Q1 2021 Community Bank System Inc Earnings Call
Welcome to the community Bank system first quarter 2021 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please.
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 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 Trent excuse me Mark from Netsuke, President and Chief Executive Officer, and Joseph the terrorists Executive Vice President and Chief Financial Officer. They will be joined by Joseph <unk> Executive Vice President and Chief Banking Officer for the question and answer session gentlemen, you may begin.
Thank you Gary Good morning, everyone and thank you all for joining our first quarter conference call.
The quarter was generally pretty good maybe even modestly better than we expected on a recurring basis GAAP earnings were obviously very strong but positively impacted by a <unk> 10 per share reserve release.
<unk> per share benefit from PPP fees, so about 79 for the quarter on a recurring basis.
The margin came in a bit better than we forecasted in our non banking businesses continue to accelerate growth on both.
Both the revenue and margin lines.
Our benefits business was up 12% and EBITDA over the last year. The wealth management business was up 35% reinsurance business was up 28%.
We also had an ever so slight bit of organic loan growth in the core ex PPP, which is atypical for us in any first quarter in loan quality is in as good a shape as I've ever seen it or.
Our consumer lending businesses are very strong right now and we expect a solid second Inc. Third quarter performance there on.
On the challenges from the margin may continue to contract and we need to rebuild our commercial pipeline, which is recovering slowly from the impact of the <unk> and.
In General I think we've got a very good start to the year.
Joe.
Thank you Mark and good morning, everyone. This is mark.
Mark noted the first quarter earnings results were solid with fully diluted GAAP and operating earnings per share of <unk> 97.
The GAAP earnings results were <unk> 21 per share or 27, 6% higher than the first quarter 2020, GAAP earnings results and 20 per share were 26% better on <unk>.
Operating basis.
Increase was attributable to a significant decrease in the provision for credit losses, higher revenues and lower operating expenses.
Offset in part by increases in income taxes with fully diluted shares outstanding comparatively the company reported GAAP earnings per share of <unk> 86, and operating earnings per share of <unk> 85 cents in the linked fourth quarter of 2020.
The company reported total revenues of $152 $5 million in the first quarter of 2021 day, $3 8 million or two 6% Inc.
Kris over the prior year's first quarter revenues of $148 $7 million increase in total revenues between the periods was driven by an increase in net interest income and higher non interest revenues in the company's financial services businesses offset in part by lower banking non interest revenues total revenues were also up $1 9 million from one two per se.
And from the linked fourth quarter driven by increases in net interest income banking noninterest revenues on financial services business revenues, although several factors contributed to the net improvement in net interest income. The results were aided by the recognition of net deferred PPP loan origination fees of $5 nine.
$9 million in the quarter due largely to the forgiveness of $251 $3 million.
Jack protection programs.
The Companys tax equivalent net interest margin was three three.
<unk>, 3% in the first quarter 2021, as compared to 365% in the first quarter of 2023, 5% from the linked fourth quarter of 2020.
Net interest margin results continued to be negatively impacted by the significant increase in loan yield cash equivalents between comparable annual quarters average cash equivalents increased 155 billion.
First quarter 2020 in the first quarter of 2021 due to the net inflows the stimulus funds from the PPP between the periods the tax equivalent yield on earning assets was $3 one 5% in the first quarter of 2021 as compared to 393% in the first quarter of 2020 to 78 basis point decrease between the capital periods the company's total call.
Cost of deposits remained low averaging 11 basis points during the first quarter of 2021 non.
Noninterest revenues were down zero point $1 million from 0.2% between the first quarter of 2021, and the first quarter of 2020. The decrease in noninterest revenues was driven by a $2 4 million or 13, 4% decrease in banking related non interest revenues, which was largely offset by a $2 3 million or five seven.
Percent increase in financial services business non interest revenues the decrease in banking related non interest revenues was driven by a $2 $2 million decrease in deposit service fees, including customer overdraft occurrences. The zero point $2 million decrease in mortgage banking income employee benefit services.
Revenues were up $1 2 million or four 6% over the first quarter 2020 results driven by increases in employee benefit Trust and custodial fees wealth management revenues were also up $1 $1 million from 14, 9% over the same periods due to higher investment management Advisory Trust services revenues insurance.
<unk> revenues also increased slightly over first quarter 2020 results.
The company reported a $5 7 million net benefit net provision for credit losses. During the first quarter of 2021 due to a significant improvement in the economic outlook.
Very low levels of net charge offs. Conversely, the company reported a $5 $6 million provisions for credit losses. During the first quarter of 2020 as the economic outlook worsened due to the pandemic.
Net charge offs for the first quarter of 2021 versus $1 $4 million or two basis points annualized as compared to $1 $6 million of 90 basis points of annualized net charge offs reported during the first quarter of 2020 for comparative purposes. The company reported a $3 1 million net benefit in the provision for credit losses during the linked fourth quarter of 2020.
The company reported $93 3 million and total operating expenses in the first quarter 2021, as compared to $93 $7 million in the first quarter of 2020, the zero point $4 million Euro 4% decrease in operating expenses was attributable to a 0.6 million on our one 1% decrease in salaries and employee benefits.
A $1 7 million.
16, 4% decrease in other expenses of zero point $3 million eight 6% decrease in the amortization of intangible assets <unk> 3 million decrease in acquisition related expenses, partially offset by a $2 million, 19% increase in data processing and communication expenses ex <unk> $16 five 2% increase.
And occupancy expenses.
The decrease in salaries.
Benefits expense was driven by a decrease in retirement related severance and medical benefit costs offset in part by increases in merit and incentive related like wages and payroll taxes. Other expenses were down due to the general decrease in the level of business activities. As a result of the COVID-19 pandemic the increase in data processing communication expenses was due to the second.
Quarter 2020, Steuben acquisition in the company's implementation of new customer facing digital technology and back office systems. During 2020 increase in occupancy costs was driven by the Steuben acquisition comparatively the company reported $95 million of total operating expenses from the linked fourth.
Quarter of 2020 the.
The company closed the first quarter of 2021 with total assets of 46 $2 billion. This was up $689 1 million or four 9% from the end of the linked fourth quarter and up $2 $81 billion or 23, 8% from a year earlier. Similarly average interest earning assets from the first quarter of 2021 of 12.
$6 9 billion were up $377 $6 million were three 1% from the fourth quarter of 2020 and up to $65 billion from 26, 4% from one year prior.
The large increase in total assets on average interest earning assets over the 12.
Over the prior 12 months was driven by the second quarter 2020 acquisition Steuben Trust and large inflows of government stimulus related deposit funding of PPP originations.
As of March 31, 2021 of the company's business lending portfolio, including 874 first draw PPP loans from the total balance of $219 $4 million.
1819 second draw PPP loans from the total balance of $191 $5 million. This compares to 3417 first dropped PPP loans growth total balance of $477 million at the end of the fourth quarter of 2020, the company expects to recognize through interest income the majority of its remaining.
First Ron net deferred PPP fees totaling $3 four.
$4 million during the second quarter of 2021, and the majority of its second draw on net deferred fees totaling $8 $3 million in the third and fourth quarters of 2021.
Ending loans at March 31, 2021 were $7 $37 billion $47 $6 million from 0.6% lower than the linked fourth quarter ending loans at $742 billion, but up $502 2 million a seven 3% from one year prior the.
The growth on ending loans year over year was driven by the acquisition of $339 $7 million of Steuben loans from the second quarter of 2020, and $399 $2 million net increase in PPP loans between the periods the decrease in loans outstanding and the link on the <unk>.
Inked quarter basis was driven by $48 3 million dollar decrease in business lending fees.
Klein in PPP loans exclusive of PPP loans net of deferred fees, the company's ending loans increased $49 million of zero to 2% during the first quarter.
On a linked quarter basis, the average book book value of the investment Securities.
The decrease of $118 3 million or three 1% due to the maturity of $666 $1 million from investment securities. During the fourth quarter, a significant portion of which occurred late in the quarter offset in part by investment security purchases during the first quarter of 2021 $546 $8 million.
Average cash equivalents increased by $587 5 million 54, 4% due to the continued growth in deposits.
Average tax book yield on the investments during the first quarter of 2021 was $1 four 2% to 2% tactical view on the investment securities portfolio, and 10 basis points of yield on cash equivalents at the end of the quarter. The company's cash equivalents balances totaled $2 billion during the first quarter the company redeemed 75 million.
A floating rate junior subordinated debt and $2 $3 million on associated capital Securities, which was initially issued by the company in 2006 companies capital reserves remained strong in the fourth quarter. The company's net tangible equity to net tangible assets ratio was 848% at March 31 2021.
This was down from $10 seven 8% a year earlier at 992% at the end of 2022.
The decrease in net tangible equity to net tangible assets ratio was driven by the stimulus via asset growth rate decrease in accumulated other comprehensive income and increase in tangible assets company's tier one leverage ratio was 963% at March 31, 2021, which is nearly two times, the well capitalized regulatory standard 5% company.
Company has an abundance of liquidity the combination of the company's cash cash equivalents borrowing availability at the Federal Reserve Bank Board capacity at the Federal home loan Bank and Unpledged available for sale investment Securities portfolio.
Provided the company with over $5 $6 $7 billion of immediately available sources of liquidity.
At March 31, 2021, the company's allowance for credit losses totaled $55 1 million.
Zero point, 75% of total loans outstanding this compares to $60 9 million or <unk> 82.
2% on loans outstanding at the end of the linked fourth quarter of 2020, and $55 $7 million from 0.81% on loans outstanding at March 31, 2020.
The decrease in the company's allowance for credit losses is reflective of an improving economic outlook from low levels of net charge offs and a decrease in delinquent loans nonperforming loans decreased in the first quarter to $75 5 million or zero, 1.0% to 2% on loans outstanding down from $76 9 million from.
104% loans outstanding.
Fourth quarter 2020, but up from $31 8 million, 0.46% of loans at the end of the first quarter of 2020, due primarily to the reclassified reclassification of certain hotel loans under extended forbearance from accrual to non accrual status between the periods.
Specifically identified reserves held against the company is not performing well.
$3 6 million at March 31, 2021.
Loans 30 to 89 days delinquent totaled $19 7 million, 0.27% of loans outstanding at March 31, 2021. This compares to loans 30 to 89 days delinquent of $44 3 million or 0.64% one year prior and 34 from $8 million reserve or seven.
Percentage at the end of the linked fourth quarter management believes the decrease from the 30 to 89 delinquent loans from the very low amount of net charge offs reported in the first quarter was supported by the extraordinary federal and state government financial system provides to consumers throughout the pandemic.
From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-19 impacted borrowers and develop loss mitigation strategies on a case by case basis, including but not limited to the extension of forbearance arrangements as of March 31st 2021. The company at 47 borrowers on forbearance due to COVID-19 related financial hardship.
Presenting $75 $6 million on outstanding loan balances of one percentage of total loans outstanding. This compares to 74 borrowers and $66 $5 million in loans outstanding equal fingers at December 31, 2020.
Operationally, we will continue to adapt to changing market conditions and remain focused on credit loss mitigation, new loan generation and deployment of excess liquidity.
We also expect net interest margin pressures to persist remained well below our pre pandemic levels. Fortunately the company's diversified non interest revenue streams, which represent approximately 38% of the company's fault revenues remain strong and are anticipated to mitigate the continued pressure on the net interest margin. In addition to the company's management team is actively implementing various earnings improvement.
Including revenue enhancements and cost cutting measures intended to favorably impact future earnings.
Thank you I'll now turn it back to Gary to open the line for questions.
We will now begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Okay.
Our first question is from Alex toward all with Piper Sandler. Please go ahead.
Hey, good morning.
Good morning, Alex.
Hey, first off Joe you ran through a number of items on on NII and NIM.
Hit in the first quarter I'm going to impact the second quarter.
Clearly in the PPP fees securities purchases, the redemption of the sub debt et cetera can you just slow down and go through those one more time and just kind of give us a sense for where not necessarily the NIM, but where NII it might be going into 'twenty to 'twenty one.
Yes, very good question, Alex So in the first quarter, we reported we had significant pay off of PPP loans. The first first draw PPP loans about $250 million and so not only do we have amortization of those net deferred fees. We also had an acceleration accelerated recognition.
Some of those fees and that contributed about.
Just under $6 million and net interest income.
The first quarter, we do expect that the remaining some of the remaining PPP net deferred fees, which.
First raw PPP is on all $3 4 million, we expect the majority of debt to be recognized.
So just on PPP.
The FERC fee basis, we would expect that to negatively impact net interest income by about $3 million on the other side is we've continued to.
Lower deposits funding, it's trickled down it was about 11 basis points last quarter, but it's continued to come down a bit which may provide some modest.
The offset to that reduction.
We've also had a pretty good first quarter for given your seasonality around.
On origination was effectively flat exclusive of debt.
PPP, we have we have pretty good.
<unk> portfolios pie.
Pipelines, right, now, which will contribute I think favorably too.
Net interest income next quarter and also we continue to evaluate opportunities to deploy additional.
Monies in the securities portfolio.
<unk>.
The expectation is there is some inflation in the market and we hope this debt.
Immediate area of the curve and long into the curve continues to move up a bit and so we have some dry powder more than some $2 billion of dry powder of fees in the quarter.
Deploy into the securities portfolio.
Right now, we're getting 10 basis points on the ancillary effectively empty calories on our balance sheet, but we're looking for the right opportunities.
Bob.
As the year plays out to invest some of that some of that excess excess cash.
So I think Alex it is difficult to give you an exact call relative to next quarter.
But I think we have a couple of things that you're particularly from a cash equivalent opportunities investment opportunities and a little bit of loan growth debt to support.
To support the second third and fourth quarters.
And in terms of the securities purchases for the day you did in the first quarter.
On a quarter, where those and are those going to have some some impact on NII and <unk>.
Yes.
Alex I'd have to pull up the actual security purchase dates, but we have made.
Security purchases throughout throughout the quarter. So some of that will assist.
We will assist the second quarter results.
So I think just for modeling purposes.
Assumption of mid quarters, I think a fair assumption as to when we redeploy invested some of those some of those securities.
Okay, Great and then.
It's been a little bit around a year or so since you guys closed the steuben deal. Obviously M&A is a big part of the CPU story could you maybe give us some commentary on sort of what youre seeing in the M&A environment out there and then.
On a lot of the deals we've seen this year has been kind of different in terms of MLR and bigger deals.
Just curious if your thought processes around M&A has changed at all in terms of the types of deals that.
You guys would be considering in 2021.
No Alex its Mark I don't I don't think our thinking has changed I don't know that it's changed much.
<unk> ever at least for an extended period of time around the general philosophy, which is to partner with high quality franchises that we feel can be sustainably additive to shareholder value.
We're not.
We're not going to.
Mark.
Never say never but.
It's highly unlikely we're going to do it.
It's highly unlikely that we're going to do a <unk>.
Larger scale transaction that to us it just creates a lot more risk.
It is inconsistent.
As opposed to bigger deals, which tend to be less assets. So at least in terms of shareholder value. So I think we will continue along the pathway of the.
Billion give or take.
Sized transactions generally in market contiguous markets.
Yes.
And those kind of.
Franchises that are a good fit for us.
Qualitatively and economically.
In terms of.
Sustainable.
Our earnings and shareholder value. So I don't think anything has changed.
Yes, the market seems to have been.
Busy lately with.
With larger deals larger institutions more on <unk>.
<unk>.
I think.
From what my take is on it.
A lot of the banks in our let's.
Call it target kind of profile.
Are still trading at.
Lower multiples because of their market cap in there.
And I think Thats, where we have fairly significant.
Opportunity. So I think right now those are.
A lot of those.
Franchises are not getting to.
On the market recognition relative to larger cash.
Companies and so I think there's always going to be a fair bit of opportunity for us in the space that we're interested in and we continue to be active in and have conversations and dialogues with them.
So.
As I told our team I suspect we.
We will have the opportunity to do something.
Instructed this year.
Okay.
And I think last time, we spoke maybe.
It was still a little bit too early to really be confident due diligence around kind of the impact of the pandemic on on balance sheet.
Now at the point, where you feel like you've seen enough and.
A lot of these economies have been impacted by by the stimulus and whatnot to actually get comfortable through the due diligence process.
Yes, I think what I'd said, Alex was I would not do a bigger deal in the middle of the bad debt because at least last year itself White book would still do.
A smaller transaction, we felt we had.
Better visibility into the risk profile on the credit.
Portfolio.
So nothing's really changed there I think a lot of the.
The.
Opportunities that we have over time.
Institutions that we know and we've followed for a long time, and we pay attention to and so we have a pretty good fees.
Alrighty.
Their portfolio and.
Their discipline around credit.
Other operational aspects of their business, so I'm not at all concerned about.
The impact lingering let's call it of the.
Of the pandemic so.
Debt will not and yes.
The fact that our thinking in any way on M&A opportunities.
Great. Thanks for taking my questions.
Thanks, Alex.
The next question is from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, Russell book.
Hey, guys.
First question would be on the employee benefit services line.
Good year over year growth.
Just to get your thoughts on the organic revenue projection there and then.
Following up on the question about M&A.
Depository deal kind of per.
<unk> Zhu from looking at.
Acquisitions within your fee verticals.
What those might be whether it's in employee benefits or elsewhere.
Yes.
We had good growth in the employee benefits.
I think it was 8% something like that.
6% I don't remember exactly.
It was pretty it was it was pretty strong growth in the expenses were flat exited moving downward.
So.
Anytime you can grow revenues.
And.
And reduce expenses that has an exponential impact on margin so very good quarter from employee benefits business.
To perform while we expect they will continue to perform well interestingly enough there are a lot of.
M&A opportunities net space right now there has been for the last 12 months to 18 months.
It's been a chip balance to compete against private equity.
We have different.
Valuation models than us in some cases.
And in terms of valuations.
But.
We have we have some things.
Percolating right now as well.
This will be ongoing in that bid on.
Debt businesses.
Very strong business I think we clearly have critical mass.
In that business the run rate on revenues. This year is going to be 100.
$110 million or so.
Really good margin so I think.
That business will continue to perform really well.
Question around whether.
Acquisition opportunities net space preclude us from kind of depository opportunities or vice versa, Yes, Theres no clearly not we.
We historically have done.
Multiple.
Transactions to cross discipline, historically, and we continue to do that it is a different from the most part subset of.
<unk> debt.
That work other than me and Joe.
On a handful of other folks and HR, it and some things but.
It's not it's a different.
It's a different level of effort with the generally different kind of.
Teens, because obviously that the teams in those business lines are actively engaged in those efforts and kind of lead those efforts.
In terms of.
Identifying and supported opportunities there so.
We clearly continue to work hard.
Both the depository side and the.
Yes.
The non banking side of our business.
We have some also some.
Things.
Opportunities.
The insurance business as well.
We're in the midst of.
Pursuing.
We expect to close on a small transaction effect I think next month and have some others that were having discussions with as.
While wealth management is little.
Different.
Never done a lot in terms of buying a home.
<unk>.
Businesses in wealth management the pricing.
Is really extreme.
On <unk>.
From time to.
Thoughts on personalities are more difficult and challenging and the other to me. It's a risk that wealth management, you don't really on the assets.
You don't know on the relationship with refiners customer relationships, even on those relations and banking the bank on the relationship for the most part in insurance.
The business on the relationship.
Little bit different wealth management. So we just we've never done a lot there, but we have we have Boston books of businesses.
Lot of them they have been very constructive as you buy one or 2 million shop.
More akin to kind of a significant signing bonus for bringing one or two or three folks on.
A lot of sense already been structured as M&A. So.
<unk> worked out really well for us.
Our buyers a little higher on doing something.
In terms of the.
Wealth management businesses, but clearly on the benefits businesses and insurance.
We've been active and I expect we will in fact reacted right now so we'll continue to do that.
Businesses have really having a bad.
They had a good year last year, and then you're looking from the first quarter and exit.
It's impressive.
Operating at a very very high level right now.
I really appreciate the detailed thoughts there Mark and then my last question guys is on the expense side of things so.
Prepared remarks, you mentioned expense initiatives.
Results this quarter.
Showed positive momentum were below consensus so it would just be curious to get a sense for.
Your thoughts on the expense run rate going forward in any detail on the type of initiatives you were referring to in your prepared remarks. Thank you.
Good question Russell.
We saw it back last year second and third quarter debt.
We're running into some margin headwinds.
Actually organized.
Our management group to look hard at some of the expense line items.
On opportunities on the revenue side.
We started to actually implement some of those.
Some of those initiatives.
In the fourth quarter third and fourth quarters and now on to that.
Into the first quarter, which we're working with our vendors on uncertainty contract.
Negotiations.
Got it.
Handful of.
The branch consolidations to reduce reduce expenses on that side.
We've looked at some other revenue line items.
Some of our.
Some of the commercial space.
Try to generate some additional revenues there.
So that's kind of the initiatives we put in place so on a going forward basis, we would expect to kind of contain so the year over year on.
Growth rate around expenses to something in the very low.
Single digits.
From a <unk>.
Annual quarter comparative basis.
I'll say in normal times, we might in the line item for Opex Opex might grow three or four 5% in the year, we're trying to continue below debt.
Really to make up for some of the challenges around the margin.
Thanks, Joe.
Just to add a bit to that Joe.
As John mentioned some branch.
Consolidations, we've done about <unk>.
<unk>.
In the past year, I think we're going to do some more of that a lot more but.
And.
So.
Got some some expense benefit.
From that.
We have relied solely on.
Attrition, which has worked out well to reduce the workforce. There. So we have that despite the fact, we consolidated.
About 20 branches and we'll do a handful more.
We haven't we haven't taken out directly any ftes other than through attrition.
I think this year, we're forecasting based on branch traffic.
If you look at before the pandemic our run rate on branch transactions.
We closed the branches than they open back up.
We looked at traffic again, and it was down about 17% pre COVID-19.
Still down about 17% pre COVID-19.
So if we look at our plan around <unk>.
Consolidation.
Ends up being around that.
17% number a reduction in.
Yes.
Branch Ftes.
Which is.
The triple digit number.
FTE. So there is some reasonable amount of.
Yes.
Expense and cost reduction share if you look at the branches. We consolidated the go on ethanol and look at our branch map.
Density there we have density in certain markets, where I would.
Characterize us as over debt so we have.
We have a fair bit of opportunity I think to consolidate and improve way. This isn't about expense reduction this is about.
Now I'll comment just more broadly.
Branch traffic for us for 10 years.
Prior to COVID-19 had declined almost exactly 4% a year.
And then COVID-19 came in people found other channels digital channels.
And a GAAP down another 17% so what we are doing is.
I would say broadly we are.
Besting in analog and investing in digital.
So.
No.
Ensuring that we have an appropriate branch structure consistent with the.
On the trends in the market the trends of our.
Our customers how they are using our channels, whether it be analog channels like branches in drive throughs or whether it be digital channels like <unk>.
Mobile.
Atms and remote deposit capture and so on.
Online banking and all of those kinds of things self service functionality. So we are just trying to mirror.
We're trying to pair up the the.
<unk> decline in analog channels with our investment in digital channel. So.
We've done a fair bit around the branches will will will probably do a little bit more but we're trying to do it prudently.
There's an expense graph trying to just.
Close branches for the sake of closing I think one of the things when you have kind.
Kind of a history of acquisitions, both whole bank and.
Yes branch transactions that we've had for the last 15 years.
Sure.
Its not debt.
Nicholas to become over debt.
In market. So we're just trying to address.
On the over debt city, we have an <unk>.
Some of our markets as a result of the history of <unk>.
M&A activity.
Thank you both for taking my question.
Thank you Rajeev.
Next question is from Matthew Breese with Stephens, Inc. Please go ahead good morning.
Hey, just a quick question on the cash.
Our cash position, how you're thinking about it so of the $2 2 billion how much of that are you defining as.
Required versus maybe we need to hold on to because there's going to be some volatility in PPP and.
And deposit balances.
The follow up to that is how much should we expect to be kind of put to work over the next few quarters either securities and loans.
Yes, it's a very good question mantech prior to the call I actually talked to our Chief investment Officer.
Deployment, and what what opportunities might be out there over the coming year.
And.
In essence, we have and we have the $2 billion, our hope and expectation is that we would have about half of that 50% of net investment over the next.
Next couple of quarters.
Moving some aside for potential.
Runoff in future opportunities.
We are.
I guess, believing that there is some inflation in the market, which might drive up the long end of the long end of the curve potentially if the fed ever.
Talks about tapering again, maybe towards the second half of the year, we could see momentum increase there. So we're looking at.
At $2 billion of effectively as dry powder.
Looking to invest maybe half of that over the over the coming three quarters or so on.
Obviously.
Watching the market day, only and just looking for those opportunities.
I would say just to add beyond that this isn't just about.
Reinvestment of $2 billion to 2 billion net.
Yeah.
<unk>.
Liquidity, but it's also about the.
Out year impact.
Margin.
And net interest income and we are extremely like most banks I suspect.
Asset sensitive.
So.
It does not work against our Alco models in fact, it helps balance our alco models by investing.
Some of that liquidity.
And.
Reducing.
Giving away that trading away some of that.
Upside risks and rising rates.
Trade off against.
Lower margin.
Ed.
Jim.
In the declining rate environment, so investing I think some of it clearly not all of it.
Opportunistically.
If we don't have the opportunity we may be on the call. It two years, saying, we still have $2 2 billion. So I don't think we're necessarily going to be.
On a rush on disciplined about how we invest it and I think Joe said over the next couple of quarters, which.
I think that would be fabulous if that happens.
I question whether.
It will.
Well.
Right.
I think I think half of it is probably.
An area where.
It would be helpful to kind of current.
Net interest income and NIM.
But would help us from an Alco standpoint in terms of balancing the.
We have falling rates and the benefit to rising rate. So a lot of this is that the discussions that we have is not driven by how do we use the $2 billion to create more earnings it's not about that.
We will be disciplined we have a lot of other earnings levers that we can pull on our polling in asphalt and so.
We'll be disciplined about it.
We get the opportunity we will we will pull that pull the trigger but it certainly wouldn't be on the <unk>.
Tired.
2 billion, because I mean, there's clearly still some risk that their debt over time.
I think the run off of the excess liquidity is going to take longer than the buildup rather than you.
Look at the balance sheet.
Year ago, two years ago in particular, there was.
Liquidity didn't look anything like that I think it will take a little bit longer.
Run offs than it did start to accumulate because.
On the stimulus.
Those kinds of things.
And.
People, reducing titles living expenses business from reducing operating expenses.
It's going to take a while so that's I guess for Mike.
My perspective, just wanted to make the point debt our interest rate sensitivity when I think about liquidity and liquidity deployment I don't think about earnings I think about interest rate risk into the future.
To understand that.
Okay.
And maybe tying this discussion back into Alex's earlier question.
Regards to net interest income.
If I strip away PPP.
I'm looking at core NII this quarter in around $86 million.
As you deploy or think about deploying half on liquidity do you think that number that 86 million represents a floor for where we are in this current economic and interest rate environment.
Good question, Matt I think it's pretty close to the floor.
Do deploy some of that excess liquidity.
That certainly will help and I think.
Per Alex's question.
Had that we had.
Late in the fourth quarter, we had a significant maturity of investment securities and we redeployed some of that during the first quarter.
And it was not all of it was deployed right at the beginning of the quarter. So we do have a little momentum from the deployment of debt 400 plus million dollars of.
Investment Securities and I know, we're looking at the TPP is.
Non core and I do understand that I mean, the other side of that it was <unk> that was the <unk>.
We did I think a pretty good job of playing that card and originating PPP and we will have some.
Recognition I think of the on the deferred fees throughout this year.
If we continue to deploy.
On that securities and have some loan growth potentially.
Potentially you can start to restore some of that net interest income outcome.
So yes.
We're obviously hopeful that that 86 years before and think that we do have some potential momentum filling in behind the TTP recognition.
We conclude 2021.
Okay.
Last one is just in regards to.
The loan pipelines, you talked about the consumer pipeline it sounded a bit more optimistic what are the components. So is it auto heavy or residential heavy.
And then you mentioned that you have some work to do on the commercial side. So just curious about the components and what does the pipeline tell you about your local economy in path towards recovery.
Yes.
Hey, Matt, It's Joe I'll take that.
Okay.
So the.
You mentioned residential so the residential on the pipeline is about 30%.
But growing about 30%.
Quarter over quarter.
And its across most of our markets.
And the extra on the patient is that it will continue to be strong as we make our way through the second quarter and into the third quarter.
So so so good activity and as you may know.
We rolled out beginning of the year.
Pale into last year beginning of this year.
Digital mortgage platform.
So we are in the digital age.
We're enjoying some upside potential from from that as well so.
To give you a sense the mortgage pipeline system about $170 million.
I'm not sure the last time I saw that number.
And so that's that's positive on.
The other positive on the retail side of the indirect portfolio the car business.
That's been growing.
<unk> as a result simple.
Change in focus on our part.
We spent a little bit more time, focusing it on volume a little less time on.
On the return.
Recognizing that we need to make some more loans around here so.
The indirect portfolio is although it doesn't have a pipeline has been growing terrifically in itself almost almost 3% year to date. So we like what we've seen again, it's across all of the footprint.
We're in on the commercial side, it's a little different story.
We're about half of where we were this time last year keep in mind, we took an approach around PPP.
We were doing it all internally. So so we took people off the street. If you will the commercial bankers from retail bankers to handle all of the PPP activity that's been going on now for 14 15 months.
So so I'm not surprised at the portfolio the pipeline is where it is.
It also recognizing just the pandemic and the impact just yet.
On.
On just general activity overall.
It's been off so.
Pipeline about half of what it was this time last year residential pipeline up nice residential mortgage pipeline up nicely.
And the application volume in the indirect portfolio also was up nicely and we expect those to continue and as Mark said, we're in the process of rebuilding the commercial portfolio that will take some time, we're seeing a little bit of.
Light at the end of the tunnel all geographies have some activity.
So.
Let's just be optimistic that we'll get the commercial pipeline heading in the right direction.
Great I appreciate it that's all I had thank you.
Sure.
Again, if you have a question. Please press Star then one please standby as we poll for questions.
Showing no further questions. This concludes our question and answer session I would like to turn the conference back over to Mr. Trying to Steve for any closing remarks.
Yes.
Nothing other than.
We will talk to you at the end of the next quarter. Thank you all for joining again.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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