Community Bank's (CBU) CEO Mark Tryniski on Q1 2016 Results - Earnings Call Transcript

| About: Community Bank (CBU)

Community Bank System, Inc. (NYSE:CBU)

Q1 2016 Earnings Conference Call

April 25, 2016 11:00 AM ET

Executives

Mark Tryniski - President and Chief Executive Officer

Scott Kingsley - Executive Vice President and Chief Financial Officer

Analysts

Joe Fenech - Hovde Group

Collyn Gilbert - Keefe Bruyette & Woods

Matt Schultheis - Boennings

Matthew Breese - Piper Jaffray

Operator

Welcome to the Community Bank Systems First Quarter 2016 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections with the industry, markets and economic environment, in which the company operates.

Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission. Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Scott Kingsley, Executive Vice President and Chief Financial Officer.

Gentlemen, please begin.

Mark Tryniski

Thank you, Sherlyn. Good morning everyone, thank you all for joining our first-quarter conference call. We started out 2016 on a productive note. Earnings are similar to last year despite margin and tax rate headwinds and business results were very strong with positive loan growth of $20 million and that compares to $70 million in runoff than last year's first quarter, and also above average deposit growth that allowed us to pay down nearly all of our outstanding overnight borrowings. So, a very good quarter from a balance sheet perspective.

Noninterest revenues were also very strong in the quarter. Banking fees were up 13% and revenues from Wealth Management, Insurance and employee benefits were up 48% in both cases due principally to the Oneida transaction that was closed in December. First-quarter noninterest revenues were 35% of total operating income providing further diversification and growth opportunities. With respect to Oneida, as we reported in January the operational integration went quite well.

For the first quarter, loans in the Oneida market were flat and deposits were up 8%. So, a decent start there for us to new markets. Most of the cost saves have been achieved. The remainder although quite small will be realized over the course of the second and third quarters. We started off Q2 in decent shape also, certainly compared to last year.

The mortgage in commercial pipelines are both strong and second-quarter fundings are expected to be higher than last year. The auto business, which was surprisingly strong in the first quarter, likely weather-related, continues to be very good.

Looking ahead, we continue to invest and build out our DFAST systems and have a roadmap that provides for a mid-2017 reporting capability, which we think positions us well with respect to the $10 billion threshold regardless of whether that is near term or beyond. Overall, superior funding, growing and diversified revenue sources, a history of operating efficiency and underwriting discipline will continue to serve the interest of our shareholder as well. Scott?

Scott Kingsley

Thank you, Mark and good morning everyone. As Mark mentioned, the first quarter of 2016 was a very solid operating quarter for us and again included the activities of the Oneida Financial acquisition for a full quarter. First-quarter operating EPS of $0.55 per share was a new all-time high for us in the first fiscal quarter of any year and was $0.01 above 2015 results despite observing a $0.125 per share year-over-year negative comparison from higher effective tax rate.

I’ll first cover some updated balance sheet items. Average earning assets of $7.61 billion for the first quarter were up 14.2% from the first quarter of 2015 and 4.2% higher than the fourth quarter of 2015, principally from the Oneida acquisition, which was closed in December of last year. Consistent with my comments from the call in January, average earning assets for the first quarter were very similar to year-end 2015 ending balances as we would seasonally expect. Average loans increased $622 million year-over-year or 14.8%, reflective of the Oneida transaction and a solid last three quarters of organic growth in 2015.

Ending loans actually increased $20 million in the first quarter a significantly better outcome than the $72 million of decline we experienced in last year's first quarter. Average investment securities were up 13.1%, compared to the first quarter of 2015, principally a result of the Oneida transaction. Ending deposits were up $993 million or 16.2% from the end of March of 2015, including approximately $700 million from the Oneida transaction with the remainder from solid core deposit growth over the past four quarters.

Total deposits increased $246 million in the first quarter of 2016, which allowed us to pay down short-term borrowings at quarter end to just $33.7 million. Although a portion of that deposit growth was related to seasonally higher municipal balances, we are pleased with the productive gains we've achieved in all types of core deposits, including those in the recently added Oneida markets.

Quarter end loans in our business lending portfolio of $1.51 billion were $270 million or 21.8% above the end of March of last year with approximately $150 million of that increase coming from the Oneida acquisition. Despite the previously mentioned one large charge-off we incurred in the fourth quarter of 2015, asset quality results in this portfolio continue to be very favorable with net charge-offs of 8 basis points of average loans over the last nine quarters.

Our total consumer real estate portfolios of $2.18 billion comprised of $1.78 billion of consumer mortgages and $403 million of home equity instruments include approximately $185 million of loans from the Oneida acquisition. We continue to retain in portfolio most of our short and mid-duration mortgage production, while selling secondary eligible 30-year instruments. Asset quality results continue to be very favorable in these portfolios with total net charge-offs over the past nine quarters of just seven basis points of average loans.

Our consumer indirect portfolio of $941 million was up $5.4 million from the end of the fourth quarter of 2015, which is seasonally very encouraging. Despite solid new car sales again in early 2016 used car valuations were the largest majority of our lending if concentrated continue to be generally stable. Net charge-offs in this portfolio were 35 basis points of average loans over the last nine quarters, a level we consider very productive and a level that stays quite consistent.

Despite the larger than typical net charge-off level we reported in the fourth quarter, which again included a $1.0 million partial net charge-off on a commercial relationship we had previously reserved for and discussed 2015 was a continuation of the favorable overall asset quality results that is part of our credit DNA. The first quarter of 2016 was no different. First-quarter net charge-offs of 10 basis points of average loans were consistent with the level reported in the first quarter of 2015. Non-performing loans comprised of both legacy and acquired loans, ended the first quarter at $26.1 million or 0.54% of total loans equivalent to the ratio reported at the end of last March.

Our March 31, 2016 reserves for loan losses represent 1.04% of our legacy loans and 0.95% of total outstandings after the Oneida acquisition. Based on the most recent trailing four quarters results, our reserves still represents almost 7 years of annualized net charge-offs. We continue to closely monitor our credit relationships influenced by natural gas related activities in the Marcellus Shale region of Northeast Pennsylvania, which totaled approximately $62 million at quarter end with roughly $44 million of that amount outstanding as of March 31.

Our exposure is comprised of 24 specific relationships, which include pipeline contractors, construction equipment and materials providers, stone and quarry enterprises, fuel and water transportation companies and hospitality related properties. The weighted average risk rating in this small segment, which is less than 1% of our total outstandings continues to be consistent with the overall commercial portfolio.

As of March 31 our investment portfolio stood at $2.9 billion and was comprised of $220 million of U.S. Agency and Agency backed mortgage obligations or 7% of the total $657 million of municipal bonds or 23%, and $1.96 billion of US Treasury Securities or 68% of the total. The remaining 2% was in corporate debt securities.

The portfolio contains net unrealized gains of $133 million as of quarter end, clearly a level higher than our recent quarter ends. Our capital levels in the first quarter of 2016 continue to be very strong. The Tier 1 leverage ratio stood at 9.95% at quarter end and tangible equity to net tangible assets ended March at 9.25%. Tangible book value per share was $17.16 per share at first quarter end and includes $40.5 million of deferred tax liabilities generated from tax-deductible goodwill or $0.92 per share.

Shifting to the income statement our reported net interest margin for the first quarter was 3.67%, which was down 16 basis points from the first quarter of last year and 3 basis points lower than the fourth quarter of 2015. The decision to pre-invest the expected liquidity from the Oneida transaction into treasury securities during the second and third quarters of last year contributed to the overall decline in net interest margin since the first quarter of 2015, but was also clearly additive to net interest income generation.

Consistent with historical results, the second and fourth quarter of each year include our semiannual dividends from the Federal Reserve Bank of approximately $0.5 million, which added 3 basis points of net interest margin to fourth-quarter results, compared to the linked third and first quarters. Proactive and disciplined management of deposit funding costs continue to have a positive effect on margin results, but have generally not been able to fully offset declining asset yields.

As I previously mentioned, our core deposit funding improvements in the first quarter of this year, including seasonal growth in municipal funds allowed us to efficiently replace almost all of our interest-rate sensitive overnight borrowings by quarter end. First-quarter noninterest income was up 31.8% from last year's first quarter and was meaningfully impacted by the Oneida acquisition. The company's employee benefits administration and consulting businesses posted an 8.5% increase in revenues with roughly a third of that coming from Oneida activities.

Our Wealth Management and Insurance Group revenues were $6.5 million above the first quarter of 2015 with 95% of that growth related to the Oneida acquisition, primarily insurance agency revenues. Consistent with Oneida's historical results the month of January and the first quarter was again seasonally strong in the acquired insurance services business. Our first-quarter revenues from deposit service fees were up from the levels reported in the first quarter 2015 with about two-thirds of that increase coming from the Oneida acquisition as higher card related revenues were able to more than offset lower utilization of account overdraft protection programs.

Mortgage banking and other banking services revenues were up $524,000 from the first quarter of last year and included a $440,000 gain on bank-owned life insurance. First-quarter operating expenses of $67.7 million included a full quarter of the operating activities of the Oneida acquisition and the approximately 275 employees that were added.

Despite the delay in the closing of the Oneida transaction from our originally announced expectations, we believe we have achieved the forecasted cost synergies we expected at announcement. The consolidation of certain smaller peripheral systems and other infrastructure efficiencies did spill into the first half of 2016, but are not expected to have a material impact on consolidated operating costs going forward.

Consistent with the recent historical experience, we did grant merit increases to our employees of approximately 3% in January. We have also continued to invest in improving our infrastructure and systems around the requirements of DFAST, as we get closer to the $10 billion asset size threshold. Our effective tax rate in the first quarter of 2016 was 32.5% versus 31.0% in last year's first quarter. Certain legislative changes to state tax rates and structures over the past two years resulted in the majority of the results in higher rates, including those related to our overall asset size now being above $8 million on a consolidated basis.

Although we essentially reported net interest margin results consistent with the fourth quarter of 2015, we continue to expect net interest margin challenges to outweigh opportunities for the balance of 2016. Although the majority of our new loan originations in our consumer lending portfolios are at yields consistent with those of the existing instruments, yields on new commercial originations remain generally below our blended portfolio yields.

Also as a reminder, a meaningful portion of the $0.07 of expected earnings accretion from the completed Oneida transaction was realized in the second through the fourth quarters of 2015 from securities pre-investment. Our funding mix and costs remain at very favorable levels today from which we do not expect significant improvement. Our growth in all sources of recurring noninterest revenues has been positive and we believe we’re positioned to expand in all those areas.

While operating expenses will continue to be managed in a disciplined fashion, we do expect to continue to invest in all of our businesses. We continue to expect Federal Reserve Bank semiannual dividends in the second and fourth quarters each year, as well as our annual dividend from certain pool retail insurance programs in the third quarter. Our first quarter 2016 net charge-offs results were again favorable and although we do not see signs of asset quality headwinds on the horizon it would be difficult to expect improvements to current asset quality results.

Tax rate management will continue to be subject to successful reinvestment of our cash flows into high quality municipal securities, which has been a challenge at times during this period of sustained low rates. In addition, as we previously mentioned near the end of 2015 and then actually experienced in the first quarter of this year, our larger consolidated asset size eliminated certain state tax planning opportunities resulting in the 1.5 percentage point increase in our full-year effective tax rate for 2016.

Despite some of these apparent challenges, we believe we remain very well-positioned from both a capital and an operational perspective for the balance of 2016 and beyond.

I'll now turn it back over to Sherlyn to open the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We’ll have our first question from Joe Fenech, Hovde Group.

Joe Fenech

Good morning guys.

Mark Tryniski

Good morning Joe

Scott Kingsley

Good morning Joe

Joe Fenech

A couple questions for you, if I could, first can you talk a little more detail about the energy portfolio, specifically last quarter I think you saw a change in the undrawn piece, can you talk if there were any - mention if there were any changes this quarter on that front and are there any change in criticized classified assets and just generally how you're thinking about that portfolio?

Scott Kingsley

Yes Joe really not a significant amount of change from the end of last quarter to your point, $62 million in total exposure, remember we sort of count everything that's being influenced by the activities down there, including hospitality related credits. So we're roughly $18 million difference between our exposure in the outstanding, risk rating has stayed about the same and has stayed very close to the blended average of the commercial portfolio in the rest of Pennsylvania. The activities around the pipeline contractors continues to be very robust with certainly no initial signs that any of the folks paying for those pipelines are going to slow down their desire to have them completed, as you appreciate different than some of the other parts of the world, on the country that have natural gas opportunity, the build-out of the transmission lines in Pennsylvania was certainly not complete. So, one could argue its still only early innings of the pipeline work.

Joe Fenech

Okay. And then I know you’ve addressed in general terms your plan for how you're thinking about the approach to $10 billion with Oneida, now closed integrated. Can you talk with any more specificity about your thoughts there, is there any update?

Scott Kingsley

Nothing in particular, Joe we continue to lay the groundwork for DFAST. We have a roadmap laid out as I said that gets us to a DFAST reporting capability around mid-2017, which the way that the timeline works in terms of DFAST relative to average balance sheet puts us in very good shape regardless of whether that deal is tomorrow or it's in 2020. So, we think we're in pretty good shape there and we're just, you know we continue to lay the groundwork for that. We have already made investments in some of our compliance and Risk Management systems to improve those. So, I think we’re in as good a shape as we're going to be in terms of what the future might bring, but again I think as I said last quarter we’re not necessarily in a hurry to get there, we just understand that over time it's likely we will get there and we want to be fully prepared for that eventuality.

Joe Fenech

On that point Mark and this might be a difficult question to answer, but are there any specific situations of when the expected obviously say which, but that could change how you think about $10 million how you cross the threshold? In other words, are you pretty set on your approach, are there some situations you could see that change your thinking? So for instance, you talked about a mid-27 reporting capability for DFAST that suggests to me just try to stay below $10 billion this year. So that Durbin doesn't hit you until mid-18. So what I'm asking is, if assuming that's your plan, is there any kind of situation out there where you say here we can't pass this up and you do something this year, which puts the Durbin hit at mid-17 or is that just not likely to happen in your view?

Scott Kingsley

Yeah. I think Joe; if we had the right opportunity we would do it tomorrow. But it would need to be the right opportunity that something that allows us to hurdle that $10 billion and threshold in a constructive fashion principally to absorb as you know the hit from Durbin. So, we’ve committed to our shareholders that when we hurdle that $10 billion threshold they will not take a step backwards in earning capacity or dividend capacity. So we expect to live up to that commitment and we think we can and I just - if the right opportunity comes up tomorrow, we would execute, if the right opportunity doesn't come up for five years than it doesn't come up. So, we continue to pursue those opportunities and we know what they are. It's not an enormous number of potential partnerships standardized there, but we know who they are and continue to work overtime to try to ultimately achieve that objective, which is to hurdle $10 billion in a fashion which does not dilute our shareholders.

Joe Fenech

Okay and then last one for me and I'll hop off. The core efficiency ratio ticked up a bit this quarter relative to the fourth-quarter average. I know there's some seasonality and some other factors in there, but it just kind of sparked the thought of, do you guys think just with your DFAST preparations, is efficiency going to tick up structurally higher from where it's been in the past? Do you guys feel like you can get back to that very high 50s very low 60s efficiency pace?

Scott Kingsley

Two-pronged answer there Joe. One, yes we’re clearly incurring some additional costs associated with preparation and readiness for DFAST, but the biggest influence on the number in the first quarter and frankly the biggest difference going forward will be this mixed change in our revenues. So when you shift from essentially 32% or 33% noninterest income sources to 35% or 36%. You [attack on] business units that typically have efficiency ratios that run higher than the blended consolidated average and so let’s just use sort of an example that we’ve talked about the past. The fee-based businesses, which should essentially take much less regulatory capital than a bank balance sheet per say. If they’ve run operating margin characteristics between 20% and 25%, inherently they're going to throw out 75% to 80% efficiency ratios. In terms and honestly Joe, we take as much that we can possibly get because we really think it’s both EPS additive and on a long-term basis very capital constructive relative to utilization. So, I would say will struggle to get back below 50% for the balance of this year. Yeah, I think when we look at where we are, the revenues need to grow faster than the operating expenses, the underlying ability for us to create positive leverage and we think we’ll do that, but I think if you look at where we ended the first quarter, you may see in this 51% range on a going forward basis for the balance of this year on a quarterly basis just because of the mix.

Joe Fenech

Okay, very helpful color thanks guys.

Scott Kingsley

You’re welcome.

Operator

We’ll go next to Collyn Gilbert, Keefe Bruyette & Woods.

Collyn Gilbert

Thanks. Good morning gentlemen.

Scott Kingsley

Hi, Collyn.

Collyn Gilbert

Scott just a question on NIM in your opening comments you’d indicated NIM challenges will outweigh opportunities. Are you just simply talking again just about the yield dynamic or that you maybe - net interest income is expected to be flat or can you just talk a little more about what you meant specifically on that?

Scott Kingsley

Yeah, absolutely and I do think that although we think that our opportunity to move up the net interest margin, is not quite as good as our opportunity to see a little bit of decline and by that I mean that 2016 may be the continuation of what we have seen for the last three or four quarters for us based on our standard pretty good commercial loan growth. Decent sized pipelines, decent sized net growth in the portfolio that's the one portfolio where again just based on our location and size and the current credit mix where the new rates are actually slightly below achieving from a blended standpoint. In fairness, we’re pretty bullish relative to the first quarter in that productive core deposit growth actually impacted core net funding. So, we were called out of the overnight borrowing business or almost out of it and we’re at that weird inflection point in the cycle where the cost of deposits for us are 10 basis points, the cost of our overnight is 50.

So very efficient outcome for us for the first quarter probably something it's very difficult to replicate since you don't have the borrowings on your balance sheet on a going forward basis. So, I think that's what it's framed around. We don't think we are in the position where we were at two or three years ago, when we said we were dropping three or four basis points a quarter of natural margin erosion. We're not there today. We think it's one or two and maybe less than that in certain quarters and in fairness in a quarter where you get a Federal Reserve Bank dividend you might find you flatten it out. So, I think where we are right now looks like it's a fairly sustainable level, but if you had to have handicap net up or net down for the next three quarters, I'd probably pick net down.

Collyn Gilbert

Okay. That's very helpful. And then also could you just - you know the strategy is obviously you expand in all of your fee businesses, can you just put a little bit more color maybe in granularity on how you see that now obviously with Oneida folded and what some of your expectations are for those businesses?

Mark Tryniski

Sure. I think historically we've built two principal fee businesses, the Wealth Management Business and the benefits business organically, there's been some acquisitions to those over time; they were less with the growth than the organic growth particularly on the wealth Management side with the organic growth has been really good recently. So what Oneida brings to us is not only some employee benefits and some Wealth Management revenues, which are admittedly more modest relative to ours, but a $20 million plus revenue insurance agency business, which is substantially larger than ours was. So that brings another leg to the stool if you will and that agency by the way is the largest agency in the Syracuse marketplace.

So, it’s a very good starting point to continue to build out those organic and also M&A kind of growth opportunities. Now it's kind of a third leg to the stool if you will, a very solid Wealth Management Business and very solid employee benefits business and a very solid insurance benefit or insurance business now which to leverage. So we've got three really high performing, high-quality businesses led by really capable and talented people that we expect to continue to roll at a very strong pace organically growing forward, but we would also expect to compliment that with high-value acquisition opportunities as well.

As Scott mentioned, our noninterest revenues are now up to 35% to 36% of the total where our historical run rate was closer to 31% or 32%. We will look for opportunities to continue to grow that. As Scott said, the capital you have to put it up against those is really much less significant and so it's a very capital light business with very high return on invested capital characteristics, which we like a lot. We have a lot of capital. At this juncture, we’re overcapitalized in a sense if you look at our balance sheet as we talked in the past, the plan is to utilize that capital as part of our $10 billion threshold transaction to help us hurdle that in a way again it doesn't work against the interest of our shareholders. So, we've got a great deal of capital that we can use judiciously both as it relates to the $10 billion threshold and as it relates to growing these nonbanking businesses again both organically and through M&A.

So, we think they will continue to grow at a very strong pace as they have for the last 10 years. We expect there's a lot of runway left on these businesses. The benefits business in particular, which is now got about a $55 million revenue run rate and we’ve talked about this in the past, but as a reminder it’s a national business, it does business in 49 states. It's the largest provider of 401(k)’s in terms of recordkeeping administration in the Commonwealth of Puerto Rico. It's got a number of really integrated components to it around SIP Administration and VEBA and we have the largest actuarial practice in New York State outside of metro New York. So there's a lot of runway left with that business on a national level. And so, we will continue to invest in all those businesses Colin, I think they have outsized growth opportunity for us going forward relative to the banks certainly on an organic basis.

Collyn Gilbert

Okay. That's very helpful and do you think Mark that I mean a double-digit growth rate is within reason or are we thinking more single-digit, mid-single-digit or so?

Mark Tryniski

I think it’s on the earnings and probably going to be single digit.

Collyn Gilbert

I thought to get more on just fee, sorry just your fee businesses.

Mark Tryniski

Yeah. That’s right ma’am, the earnings and the fee business.

Collyn Gilbert

Okay.

Mark Tryniski

Yeah, because we think revenues are important and ultimately revenues need to grow, but we also pay attention to pre-tax earnings of those businesses and the margins of those businesses. Again, gets back to this simple, but effective theory that revenues need to grow faster than expenses. And so, I wouldn't task them with a double-digit revenue growth, but if you can get a solid single-digit revenue growth and you do get operating leverage on those businesses you would be pushing a double-digit earnings growth. There's been a lot of years where those businesses have achieved double-digit earnings growth in a year organically.

So, I mean, it's achievable, I just think as particularly as they get larger, it is gets much more difficult to grow the earnings of $55 million revenue business at a double-digit pace, but we think solid single-digit revenue growth and higher earnings growth whether it's double digits or not would be where we would expect those businesses to go. And Colin, just one more quick thing because I think you had it in your first glance so note this morning. To remind, we have $0.5 million more in intangible amortization in the first quarter than we had a year ago. Most of that relates to the core customer intangible list of the insurance business.

So as much as we think you really should like these types of businesses in terms of all of their operating characteristics. We kind of have to remind people that we are restoring tangible capital at an accelerated pace with that kind of amortization, which again as you heard us say before it’s really important to us because that's the source of dividend capacity. We will not lose sight of that. Probably you'll hear us before the year is out reminding people the difference between our cash earnings per share and our GAAP earnings per share because again it's a dividend capacity discussion.

Collyn Gilbert

Okay. That's really helpful, thank you guys.

Mark Tryniski

Thanks.

Scott Kingsley

Thanks, Collyn.

Operator

We’ll go next to Matt Schultheis, Boennings.

Matthew Schultheis

Good morning.

Mark Tryniski

Good morning, Matt.

Scott Kingsley

Good morning, Matt.

Matthew Schultheis

So, a quick question on your deposit growth, you said some of this was municipal inflows are you willing to quantity how much of that growth came out from that source?

Scott Kingsley

Matt, it was the majority of the inflows or the majority of the change was from municipal deposits. So we are probably actually close to two/thirds, but I'll make the point as right now that municipal deposit gathering for us in our smaller markets. It’s actually become something that is very much a core activity not that it wasn't before, but remember things like the LCR really penalize some of the larger banks relative to holding onto small municipal relationships. In other words, they carry characteristics of collateral holding and they quite frankly count against your liquidity characteristics when you're running some of those large characteristics.

So what we're actually seeing in our marketplaces is the larger regional banks a couple of the national banks that are actually going the other direction relative to customer utilization on municipal count. So, I will look at us as having this unique opportunity currently where we have the balance sheet capacity to put some of that on the books and we also have the service capacity to take care of some of those customers in our general markets on an ongoing basis. So, I think our position today Matt that could be wrong at the end of the second quarter is that you’ll see more retention of municipal deposit balances at a core level for the next hand full of quarters for us and maybe think our size was smaller.

Matthew Schultheis

Okay.

Mark Tryniski

And I think the other follow-up is, well, if you look at the weighted average cost of municipal funds at the end of the first quarter, excluding the Oneida relationships. So the legacy Muni relationships, which is out of the billion I think we have in total Muni deposits, I think it's about $750 million in legacy. The weighted average cost of funds is 2 basis points. So, it can represent much more attractive funding than historically maybe it has and I think there's also greater retention characteristics as Scott said because of some of the bigger banks and the impact of LCR, we also have a balance sheet to be able to collateralize those deposits because we have a relatively lower loan deposit ratio than a lot of other institutions. So, it was certainly productive for us in the first quarter.

Matthew Schultheis

Even without that pace of growth in the municipal side, the deposit growth would've been fairly fast and you did say you had some success in your markets outside of the municipal relationships that you maybe just highlighted. Would you attribute the rest of it to then? Was it commercial, was it retail, were you running any specials?

Scott Kingsley

No specials Matt. I think it’s really just a function of our continuing program that has been focused on core deposit gathering for five or six years that we continue to rejuvenate that program. We really think that's where a lot of the core value of our franchise in total is delivered from is on the core retail side. So it's a combination of retail accounts, commercial accounts, as you can tell it's not in CDs. So our markets have not necessitated any kind of special based running and to follow-up on Mark's point I think if and when the curve finally moves up that there actually is a raising rate environment. Our marketplaces should not be the first ones to the front of the class to raise rates, just from the competitive balance as well as not only us, but some of our peers and our competitive footprint that have lower loan to deposit ratios.

Matthew Schultheis

Okay and one last follow-up question to some earlier comments regarding acquisitions and $10 billion. Are there any markets that you're not in currently that you would look at, I'm thinking of Ohio maybe New Jersey may be the New England or Western Pennsylvania that would be attractive to you?

Mark Tryniski

Yes. We look at those markets. We spend time in those markets. We know the CEOs in those markets and the investment bankers in those markets. So, we always look for opportunities to grow our franchise at a high value way for shareholders over time and that's part of our charge as senior leadership. So, yes we do spend time in adjacent states and contiguous states and the current states that we have a footprint in. So, the answer is yes.

Matthew Schultheis

Okay. Thank you.

Scott Kingsley

Thank you, Matt.

Mark Tryniski

Thanks Matt.

Operator

[Operator Instructions] We’ll go next to Matthew Breese, Piper Jaffray.

Matthew Breese

Good morning guys.

Scott Kingsley

Good morning, Matt.

Mark Tryniski

Good morning, Matthew.

Matthew Breese

Just a quick follow-up on the municipal deposit outlook, it sounds a bit more positive and given the characteristics around gathering those types of deposits specifically as it relates to collateral and securities, should we anticipate your securities portfolio growing as well? Or do you think there is - do you have the ability to use the municipal letter of credit on those new deposits?

Scott Kingsley

To date Matt we have not had to use municipal letters of credit because we just have had the extra capacity on the balance sheet. Remembering you can pledge multiple different classes of securities and needless to say we’ve got a lot of those on the balance sheet, I would say we would probably find that if we could efficiently add a very, very low cost core deposit, we would consider modest duration investment growth if that was the net answer. We would not let first quarter activities dictate that that's our forecast going forward.

We would certainly probably want to sit through the second quarter and maybe into the summer to see what the actual balance activity is of some of our customers. Some of our customers that had increased balances from what we've seen in the past. But generally I would say we're very upbeat and positive relative to the outlook of using that on a going forward basis and maybe even thinking about that in terms of does a point in time actually come in a rising rate environment where there are other classes of deposit customers that other banks are more aggressively chasing because I just don't think that there's going to be a lot of banks that can aggressively chase municipal funding or municipal balances and have a kind of balance sheet capacity that we enjoy today.

Matthew Breese

Okay. And then flipping to the other side of the margin, just wanted to follow up on the commercial yields, so what are you getting from new commercial yields versus what's already existing on the balance sheet?

Scott Kingsley

The commercial in one of the portfolios for us were over the course of the last several quarters there's been a more significant difference between the portfolio yield and new originations. In the first quarter, we were, the portfolio yield was in the low fours and new originations were in the 360s. So there's still a little bit of difference, that's the one portfolio on the auto portfolio, the direct lending portfolio, and the mortgage portfolio for the most part there's been reasonable convergence give or take a few basis points up or down each quarter between the portfolio yield and the origination yield, but we're still not there yet on the commercial yield it continues to be very competitive and the new origination yields are still a reasonable bit lower than the overall portfolio yield.

Matthew Breese

Got it. Okay and just staying on the auto piece for a second there's been a lot of commentary for the industry around deteriorating credit standards and maybe we'll see a pickup in delinquencies or charge-offs, not just for you, but for the industry. I was hoping you could comment on that specifically as it relates to your portfolio and your market in upstate New York.

Scott Kingsley

Sure Matt. I think that generally what our position on that is, we are operating at a very stable market that is seeing very stable net asset quality results, which again is probably indicative of our history. I think a lot of the dialogue you're getting from a national perspective is about deterioration of lower FICO score, arguably subprime type outcomes where you had typically most used car financing probably falls into that perspective. Now the interesting comment I will make relative to our portfolio is remember that about 80% to 85% of what we do is A and B FICO score, so there is a certain class of customers that were financing that have C scores or no scores, a lot of those customers come with guarantor support, in cases where we complete the financing.

The other thing for us is that we're in market places that don't offer much alternative relative to transportation there really is in a lot of public transportation in our marketplace. So, I think what you get is a more acute servicing characteristic of people with their auto loans understanding that they got to make the payment if they're going to go to work. So from a practical standpoint, I think some of that is market generated, but I would think that our markets would be slow to reach that credit characteristic of erosion, I think you're going to see that more in sort of more demographically concentrated markets or with providers who have a larger portfolio in new car loans.

Matthew Breese

Okay. And then just touching on expenses quickly, seasonally salaries and benefits this quarter can pick up as bonuses merit increases how much of the pickup this quarter was more seasonal or one-time in nature?

Scott Kingsley

I think the general trend line if you looked at sort of understanding the fourth quarter had one month of the Oneida activities involved and we sort of had a full quarter for the first quarter. I think you'll find that if you do the math on that it's generally pretty linear. So, what difference changed as of the first of the year we did do a merit increase for our folks, so kind of think about a 3% type salaries and wage type change, but to your point, you raised a reasonable point relative to seasonality I think we look at general payroll taxes as roughly as 7.5 [ph] per share more expensive in the first quarter than they are in the second, third and fourth quarters because you've moved to some of the statutory rate structures that you end up with just a lower contribution to that in the balance of the year.

Historically, banking fees for us are typically $0.01 per share stronger in the second third and fourth quarter than they are in the first quarter, principally activity-based. Now we had milder winter that we had the year before, but remember this is upstate New York we still had winter. So we still think activity levels will probably be higher in the second, third and fourth quarters. We're likely to have a bit lower utilities and maintenance cost maybe that's a $0.005 a share maybe it's a little less than that. I think, we believe we will have lower insurance base revenues in the second and third quarter remember insurance revenue recognition for insurance agencies is largely based on renewal dates of policies and a lot of policies renew in the fourth quarter in the first fiscal quarter.

So, I think we're looking at the first fiscal quarter being the high watermark from a revenue standpoint. Again, maybe $0.005 to $0.01 per share lower in the second and third quarter and then back up to first-quarter levels in the fiscal fourth quarter. I think we talked about our FRB dividend, which is around half a million bucks in the fourth quarter. And again we’ve [indiscernible] $0.01 per share in retail, the program that we participate in for retail insurance programs on a pool basis has always delivered about $0.01 per share in the third fiscal quarter. So, some seasonality, I think all in, I think as Mark mentioned in his comments we think there's a little bit more opportunity for some cost stays related to getting on common systems related to the acquisition, some of the smaller systems. But I wouldn't think that that would be a $0.01 a quarter, I would think it would be something south of that.

Matthew Breese

Okay. Can you give us an outline of what you are modeling for full-year 2016 expenses?

Scott Kingsley

I would guess that if it was me, I would start with what we did in the first quarter and drop about $1 million to $1.2 million in payroll taxes and utility cost and then add back data payroll in the third and the fourth quarter, I think it would be close.

Matthew Breese

Great, I appreciate it. Thank you.

Scott Kingsley

Thanks Matt.

Mark Tryniski

Thanks Matt.

Operator

We have no further questions in the queue at this time. I'll turn the conference back to management for any additional or closing remarks.

Mark Tryniski

Excellent. Thank you all for joining in the conference call. Look forward to talking to you all again next quarter. Thank you.

Operator

That does conclude today's conference. Thank you for your participation. You may now disconnect.

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