Q2 2021 Community Bank System Inc Earnings Call
Good day and welcome to the community Bank system.
Second quarter of 2021 earnings Conference call. Please add to this presentation contains forward looking statements within the provisions of the private Securities Litigations Reform Act of 1995 that are based on current expectations estimates and projections about the industry market and economic environment in which the company operates such statements involve.
The risks and uncertainties that could cause actual results to differ materially from those results discussed in these statements. These risks are detailed in the company's annual report on form 10-K, with the Securities and Exchange Commission.
Today's call's presenters Ardmore of Katrina, and ski President and Chief Executive Officer and Joseph.
If the terrorists executive Vice President and Chief Financial Officer the.
He will be joined by Joseph Serban Executive Vice President and Chief Banking Officer for the question and answer session gentlemen, you may begin.
Thank you Paul Good morning, everyone and thank you for joining our second quarter conference call for you all well.
I'll start with the brief comment on earnings and John will provide more detail.
The quarter was about as we expected with the reported earnings strength driven by a reserve release beyond that the margin continues to be headwind for us.
Overall deposit fees and the strength of the financial services businesses of tailwind.
From the.
The business line perspective, commercial was flat ex PPP and muni loans off of the.
The pipeline is growing back post COVID-19 quicker than we expected the good news the.
Mortgage business is strong the biggest pipeline we've ever had the payoffs of elevated also so the book is growing more slowly than it might otherwise.
Indirect lending business had a great Q2, with Outstandings up 8% over Q1.
Deposit service fees continued to rebound from the pandemic impact and were up 18% from the depressed Q2 of 2020.
For the entire industry deposits are up.
Our financial services businesses.
The star performers of the quarter with combined revenue is up 14% and pre tax earnings up 25% of over 2020.
We're also pleased to announced earlier this month the acquisition of the fringe benefits design of the Minnesota provider of retirement plan administration and consulting services of offices in Minneapolis in South Dakota.
We're on the benefit space is very active right now in terms of opportunities and we expect more to come.
<unk> of the diversified revenue model has never been so apparent.
As we announced last week, our board has approved the <unk> per quarter increase in our dividend, which marks the 29th consecutive year of dividend increases and we think available.
Our validation of our disciplined and diversified business model.
As we announced in March we have appointed Dimitar drive in office, our executive Vice President for financial services and corporate development again in this role on June.
The joined US from Lazard, where he was the managing director and the financial institutions growth and has over a dozen years.
Of experience in investment banking, serving clients in the banking benefits of Fintech space.
I've known and worked with Dimitar for nearly his entire career and I'm thrilled to have him on board supporting our growth initiatives.
Looking ahead, we will be doing our best to manage the changing wins, we of the headwind of margin pressure for growth.
Credit Mark.
Some of our financial services businesses and liquidity deployment are all tailwind.
Joe.
Thank you Mark and good morning, everyone as Mark noted the second quarter earnings results were solid with fully diluted GAAP and operating earnings per share of <unk> 88.
The GAAP earnings results for <unk> 22 per share.
Share of 33, 3% higher than the second quarter of 2020, GAAP earnings results and <unk> 12 per share or 15, 8% better on an operating basis the.
Improvement in earnings per share was led by lower credit related costs and the significant increase of noninterest revenues, particularly in the Companys non banking businesses comparatively the company reported GAAP earnings.
Earnings and operating earnings per share of <unk> 97 from the linked first quarter of 2021.
The company reported total revenues of $151.6 million in the second quarter of 2021, a $6.7 million.
6% increase over the prior year second quarter revenues of $144.9 million the.
The increase of total revenues.
In the periods was driven by a $5.3 million or 13, 7% increase in financial services business revenues, and a $1.2 million or 8.6% increase in banking related non interest revenues net interest income of $92.1 million was up zero point $2 million of 0.2% over.
The second quarter of 2020 results total revenues were down <unk> $9 million of 0.6% from the linked quarter first quarter, driven by a $1.9 million decrease in net interest income offset in part by higher noninterest revenues. Although net interest income was up slightly over the same quarter last year of the results for Keith on the lower net interest margin outcome.
The Companys tax equivalent net interest margin for the second quarter of 2021 was $2, 79%. This compares to 3.3% in the first quarter of 2021% and 337% 1 of your prior net.
Net interest margin results continued to be negatively impacted by the low interest rate environment and the abundance of low yield cash equivalents the.
And on the company's balance sheet the <unk>.
Yield on earning assets was 2.9% in the second quarter of 2021 as compared to 3.1 of 5%.
On the linked first quarter of 3.5% to 6% 1 year prior during the second quarter of the company recognized $3.9 million of PPP related interest.
Net income including 2.
<unk> 9 million of net deferred loan fees.
For $6.9 million of PPP related interest income recognized in the first quarter, including $5.9 million of net deferred loan fees. The company's total cost of deposits remained low averaging 10 basis points during the second quarter of 2021.
Employee benefit services revenues.
<unk> were up $3.4 million of 14, 2% over the prior year second quarter driven by increases in employee benefit trust. The custodial fees wealth management revenues were also up $1.9 million for 29, 2% driven by higher investment management and advisory of Trust services revenues insurance services revenues.
As in the prior year's results the increase in banking related noninterest revenues was driven by a $2.3 million 17, 6% increase in deposit service and other banking fees offset in part by a $1 million decrease in mortgage banking income.
During the second quarter of 2021 of the company reported a net benefit in the provision for credit losses.
<unk> were $2.3 million. This compares to a $9.8 million provision for credit losses reported in the second quarter of $2023.2 million of which was due to the acquisition of Steuben Trust Corporation for the remaining $6.6 million largely driven by pandemic related factors.
During the second quarter of 2021, the company for the 3 basis points of net low recoveries.
Ares and the post vaccine economic outlook remains positive.
At the end of the second quarter, there were only 12 borrowers representing $2.4 million on loans outstanding of that remainder of the pandemic related forbearance.
This compares to 47 borrowers of pandemic related forbearance, representing $75.6 million at the end of the first quarter and 3700.
Part of the approximately $700 million of all of those getting 1 year earlier. These factors drove down the expected loan losses, resulting in the recording of the net benefit of the provision for credit losses for the quarter.
The company reported $93.5 million total operating expenses in the second quarter of 2021 as compared to $87.5 million in the second quarter of 2020.
Excluding the 3.4 million of acquisition related expenses, the $6 million or 6.9% increase in operating expenses was attributable to a $3.2 million of 5.8% increase in salaries and employee benefits of $1.9 million, 78% increase in data processing communications expense.
The <unk> 7.
$7 million, 747% increase in other expenses net.
Zero point $5 million of 5.3% increase in occupancy and equipment expense offset in part by the 0.3 million 7.9% decrease in the amortization of intangible assets for the increase in salaries and employee benefits expense was driven by increases in merit related employee wages.
Higher payroll taxes, including increases of the state related to unemployment taxes.
Our employee benefit related expenses and the Steuben acquisition.
Other expenses were up due to the general increase in the level of business activities, including increases in business development marketing expenses the.
The increase in data processing communications expenses was due to the second quarter 2000.
Thousand 20, Steuben acquisition in the company's implementation of new customer facing digital technologies and back office systems between the comparable periods.
The increase in occupancy and equipment expenses, driven by the Steuben acquisition and comparison of the company reported $93.2 million of total operating expenses in the first quarter of 2021 zero point of 3.
3 million, 3% lower than the second quarter of 2021 for total operating expenses.
The effective tax rate for the second quarter of 2020 on was 23, 1% up from 23% in the second quarter of 2020.
The increase in the effective tax rate was primarily attributable to an increase in certain state income tax rates.
That were enacted in the second quarter of 2021.
The company closed the second quarter of 2021 of the total assets of $14.8 billion. This was up $181.1 million of 1.2% from the end of the linked first quarter and up $136 billion of 10, 1% from a year earlier.
Average interest.
Interest, earning assets for the second quarter of 2021 of $13.37 billion were up $686 million of 5.4% from the linked first quarter of 2021 and up to $2.7 billion of 24% from 1 year prior.
The very large increases until assets on average interest earning assets over the prior 12 months.
<unk> was driven by the second quarter of 2020 acquisitions have been in large inflows of the government stimulus related deposit funding of PPP originations.
Company's ending loan balances of $7.$2.4 billion were down $124.2 million of 1.7% from the end of the first quarter exclude.
Excluding the net decrease in PPP loans of 126.
$6.1 million and the seasonal decrease in municipal loans totaling $41.2 million any loans increased $43 million for 0.7%.
As of June 30 of 2021 of the Companys business lending portfolio of included 317 first draw PTT loans, where the total balance of $72.5 million.
In 2250 for a second draw of PPP loans for the total balance of $212.3 million.
The company expects to recognize through interest income on the majority of the 3 remaining first draw on it.
For PPP fees totaling zero point $9 million during the third quarter of 2021, and the majority of its second through all of the net deferred PPP.
The piece totaling $9.2 million over the next few quarters on.
On a linked quarter basis, the average per book value of the investment securities portfolio increased.
292 million 7.9% from $3.67 billion during the first $1 billion during the first quarter to $3.96 billion during the second quarter.
With the set the company has largely remained on the sidelines with respect to deploying excess liquidity into the market interest rates become more attractive growth.
In the second quarter of the Companys average cash equivalents of $202.7 billion, representing approximately 16% of the Companys average earning assets.
This compares to $1.67 billion.
And the average cash equivalents during the first quarter of 2021.
$823 million.
In the second quarter of 2020.
$408 million of $24.
5% increase in average cash equivalents during the quarter was driven by the continued inflow of federal stimulus funds. The originated origination of second draw PPP loans.
And the first draw of PPP loan forgiveness.
The company's capital reserves remains strong in the second quarter. The company's net tangible equity tangible assets ratio was 9 point on 2% at June 30 of 2021. This was down from 10.8% of your earlier, but up 848% at the end of the first quarter.
Company's tier 1.
On leverage ratio was 936% at June 32021, which is nearly 2 times, the well capitalized regulatory regulatory standard of 5%.
Company has an abundance of liquidity of the combination of the company's cash on cash equivalents borrowing available Federal reserve bank borrowing capacity of the federal home loan bank and Unpledged available for sale of investment Securities portfolio provided.
The company with over $6.1 billion of immediately available sources of liquidity.
At June 30 of 2021 of the company's allowance for credit losses totaled $51.8 million for zero point, 71% of total of loans outstanding.
This compares to $55.1 million of zero point, 75% of total loans outstanding.
At the end of the first quarter of 2021% and $64.4 million or 0.86% of total loans outstanding at June 30 of 2020.
The decrease of the allowance for credit losses is reflective of an improving economic outlook. The very low levels of net charge offs and a decrease in delinquent loans and loans on pandemic related forbearance.
Performing loans decreased for the second quarter to $72 million of.
97% of loans outstanding down from $75.5 million for 1.2% of loans outstanding at the end of the linked the first quarter of 2021.
But up from $26.8 million of 0.36% of loans outstanding at the end of the second quarter.
For 2020, due primarily to the reclassification of certain hotel loans under extended forbearance from accrual to non accrual status between the periods the <unk>.
Specifically identified reserves held against the company's nonperforming loans total only $2.8 million at June 30 of 2021.
Loans 30 to 89 days delinquent totaled <unk> 2.5%.
Non outstanding at June 32021, this compares to <unk>, 37% 1 year prior to the zero point of 2.7% at the end of the linked first quarter.
Management believes the low levels of delinquent loans and charge offs as the supported by the extraordinary federal and state government financial assistance provided the consumers throughout the pandemic.
We remain focused.
On new loan origination and will continue to monitor market conditions to seek the right opportunities to deploy excess liquidity our pipeline loan pipeline has increased considerably during the second quarter on asset quality remains very strong. We also expect net interest margin pressures to persist for remained well below pre pandemic levels, but also believer of abundance of cash equivalents representatives.
And the significant future earnings opportunity.
We're also fortunate and pleased to have the strong non banking businesses that support of diversified streams of noninterest revenue.
And lastly to Echo Mark's comments were pleased and excited to welcome the customers employees of FTE and the community Bank team. Thank you Ellen and I will turn it back to call for questions.
And we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone.
Kind of using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2 and at this time, we will pause momentarily to assemble the roster.
So the first question today will come from Alex for it all with Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, the ONEOK.
The first off I just wanted to ask about you know as I kind of look at 'twenty 'twenty 2 over 'twenty 'twenty..1 you know of couple of things like the reserve releases P. P.
Some of those things, obviously aren't gonna be repeatable on 'twenty 'twenty 2 setting up you know the possibility of earnings going lower and I was wondering if that.
Has any impact on how you think about M&A I know when you guys crossed the 10 billion Mark there was a little bit more of an emphasis the kind of cover the durbin by doing a slightly larger transaction and I'm.
I'm wondering if if your outlook on the M&A has changed at all just kind of as you look forward into what earnings made brand next year.
No I think it's a fair question there were some things of this year. There clearly are nonrecurring and we're going to have the.
The refill the bucket.
I think.
Organic growth is going to have to improve we need to continue the momentum of our financial services businesses.
On the fees continued to rebuild the Joe.
The essential.
So I think we have some levers to flow in terms of continued momentum.
Relative to earnings.
Offsetting some of the nonrecurring.
The revenues over the course of the last year and that's our job is to is to grow earnings every year.
It doesn't really change our outlook as it relates to M&A on the.
M&A is more of the longer term continue.
<unk>.
Our strategy to try to create.
Above average.
Shareholder returns with below average risk.
That's really so we arent going to.
We're not going of forecast.
If we forecasted lower.
Core operating earnings I don't think of strategy to address that is the try to find something for that purpose I think we look at M&A more strategically what's the.
Fit.
What does it contribute into the future how does it create sustainable and growing shareholder.
Shareholder value. So I would say it doesn't really change at all of our outlook on M&A, which is more of the.
Speaking of exercise not really.
Yeah.
I think with Durbin over with.
The $10 billion.
Yes, the urban I guess.
That was a little bit different.
Current that was a.
The $10 million and $12 million, yet theres no operational mechanism to absorb the 10 or $12 million.
So.
That was a little bit different but with that said.
<unk>.
I think our.
At the time of articulation of new shareholders was we expect to cross the $10 billion.
Without reducing earnings and that's our job as management so the.
The only realistic way to do that is true.
The good M&A opportunities, we were fortunate to be able to.
The 2 in that timeframe.
Acquire 2 really strong franchises and merchants in Vermont.
And our.
The business.
Boston.
Which continues for them yet an extremely high level.
With respect to.
Growth in revenue and growth.
In March.
But ordinary course.
M&A is more strategic and less tactical so it doesn't really change our philosophy on how we think of it.
Okay.
And then just kind of on the same along the same topic you alluded to some opportunities on the benefits space in your prepared remarks on.
Although it is going to continue to follow the same sort of.
Similar transactions for what we've seen.
With the most recent 1 kind of of all be sort of relatively bite sized and overtime.
On improve that business, but not necessarily huge needle movers in the near term.
I think thats the.
The expectation right now, but the debt.
If we had the opportunity to do another larger transaction with the IRS transaction that we did in Boston.
For years ago.
We would definitely do it.
So.
I think for the most part I mean, I think what's driving a lot of these non banking opportunities right now is just the cash.
<unk> over the cap gains right.
Some of these businesses were started 20 years ago with the dollar.
Other worth $20 million of $30 million.
Or more.
And it's all cash gain if I sell now I can say, 20% by zone sometime.
Sometimes the future of pay 40%. So I think it's as simple as that in terms of what's driving a lot of the the.
The activity right now so.
We're also getting a little bit bigger.
Our benefits business right now of the run.
Rates of over $110 million in revenues.
And the profit.
The margin of the operating margin has actually grown over the last couple of years nicely.
No.
It's a great business for us and we've got a fair bit of critical mass in the debt business.
There's a couple of businesses we are.
1 of the lead players in the U S in those spaces.
For you to have on.
<unk> for us the partner with.
Much larger financial institutions.
On the kind of the institutional trust side.
And in some some other some other areas.
So we've got a lot of momentum in that business and we're going to continue to invest in it whether it's organic.
The organic which we've done some price.
Part of this startup of the VEBA business.
A few years ago with zero revenue is now.
There is probably 1 for pushing 5.
Million.
The good margin. So we will continue to invest in the organically in terms of starting up either product lines or.
Yeah.
The other other organic startups and also look at what we think are high value the acquisition opportunities. There's a lot of businesses net space the.
We wouldn't be inter.
In for.
For different reasons.
Like to acquire.
The acquiring revenues is great, but we also like to acquire a product line.
Technology for consulting resources.
And so if we find the transaction that has some of those value drivers for us the much.
<unk> attractive and just bolting on some.
Some some revenues, which can also be I mean, I'm not suggesting we wouldn't do.
More tactical acquisitions, but we also like.
Really strong consulting.
For more product line knowledge consulting.
More already on the technical talent sales talent.
Which is what we got with SBB sales and income.
Consulting tail. So it's not it's not just the revenue stream, but.
It's active right now on that space.
It's always been very busy.
We'll continue to hopefully be busy in that space for a while but.
The operating momentum for that business is really tremendous right now.
Not just organically, but in terms of our opportunity to partner with much larger.
Financial institutions and clients I mean, we have.
And number of Fortune 500 clients.
In our benefits business that we do institution institutional trust the workforce so.
We will continue investing in our business and right now the the M&A opportunities are pretty good.
Awesome and then just the final question for me the strong.
Consumer indirect growth you had this quarter was that reflective of any sort of change in how you guys are thinking about that portfolio of any pricing changes or anything that we should be aware of for the as we kind of think how.
Of that portfolio could kind of evolve over the next couple of quarters.
No I don't I don't think so the.
<unk> is really kind of your.
You're at the Mercy of the market I mean, the market goes up the market goes down we have been in that space for a long time, we don't get in get out getting it out a lot of players who have gotten out most of it which has been a little bit helpful.
Our business is.
The biggest component is used auto.
Pricing was very good.
There's not much new inventory.
Yes.
Thus valuable to finance new vehicles of it is us.
In any of that so it's just been a really.
Last quarter was really good it also kind of get top coal pretty quickly so.
The next quarter.
Right now you can be better and can also be worse, it's more volatile it's lee.
Yes.
Predictable in some ways we've net.
We had to really deal with inventory before as an issue on that business, but now we're dealing with it and as I said I think its in some respects working to our advantage because of the used car markets.
Quarter might be good and pretty active in.
The biggest component of what we financing debt in that business.
Awesome, Thanks for taking my questions.
Thanks, Alex.
And our next question will come from ex quick with spending and Scattergood. Please go ahead.
<unk>.
Good morning, guys.
Good morning, Eric.
You mentioned a couple of times in the prepared remarks that the pipeline for the loan pipelines had increased significantly during the quarter on your acutely focused on new loan origination going forward, if we <unk>.
Back out the expectation that the PPP.
Loans continued to run off of their forgive me I'm just curious if you could frame maybe what the opportunity is for net growth in the remaining portfolio is in the back half of the year on into next year.
Joe you want to go Eric to serve and how are you. This morning.
Hey, Jeff.
Let me give you.
The little bit of an insight into the pipeline of activity 1.
Commercial pipeline.
We're on the.
The building stage, if you will.
And.
The pipeline from June of 19 June of 'twenty.
The team the June of 'twenty, 'twenty, 1 sort of about 35%.
And if you look at it from June of 2000, 22021 of its about 3.5% on compared to the minute.
On the you have to look at the the.
The first half of 2021 to understand the what.
Going on in the business.
29% for 2021.
It was an 85% increase from the average of.
The Q1 to the average of Q2, so the pipeline has grown significantly in the commercial business.
In the months of May and June and hopefully that will continue on for US like I said since since 2019 years of.
Sort of 5%.
On the on.
The residential mortgage side, Mark had mentioned earlier, maybe it was Joe the tool.
The high point of of our pipeline, which we are on plan.
Does that vendors with interest in pipeline that large on.
Both in dollars, but also on applications.
About 3 things.
So in dollars were up about 50.50, 50% of if you look at June June of 19, the June 'twenty, 1 growth of about 50%.
If you look at your June of 'twenty to 'twenty, 136% in dollars were up 35% in the application. So it seems as though it's going into right direction.
<unk>.
We anticipate.
Maybe another net.
$20 million in the indirect portfolio maybe another.
$40 million on the residential portfolio has become the closeout the year.
But.
Like Mark said, particularly in the indirect portfolio that type of coal.
<unk> so it could be a bigger number of lesser number, but nonetheless, I think we're positioned nicely given the pipeline given the application volume.
We will see growth.
Continued growth of both of those portfolios. The commercial as you know it takes a little longer but I think the physician nicely with the.
The size.
Pipeline as well as the committed net funded rate loans already approved on.
Therefore for that piece of the price increase by about 9%.
Quarter over quarter so.
I think we're poised for them.
The continued improvement.
Thanks, John I appreciate that color.
And then switching gears to the <unk>.
<unk> and the outlook for provisioning going forward it looks like the reserve now as you know backward was at the end of 2019.
Before the pretty much kind of released all of the Bill that you had from last year is it safe to assume then that the provisioning going forward will reflect.
They're kind of net charge offs, and then growth in the loan portfolio or the other items to kind of consider at this point.
Okay.
Eric This is Joe was the tariffs.
Based on.
The kind of where we've been on where we are today I think thats the <unk>.
Reasonable expectation.
I think the.
The markets, obviously the moment for Colgate.
And turmoil and we provision accordingly.
We think we're kind of on the back end of that I mean, I suppose there could be another surge.
We're concerned about that but right now.
We came out of the pandemic of very good shape from a credit perspective.
So for growth of the portfolio.
On sort of charge offs will likely drive some of the provisioning on a going forward basis. The economic outlook, we don't anticipate having the same level of volatility that we had certainly going through the pandemic.
So that component of the the reserve calculation.
We anticipate at least as of right now.
That's the sort of stabilize.
So I think that for.
Provisioning.
All of the volatility of provisioning should settle down as we as we look ahead.
Got it and then thinking about the tax rate.
You mentioned in the press release and your comments that there were some changes at the at the state level, which led to the increase here on <unk> with any of that increase the <unk> catch up or is that 23% rate of decent run rate going forward.
Yes. So there was there was a bit of of catch up.
It was retroactive for the.
I think it was the year so all of the run rate in around 22.
Plus plus or minuses reasonable ex.
Moving any sort of.
Employee related stock option exercise and the benefits related to the absolute for run rate probably in the round 22%.
On the effective tax rate.
Great. Thank you for taking my questions today.
Good morning, Sir.
And our next question will come from Russell Gunther with D. A Davidson. Please go ahead.
Hey, good morning, guys.
Good morning, Good morning Russell.
Would you guys, Joe perhaps would be able to.
Give us some color on the P&L impact of the more recently announced employee benefit deal from a fee and expense perspective over the next couple of quarters and then.
The kind of sticking with that being bigger picture of how the fee and expense outlook for the back half of the year is shaping up.
So it was a very Russell was it was a small transaction for us.
We paid less than.
$20 million for for the for the company, we expect the revenue run rate of for that business to be less than $10 million on a on a going forward basis.
Yes.
So the overall impact of the business will be very marginal I think as mark was alluding to we picked up some for.
The key Jake.
Benefit of.
Net acquisition, it's a beachhead in the Midwest.
Direct sales force.
Just additive overall to our.
Based on to our 401 K practice within the within the employee benefits space, but pretty.
Pretty small acquisition for us, but I think strategically important I think.
We believe there will be additional opportunities just kind of.
Similar type of transactions down the road.
All of.
Some of those to the for the table going forward.
Thanks, Joe and then you guys had said previously.
The.
We'll focus on low single digit expenses for the year and it's been really good discipline here, you're certainly on track for that.
As you look out.
2020 of 22 similar to a question earlier.
Is that of range you will continue to target that low single digit given some revenue challenges or are there.
Targeted franchise investment or just inflationary pressures that would push that higher.
Russell that is that as our.
And it's our hope that the.
Challenge, obviously as you kind of mentioned is just keeping on that particularly.
Payroll and wages theres more pressure.
On on wages than Theres been in the past that'll be a challenge for us to continue to.
To manage that appropriately.
Are those of qualified and experienced staff. So there is some pressure on the wage front for sure.
But we are we of act we are actively managing all of the line items that we can from an operating expense base.
Basis, we as we've also mentioned we kind of consolidated some branches over.
The last year year, and a half and we're starting to see some of the benefits from a cost perspective.
It's baked into the net.
The quarterly earnings so our expectation is there's kind of low single digits, excluding any sort of <unk>.
Significant acquisitions and so.
So we're going to continue to manage that.
Prudently.
Thanks, Joe last 1 for me is on the margin you guys have mentioned that I think of couple of times.
The headwind that remains there can you give us a sense for the for the back half of the year is the expectation.
<unk> for pressure from this $2.79 prior to the some excess liquidity getting deployed or.
How do you see the.
Near term trends.
Yes for Russell from overall margin perspective, it's going to continue to be of challenged.
To support any sort of growth on the margin excluding as you pointed out the additional investment of securities.
We are the loans.
The decline is increasing as Joe was indicating we are starting to see a lot of the loan growth that will help the margin.
At least at least the debt.
That debt roughly.
The $2 billion of cash equivalents.
<unk> Tomorrow decided to invest that in the 10 year Treasury represents about $22 million on a pre tax operating basis.
The 1.5 year Treasury were for 150, that's closer to the $30 million improvement in net interest income, but we need the market.
Kind of work with us a bit on that and we kind of see that as the significant earnings opportunity in margin improvement opportunity.
And as you are aware, we don't really have anywhere to go on the on the cost of funds side.
The change of our cost of funds on cost of deposits of 10 basis points is about as low as it's going to go and so that's really been the challenges.
Is deploying that excess liquidity and obviously, we don't have a lot of room to go down on the deposit side because of the strength of of core deposit franchise. So.
From a margin perspective.
We certainly hope for at the low point.
Potentially it could drift a bit lower.
But we also expect the net interest income of leased we could stabilize it with some loan growth and some deployment of the.
Of the excess excess liquidity on the back end of the year or 2 I think it might be worth noting that we're sitting on about 9 million.
Of net deferred fees on the PPP side that have not been recognized so assuming that fourth quarter is the majority of the forgiveness activity, we will see some of that hitting in the back end of the fourth quarter and debt.
At least show improvement in the posted margin, we do recognize most of it.
The only thing got it yeah.
Yes.
If you look at the originations this quarter.
Our commercial book, our mortgage book and our indirect book.
Were all lower than what the aggregate portfolio yield is right now.
So kind of the core.
Take out PPP.
All of the other stuff that kind of confuses the margin right now the core operating margin.
It's kind of go down I don't see how that does happen. If you look at just what happened this quarter.
With that said.
We need to we need.
Sure.
Of the rate's going to go down.
The challenge for Us and our team is.
Sure.
It's not what the dollars per day. So if the rate goes down we get enough growth that we can offset that.
Can we can manage the dollars.
That's that I think is.
To grow is really simple.
Yes.
So the idea of the $2 billion, yes, we invested $1 billion of half of $1.50.
For $1 billion Thats, great hope business strategy. So.
That'd be great of the market cooperates and we have the opportunity that's wonderful the does it.
We need to we need to plan as to how we we.
The gross margin dollars and of declining.
Rate environment.
The challenge that we're focused on.
Understood. Thanks, Mark Thanks, Joe.
Thanks Robert.
And once again, if you would.
A question. Please press Star then 1.
Our next question will come from Matthew Breese with Stephens, Inc. Please go ahead.
Yeah.
Good morning.
Hey, I just wanted to stick on the steam of liquidity.
I just want to confirm so the message for now.
Is that.
In terms of investing on liquidity into securities just because of how low yields or do I have that right.
Yes at 127, you have that right okay.
<unk>.
Has there any has there been a turning point yet in terms of liquidity starting to roll off the balance sheet have you seen that quarter, the dangers of continuing to stick around and <unk> growth.
We have not seen a trend yet in terms of.
Run off of of any of that excess liquidity.
In the past quarter, we saw an increase.
So so we are.
Not seeing that.
Debt occurring yet.
So we think most of the $2 billion is here to stay we don't think.
Like all of it necessarily but most of it is probably here to stay on the balance sheet. So we do.
Feel like we're going to need to deploy that at some point when the when.
When the cycle is right for us.
Okay, I will say that line okay.
If you look at the quarterly run rate I think the.
I think the deposit inflows for the rate of.
Well most of the decrease right so the.
The slowing down in terms of the.
The.
In Florida.
Right, Okay, and then Mark you mentioned debt stripping the way PPP.
New versus existing loan yields still show some pressure.
I will give us an update on where you're seeing the most pressure with that debt.
Alta is.
Okay.
On.
Kind of going by memory here.
Uh huh.
Yes.
It was across the board actually.
It.
Could you.
It was pretty pretty consistent so I'd say.
On the consumer mortgage side, the Delta was about.
What does the 80 basis points business lending is.
The 80 basis points.
The indirect business was 80 basis points.
About it's about 80 basis points.
Okay.
The second quarter origination yield versus the aggregate portfolio yield.
For the quarter, so it's about 80 basis.
Okay.
And then last 1 from me.
Could you remind us.
How much of the portfolio is floating or <unk> has seen really short duration. So just wanted to get a sense is.
Talks about fed hikes intensify.
Well positioned you are for capturing some of that.
The point out of the gate.
So are are floating rate.
Loan instruments.
We're about $1 billion 3 billion for.
In that neighborhood.
So it's not a significant.
A component of our overall loan portfolio.
Benefit, but obviously, if we do get rate hikes in the <unk>.
Excess liquidity comes into play as well, but from a loan perspective.
<unk>.
Its about that level.
Okay.
Great. The other thing too is that debt.
Indirect portfolio turns over really quick 1 of the cash flows the all of them up like 40 million.
For the month for something in cash flows.
Net debt portfolio turns over the really quick also.
Right right that's like a.
On 12, 24 month product correct.
Yes, it's a little bit it's a little bit it's a little bit more than that but you also get payoffs so out of that share with the average mature.
30.
Contractual versus actually the.
The 3 units, it's probably 24 to 36 months somewhere.
Okay.
Very good.
Thats all I had thanks for taking my questions.
Thank you Matt Thanks, Matt.
And this will conclude.
Sure the question and answer session I would like to turn the conference back over to Mr. Czarnecki for any closing remarks.
Thank you Paul Thank you all for joining and we will talk again next quarter. Thank you have a good summer.
The conference has now concluded. Thank you for attending today's presentation you may.
Conclude on Thats your lines at this time.
Thank you for.
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All of us.
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