Q4 2020 Community Bank System Inc Earnings Call
Welcome to the community Bank system fourth quarter 2020 earnings Conference call.
Please note that this presentation contains forward looking statements within the provisions of the private Security Litigation Reform Act of 1995 that are based on current expectations estimates and projections about the industry markets and economic environment in which the company operates.
Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements.
These risks are detailed in the Companys annual report and form 10-K filed with the Securities and Exchange Commission.
Todays call presenters presenters are Mark <unk>, President and Chief Executive Officer, and Joseph Sitar S X.
Decorative vice President and Chief Financial Officer.
They will also be joined by Joseph Serbin Executive Vice President and Chief Banking Officer for the question and answer session gentlemen, you may begin.
Thank you Tom.
Everyone and thank you all for joining our fourth quarter conference call.
Joe will do a deeper dive on Q4, so I'll start with a couple of brief observations and then comment on 2020 as a whole.
Fourth quarter earnings and operating performance, we're just fine no surprises, but it's about as we expected.
Operating earnings were up a few pennies over last year's fourth quarter and any better from Q3, so modest forward progress.
Loan growth was slightly negative in the quarter.
Typical but deposits just continued to grow similar to others and were up $100 million for the quarter GAAP.
Quality continues to be very good.
<unk> reported a spike in NPA is because of the policy judgment around deferrals that Joel will explain further.
2020, as a whole was certainly a challenging year.
However, operating earnings were only off <unk> or one 5% from 2019.
In hindsight, that's much better than we were expecting earlier in the year.
There are a lot of moving parts and the reconciliation between years due to the pandemic.
There was a significant negative impact from the decline in our core margin and our retail banking revenues, which we were able to offset a number of other ways principally operating expense reduction.
<unk> of our non banking businesses, all of which had a tremendous year.
Pre tax operating earnings of our benefits business was up 11%.
<unk> was up 13% and insurance was up 16%.
Value with diversified revenue model was readily apparent in 2020.
From an operational perspective, it was an extremely productive year. Despite the challenges of the pandemic.
We developed and implemented several new digital products and platforms. We consolidated 13 branches and we closed on the acquisition of Steuben Trust in the second quarter.
I'm relatively pleased with 2020 overall and our forward progress pandemic notwithstanding.
Looking ahead to 2021, our focus will be on effectively countering ongoing margin pressure.
Moving organic performance.
<unk> growth and investment in our non banking businesses in.
In a continuation of our investment in digital and rationalization of analog.
I also expect the strength of our earnings balance sheet and capital generation will serve us well going forward as we continue to evaluate high value strategic opportunities across our businesses benefit from our shareholders.
Joe.
Thank you Mark and good morning, everyone as Mark noted the earnings results for the fourth quarter of 2020 were very solid, especially in light of the economic challenge from using industry headwinds we faced throughout the year.
The company recorded 86, Inc.
Fully diluted GAAP earnings per share for the fourth quarter, excluding acquisition expenses acquisition related provision for credit losses unrealized gain on equity securities and gain on debt extinguishment net of tax effect fully diluted operating earnings per share were <unk> 85 for the quarter. These results matched third quarter 2020 results and we are too.
<unk> per share higher than the fourth quarter of 2019 fully diluted operating earnings per share of 83.
The company reported total revenues of $156 million in the fourth quarter of 2020, an increase of zero point $8 million or 0.5% from the prior year's fourth quarter. The increase in total revenues between the periods was driven by an increase in net interest income higher non interest revenues in the company's financial services businesses.
Gain on debt extinguishment offset in part by a decrease in banking related non interest revenues total revenues were down $2 million from one 3% from the linked third quarter, driven largely by a $4 $8 million decrease in mortgage banking revenues as the company pivoted from selling in secondary market eligible residential mortgage loans late third quarter.
Holding net ports home portfolio in the fourth quarter.
The company reported net interest income of $93 $4 million in the fourth quarter up zero point $7 million was 0.7% over the fourth quarter of 2019.
The increase was driven by a $2 $2 $8 billion or 22, 7% increase in average earning assets between periods.
Net in part by 66 basis point decrease in net interest margin the company's fully tax equivalent net interest margin was 3.05% in the fourth quarter of 2020 as compared to $3 seven 1% in the fourth quarter of 2019.
Net interest income increased <unk> $5 million of 0.5% over the linked third quarter, while net interest margin was down 70 basis points.
The fourth quarter, the company reported $3 $5 million of PPP related interest income as compared to $3 million of PPP related interest income in the third quarter 2020 at December 31, 2020 remaining net deferred fees associated with the 2020, PPP originations were $9 million, the majority of which the <unk>.
Company expects to realize through interest income in 2021.
Noninterest revenues were up zero point $1 million or 0.1% between the fourth quarter of 2019, and the fourth quarter up from 2020 employee benefit services revenues were up $1 $7 million or 7% from.
From $25 million in the fourth quarter of 2019% to $26 7 million gallons in the fourth quarter of 2020, driven by increases in plan administration and recordkeeping revenues. The employee benefit Trust revenues wealth management insurance services revenues were also up $1 billion or seven 3% over the same periods. These increases were.
Actually offset by a $2 million or 11, 2% decrease in deposit service and other banking fees due to lower deposit related activity fees, including overdraft occurrences we.
We reported <unk> $9 million loss on mortgage banking activities in the fourth quarter of 2020 as compared to a tier $2 million gain during the fourth quarter of 2019, resulting in a $1 $1 million decrease between the periods due to the change in the Companys mortgage banking strategy as noted previously.
Finally during the fourth quarter of 2020, we redeemed $10 million of subordinated notes acquired in connection with the 2019 acquisition of Kinderhook Bank Corp, and reported zero point $4 million gain on debt extinguishment.
The company reported a $3 $1 million net benefit in the provision for credit losses. During the fourth quarter of 2020. This compares to a $2 9 million provision for credit losses during the fourth quarter of 2019, the net benefit reported per.
Provision for credit losses was driven by several factors, including a $2 million reversal of previously recorded allowance for credit losses from the purchase credit deteriorated loans, a significant improvement in the economic outlook and a substantial decrease in loans under COVID-19 related forbearance agreements offset in part by anticipated increases in non performing assets.
And the related specific impairment reserves nominally pointing out.
For comparative purposes, the company reported $1 $9 million from the provision for credit losses during the third quarter of $2029 8 million in the second quarter of 2020, Inc, including $3 2 million of acquisition related provision from the credit losses due to the acquisitions we've been.
And $5 6 million provision for credit loss rate.
First quarter of 2000.
During the first two quarters of 2020 financial conditions deteriorated rapidly as state and local government shutdown a substantial portion of the business activities in the company's markets unemployment level slight these conditions drove the company has built its allowance for credit losses. During the first quarter first two quarters of 2022 accounts for the expected loan losses and wallboard volume during the third.
Quarter, the economic outlook remains unclear as markets, we're uncertain as to the efficacy approval rollout with COVID-19 vaccines.
With a greater than anticipated decline in actual unemployment levels as well as the federal government's approval of a COVID-19 vaccine in comp versus recent approval of the additional federal stimulus funding near term economic forecast improved driving a net release from the allowance for credit losses during the fourth quarter.
The company reported loan net charge offs of $1 3 million seven basis points annualized during the fourth quarter of 2020 comparatively low net charge offs in the fourth quarter of 2019 were $2 $4 million from 14 basis points annualized.
On a full year basis, the company reported net charge offs of $5 million or seven basis points of average loans outstanding. This compares to $7 $8 million from 12 basis points in net charge offs for 2019 the cash.
Our reported $94 $6 million of total operating expenses in the fourth quarter of 2020 exclusive of zero point $4 million of acquisition related expenses. This compares to total operating expense was $94 $4 million in the fourth quarter of 2019 exclusive of zero point $8 million of acquisition related.
The year over year zero point $2 million Euro, 2% increase in operating expenses exclusive of acquisition related expenses attributable to a $1 7 million or two 9% increase in salaries and employee benefits and a $1 5 million 13, 5% increase in data processing communications expenses offset in part.
By $2 $5 million of 19, 4% decrease in other expenses.
Zero point $4 million, 11% decrease in the amortization of intangible assets.
The increase in salaries and employee benefits was driven by merit related increases in employee wages and a net increase in fulltime equivalent employees between the periods due to both the stupid and acquisition in the second quarter of 2020 and other factors.
Partially offset by lower employee benefit expenses, primarily associated with a decrease in employee medical expenses due to reduced provider utilization the.
The increase in data processing and communication expenses was due to the Steuben acquisition and the implementation of new customer facing digital technologies and back office workflow systems. Other expenses were down through the general decrease from the level of business activities and as a result of it as a result of the COVID-19, pandemic, including travel and entertainment and marketing business development.
Spencers narrative.
Notably the company reported $93 $2 million of total operating expenses in the linked quarter linked third quarter of 2020 exclusive book $3 million of.
Litigation accrual expenses from 0.8 million of acquisition related expenses the.
The company close to fourth quarter of 2020 with total assets of $13 93 billion. This was up $85 $8 million of 0.6% from the third quarter.
252 billion or 22, 1% from a year earlier.
Similarly average interest earning assets for the fourth quarter of 2000, 2012, three $1 billion were up $356 $8 million or 3% from the linked third quarter of 2020 and up to $2 8 billion or 22, 7% from one year prior.
The large increase in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Steuben Trust Corporation, and large inflows of government stimulus related funding of PPP originations ending loans at December 31, 2020 was 742 billion up $525 $4 million from.
Seven 6% from one year prior due to the stupid acquisitions in the origination of PPP loans, ending loans, however were down $42 $7 million from 0.6% from the income linked third quarter due to a decline in business activity in the company's markets due to seasonal factors, the COVID-19, pandemic and PPP forgiveness.
In the quarter, the company's PPP loan balances decreased $36 5 million or seven 2%.
$507 2 million.
At September 32020 to 470.
$7 million at December 31, 2020.
During the fourth quarter, the Companys average investment Securities book balances increased $636 9 million or 22% from $3 5 billion.
In the third quarter to $3 $78 billion during the fourth quarter due to the purchase of Treasury and mortgage backed securities during the quarter.
Average cash equivalents decreased $221 $7 million from 17% from $1 $3 billion during the third quarter to $108 billion during the fourth quarter from.
In the fourth quarter, the company purchased $1.02 billion of treasuries and mortgage backed securities at a weighted average market yield of 138%. The purchases were major stabilize near term net interest income and hedge interest rate risk against a sustained low interest rate environment.
Company's average total deposits were up $275 9 million or two 5% quarter basis, and up $2 1 billion or 23, 2% over the fourth quarter of 2019 total average deposits from the fourth quarter were 11, two 1 billion as compared to $9 1 billion in the fourth quarter of <unk>.
2019.
The Companys capital reserves remains strong in the fourth quarter, the company's net tangible equity to net tangible assets ratio was 992% at December 31, 2020. This was down from 10, 1% at the end of 2019, but consistent with the end of the linked third quarter company's tier one leverage ratio was 10 six.
<unk> percent at December 31, 2020, which remained over two times, the well capitalized regulatory standard of 5%.
The company has an abundance of liquidity resources and extremely is extremely well positioned to fund future loan growth and a combination of the companys cash and cash equivalents borrowing availability at the Federal Reserve bank borrowing capacity at the federal home loan bank and other plants available for sale investment Securities portfolio provided the company with over 525 billion.
Immediately available sources.
Sure.
From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-19 impacted borrowers to develop loss mitigation strategies on a case by case basis, including but not limited to the extension of forbearance arrangements at December 31, 2000, 2074, borrowers representing $66 5 million from <unk>.
Less than 1% of total loans outstanding remained in Covid related forbearance. This.
This compares to 216 borrowers representing $192 7 million or two 6% of loans outstandings with assets under Covid related forbearance at September 30th.
2020, and 3699 borrowers representing 704.
$1 million or nine 4% of loans outstanding at June 30.
Although these trends are favorable nonperforming loans increased in the fourth quarter to $76 $9 million or one 4% net loans outstanding up $44 $6 billion from the linked third quarter and up $52 6 million from the fourth quarter of 2019 during the fourth quarter. The company determined that borrowers that were granted loan payment deferrals.
Under forbearance beyond 180 days would be classified as non accrual loans and less they could demonstrate current repayment capacity or sufficient cash reserves to service their pre forbearance payment obligations to <unk>.
Substantial majority of these borrowers operating the hotel sector, including several that operate near the Canadian border, which have been additionally impacted by restrictions on cross border travel specifically.
<unk> identified reserves held against the company's non performing loans from $3 $9 million at December 31, $2023 3 million of which was attributed to a single nonperforming hotel loans as mentioned in prior earnings calls the weighted average estimated loan to value of the company's hospitality loan portfolio prior to the upside of Covid was approximately 55%.
We continue to believe that the ultimate losses recognized and approved both nonperforming hotel homes will be well contained given the pre COVID-19 cash flow of these properties the financial strength of the operators, we have historically finance and the low loan to values on these assets.
At December 31, 2020, the level of loans 30 to 89 days delinquent remain fairly consistent with pre COVID-19 levels loans 30 to 89 days delinquent totaled $34 8 million or 0.47% of loans outstanding at December two.
<unk> 2020. This compares to loans 30 to 89 days delinquent of $40 9 million reported five 9% one year prior and $26 6 million 0.36%.
At the end of the linked third quarter net charge offs on loans were low at one $3 million of seven basis points annualized from the fourth quarter and $5 million for seven basis points for the full year of 2020.
The company's allowance for credit losses decreased from $65 million of 087 percent of total loans outstanding at September 32020 to $60 $9 million of 0.82% of total loans outstanding at December 31.
The net $4 $1 million of lease of allowance for credit losses was driven by an improving economic outlook a substantial decrease in loans and.
Forbearance, a $2 million reversal of previously recorded allowance for credit losses from the purchase credit deteriorated loans, which was paid off during the fourth quarter.
At December 31, 2020, the allowance for credit losses of $69 $69 million, representing over 12 times, the company's trailing 12 months net charge offs.
Operationally, we will continue to adapt to changing market conditions to remain very focused on asset quality and credit loss mitigation, we anticipate assisting the substantial majority of the company's 2021st draw PPP borrowers with forgiveness requests throughout 2021.
Any new second draw PPP loans and advances.
We began to redeploy portions of our cash equivalent balances into investment securities. During the fourth quarter to increase interest income on a going forward basis and provide a hedge against sustained the sustained low interest rate environment. We also expect net interest margin pressures to persist to remain well below our historical levels. Furthermore, we anticipate the deposit levels to remain elevated for most.
A 2020, especially for 2021, especially with potentially more federal stimulus on the horizon.
Accordingly, we will look to deploy additional overnight cash equivalence to higher yielding earning assets.
Fortunately the companies diversify non interest revenue streams, which represent approximately 38% of the company's total revenues from 2020 remains strong and we anticipate to mitigate the continued pressure on net interest margin and.
In addition, the company's managed management team is actively implementing various earnings improvement initiatives, including revenue enhancement and cost cutting cost cutting measures.
In fact future earnings.
Now I will turn it back over to time to open the line for questions.
We will now begin the question and answer session to ask a question you May Press Star and then one on your Touchtone phone.
If you are using a speaker phone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star and then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Alex <unk> with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Allison Good morning, Alex.
Just first off wondering how you guys are thinking about loan growth for 2021 other than adjusted in the mortgage strategy to put production on the balance sheet have you made any other tweaks to any other lines to try to get a little bit more in terms of balances and put some of that cash to work.
Hey, Alex Joe <unk>, how are you this morning.
Well thanks.
I'll take that.
So we'll stay on the resi mortgage side from a moment Mark mentioned in his comments about some digital strategies.
One of those strategies is to come out with a.
Digital application.
And prequalification functionality, which.
We will go live here shortly so hopefully that will benefit our mortgage portfolio.
We will also.
Direct from folks.
Ah redirect folks too mark.
It might be a little hotter force hydro in a good way better more more activity or opportunity force redirect some some of our ftes that way as well.
On the indirect side, which as you know is another.
A meaningful portfolio on the indirect side.
I think that the industry expects uptick in totally.
We're going to do a little bit better job in managing between growth and yield.
We were focused more on return.
'twenty then.
Then we had in past years I think in 2021, and we will do a better job in balancing.
Both from the yield.
And we will also we will also target some folks in markets that are more robust than others and then on the commercial side it's soft.
And I suspect, it's going to continue to be soft as.
And so the customers are either risk averse or taking advantage of all of the stimulus money that debt.
It's available.
Eligible for them and.
Sitting back waiting to see what the new administration is going to do or flu vaccines are going to rollout. So.
The expectation on the commercial side as we will be active but it will still be it will still be soft to give you some sense of that.
In the commercial portfolio.
Pipeline typically typically loans $3 50 to 400 right now we're at $136 million and that number is probably going to go down because we had a pretty pretty good month in December.
And on the resi mortgage side, we're two times.
Normal run rate. So we run about $100 million were twice net as we sit here now so we fully expect to see the growth in the in the mortgage portfolio growth in the indirect.
It will be a struggle on the commercial.
And is the intention to keep put all of the residential production on the balance sheet for the foreseeable future.
The majority of it.
We'll keep the pipeline grew used a little bit but yes.
More than the lion's share will be kept on the balance sheet.
Okay and then.
Joseph Terrace.
I missed what you said in terms of the securities purchases I was hoping you could go over that one more time and just.
If I did hear it correctly I was having a hard time getting that to jive with the.
With the balances I saw on the balance sheet at the end of the quarter.
Sure.
During the quarter Alex.
We purchased about $1 billion in securities mortgage backs and treasuries, but we also had some maturities.
Treasuries as well so on an average basis.
The securities balances were off about 630, I think its number $636 million on a quarter over quarter average, but the purchase activities from closer to a $1 billion.
Okay, and then as you look forward into 2021 that you're going to.
Alright, Thank you, yes, yes, yes.
And as we look forward into 2021.
We're going to continue to likely deploy some of that excess cash equivalents that are.
That are on the balance sheet.
The other day, which did not still about $1 billion six cash equivalents.
So we're going to it looks like the stimulus money is here to stay so to speak. So we are going to look to continue to deploy.
Some of those.
Into into securities and try to effectively stabilize net interest income and a long term flat rate environment.
So as to.
Weather.
We're hopeful that put at least $1 billion to work in the next debt.
Next several months, we have to get the rate levels in terms of return opportunity to do that but that's the expectations that we still have.
You still have some work to do on the on the <unk>.
Security purchases.
And the second quarters.
Okay, great. Thanks for taking my questions.
Welcome loans.
The next question comes from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good morning, guys.
Thank you Russell.
I was hoping to follow up Mark on some comments you made with regard to potential cost cutting measures for 2021, just curious what you guys are contemplating.
If youre able to quantify that or even more just big picture.
That may.
It may come from.
Sure.
I'll start and then Joe a few others.
Net.
As 2020 played out it became clear that we were going to have to.
Revisit.
Our operating structure.
Our revenue streams every element of our business and take a fresh look at where we had.
Productive and constructive opportunities to enhance performance whether that was additions.
Additions to revenues.
Or.
Reductions in expenses, so we convened a team of our senior.
Our senior folks.
Bob 15, 15 of us and we.
Spent a lot of time identifying opportunities to be to be to be more efficient opportunities to reduce expenses and opportunities to improve revenue. So we have a.
We have a plan.
Two to move forward and affect that and it's really across the it's across the spectrum I mean some of it is.
As we continue to look at our our branch footprint as I said we.
Affected.
Affected 13 consolidations this year, we're looking at more 2020.
And for most part these are near distance type consolidations.
And that brings with it some modest reduction in ongoing operating costs.
We are looking at.
Are all of our vendor contracts many of them have already been <unk>.
Renegotiated.
In a productive way.
A lot of that relates to technology things, which is really changing in terms of just the cost structures and all of that and so we've had.
<unk>.
Good success in renegotiating some of our card.
Contracts technology, and otherwise and we really just kind of looked at every literally detailed items on the P&L and said what can we do to make it better and reduce the reducing capture some cost. We did the same thing on the revenue side. So you put that whole thing into place and that's it.
It's not insignificant.
The catalyst for that correctly.
I would say mid 2000.
<unk> was.
Was.
Not as much.
The pandemic as it was.
When we did kind of a forward assessment of our our margin and net interest income.
Into 2021, so we felt the need to two.
To address that so.
So we are.
And then I appreciate your thoughts Mark yes.
Yeah kind of.
Got to the revenue question I was planning to ask Max you spoke about the <unk>.
Single family Digital application, maybe that's one of the revenue enhancements, you're referring to but are there any other details on that front that you could talk about and then as a follow up given your comment that the <unk>.
Margin pressure really led you to this I mean, if we tie.
Revenue enhancements and the cost cutting together.
Do you expect to be able to generate positive operating leverage this year does that debt target.
Well I'm not going to there's a lot of moving parts here. We're also as you know so I'm not going to comment specifically on kind of.
Only because we don't issue forward guidance and so but.
We are expecting.
A reasonably significant impact from all of our efforts.
Just to say that.
On the first question I think was related to the mortgage and prequel.
Yes.
I don't expect we'll have a lot of.
Yes, that's not a revenue opportunity that's more of a.
As we compete more on a digital basis I think I've said this in the past, but we have markets, where we operating but we have 80%, 60%, let's say deposits deposit market share and we're only the second largest mortgage lender behind quicken loans. So.
That's not right we have to have a different approach to our mortgage model. So thats.
We spent.
Team did a lot of great work in developing that.
That platform it wasn't plug and play we kind of built it out ourselves.
It's going to be two components to it the prequalification component, which I think we are using right now internally to get rolled out pretty quick really quick.
Yes.
Publicly in that.
The online mortgage application, which I think our customers are already using so that's the first piece of that buildup at the second piece is how do we drive customers to those platforms because it doesn't really matter. If you have a good platform if nobody's visiting your your digital store then it doesn't really it doesn't matter Mark. So there's there's two important elements digital one is it.
Platform two is driving traffic to it so that it's not going to be as much.
Near term cash fee or revenue opportunity as much as an important.
Mechanisms for us to capture greater hopefully.
Mortgage share as as the Mark as markets and consumer demand volume more to the digital channels.
Alright, great. Thank you Mark and then last one from me you mentioned as part of the 2021 strategic.
Focus would be high value strategic opportunities just curious if you could expand upon that is it.
Looking for depository opportunities within your differentiated fee verticals.
Any commentary you can provide there would be great.
Yes, I think.
Sure.
The model isn't going to change much from history, Russell, we've always kind of dependent on doing.
Higher value I think for us and our shareholders.
M&A to kind of supplement organic growth, which is not sufficient for us to generate a double digit return over time, which is our growth.
So.
We will continue to look for those opportunities as I said across all of our businesses that would include deposits or is it would certainly include our.
Benefits business.
Our insurance business, where we have a couple of things going on right now.
Is that.
So we're doing some things in the wealth business, it's more organic I would say that has a lot of potential.
So we will continue to look for those.
High value strategic opportunities that are asymmetric with respect to their risk reward profile and I think the reason I commented on it just feels a little bit like theirs.
The market is opening up a little bit theres more opportunities. There is more conversations I think from most of the last year.
Multiples were really down earnings were down a lot.
Of fear and uncertainty that is that a.
Great environment for four.
M&A I think that's changed a little bit multiples have come back across the industry.
I think the near term catalysts.
Could be.
<unk>.
The interest rate environment and the margin when you look at the industry.
The entire industry is operating income was up 3% margin flow.
Venture a guess debt.
Most banks at sub 3% margin do not earn their cost of capital.
So I think thats going to create some opportunities I think.
The potential second.
Derivative of that relative the second.
Mark.
Challenge is going to be on the technology front because of the cost of all these.
The cost of technology.
And as you look to kind of transition.
Over time.
From from analog to digital.
<unk>.
It's clear that the the debt.
Cost to invest in digital is significant.
It's ongoing.
And that's either either customer facing digital channels or backroom, we're doing a lot of things to try to make our debt.
Net room more efficient and.
We've got a group that's working on.
A digital workflow system and we've had some early.
Successes as we're kind of learn and grow into that model. So we can build it out in a more meaningful way.
All of those platforms are tremendously expensive. So I think as thanks realized particularly the smaller bank we have to invest if we want to compete they looked at the cost of that technology.
<unk>.
<unk>.
If your NIM is two 8% having sufficient earnings strength.
To make those investments is going to be a real challenge.
I think that there is going to be more opportunity over the course of 2021 certainly than there was in 2020.
I appreciate your thoughts Mark. Thank you very much that's it from me guys.
Thanks Russell.
Again, if you have a question. Please press star and then one.
Our next question comes from Matthew Breese with Stephens incorporated please go ahead.
Hey, good morning.
Good morning, Good morning, Matt.
Just following up on the dialogue in terms of.
Tweaks to the model and then some of the upcoming challenges.
I was hoping for a little bit more of a quantitative assessment.
The headwinds and then with the changes what the outlook could be and maybe to start with.
On the loan growth outlook so.
With the focus on indirect and mortgage obviously, some weakness from commercial what is the overall.
Outlook for loan growth this year.
So Matt this is Joe <unk> I'll take that question so.
Alluded to we don't offer initially forward guidance, but historically our loan growth.
Single digits and and.
Some years, that's commercially driven off of the year that might be in direct revenue.
Driven I would say when looking at kind of those three those three pieces as Joe alluded to Joe serving alluded to is the mortgage decline is solid right now.
We have some some growth opportunities.
Mortgage pipeline.
Debt, maybe slightly above historical levels.
Excellent.
Breakout above kind of that low single digit level.
And on the indirect side the expectation is that the market will be put in the spring, we still see a lot of art.
Tumors.
And they're in their checking and savings accounts, which I think probably more tense.
Spending.
Non.
So the expectation around the indirect portfolio was probably.
Kind of the.
Low to mid single digits as well in the commercial side.
The.
Pipeline is a little bit smaller as Joe as Joe mentioned, however, some of that has quite frankly been crowded out by PPP.
Type opportunities and our belief is debt.
Reducing debt and demands so on.
On the commercial side.
Hopeful tended to keep our head above water at least in the early part of the year and then we will have debt across debt.
Right.
So that's kind of the expectations around.
Volume growth for.
Early 2021.
Got it okay very helpful. And then if I think about net interest income if you strip away accretable yield.
Exclude the PPP fees and income and the FRB dividend I seek out with core net interest income.
Right around $88 million with some of the changes do you think you can hold that debt quarterly number in 2020 wondering do you think.
Given the margin challenges that it's likely to decline.
Well there will be continued challenges on asset yields in 2021, and I would say debt.
Mark.
Home portfolio for the fourth quarter, we yielded about a $4 17.
New volume for loans that were put on the books in the fourth quarter.
So there is some rollover of loan loan portfolio and.
Pressure.
It yields.
That however.
As I mentioned, we do have about a $1 six sitting in cash equivalents.
Mark.
And we have an opportunity to make up debt.
Decrease.
Just sort of a volume play and just.
Investing some of that overnight cash.
Pretty small.
So.
Obviously, if this environment the current environment persists for a very long period of time, it's going to continue to pose a challenge not only hospitals, but all banks.
If we do get some slope in the yield curve later in the year, maybe we can sort of.
Level out our margin expectations on a going forward basis, but I think we're going to we're going to continue to see some assets.
Particularly loan yield compression and we are going to try to make it up with some of the <unk>.
Investment Securities activities.
Got it okay.
Good.
I will I will leave it there I appreciate you taking my questions. Thank you.
Thanks, Matt.
Our next question comes from Bryce Rowe with the half day group. Please go ahead.
Hi, Thanks, good morning, and thanks for taking the questions here.
One Mark just wanted to.
Good morning, good morning.
I wanted to ask about kind of the discussion around.
Adding to the securities portfolio and then the comment you made about some.
Some of these stimulus funds stealing.
Somewhat permanent so to speak in terms of sticking on the balance sheet.
So when you when you talk about the excess cash or the cash balances being as high as they are one point.
$6 billion.
Give or take.
What's the what's the level, you're comfortable taking that down to kind of given your view.
Sure.
The permanent.
Of the stimulus dollars.
Yes.
It is a very good question Bryce I think all the banks right now are struggling with.
How long that stimulus money sticks around so to speak.
But I think we're at this point fairly comfortable debt.
Even if we projected some runoff.
<unk>.
Some of those funds, we still would be comfortable investing potentially up to another $1 billion.
Overtime in.
In the securities portfolio keep in mind, we also have some simple.
Charities later in the year.
Just on what's sitting on the balance sheet right now.
One 1 billion, we'd love to the interest rate to be a little higher levels to be a little bit higher.
But our alternative at the moment is 10 basis points and overnight cash. So we're value we're continuing to evaluate debt, but I don't think we go too far beyond that obviously, there is a potentially another round of stimulus coming which could inflate.
The deposit levels.
Higher.
So we'll have to evaluate that as debt sort of unfolds in front of us.
One $6 billion, we think is.
Pretty significant cash equivalents balance right now.
Alright.
Roughly $1 billion of that over the coming quarters.
The challenge to just to add the debt.
At $1 billion six now if we do another I'm, just making this up but $400 million in PPP.
That's a couple billion dollars, we have what Joe maturing another for another 400 maturing there is to force yet too.
$2 5 billion.
And by the end of the year so.
We're looking at cash that's why we're kind of thinking about it not just we have $1 six right now, but where does that $1 billion six going to be at the end of the year and so how do we think about net capex, though.
We are not going to put ourselves in.
In a position where we are.
We're not liquid when you look at our liquidity is always because the nature of our balance sheet and the branch transactions, we've done in the lower growth on the long side. So.
We have enormous liquidity so we're not we're not really.
And your loan to deposit ratio.
<unk>.
In the sixties now liquidity is not your problem. So.
We have is the comfort level with that Joe said as we've kind of discussed this earlier.
Right now, it's a $1 billion level.
Okay. Okay, and then maybe Joe you could you could speak to where you are seeing.
Investment yields opportunities to put money to work within net within the Securities book.
Yes.
That is the challenge as we sit here right now is trying to find those those opportunities.
In the fourth quarter.
Merrily.
Treasury is from rent. So that's kind of we typically have had a pretty plain vanilla safe secure portfolio. So we will likely be in treasuries and may be some.
Maybe some municipal and mortgage backed securities.
Relative to yield I mean, the 10 year Treasury I think this morning was a 106% or 107, that's not quite at the levels, we'd like them to be obviously.
So we think potentially some system.
Stimulus and other items, Mike drive off of that yield curve a bit.
In the coming quarter, and so hopefully we can get a little bit better net.
Levels, when we invest $1 billion over that over the coming quarter, Yes, just one quick follow up.
This discussion of yields.
Asset classes of securities in it.
<unk>.
No we don't.
This discussion is all.
Within the greater context of asset liability.
Interest rate rise.
This debt.
Joe made reference to it but we have a risk as default rate not the rising rates.
So in the event we.
By $1 billion of something like a half a book in the quarter whatever it is it's not very much feel good from an earnings standpoint, no not at all.
But interest rates are low for a long time, it's going to be additive.
Rates go back up if you look at the <unk>.
Internal Alco Mark.
Yet.
An increase in interest rates.
We're going to be fine with that $1 billion in it back in the quarter because the.
Speed at which other things.
Reprice, So you get you get upward accretion too.
Net so it's not it's.
It's not just about.
We can now.
We would that put a $1 billion of securities out of the book at low interest rate.
If it did protect us with respect to our interest rate risk profile, which is what this does if it didn't do that we would sit on the liquidity.
But actually that hurts us because like other <unk>.
Thanks.
Bob.
Central banks around the world have gone negative.
And so.
That's.
I think Janet Yellen is even kind of gone on record historically say in that she made reference to negative rates being potentially useful tool. So I think we are.
Just trying to be sensible, but understanding that this is all within the cash interest.
Interest rate risk net earnings management.
Okay.
Understood.
Good perspective.
Maybe one more question from me in terms of.
And Mark you touched on.
The round three here of PPP.
Either way, whether there is a guess in terms of how much how.
How much you might do relative to the first round, but but I was kind of curious what youre seeing in terms of the pace of forgiveness here in 'twenty. One if you can comment on that.
Yes.
Just wanted to I wanted to get a feel for it if it's picked up or not as weak as we've moved into the to the year.
Hey, Bryce I'll take that this is Joe so.
<unk> one will start there.
PPP loan forgiveness pace.
Clicking along pretty well.
And we will pick up as a result.
The SBA putting out there.
They're short form forgiveness for loans of 150 or $150000. So.
Would expect the pace to accelerate as a result of debt.
With respect to.
PPP too.
And what kind of activity, we're seeing there interestingly enough it.
Busy, but it's nowhere as near as hectic as it.
It was with the beginning of PPP won the borrowers don't seem to be frantic.
The next to the clients don't seem to be frantic plus.
Boston down our doors.
They are truly non applications productively and.
Here, we sit a week later from when we opened up and we've got about.
I don't know 1300 applications, we probably did 300 applications on day one of the.
The P. P P. One.
One round so.
PPP won forgiveness will pick up.
PPP to activity.
I think that's 400 million is probably a number we can get to.
Or more.
We'll see what day it could be.
Excellent. Thank you guys for Covid.
For the color I appreciate it.
Thanks Bryce.
This concludes our question and answer session I would now like to turn the conference back over to Mr. <unk> for any closing remarks.
Thank you Tom Thanks, everybody for joining and we will talk to you again in April Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.