
Organic execution in our non-banking businesses has been tremendous, but we will continue to look to acquisition opportunity as well to grow the product rep, talent, revenue and earnings’ strength of those businesses. And given the recent and expected ongoing challenges to the banking industry, we are hopeful to have a high-value acquisition opportunity this year as well. We are very much looking forward to 2022.
Joe?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Thank you, Mark, and good morning, everyone. As Mark noted, the fourth quarter results were solid, with fully diluted GAAP earnings per share of $0.80. The GAAP earnings results were $0.06 per share or 7% below the fourth quarter 2020 GAAP earnings and $0.03 per share or 3.6% below linked-quarter third quarter results. Fully diluted operating earnings per share, which excludes acquisition-related expenses and other non-operating revenues and expenses, were $0.81 for the quarter, $0.04 per share or 4.7% below the prior year’s fourth quarter and $0.02 per share or 2.4% below linked third quarter results.
The decrease in operating earnings per share were driven by increases in the provision for credit losses, operating expenses, income taxes, and fully diluted shares outstanding, offset in part by increases in net interest income and noninterest revenues between comparable quarters. The company reported $2.2 million provision for credit losses in the fourth quarter of 2021 as compared to a $3.1 million net benefit in the provision for credit losses in the fourth quarter of 2020. Adjusted pretax pre-provision net revenue per share — which excludes the provision for credit losses, acquisition-related expenses, and other non-operating revenues and expenses and income taxes — was $1.09 in the fourth quarter of 2021 as compared to $1.03 a year prior and $1.04 in the linked third quarter.
On a full-year basis, the company reported fully diluted GAAP and operating earnings per share of $3.48 and $3.49, respectively. These were up $0.40 per share or 13% and $0.25 per share or 7.7%, respectively, over 2020 results. Full-year 2021 adjusted pretax, pre-provision net revenue per share of $4.28 was up $0.02 per share over 2020 results. The company reported total revenues of $159.7 million in the fourth quarter of 2021, a new quarterly record for the company, a $9 million or 6% increase over the prior years’ fourth quarter.
The increase in total revenues between the periods was driven by a $2.3 million or 2.5% increase in net interest income, a $1.6 million or 11% increase in banking related non-interest revenues and a $5.5 million or 13.2% increase in financial services revenues, offset in part by $0.4 million decrease in gain on debt extinguishment. Total revenues dropped $2.8 million or 1.8% from third quarter 2021 results, driven by a $3.1 million or 3.4% increase in net interest income. Total non-interest revenues accounted for 40% of the company’s total revenues in the fourth quarter. The company’s net interest income increased $2.3 million or 2.5% over the same quarter last year, despite a significant decrease in its net interest margin.
The company’s taxable and net interest margin for the fourth quarter of 2021 was 2.74% as compared to 3.05% one year prior, a 31-basis point decrease between the periods. Comparatively, the company’s tax equivalent net interest margin for the third quarter of 2021 was also 2.74%. Although net interest margin results remained below the pre-pandemic levels, the company’s fourth quarter net interest income expanded over the prior year’s fourth quarter and linked third quarter results driven by non-PPP-related organic loan growth, the deployment of excess liquidity for low yield cash equivalents to higher yield investment securities, earning asset growth and the reclassification of several large business lending relationships from non-accrual to accruing status.
The company’s tax equivalent yield on earning assets was 2.83% in the fourth quarter of 2021 matching third quarter results and 3.18% in the prior year’s fourth quarter. During the fourth quarter of 2021, the company recognized $3.6 million of PPP-related interest income, including $3.3 million of net deferred loan fees. This compares to $3.5 million of PPP-related interest income recognized in the same quarter last year and $4.3 million in the late third quarter of 2021. The company recognized $18.7 million of PPP-related interest income in 2021. The company’s total cost deposits remain low, averaging 8 basis points during the fourth quarter of 2021.
Employee benefits services revenues for the fourth quarter of 2021 were $30.4 million, $3.7 million or 13.7% higher than the fourth quarter 2020. The improvement in revenues was driven by increases in employee benefit trust, the custodial fees, as well as incremental revenues for the third quarter acquisition of Fringe Benefits Design of Minnesota. Wealth management revenues for the fourth quarter of 2021 were up $8.5 million — were $8.5 million, up from $7.5 million in the fourth quarter of 2020. The $1 million or 13.4% increase in wealth management revenues was primarily driven by increases in investment management and trust services revenues.
Insurance services revenues of $8.5 million were $0.9 million or 11.2% over the prior year’s fourth quarter, driven by organic growth factors and the third quarter acquisition of a Boston-based specialty life insurance practice. Banking non-interest revenues increased $1.6 million or 11% from $15 million in the fourth quarter of 2020 to $16.6 million in the fourth quarter of 2021. This was driven by a $1.2 million increase in mortgage banking income and $0.5 million or 3% increase in deposit service and other banking fees. During the fourth quarter of 2021, the company reported provision for credit losses of $2.2 million.
This represents — this compares to the $3.1 million net benefit in the provision for credit losses for the fourth quarter of 2020. The company reported net loan charge-offs of $1.7 million or annualized 9 basis points of average loans outstanding. During the fourth quarter of 2021 as compared to net charge-offs of $1.3 million in annualized 7 basis points of average loans outstanding for the fourth quarter of 2020. Although economic forecasts remain generally stable during the fourth quarter of 2021 despite the rapid spread of the COVID Omicron variant, the company’s allowance for credit losses increased $0.4 million reflective of a $165.3 million increase in non-PPP loans outstanding and other qualitative factors.
Comparatively in the fourth quarter of 2020, economic forecast had improved significantly from the prior quarter, resulting in the release of credit reserves in the quarter. On a full-year basis, the company reported $2.8 million in net charge-offs or 4 basis points of average loans outstanding during 2021 as compared to $5 million of net loan charge-offs or 7 basis points of average loans outstanding during 2020. On a full-year basis, the company reported an $8.8 million net benefit in the provision for credit losses of the economic outlook and the loan portfolio’s asset quality profile both steadily improved.
The company reported $100.9 million of total operating expenses in the fourth quarter of 2021 compared to $95 million of total operating expenses in the prior year’s fourth quarter. The $5.9 million or a 6.2% increase in operating expenses was primarily attributable to a $4.9 million or 8.5% increase in salaries and employee benefits, driven by increases in merit and incentive related employee wages, staffing increases due to recent acquisitions, higher payroll taxes, including increases in state related unemployment taxes and higher employee benefit related expenses.
Acquisition related expenses were also up $0.4 million between accountable and quarters due to the pending Elmira Savings Bank acquisition and other recent financial services acquisitions. The effective tax rate for the fourth quarter of 2021 was 23% and 21.4% on a full-year basis, up from 20.9% and 20.1% respectively from the equivalent prior-year periods. The increase in the effective tax rate was primarily attributable to an increase in certain state income taxes that were enacted through period and a decrease in the proportion of tax exempt revenues in relation to total revenues.
The company crossed $15.5 billion in total assets during the fourth quarter, driven by the continued inflows of deposits, which increased $187.3 million or 1.5% from the end of the third quarter. Ending loans at December 31, 2021 was $7.37 billion, $91.1 million or 1.3% higher than the third quarter 2021 ending loans of $7.28 billion and $42.3 million or 0.6% lower than one year prior. Excluding PPP loan activity, ending loans increased $165.3 million or 2.3% during the fourth quarter of 2021, $334.5 million or 4.8% on a full-year basis. Loans outstanding net of PPP loans have grown organically by more than 2% in both the third and fourth quarters of 2021.
As of December 31, 2021, the company’s business lending portfolio includes 722 PPP loans with a total balance of $87.9 million. The company expects to recognize the majority of its remaining net deferred PPP fees totaling $3.1 million over the first and second quarters of 2022. Although the company’s low yielding cash equivalents remain elevated, totaling $1.72 billion at December 31, 2021, the company deployed a significant portion of its excess liquidity during the fourth quarter by purchasing $668 million of investment securities at a weighted average purchase yield of 1.41%.
These activities continued into January with the purchase of an additional $757.6 million of investment securities at a weighted average purchase yield of 125.6%. The company’s capital ratios remain strong in the fourth quarter. The company’s Tier 1 leverage ratio was 9.09% at December 31, 2021, which is nearly two times the well-capitalized regulatory standard of 55%. While the net tangible equity net tangible assets ratio was 8.69% at December 31, 2021. Company has an abundance of liquidity. The combination of the company’s cash, cash equivalents, borrowing ability, the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with $6.63 billion of immediately available source of liquidity at the end of the fourth quarter.
At December 31, 2021, the company’s allowance for credit losses totaled $49.9 million or 0.68% of total loans outstanding. This compares to $49.5 million or 0.68% of total loans outstanding at the end of the third quarter of 2021 and $60.9 million or 0.82% of total loans outstanding at December 31, 2020. The $0.4 million increase in loss for credit losses during the fourth quarter is reflective of non-PPP-related loan growth and other qualitative factors. Nonperforming loans decreased in the fourth quarter to $45.5 million or 0.62% of loans outstanding, down from $67.8 million or 0.93% of loans outstanding at the end of the linked third quarter of 2021 and $76.9 million or 1.04% at the end of the fourth quarter of 2020.
The significant decrease in nonperforming loans during the fourth quarter is primarily due to the reclassification of certain hotel loans from non-accrual status to accrual status. Loans 30 to 89 days delinquent totaled 0.38% of total loans outstanding at December 31, 2021. This compares to 0.47% one year prior, and 0.35% in the linked third quarter. We believe that the company’s asset quality remained strong, but acknowledge that historically low levels of net charge-offs experienced in 2021 and generally benign credit environment were supported by the extraordinary federal and state government financial assistance provided to businesses and consumers throughout the pandemic.
Looking forward, we’re encouraged by the momentum in our business. The company generated solid organic loan growth in 2021, especially in the third and fourth quarters. The financial services businesses have been growing and performing very well. Asset quality remains strong and we’ve been active in deploying our excess liquidity as interest rates have climbed in recent weeks. In 2022, we will remain focused on new loan generation we’ll continue to monitor market conditions to seek additional opportunities to deploy excess liquidity.
And lastly to echo Mark’s comments, we’re pleased and excited to be partnering with Elmira Savings Bank. Elmira’s been serving its communities for 150 years and we will enhance our presence in five counties in New York, Southern Tier and Finger Lakes regions. We initially anticipated completing the acquisition in late first quarter 2022, but now expect to close the second quarter of 2022. The integration efforts are going very well, and we sincerely appreciate the efforts of our colleagues at Elmira Savings Bank to make the transition as seamless as possible for its customers.
Thank you. I will now turn it back to Chad to open the line for questions.
Questions and Answers:
Operator
Thank you. [Operator Instructions] And the first question will be from Alex Twerdahl from Piper Sandler. Please go ahead.
Alexander Twerdahl — Piper Sandler Companies — Analyst
Hey, good morning, guys.
Mark E. Tryniski — President & Chief Executive Officer
Good morning, Alex.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Good morning, Alex.
Alexander Twerdahl — Piper Sandler Companies — Analyst
First off, I was hoping that you could — appreciate your comments on the investments that you’re putting into the commercial and retail lending teams. I was hoping you could comment a little bit on the pipelines going into the beginning of the — for the sustainability of that 2-plus percent overall organic loan growth over the next couple of quarters?
Joseph F. Serbun — Executive Vice President & President Of Retail Banking
Yeah, Alex. Joe Serbun. I’ll take that. I’ll give you the commercial pipeline. I’ll also give you the resi mortgage pipeline as well. So, the pipeline for 2021, December 2021 ended at $348 million, excuse me, $335 million as compared to December 2020 which was at $136 million. And then the anticipated funding rate loans that have been approved but not yet funded through 2021, it’s $348 million, and for 2020, it was $212 million. And it was across all of the — or is across all of the regions, some more than others but everybody seems to be participating in the activity.
And much of that’s coming by way of CRE or multifamily, some self-storage kind of activity, C&I activity so a variety of lending opportunities. On the consumer side, the resi mortgage pipeline’s at 141, which is a little lighter than where we were at the same time last year at 165, but I’m not concerned. That was the reflection of our improved process. So we’re getting things through the pipe and through the funnel faster, which, therefore, we’re not surprised that we’re not at the 160 plus. Our — the number of days that we’re turning things through are improving. So I feel real comfortable with the activity in the resi pipeline as well.
Alexander Twerdahl — Piper Sandler Companies — Analyst
Great. And then can you comment a little bit on to the blended yields on new loans? And was there some in the fourth quarter, was there some recognition of interest that perhaps from those loans that were on nonaccrual that return to performance status?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah. Alex, this is Joe Sutaris, I can take that question. So the blended yield of new volume in the fourth quarter was about a 3.30%, give or take, with our blended current book yield excluding PPP in the fourth quarter of about 4%. So we are putting new loans on it rates below the existing yields but obviously that the volume and growth has been very good in the last couple of quarters but we’re putting new volume on at 3.30%. With respect to the nonaccrual loans that move to accrual status during the quarter, we booked approximately a $1 million of interest income related to those loans coming — moving from nonaccrual status to accrual status in the quarter.
Alexander Twerdahl — Piper Sandler Companies — Analyst
And final question, as it relates to the liquidity deployment, how do you think about that? Is it in terms of sort of a target liquidity level or deposit balances or you just look to see what if the loan growth shakes out and then sort of step up the rest with security balances? Or maybe give us a sense, I know you’ve said that you did some purchases in January, but kind of how should we think about the pace of liquidity deployment over the next couple of quarters?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah. So we still have some modest amount of open strategies for some of the terms that we’d like to hit in the securities portfolio, so, we stay at those levels. I think it’s fair to expect another call it, $0.5 billion or so to be invested over the first part of the year. But to your point, yes, we’ll be monitoring the loan portfolios as well to see what the growth expectations are there and obviously monitoring where the rate curve is going as well.
So what we’re really trying to target, Alex, is also to build a nice cash flow ladder on the securities portfolio going out in the future period. So there are other opportunities. When and if rates stay higher or move higher, we’ll have opportunities to reinvest some of those in — on a going forward basis. So we probably will maintain some levels of liquidity — continue to maintain higher levels than we have certainly pre-pandemic. But we’re also looking to deploy — continue to deploy some of the additional liquidity in the first half of the year.
Alexander Twerdahl — Piper Sandler Companies — Analyst
Great. Thanks for taking my questions.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Welcome.
Operator
And the next question will be from Russell Gunther from D.A. Davidson. Please go ahead.
Russell E. T. Gunther — D.A. Davidson & Co. — Analyst
Hi. Good morning, guys. I just had a quick follow-up on the growth conversation. Appreciate the pipelines that were provided but with — as was mentioned, really strong growth in the back half of the year. So could you give us a sense for what your organic growth expectation is for ’22, and what some of the asset class drivers would be? And then just particularly curious as to thoughts around retaining single family at the current click.
Joseph F. Serbun — Executive Vice President & President Of Retail Banking
Russell, I’ll take that. It’s Joe Serbun. So — excuse me. So the overall expectations are that we’re going to grow in the mid-single-digits overall. And the expectation on the commercial side is that we will grow. And I mentioned some of the asset classes earlier that we are focused on and have been focused on. Yet on the retail products, to retail clients, the installment loan and more importantly, the indirect loans, as well as the resi mortgages, we expect them to continue to grow. We’re probably at a slower pace than they have historically. We have some inventory challenges with houses and cars and of course, the anticipated rate hikes and what the impact, what kind of headwinds they may provide. So that’s what we expect for overall growth and portfolio growth. And we do expect to retain our mortgages on the balance sheet.
Mark E. Tryniski — President & Chief Executive Officer
Russell, it’s Mark.
Russell E. T. Gunther — D.A. Davidson & Co. — Analyst
Hi, Mark.
Mark E. Tryniski — President & Chief Executive Officer
Russell, it’s Mark. Hi. I just wanted to add, in my prepared comments said that we’ve kind of begun to focus and invest in our commercial and our retail businesses to improve organic execution, to include people, systems and products. So we are investing in our mortgage business in different ways around products, around people, around our model, our mortgage model, which has always been more ranch-oriented and less mortgage originator-focused.
So we’re going to reposition that a bit. We’re also investing in our commercial business in different ways in some of the markets that we’re already in with improved resources also, pursuing other adjacent markets that have superior growth potential characteristics relative to our existing markets. So, we are making an effort this year to do a better job and grow better over time by investing in our organic execution ability. Joe had mentioned kind of the days to close on the mortgage side. We’ve added some resources to our mortgage business in the back office to try to keep that — to keep those days down.
Because in anticipation of some of these investments that we’re making in the mortgage business around people and our model, we’re going to — we expect more throughput. And so we’re going to need to have more back room capabilities, which we’ve all already started to ramp up a bit. So that explains as Joe said, why the hell did the pipeline’s down with the average days to close is also down. So we’re getting through the fall quicker. So just wanted to follow-up with that comment on kind of the investment we’re going to be making in — across our commercial and mortgage business here in 2022.
Russell E. T. Gunther — D.A. Davidson & Co. — Analyst
I appreciate it, Mark. Thank you both for the follow-ups there. And then switching gears to the margin that you mentioned in prepared remarks remains a headwind. You guys detailed the kind of new money yield versus what’s coming off. But curious how you balance that with what the Fed might do and the impact of rate hikes on your outlook? So could you share kind of what you’re expecting from a Fed rate hike perspective and how each 25 basis points might impact the margin or NII, however, you guys want to take a crack at that? Thank you.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah. Russell, this is Joe Sutaris. I’ll take a shot at that. So for — on a full year basis between variable rate loans and loans that effectively are paying principal payments and prepayments of loans, we expect a little over $2 billion, $2 billion to $2.5 billion of, I will call it repricing opportunity in our full — on a full year basis. So you know when and if the Fed does raise rates and I think we’re kind of in the camp of everyone else, which is — we could see three rate hikes this year, maybe some more in 2023, we’ll have the opportunity to climb the curve if the long end goes up or the middle part of the curve goes up a bit, just because that’s where most of our new loan generation surprise.
Now obviously, we have some variable rate loans that will immediately leapt off the floor most of them in the next 12 months. On a variable rate loan side, we have about $850 million that we expect to reprice in the next 12 months and another $800 million in 2023 in the portfolio. So I think we’re going to have some opportunities to expand margin when and if rates do go up and we are asset sensitive. I’ll also remind you that and the group that our deposit beta in the last several cycles, get back to the ’15 through ’18 cycle, was very close to zero for most of the cycle. So you know, when and if rates go up, we would expect the margin outcome to get a bit better for us.
Russell E. T. Gunther — D.A. Davidson & Co. — Analyst
Great. Thank you, Joe. I appreciate it. And then just last one, switching gears, appreciate your guys thoughts on the revenue growth outlook within the employee benefits line and the trends and activity you’re seeing for ’22 and then I’ll step back. Thank you.
Mark E. Tryniski — President & Chief Executive Officer
Yeah. Well, it was double-digit growth this year and the top line, I think, was 12 percent. The pretax earnings line was 20%. I think we also achieved that last year as well, double-digits on top and bottom line. Every year, we do that. We always say to ourselves, at what point does this slow down? And it doesn’t. It doesn’t seem to. So I’m optimistic we can continue to grow the top line at double-digits. I think we’re pretty well-positioned to do that actually heading into 2022. Some of those revenues are market dependent. And so there’s some impact. If you — if we get a significant slide in the market, that would impact some of those revenues.
On the other hand, the insurance market is hardening. And so you’re going to get that — the benefit from a hardening of the insurance market. The other benefits business, just we have — we’re in a sweet spot right now in our benefits business where we have the ability to serve larger players. And some of those are very large financial services businesses, which are coming to us to outsource their administration and recordkeeping, custodial — not custodial but trust needs. And so we’re getting incoming opportunities of significance in that space right now which is great. And we’ve got some partnerships with some very large national and multinational financial services organizations that have come to us to help some of their needs and issue as well.
So there’s just — in addition just organic growth in that business were, we’re in really good spot in terms of the scale of that business and our capacity to serve much larger, very large national and multi-national financial services for in terms of what we do and the products and services and capabilities we have in those businesses. So what started as a kind of a 401(k) shot 20 years ago has evolved to something much more sophisticated and complex, with incredible technology and capabilities that we’re now leveraging into much larger opportunities in the marketplace. So I would, I would expect that business as will grow double digits next year as well, so we’ll keep investing in those businesses. They’re great businesses. The run rate this year should be about $200 million in revenues for our non-banking businesses. And we think that 2022 will be also a really good year across the board.
Russell E. T. Gunther — D.A. Davidson & Co. — Analyst
I appreciate it, Mark. Thank you all for taking my questions.
Mark E. Tryniski — President & Chief Executive Officer
Thanks, Russell.
Operator
And the next question will be from Matthew Breese from Stephens Inc. Please go ahead.
Matthew M. Breese — Stephens, Inc. — Analyst
Good morning.
Mark E. Tryniski — President & Chief Executive Officer
Good morning, Matt.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Good morning, Matt.
Matthew M. Breese — Stephens, Inc. — Analyst
Sorry. Just going back to the rate discussion, I was hoping you could give us a sense for the duration of the securities book and what percentage of securities are floating rate, if any, and an attack on, just that 100 basis point net interest income sensitivity model in your 10-Q? What deposit rate are you making in?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah, I’ll take that Matt, this is Joe Sutaris. So the effective duration of the portfolios is just over seven years fairly well-laddered. It’s almost all fixed rate securities with bullet type securities, a lot of treasury securities. We do have some MBS securities that provide a variable cash flow, but they’re not variable instruments. Just the cash flows will change over time, depending on the prepayment levels. But it’s — I think it’s fairly well-laddered so we will have some opportunities, I think, to reprice and purchase new securities as time passes and those run off. I’m sorry, Matt. What’s your second question was?
Matthew M. Breese — Stephens, Inc. — Analyst
Yeah. In your prior comment, we discussed as a reminder for the last hiking cycle, the deposit beta was close to zero. And I was curious in your 10-Q where you show the net interest income sensitivity if behind that data, are you running a zero percent beta or what are you assuming there?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
We have some modest data built in, Matt, as opposed to the zero through the whole cycle, but it’s but it’s very modest, less than, probably less than a 10 in the model. Just based on our past experience, we have very little beta and we would expect that to be similar for this cycle as well. And I would just add that the whole industry is awash in liquidity. So, from a competitive standpoint as well, I would expect that we might not be as competitive this cycle for deposit this early in the cycle as it was in the last cycle. So I think our ability to keep deposit rates kind of near their current levels in 100 or 200, at least for a 12-month period is very reasonable. It’s a reasonable expectation.
Matthew M. Breese — Stephens, Inc. — Analyst
Got it. Okay. My next one is, industry-wide we’re starting to see some pretty larger banks change deposit to receive mostly tied to overdraft and NSF. I think there’s some fear that CFPB could be just a little bit more impactful over the coming months and years. Just curious how you look at depositories, if you feel like there’s anything at risk and if so, how would you kind of outline that?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah, Matt, I think we’re, I think we’re in a good position from the standpoint of our checking deposit base. Historically going back, gosh, it’s been about 15 years. We’ve been a free shop per se for our retail customers and kind of a low activity charges even on our, on our commercial businesses. So if, if we, if we modify practices going forward for overdraft outcomes, we potentially could go backwards in terms of the revenue line item. But I think we also have the ability to make up some of that another, other areas of deposit service fees. So I feel like we’re fairly well-positioned.
We are certainly evaluating all of our offerings and looking and keeping an eye on all of the changes in the regulatory environment. So it’s certainly on our radar. And we expect this year we will probably make some modifications to our offerings but we also think we’re well positioned. We’re aware of some other institutions that certainly had call a monthly maintenance fees per se and overdraft fees that were significant. And at least we’re in the position where I think our maintenance costs and activity fees are lower than some of our peers. So we might have some ability to make up some of that lost revenue as we change our product set.
Matthew M. Breese — Stephens, Inc. — Analyst
Great. Okay. Last one for me, just on share repurchases, looking back, I can’t remember if in the years I’ve covered you if I remember a quarter where you’ve actually repurchased stock. But I was hoping you could just walk through what triggered that capital deployment strategy, you know, was it valuation driven or was it more from the standpoint that you executed it on everything else including loan growth, M&A, securities growth, things like that?
Mark E. Tryniski — President & Chief Executive Officer
Yeah, Matt. It’s Mark. I’ll comment on that one. I think you’re right, we haven’t historically bought back a lot of stock. One of the things I kind of wanted to do for a long time was just a, call it, housekeeper cleanup of shares issued under the employee equity. It’s not a lot, but just as a matter of housekeeping, I would call the cleanup [Technical Issues] and we finally got around to doing it and we’ll probably — you’ll see that going forward. So there’s really no rhyme or reason other than that. It’s not some, you know, detailed scientific capital allocation strategy. It’s just kind of more, you know, good hygiene. Let’s clean up the share creep associated with the equity plans over time. And so you’re probably continuing to see that in the future.
Matthew M. Breese — Stephens, Inc. — Analyst
Okay. Do you think we should expect that like a once-a-year cleanup?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
I think, Matt, we would — we’d pick our spots over the year and, you know, do it and probably, you know, incremental bites over the year, but I think in effect on a full-year basis, we’re looking at just, you know, cleaning up the creep, which is, you know, 300,000 to 500,000 shares depending on the year, maybe a little less.
Matthew M. Breese — Stephens, Inc. — Analyst
Got it. Okay, great. I appreciate you taking my questions. Thank you.
Mark E. Tryniski — President & Chief Executive Officer
Thanks, Matt.
Operator
And the next question will come from Chris O’Connell with KBW. Please go ahead.
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
Good morning, gentlemen. So just wanted to start it off with the expense base and you guys obviously have rationalized the branch network quite a bit over the past 12 months or so. And it was just outside of the Elmira deal. I was just wondering about how much of that opportunity is left. And in general, how you think about organic expense growth into 2022?
Mark E. Tryniski — President & Chief Executive Officer
Yeah, Chris it’s a good question, fair question. So our run rate the last couple of quarters and operating expenses was about $100 million. I would expect that as we look at 2022 to potentially add a couple hundred — excuse me, a couple million dollars to that result. And certainly Q1 and into Q2 excluding the Elmira opportunity, we tend to give our merit based increases at the beginning of the year or so. And we also have higher payroll taxes in the first quarter. So I think you’ll see most of that sort of achieved in the first quarter.
So we know a couple of million dollars on top of what we did in the last couple of quarters. And then that sort of becomes our run rate. So with wage pressures, we would typically have, I’ll call it 3% kind of expectation around operating expenses growth, it’s probably closer to 4% or 5% with certainly with wage pressures in that, in the market. We’re also investing in some loan generation resources, which will add a little bit, a little bit to cost as we, as we move ahead. But nothing too far out of the ordinary just a bit higher on the expected run rate.
With respect to additional opportunities to rationalize the business, I think we’ll continue to look at those. They can take a little time to sort of bake into the opex. You did announced any sort of rationalization and execute on them. And then ultimately, Rationalizations and execute on them. And then ultimately, you realized those aims over the future periods. I will say that particularly the occupancy and the equipment expense line items have been pretty flat the last couple of the years particularly because of some of the consolidation activities.
And the last thing I will note is that, our — we continue to invest in digital technologies, so the expectation that we’re going to continue to do that, the world is changing and we’re trying to keep pace with that with that change. So the telecommunications and IQ expense line item could creep up a bit more than kind of a core run rate for expenses. But — call it the occupancy and those types of bus will tend to be probably below the core run rate.
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
Great, that’s helpful. And then suddenly, you guys mentioned in the prepared comments that you would be looking to do potentially another deal in the next year, if the opportunity presents itself. If you could just give a reminder of what would be the ideal size and geographical landscape or net add for your loan generation capabilities, etc, for under — for an ideal transaction, that’d be great.
Mark E. Tryniski — President & Chief Executive Officer
Sure Chris, this is Mark. I think $1 billion to $2 billion is a good sweet spot for us either within our footprint or contiguous to our footprint, high quality franchise, good culture, not a fixer upper. Something that has valuable assets that are under appreciated in the market that could be a mortgage business That could be wealth, which interesting to me, if you look at the some of the banks out there in that size at least in and around our markets, the northeast generally, there’s some really, really good $1 billion to $2 billion banks with really good wealth businesses that are trading 9 times earnings.
So I think there’s a lot of opportunity and I think, you know, banks like that are going to have a challenging time getting a multiple in the market for, you know, a variety of reasons. And so, I think, you know, with our — currency and kind of background and expertise and history of value creation for shareholders, including those who we partner with, I think there’s a good opportunity in 2022 to find something that fits that kind of ideal criteria.
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
That’s helpful color. Thank you. And then, what about, you know, on the non-bank side, you know, within the fee businesses, could you just give us an update on — you did — you inked a couple of smaller acquisitions over the past couple of quarters there. Is there still good opportunities presenting themselves or just being a little bit priced out due to, you know, some of the entrance of, you know, key competition in those spaces.
Mark E. Tryniski — President & Chief Executive Officer
Yeah. I think the, you know, insurance space is pretty still, I mean, at the very, very fragmented market. And in that space, scale makes a difference. So I think we’ll continue to have opportunities in the insurance space. We’ve never done a lot in wealth in terms of larger acquisitions because they tend to be overly expensive and you don’t really own the assets. So we’re a little bit cautious in the wealth space. What we do in the wealth space is we bring on small offices like one or two or three folks on the team.
And they have a couple of $300 million and we’ll bring them on, it’s not what you can call an acquisition but. So we’ve done some of those, in fact, I think we’re looking at one or two right now along those lines. So most of the stuff in the wealth side is that what you consider a traditional larger acquisitions they’re more smallish shops that are jumping on to our platform and there’s a monetization of that for them. It’s part of that sometimes structured as a sign on bonus kind of thing. In the benefits space the couple we did last year were both negotiated transactions. They were not bid PE. I think we have a lot of relationships across the U.S. and in Puerto Rico.
We have the largest benefits provider in the Commonwealth of Puerto Rico. So we have a lot of relationships and not everybody wants to sell PE for obvious reasons. So I think we’ll continue to have opportunities. I think we will probably see other opportunities where we get to go up for assets to get shot to the broader world in which case we will have a harder time beating PE just frankly based on price and it was really particularly high value asset for us for some reason. But we’ll keep playing — we’ve been close a couple of times. So we’ll see, I mean, one of the challenges, frankly, is the investment bankers for the PE firms kind of like they sell to each other.
And they like to do business with the PE firms because there’s a lot more business to do with them versus us where we’re not quite as active We’re not in the business of buying and selling assets. So, the investment bankers kind of favor the PE bids. It makes it a little bit more challenging. So — but, I mean, we understand the field of play and we do our best to play in it without being undisciplined. But I think the real opportunity is going to be focusing on those negotiated transactions where we have good relationships and good assets as well as this opportunity to kind of reach up market and talk to some of these bigger financial services players and leverage off their scale to create opportunities for us.
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
Great. And just on the credit side, it’s good to see the big chunk in non-accruals coming onto accrual this quarter. As you guys look ahead over the next quarter or two, is there any other significant chunks or kind of clips of those six-month periods that are coming up here that you could see another sizable chunk of the non-accruals kind of coming back on?
Joseph F. Serbun — Executive Vice President & President Of Retail Banking
Hey, Chris, this is Joe Serbun. Yeah. The 18 [Indecipherable] that we moved were the obvious ones. There’s a couple of others that are not — none of them are of significant size, first of all. And secondly, there’s a few that didn’t have, if you will, six months’ worth of performance underneath and they made us comfortable enough to move them from non-accrual to accrual. But I think that as we go through the second quarter, what we evaluate then and as we go through the third quarter, we’ll do the same thing. And if it warrants moving on, we’ll move — but there’s nothing. There’s no large number of assets that we’re looking to move. The biggest move took place in December.
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
Understood. And last one, just a little clean up. How are you guys doing the tax rate for next year?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
The tax rate, I think it’s fair to expect somewhere between, call it, 22.5% and 23.5% a going forward basis. We’ve had certain states that enacted higher rates. And so, we’re dealing with that. Also, if you look at the balance of our earning assets, there’s more assets deployed in taxable assets than there have been in the past. So I would expect the rate to kind of hover between, call it, 22.5% and 23.5% potentially a little bit lower. But that’s I think a fair expectation for 2022.
Christopher O’Connell — Keefe, Bruyette & Woods, Inc. — Analyst
Great. Thanks for taking my questions.
Mark E. Tryniski — President & Chief Executive Officer
Thanks, Chris.
Operator
The next question will come from Erik Zwick from Boenning & Scattergood. Please go ahead.
Erik Zwick — Boenning & Scattergood, Inc. — Analyst
Thanks. Good morning, guys.
Mark E. Tryniski — President & Chief Executive Officer
Good morning, Erik.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Good morning, Erik.
Erik Zwick — Boenning & Scattergood, Inc. — Analyst
Most of my questions have been answered. Just one and I apologize if I missed it in the opening commentary. What was the driver of the decision to move the closing of Elmira to 2Q?
Mark E. Tryniski — President & Chief Executive Officer
I don’t feel so much a decision on our part. It’s just an expectation around where we see the trend of the regulatory approval process going. So, we decided to push it off too much further out just based on the progress and the dialogue with the regulators. I mean, there’s nothing of note or concern. I think it’s just right now with the administration and the pending with the administration and the pending appointments of some of the agency leadership and the — I’ll call it the interest of all of the regulatory agencies on every single transaction, even those who have a, let’s call it, tangential involvement, it’s a lot more complicated, slow everyone. That’s just the trend right now. So we just decided to push it out a couple of months to be sure.
Erik Zwick — Boenning & Scattergood, Inc. — Analyst
Got it. That makes sense. And what month within 2Q are you targeting at this point?
Mark E. Tryniski — President & Chief Executive Officer
We’re looking at May right now.
Erik Zwick — Boenning & Scattergood, Inc. — Analyst
Perfect. Thanks. That’s all I had today. I appreciate your taking my questions.
Mark E. Tryniski — President & Chief Executive Officer
Thanks, Erik.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Thank you.
Operator
[Operator Instructions] The next question will be from William Wallace of Raymond James. Please go ahead.
William Wallace — Raymond James & Associates — Analyst
Thank you. Good morning, guys. How are you?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Good. Good morning, Wally.
Mark E. Tryniski — President & Chief Executive Officer
Good. Hi, Wally.
William Wallace — Raymond James & Associates — Analyst
I had one follow-up question to Matt’s line of questioning around deposit service fees. If I look at that line as a percentage of average core deposits, pre-COVID, you guys were running of 20 basis points to 22 basis points per quarter, and then, like the industry, that dropped once COVID hit with all the stimulus, etc. But yours have been kind of stubborn and not recovering like we’ve seen other banks. So I’m curious if you’ve analyzed the trends in your deposit portfolio and if you have any expectation of what that deposit service fee line might look like moving forward through the next several quarters or a couple of years.
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah. Hi, Wally. This is Joe Sutaris. I can take that. So the advantage that we’ve had on a core funding base over a lot of years is really our core deposit base. And so our ability to track demand deposits if you will is very strong over the long period of time, we feel a lot of branch acquisitions over time that brought in good core deposit relationships. When the stimulus fund came in, most of that — those funds came into consumer checking accounts and so just on that basis alone, you know, our core deposit base grew substantially, probably more so than many of our peers and those balances continue to be substantial and high if you will by historical standards. So in that cycle effectively the number of overdraft occurrences and other fees simply came down because the balances were higher.
And so, I would expect that as, assuming that there’s some of that money gets spent by consumers over time and balances come down, we would be kind of moving back toward a more historic but probably not getting back to the levels we were certainly pre-COVID. And as we also mentioned, we are evaluating the offerings and the offerings potentially could change in 2022 and our expectation is that we do have some ability to potentially get some other deposit fees that are not NSF and overdraft related just because we’ve offered a free checking product suite and low transaction fees if you will over a long extended period of time.
William Wallace — Raymond James & Associates — Analyst
Okay. Thank you very much. That’s very helpful. And then one follow-up for you, I think it was Mark that was talking about the expense base and it sounded like you were saying we’re starting off the year around $102 million or so and then you’d think that there would be 4% to 5% kind of [Indecipherable] expense pressures on top of that. Is that — did I interpret your commentary to start with?
Joseph E. Sutaris — Executive Vice President & Chief Financial Officer
Yeah, Wally, this is Joe Sutaris. I made that comment, so we were running about $100 million in expenses the last — the prior two quarters. And typically what we have is we have an adjustment in the first quarter because merit based increases go through, payroll taxes kick in, [Indecipherable] taxes kick in. So we typically move up a bit. And my expectation is that it’ll be a couple of million dollars from Q4 to Q1. And then, on a run rate basis, on a going forward basis, I think a 4% to 5% expectation on an annualized basis is a more reasonable expectation whereas in the past that you potentially could be 2% to 4%. But just obviously there’s inflation in the market. There’s, there’s various wage pressures. I think our core run rate in terms of just growth is going to be just a little bit higher than it has been, certainly, certainly in the past. And we’re also investing in resources to originate, new loans and grow the loan portfolio and have better organic execution alongside as well.
William Wallace — Raymond James & Associates — Analyst
Okay. Yeah. Thank you very much for that, Joe. I appreciate that’s all I had. Thanks, guys.
Mark E. Tryniski — President & Chief Executive Officer
Okay. Thanks, William.
Operator
Ladies and gentlemen, this concludes our question-and-answer session, I would like to turn the conference back over to Mr. Tryniski for any closing remarks.
Mark E. Tryniski — President & Chief Executive Officer
No further remarks from me, Chad. Thank you. Thank you all for joining us this morning and we will talk again after the end of the first quarter. Thank you.
Operator
[Operator Closing Remarks]