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spk07: 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 predictions 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 company's annual report and form 10-K, filed with the Securities and Exchange Commission. Today's call presenters are Mark Trenisky, President and Chief Executive Officer, and Joseph Sitaris, Executive 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.
spk05: Thank you, Tom. Good morning, 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 were just fine. No surprises. It was about as we expected. operating earnings were up a few pennies over last year's fourth quarter and a penny better than Q3, so modest forward progress. Loan growth was slightly negative in the quarter, not atypical, but deposits just continued to grow, similar to others, and were up $100 million for the quarter. Asset quality continues to be very good. We did report a spike in NPAs because of a policy judgment around deferrals that Joe will explain further. 2020 as a whole was certainly a challenging year. However, operating earnings were only off 5 cents or 1.5% from 2019. In hindsight, that's much better than we were expecting earlier in the year. There are a lot of moving parts in the reconciliation between the years due to the pandemic, but there was a significant negative impact from the decline in our core margin and our retail banking revenues, which we were able to offset in a number of other ways, principally operating expense reductions and performance of our non-banking businesses, all of which had a tremendous year. The pre-tax operating earnings of our benefits business was up 11%. Wealth was up 13%, and insurance was up 16%. The value of a 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. So 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, improving organic performance, continued growth and investment in our non-banking businesses, and 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 for the benefit of our shareholders.
spk04: Joe? Thank you, Mark, and good morning, everyone. As Mark noted, the earnings results for the fourth quarter of the 2020 were very solid, especially in light of the economic challenges and industry headwinds we faced throughout the year. The company recorded 86 cents in fully diluted gap 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 85 cents for the quarter. These results match third quarter 2020 results and were two cents per share higher than the fourth quarter of 2019, fully diluted operating earnings per share of 83 cents. The company recorded total revenues of $150.6 million in the fourth quarter of 2020, an increase of $0.8 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, and a gain on debt extinguishment offset in part by a decrease in banking-related non-interest revenues. Total revenues were down $2 million, or 1.3%, from the linked third quarter, driven largely by a $4.8 million decrease in mortgage banking revenues as the company pivoted from selling its secondary market-held residential mortgage loans during the third quarter to holding them for its own portfolio in the fourth quarter. The company recorded net interest income of $93.4 million in the fourth quarter, up $0.7 million, or 0.7%, over the fourth quarter of 2019. The increase was driven by a $2.28 billion, or 22.7% increase in average earning assets between the periods, offset in part by a 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 3.71% in the fourth quarter of 2019. Net interest income increased $0.5 million, or 0.5%, over the length third quarter, while net interest margin was down seven basis points. During the fourth quarter, the company recorded $3.5 million of PPP-related interest income as compared to $3 million of PPP-related interest income in the third quarter of 2020. At December 31, 2020, remaining net deferred fees associated with the 2020 PPP originations were $9 million, the majority of which the company expects to realize through interest income in 2021. Non-interest revenues were up $0.1 million, or 0.1% between the fourth quarter of 2019 and the fourth quarter of 2020. Employee benefit services revenues were up $1.7 million, or 7%. from $25 million in the fourth quarter of 2019 to $26.7 million in the fourth quarter of 2020, driven by increases in plan administration record-keeping revenues and employee benefit trust revenues. Wealth management insurance services revenues were also up $1 million or 7.3% over the same periods. These increases were partially 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 recorded $0.9 million loss on mortgage banking activities in the fourth quarter of 2020 as compared to a $0.2 million gain during the fourth quarter of 2019, resulting in a $1.1 million decrease between the periods due to the change in the company's mortgage banking strategy as known previously. Finally, during the fourth quarter of 2020, We redeemed $10 million of support data notes acquired in connection with the 2019 acquisition of Kendrick of Bancorp and recorded a $0.4 million gain on debt extinguishment. The company recorded 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 recorded in the... provision for credit losses was driven by several factors, including a $2 million reversal of a previously recorded allowance for credit losses and a purchase credit maturated loan, 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 results on those non-performing assets. For comparative purposes, the company recorded $1.9 million in the provision for credit losses during the third quarter of 2020, $9.8 million in the second quarter of 2020, including $3.2 million of acquisition-related provision for the credit losses due to the acquisitions we've been, and $5.6 million of provision for credit losses during the first quarter of 2020. During the first two quarters of 2020, financial conditions deteriorated rapidly as state and local governments shut down a substantial portion of business activities in the company's markets and an unemployment-level spike. These conditions drove the company to build its allowance for credit losses during the first two quarters of 2020 to account for the expected lack of loan losses and loan portfolio. During the third quarter, the economic outlook remained unclear as markets were uncertain as to the efficacy, approval, and rollout of the COVID-19 vaccines. With a greater than anticipated decline in actual unemployment levels, as well as the federal government's approval of the COVID-19 vaccine and Congress's recent approval of the additional federal stimulus funding, The near-term economic forecast improved driving and net release in the allowance for credit losses during the fourth quarter. The company reported loan net charge-offs of $1.3 million, or seven basis points annualized during the fourth quarter of 2020. Comparatively, loan net charge-offs in the fourth quarter of 2019 were $2.4 million, or 14 basis points annualized. On a full year basis, the company reported net charge-offs of $5 million, or seven basis points of average loan outstanding. This compares to $7.8 million, or 12 basis points in net charge-offs for 2019. The company recorded $94.6 million of total operating expenses in the fourth quarter of 2020, exclusive of $0.4 million of acquisition-related expenses. This compares to total operating expenses of $94.4 million in the fourth quarter of 2019, exclusive of $0.8 million of acquisition-related expenses. $0.2 million or 0.2% increase in operating expenses exclusive of acquisition-related expenses, attributable to a $1.7 million or 2.9% increase in salaries and employee benefits, and a $1.5 million or 13.5% increase in data processing communications expenses offset in part by a $2.5 million or 19.4% decrease in other expenses, and a $0.4 million or 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 full-time employment employees between the periods due to both the student acquisition in the second quarter of 2020 and other factors, but were partially offset by lower employee benefit expenses primarily associated with the decrease in employee medical expenses due to reduced provider utilization. The increase in data processing and communication expenses was due to the student acquisition and the implementation of new customer-facing digital technologies and back office workflow systems. Other expenses were down through the general decrease in the level of business activities as a result of the COVID-19 pandemic, including travel and entertainment, marketing, and business development expenses. Comparatively, the company recorded $93.2 million of total operating expenses in the third quarter of 2020, exclusive of $3 million of litigation accrual expenses and $0.8 million of acquisition related expenses. The company closed the fourth quarter of 2020 with total assets of $13.93 billion. This was up $85.8 million or 0.6% from the end of the third quarter and up $2.52 billion or 22.1% from a year earlier. Similarly, average interest earning assets for the fourth quarter of 2020 of $12.31 billion were up $356.8 million or 3% from the third quarter of 2021. up $2.28 billion to 22.7% from one year prior. A very large increase in total assets and average interest earning assets over the prior 12 months, including by the second quarter 2020 acquisition of Steuben Trust Corporation, and large inflows of government stimulus-related funding and PPP originations. Ending loans at December 31, 2020, were $7.42 billion, up $525.4 million, or 7.6% from one year prior, due to the student acquisition and the origination of PPP loans. Ending loans, however, were down $42.7 million, or 0.6%, from the end of the linked third quarter to a decline in business equity in the company's markets due to seasonal factors, the COVID-19 pandemic, and PPP forgiveness. During the quarter, the company's PPP loan balances decreased $36.5 million, or 7.2%, for $507.2 million at September 30, 2020, to $473.2 million. $27.7 million at December 31st, 2020. During the fourth quarter, the company's average investment securities book balances increased $636.9 million, or 20.2%, from $3.15 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, or 17%, from $1.3 billion during the third quarter to $1.08 billion during the fourth quarter. During the fourth quarter, the company purchased $1.02 billion of treasury and mortgage-backed securities at a weighted average market yield of 1.38%. The purchases were made to stabilize near-term net interest income and hedge interest rate risk against a sustained low interest rate environment. Companies average total deposits were up $275.9 million or 2.5% on a quarter basis and up $2.1 billion or 23.2% over the fourth quarter of 2019. Total average deposits for the fourth quarter were $11.21 billion as compared to $9.1 billion in the fourth quarter of 2019. The company's capital reserves remain strong in the fourth quarter. The company's net tangible equity and net tangible assets ratio was 9.92% at December 31st, 2020. This was down from 10.01% at the end of 2019, but consistent with the end of the length of the third quarter. The company's tier one leverage ratio was 10.16% at December 31st, 2020, which remained over two times the well-capitalized regulatory standard of 5%. The company has an abundance of liquidity resources and is extremely well positioned to fund future loan growth. A combination of the company's cash and cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank, and unplensed available for sale investment securities portfolio provided the company with over $5.25 billion of immediately available sources of liquidity. From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-19-infected borrowers and develop loss mitigation strategies on a case-by-case basis, including but not limited to the extension of forbearance arrangements. At December 31, 2020, 74 borrowers, representing $66.5 million and less than 1% of total loans outstanding, remained in COVID-related forbearance. This compares to 216 borrowers representing $192.7 million, or 2.6% of loans outstanding were active under COVID-related forbearance in September 30, 2020, and 3,699 borrowers representing $704.1 million, or 9.4% of loans outstanding at 2.30 of 2020. Although these trends are favorable, non-performing loans increased in the fourth quarter. the $76.9 million, or 1.04% of loans outstanding, up $44.6 million from the length of the third quarter, and up $52.69 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 unless they could demonstrate current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligations. The substantial majority of these bars operate in the hotel sector, including several that operate near the Canadian border, which have been additionally impacted by restrictions on cross-border travel. The specifically identified reserves held against the company's non-performing loans totaled $3.9 million at December 31, 2020, $3 million of which was attributed to a single non-performing hotel loan. As mentioned in prior earnings calls, the weighted average estimated loan to value in the company's hospitality loan portfolio prior to the onset of COVID was approximately 55%. We continue to believe that the ultimate losses recognized in the current flow of non-performing hotel homes will be well-contained given the pre-COVID cash flow of these properties, the financial strength of the operators we have historically financed, and the low loan to values on these assets. At December 31st, 2020, the level of loans 30 to 89 days delinquent remained fairly consistent with pre-COVID levels. Loans 30 to 89 days delinquent totaled $34.8 million, or 0.47% of loans outstanding at December 1st, 2020. This compares to loans 30 to 89 days delinquent of $40.9 million, or 0.59% one year prior, and $26.6 million, or 0.36% at the end of the length third quarter. Net charge-offs on loans were low at $1.3 million for seven basis points annualized in the fourth quarter and $5 million for seven base points for the full year of 2020. The company's allowance for credit losses decreased from $65 million, or 0.87% of total loans outstanding at September 30, 2020, to $60.9 million, or 0.82% of total loans outstanding at December 31, 2020. The net $4.1 million release of allowance for credit losses was driven by an improving economic outlook, a substantial decrease in loans and forbearance, a $2 million reversal of a previously recorded allowance for credit losses and a purchase credit deteriorated loan, which was paid off during the fourth quarter. At December 31st, 2020, the allowance for credit losses of $60.9 million represented over 12 times the company's trailing 12 months net charge-offs. Operationally, we will continue to adapt to changing market conditions and remain very focused on asset quality and credit loss mitigation. We anticipate assisting the substantial majority of the company's 2020 first draw of PPP borrowers with forgiveness requests throughout 2021 and granting new second draw of PPP loans and advances. Although 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 or remain well below our historical levels. Furthermore, we anticipate the deposit levels to remain elevated for most of 2020, especially for 2021, especially with potentially more federal stimulus on the horizon. Accordingly, we will look to deploy additional overnight cash flow to higher yielding earning assets. Fortunately, the company's diversified non-interest revenue streams, which represent approximately 38% of the company's total revenues in 2020, remain strong and are anticipated to mitigate the continued pressure on net interest margin. In addition, the company's management team is actively implementing various earnings improvement initiatives, including revenue enhancements and cost-cutting measures intended to favorably impact future earnings. Thank you.
spk06: Now I will turn it back over to Tom to open the line for questions. We will now begin the question and answer session.
spk07: To ask a question, you may press star and then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then 2. At this time, we will pause momentarily to assemble our roster.
spk06: The first question comes from Alex Tordahl with Piper Sandler.
spk07: Please go ahead.
spk09: Hey, good morning, guys.
spk05: Good morning, Alex. Good morning, Alex.
spk09: I was just first off wondering how you guys are thinking about loan growth for 2021, other than adjusting 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?
spk01: Hey, Alex. Joe Servin. How are you this morning?
spk06: Well, thanks.
spk01: I'll take that. So we'll stay on the Resi Mortgage side for a moment. Mark mentioned in his comments about some digital strategies, and one of those strategies is to come out with a digital application in pre-qualification functionality, which we will go live here shortly. So hopefully that will benefit our mortgage portfolio. We'll also redirect folks to markets that might be a little hotter for us, hotter in a good way, more activity, more opportunity for us. We'll redirect some of our FTEs that way as well. On the indirect side, which, as you know, is another meaningful portfolio, on the indirect side, I think that the industry expects uptick, and so do we. We're going to do a little bit better job in managing between growth and yield. We were focused more on return in 2020 than we had in past years. I think in 2021 we'll do a better job in balancing the growth and the yield component. And we'll 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 customers are either risk averse or taking advantage of all of the stimulus money that is available for them and sitting back waiting to see what the new administration is going to do or how the vaccines are going to roll out. So the expectation on the commercial side is we'll be active, but it will still be soft. To give you some sense of that, In the commercial portfolio, the pipeline typically runs 350 to 400. Right now we're at $136 million. That number is probably going to go down because we had a pretty active month in December. And on the resi mortgage side, we're two times our normal run rate. So we run about $100 million and we're twice that as we sit here now. So we fully expect to see the growth in the in the mortgage portfolio growth in the indirect, and it'll be a struggle in the commercial.
spk09: And is the intention to put all of the residential production on the balance sheet for the foreseeable future?
spk01: The majority of it. We'll keep the pipeline greased a little bit, but, yeah, more than the lion's share will be kept on the balance sheet.
spk09: Okay. And then, um, Joseph terrace, um, I think I missed what you said in terms of the securities purchases. I was hoping you could go over that one more time and just, I guess if I did hear it correctly, I was having a hard time getting that to jive with the, uh, with the balances I saw on the balance sheet at the end of the quarter.
spk04: Sure. Um, during the quarter, Alex, we, uh, we purchased about a billion dollars in insecurities, mortgage backs and treasuries. But we also had some maturities of treasuries as well. So on an average basis, the securities balances were up about 630, I think it's the number, $636 million on a quarter-over-quarter average. But the purchase activities were closer to a billion.
spk06: Okay. And then as we look forward into 2021, are you going to cut you off?
spk04: Yes. Yes, Al. Yeah, and as we look forward into 2021, we're going to continue to likely deploy some of those excess cash equivalents that are on the balance sheet. I think the other day we're sitting on still about $1.6 billion of cash equivalents. It looks like the stimulus money is here to stay, so to speak, so we're going to look to continue to deploy some of those into securities. and try to effectively stabilize an editor's income in a long-term flat rate environment. So as to whether we're hopeful to put at least a billion to work in the next several months, we have to get the right levels in terms of return opportunity to do that. But that's the expectation is that we still have some work to do on the investment security purchases in the second quarter.
spk06: Okay, great. Thanks for taking my questions.
spk00: Welcome, Alex.
spk07: The next question comes from Russell Gunther with DA Davidson. Please go ahead. Hey, good morning, Guy.
spk03: Good morning, 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 you're able to quantify that or even more just big picture where that may come from.
spk05: Sure. I'll start then, Joe, if you want to add. As 2020 played out, it became clear that we were going to have to revisit our operating structure, you know, our revenue streams. I should look at where we had productive and constructive opportunities to enhance performance, whether that was additions to revenues or reductions in expenses. We convened a team of our senior folks, about 15 of us, and we spent a lot of time identifying opportunities to be more efficient, opportunities to reduce expenses, and opportunities to improve revenue. So we have a plan to move forward and affect that. And it's really across the spectrum. I mean, some of it is, as we continue to look at our branch footprint, as I said, we've We've affected 13 consolidations this year. We're looking at more for 2020. For the most part, these are near-distance type consolidations. That brings with it some modest reduction in ongoing operating costs. We are looking at all of our vendor contracts. Many of them have already been renegotiated. in a productive way. A lot of that relates to technology things, which is really changing quick in terms of just the cost structures and all of that. And so we've had good success in renegotiating some of our contracts, technology, and otherwise. We really just kind of looked at every literally detailed item on the P&L and said, what can we do to make it better and reduce and capture some costs? We did the same thing on the revenue side. So, you know, you put that whole thing into place and it's, you know, it's not insignificant. The catalyst for that, frankly, in I would say mid-2020 was not as much the pandemic as it was when we did kind of a forward assessment of our margin in our net interest income dollars into 2021. So, you know, we felt the need to, you know, to address that. So, you know, so we are.
spk03: And then I appreciate your thoughts, Mark. You kind of got to the revenue question I was planning to ask next, and you spoke about the 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, you know, given your comment that the margin pressure really led you to this, I mean, if we tie the revenue enhancements and the cost cutting together, do you expect to be able to generate positive operating leverage this year? Is that the target?
spk05: Well, I'm not going to – there's a lot of moving parts here, Russell, as you know, so I'm not going to comment specifically on that only because, you know, we don't issue – forward guidance. But we are expecting a reasonably significant impact from all of our efforts. Let me say that. The first question I think was related to the mortgage and pre-qual. I don't expect we'll have a lot of... That's not a revenue opportunity. That's more of a... As we compete more a digital basis. I think I've said this in the past, but we have markets where we operate, where we have 80%, 60%, let's say, deposit market share, and we're only the second largest mortgage lender behind Quicken Loans. So, you know, that's not right. We have to have a different approach to our mortgage model. So that's the, you know, we spent, our 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. There's going to be two components to it. The pre-qualification component, which I think we're using right now internally, will get rolled out pretty quick, really quick, publicly. And then the online mortgage application, which I think our customers are using. So that's the first piece of that is build out that. 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 digital store, then it doesn't matter much. So there's two important elements to digital. One is the platform. Two is driving traffic to it. So that is not going to be as much a near-term kind of fee or revenue opportunity as much as an important mechanism for us to capture greater, hopefully, mortgage share as markets and consumer demand evolve more to the digital channels.
spk03: All right, great. Thank you, Mark. And then last one for 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 depositories, opportunities within your differentiated fee verticals? Any commentary you could provide there would be great.
spk05: Yeah, I think, you know, The model isn't going to change much from history. We've always kind of depended 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 goal. So we will continue to look for those opportunities, as I said, across all of our businesses. That would include depositories. It would certainly include our benefits business, our insurance business. We have a couple things going on right now. We're doing some things in the wealth business that's more organic, I would say, that has a lot of potential. We'll 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, it just feels a little bit like the market is opening up a little bit. There's more opportunities. There's more conversations. I think for most of the last year, multiples were really down. Earnings were down. A lot of fear and uncertainty. That is not a great environment for M&As. I think that's changed a little bit. Multiples have come back across the industry. I think the near-term catalyst could be just the interest rate environment and the margin. You look at the industry, I think the entire industry is operating in sub-3% margins. I would venture a guess that most banks at sub-3% margins do not earn their cost of capital. I think that's going to create some opportunities. I think the potential second derivative of that, the second challenge is going to be on the technology front because of the cost of all these, the cost of technology. As you look to transition over time from analog to digital, it's clear that the the cost to invest in digital is significant, and it's ongoing. And that's either customer-facing digital channels or, you know, backroom. We're doing a lot of things to try to make, you know, our backroom more efficient. And, you know, we've got a group that's working on, you know, a kind of 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 banks realize, you know, particularly the smaller banks, we have to invest if we want to compete. They look to the cost of that technology and if, you know, if your NIM is, you know, 2.8% having you know, sufficient earning strength, you know, to make those investments is going to be a real challenge. So I just think that there's going to be more opportunity over the course of 2021, certainly than there was in 2020.
spk03: I appreciate your thoughts, Mark. Thank you very much. That's it for me, guys.
spk06: Thanks, Russell.
spk07: Again, if you have a question, please press star and then one. Our next question comes from Matthew Brees with Stevens Incorporated. Please go ahead.
spk08: Hey, good morning. Good morning, Matt. You know, just following up on the dialogue in terms of, you know, tweaks to the model and some of the upcoming challenges, you know, I was hoping for a little bit more of a quantitative assessment of the headwinds and with the changes what the outlook could be. And maybe to start with, you know, on the loan growth outlook. So, you know, with the focus on indirect and mortgage, obviously some weakness in commercial, what is the overall outlook for loan growth this year?
spk04: So, Matt, this is Joe Satiris. I'll take that question. So, you know, as alluded to, we don't offer necessarily forward guidance. But, you know, historically, our loan growth is below single digits. And, you know, know some some year that's commercially driven other years it might be indirect driven driven i would say when looking at kind of those three those three pieces you know as joe alluded to joe sermon alluded to is the mortgage offline is is be solid right now we have some growth opportunities for mortgage pipeline uh that you know maybe is slightly above you know 12 levels certainly not what's going you know, break out above kind of that low single-digit level. And on the indirect side, the expectation is that the market will be good in the spring. We still see a lot of our boomers in their checking and savings accounts, which, you know, I think probably portends some spending. So the expectation around the indirect portfolio is probably, you know, in kind of the low to mid single digits as well. And the commercial side, the pipeline is a little bit smaller as Joe mentioned. However, some of that is quite frankly being crowded out by PPP type opportunities and our belief is that PPP reduces some of that demand. You know, on the commercial side, you know, we're hopeful kind of to keep our head above water, at least in the early part of the year, and then we'll have to, you know, cross that. So, you know, that's kind of the expectations around Longwell for early 2021.
spk08: Got it. Okay. Very helpful. And then if I think about net interest income, you know, I strip away accretable yields, But to exclude the PPP, you know, fees and income and the FRB dividend, I shake out with, you know, core net interest income right around $88 million. You know, with some of the changes, do you think you can hold that quarterly number in 2021? Or do you think, you know, given the margin challenges, that it's likely to decline? Yeah.
spk04: Well, there will be continued challenges on asset yields in 2021, and I say that in the sense that, you know, our loan portfolio for the fourth quarter, we yielded about a 417. You know, new volume for loans that were put on the books in the fourth quarter was 380. So, you know, there's some rollover of loan portfolio, and, you know, so that will put pressure on asset yields. To counter that, however, as I mentioned, we do have about $1.6 billion sitting in cash equivalents at the moment. And we have an opportunity to make up that decrease by just sort of a volume play and just investing some of that overnight cash. Okay. Obviously, if this environment, the current environment persists for a very long period of time, it's going to continue to pose a challenge on not only us, but all banks. If we do get some slope in the yield curve later in the year, maybe we can level out our margin expectations on a going forward basis. I think we're going to continue to see some asset, particularly long yield compression, and we're going to try to make it up with some of the investment securities activities.
spk08: Got it. Okay. Understood. I will leave it there. I appreciate you taking my questions. Thank you. Thanks, Matt.
spk07: Our next question comes from Bryce Rowe with the Hovde Group. Please go ahead.
spk02: Thanks. Good morning and thanks for taking the questions here. One, 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 of these stimulus funds stealing somewhat permanent, so to speak, in terms of sticking on the balance sheet. So when you talk about the excess cash or the cash balances being as high as they are at one point, $6 billion, give or take, you know, what's the level you're comfortable taking that down to, kind of given your view of, you know, of the permanence of these stimulus dollars?
spk04: Yeah, no, that is a very good question, Bryce. I think all the banks right now are struggling with, you know, how long the stimulus money sticks around, so to speak. But I think we're at this point, you know, fairly comfortable that we even, you know, even if we projected some runoff of, you know, some of those funds, we still would be comfortable investing potentially up to another billion dollars over time in the securities portfolio. You know, keep in mind, we also have some, you know, some maturities later in the year. But based on what's sitting on the balance sheet right now, We'd love the interest rates to be a little higher and levels to be a little bit higher, but our alternative at the moment is 10 basis points in overnight cash. We're continuing to evaluate that, but I don't think we go too far beyond that. Obviously, there's potentially another round of stimulus coming, which could inflate the deposit levels even higher. We'll have to evaluate that as that unfolds in front of us. You know, $1.6 billion we think is a pretty significant cash equivalence balance right now, so we're going to deploy, you know, roughly a billion dollars of that over the coming quarters.
spk05: I think the challenge, just to add to that, we're at $1.6 billion now. If we do another, I'm just making this up, but $400 million in PPP, right, that's a couple billion. We have what, Joe, maturing? another 400 maturing. There's two, four. So you got two, you know, about two and a half billion dollars if you don't do anything by the end of the year. So we're looking kind of, that's the way we're kind of thinking about it. Not just we have a billion six right now, but where's that billion six going to be at the end of the year? And so how do we think about it in that context? So we are not going to put ourselves in a position where we're, we're not, we're not liquid. I mean, you look at our liquidity is always because the nature of our balance sheet and branch transactions we've done and we, you know, the lower growth on the loan side. So we, we, there's, we have enormous liquidity. So we're not, we're not really, when you're loan to deposit ratio is in the sixties, liquidity is not your problem. So, you know, we, we have a comfort level at Joe said, as we've kind of discussed this earlier, right now at the billion dollar level.
spk02: Okay. Okay, and then maybe, Joe, you could speak to where you're seeing investment, you know, yields, opportunities to put money to work within that securities book.
spk04: Yeah, well, Bryce, that is the challenge as we sit here right now is trying to find those opportunities. You know, like I said, in the fourth quarter, we primarily treasury instruments, and that's kind of we typically have had a pretty plain vanilla, you know, safe, secure portfolios, so it'll likely be in treasuries and maybe some municipal and or mortgage-backed securities. Relative to yield, 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. We think potentially some stimulus and other items might drive off that yield curve a bit. in the coming quarter. And so hopefully we can get a little bit better net levels when we invest a billion dollars over the coming quarter.
spk05: Yeah, just one quick follow-up. You know this discussion of the yields and asset classes of securities. This discussion is all within the greater context of asset liabilities. rate risk. Joe made reference to it, but our risk is to falling rates, not to rising rates. In the event we buy a billion dollars or something, a buck and a half or a buck and a quarter, whatever it is, it's not very much. Does it feel good from an earning standpoint? No, not at all. But if interest rates are low for a long time, it's going to be additive. And if rates go back up, if you look at the internal alcohol modeling and you get an increase in interest rates, we're going to be fine with that billion dollars and a buck and a quarter because the speed at which other things reprice. So you get upward accretion to NIP. So it's not just about freaking out. You know, we would not put a billion dollars of security on the books at a low interest rate if it didn't protect us with respect to our interest rate risk profile, which is what this does. If it didn't do that, we'd sit on the liquidity. But actually, that hurts us because, like, other banks, you know, or, you know, central banks around the world have gone, you know, negative. And so, you know, that's... I mean, I think Janet Yellen has even kind of gone on record historically saying that she, you know, made reference to negative rates being a potentially useful tool. So I think we're just trying to, you know, be sensible, but understanding that this is all within the context of interest rate risk, not earnings management.
spk02: Understood. That's good perspective. Maybe one more question. for me in terms of, and Mark, you touched on, you know, the round three here of PPP and, you know, whether there's a guess in terms of how much you might do relative to the first round. But, you know, I was kind of curious what you're seeing in terms of the pace of forgiveness here in 21, if you can comment on that. You know, just wanted to get a feel for it. if it's picked up or not as we've moved into the year.
spk01: Hey, Bryce, I'll take that. This is Joe. So PPP-1, we'll start there. PPP-1, the forgiveness case was clicking along pretty well. And we'll pick up as a result of the SBA putting out their short-form forgiveness for loans of $150,000 or less. I would expect the pace to accelerate as a result of that. With respect to PPP2 and what kind of activity we're seeing there, interestingly enough, it's busy, but it's nowhere as near as hectic as it was with the beginning of PPP1. The borrowers don't seem to be frantic, or I should say the clients don't seem to be frantic. They're not busting down our doors. They're filling out applications productively, and here we sit a week later from when we opened up, and we got about, I don't know, 1,300 applications. We probably did 1,300 applications on day one of the PPP1 round. So PPP1, forgiveness will pick up, and PPP2 activity, I think that 400 million is probably a number we can get to. or more. We'll see what the activity is like, though.
spk02: Excellent. Thank you, guys, for the call. I appreciate it.
spk06: Thanks, Bryce.
spk07: This concludes our question and answer session. I would now like to turn the conference back over to Mr. Trenisky for any closing remarks. Thank you, Tom.
spk05: Thanks, everybody, for joining, and we will talk to you again in April. Thank you.
spk07: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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