Community Bank System, Inc. (CBU) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the Community Bank System First Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections 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 Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. They will also be joined by Joseph Serbun, 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 and maybe even modestly better than we expected on a recurring basis. GAAP earnings were obviously very strong, but positively impacted by a $0.10 per share reserve release and a $0.08 per share benefit from PPP fees, so, about $0.79 for the quarter on a recurring basis. The margin came in a bit better than we forecasted and our non-banking businesses continue to accelerate growth on both the revenue and margin lines. Our benefits business was up 12% in EBITDA over the last year. The wealth management business was up 35%. And the insurance business was up 28%. We also had an ever so slight bit of organic loan growth in the quarter [ex] [ph] PPP, which is atypical for us in any first quarter, and loan quality is in as good a shape as I've ever seen it. Our consumer lending businesses are very strong right now and we expect a solid second and third quarter performance there. On the challenges front, the margin may continue to contract and we need to rebuild our commercial pipeline, which is recovering slowly from the impact of the pandemic. In general, I think we had a very good start to the year. Joe?

Thank you, Mark and good morning everyone. As Mark noted, the first quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.97. The GAAP earnings results were $0.21 per share or 27.6% higher than the first quarter of 2020 GAAP earnings results and $0.20 per share or 26% better on an operating basis. The 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 $0.86 and operating earnings per share of $0.85 in the linked fourth quarter of 2020. The company recorded total revenues of $152.5 million in the first quarter of 2021, a $3.8 million or 2.6% increase over the prior year’s first quarter revenues of $148.7 million. The 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 or 1.2% from the linked fourth quarter, driven by increases of net interest income banking, non-interest revenues, and financial services business revenues. Although several factors contribute to the net improvement and net interest income, the results were aided by the recognition of net deferred PPP loan origination fees of $5.9 million in the quarter due largely to the forgiveness of $251.3 million of Paycheck Protection Program loans. The company's tax equivalent net interest margin was 3.03% in the first quarter of 2021, as compared to 3.65% in the first quarter of 2020, and 3.05% in the linked fourth quarter of 2020. Net interest margin results continue to be negatively impacted by the significant increase in low yield cash equivalents between the comparable annual quarters. Average cash equivalents increased $1.55 billion in the first quarter of 2020 and the first quarter of 2021, due to the net inflows of stimulus funds and PPP between the periods. The tax equivalent yield on earning assets was 3.15% in the first quarter of 2021, as compared to 3.93% in the first quarter of 2020, a 78 basis point decrease between the capital periods. The company's total cost of deposits remained low, averaging 11 basis points during the first quarter of 2021. Non-interest revenues were down $0.1 million or 0.2% between the first quarter of 2021 and the first quarter of 2020. The decrease in non-interest 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 5.7% increase in financial services business management 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, a $0.2 million decrease in mortgage banking income. Employee Benefits Services, revenues were up $1.2 million or 4.6% 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 or 14.9% over the same periods due to higher investment management advisory trust services revenues. Insurance Services revenues also increased slightly over first quarter 2020 results. The company recorded a $5.7 million net benefit in the provision for credit losses during the first quarter of 2021, due to a significant improvement in the economic outlook, and very low levels of net charge-offs. Conversely, the company reported a $5.6 million provision 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 were $0.4 million or 2 basis points annualized, as compared to $1.6 million or 9 basis points annualized of net charge-offs reported during the first quarter of 2020. For comparative purposes, the company reported a $3.1 million net benefit and provision for credit losses during the linked fourth quarter of 2020. The company reported $93.3 million in total operating expenses in the first quarter of 2021 as compared to $93.7 million in the first quarter of 2020. The $0.4 million or 0.4% decrease in operating expenses was attributable to $0.6 million or 1.1% decrease in salaries and employee benefits, $1.7 million or 16.4% decrease in other expenses, $0.3 million or 8.6% decrease in the amortization of [intangible] [ph] assets, a $0.3 million decrease in acquisition related expenses, partially offset by a $2 million or 19% increase in data processing and communication expenses, and $0.6 million or 5.2% increase in occupancy expenses. The decrease in salaries and benefits expenses driven by a decrease in retirement related severance and medical benefit costs offset in-part by increases in merit and incentive related employee 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 and communications expenses was due to second quarter 2020 Steuben acquisitions and the company's implementation of new customer facing digital technology and back office systems during 2020. The increase in occupancy costs was driven by the Steuben acquisition. Comparatively company reported $95 million in total operating expenses in the linked fourth quarter of 2020. The company closed the first quarter 2021 with total assets of $14.62 billion. This was up $689.1 million or 4.9% from the end of the linked fourth quarter, up $2.81 billion or 23.8% from the year earlier. Similarly, average interest earning assets for the first quarter of 2021 of $12.69 billion, were up $377.6 million, or a 3.1% from the linked fourth quarter of 2020 and up $2.65 billion or 26.4% from one year prior. The very large increase in total assets and average interest earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Steuben Trust and large inflows of government stimulus-related deposit funding at PPP originations. As of March 31, 2021, the company's business lending portfolio, including 874 first draw PPP loans with a total balance of $219.4 million and 1,819 second draw PPP loans with a total balance of $191.5 million. This compares to 3,417 first draw PPP loans with a total balance of $470.7 million at the end of the fourth quarter of 2020. The company expects to recognize through interest income, the majority with remaining first draw net deferred PPP fees totaling $3.4 million during the second quarter of 2021, and the majority of its second draw net deferred PPP 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 or 0.6% lower than the linked fourth quarter ending loans of $7.42 billion, but up $502.2 million to 7.3% from one-year prior. The growth in ending loans year-over-year was driven by the acquisition of $339.7 million of Steuben loans in the second quarter of 2020 and $399.2 million net increase in PPP loans between the periods. The decrease in loans outstanding on a linked quarter basis was driven by a $48.3 million decrease in business lending, due to a decline in PPP loans. Exclusive of PPP loans, net of deferred fees, the company’s ending loans increased $14.9 million or 0.2%, during the first quarter. On a linked-quarter basis, the average book value of the investments securities decreased $118.3 million, or 3.1%, due to the maturity of $666.1 million of 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 totaling $546.8 million. Average cash equivalents increased $587.5 million, or 54.4%, due to the continued growth of deposits. The average tax equivalent yield on the investments during the first quarter of 2021 was 1.42%, [roughly 2.02%] taxable yield on investment securities portfolio, and 10 basis points of yield on cash equivalents. At the end of the quarter, the company's cash equivalent balances totaled $2 billion. During the first quarter, the company redeemed $75 million of floating rate junior subordinated debt and $2.3 million of associated capital securities, which was initially issued by the company in 2006. The company's capital reserves remain strong in the fourth quarter. The company's net tangible equity and net tangible assets ratio was 8.48% at March 31, 2021. This was down from 10.78% a year earlier and 9.92% at the end of 2020. The decrease in net tangible equity to net tangible assets ratio was driven by the stimulus needed asset growth, a decrease in accumulated other comprehensive income and increase in tangible assets. The company’s tier 1 leverage ratio was 9.63% at March 31, 2021, which is nearly two times the well-capitalized regulatory standard of 5%. The company has an abundance of liquidity. The combination the company's cash, cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with over $5.67 billion of immediately available sources of liquidity. At March 31, 2021, the company's allowance for credit losses totaled $55.1 million, or 0.75% of total loans outstanding. This comparison is $60.9 million or 0.82% of loans outstanding at the end of the linked fourth quarter of 2020, and $55.7 million or 0.81% of loans outstanding at March 31, 2020. The decrease in the company's allowance for credit losses is reflective of an improving economic outlook, low levels of net charge-offs, and a decrease in delinquent loans. Non-performing loans decreased in the first quarter to $75.5 million or 1.02% of loans outstanding, down from $76.9 million from 1.04% of loans outstanding at the end of the linked fourth quarter of 2020, but up from $31.8 million or 0.46% of loans at the end of the first quarter of 2020, due primarily to the reclassification of certain hotel loans under extended forbearance from [indiscernible] between the periods. This specifically identified reserves held against the company's [non-performing] loans totaled $3.6 million at March 31, 2021. Loans 30 to 89 days delinquent totaled $19.7 million or 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 34.8 million or 0.47% at the end of the linked fourth quarter. Management believes the decrease in the 30 to 89 delinquent loans and the very low amount of net charge-offs reported in the first quarter was supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic. 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. As of March 31, 2021, the company had 47 borrowers in forbearance, due to COVID-19 related financial hardship representing $75.6 million in outstanding loan balances, or 1% of total loans outstanding. This compares to 74 borrowers and $66.5 million in loans outstanding in forbearance at December 31, 2020. Operationally, we will continue to adapt to the changing market conditions or remain focused on credit loss mitigation, new loan generation, and deployment of excess liquidity. We also expect net interest margin pressures to persist remain well below our pre-pandemic levels. Fortunately, the company's diversified non-interest revenue streams, which represent approximately 38% of the company's total revenues remain strong and are anticipated to mitigate the continued pressure on the 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. I will now turn it back to Gary to open the line for questions.

[Operator Instructions] Our first question is from Alex Twerdahl with Piper Sandler. Please go ahead.

Hey, good morning.

Good morning, Alex.

Good morning, Alex.

Hey, first off, Joe you ran through a number of items on NII impacting the NIM that hit in the first quarter, and are going to impact the second quarter, including the PPP fees, securities purchases, the redemption of the sub debt, etcetera. 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 were NII might be going into 2Q 2021?

Yeah, it’s a very good question, Alex. So, in the first quarter, we recorded – we had significant pay off of PPP loans. The first draw PPP loans, about 250 million. And so not only do we have amortization of those net deferred fees, we also had, you know, accelerated recognition of some of those fees. And that contributed about just under $6 million in net interest income in the first quarter. We do expect that, you know, the remaining – some of the remaining PPP net deferred fees, which – on the first draw of PPP is about 3.4 million. We expect the majority of that to be recognized, you know, so, you know, just on a PPP, you know deferred fee basis, we would expect that to negatively impact net interest income by about $3 million. On the other side, is, you know, we've continued to, you know, lower deposit 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 offset to that reduction. You know, we've also had a pretty good first quarter for, you know, given our seasonality around, you know, new loan originations, effectively flat exclusive of the PPP, you know we have pretty good, you know, consumer portfolios, pipelines right now, which will contribute, I think, favorably to, you know, to net interest income next quarter. And also, you know, we continue to evaluate opportunities to deploy additional monies in the securities portfolio. You know, I think, the expectation is that there is some inflation in the market. And we hope that the intermediate area of the curve and long-end of the curve continues to move up a bit. And, you know, so we have some dry powder, more than some. $2 billion of dry powder at the end of the quarter to deploy into the securities portfolio, which right now, we're getting 10 basis points on that. So, they’re effectively empty calories on a balance sheet, but we're looking for the right opportunities, as the year plays out to invest some of that excess cash. So, I think, Alex, you know, it is difficult to give you the exact call relative to next quarter. But I think that we have a couple of things that are particularly around cash equivalent opportunities, investment opportunities, and a little bit of long rope to support the second, third, and fourth quarters.

Okay. In terms of the securities purchases for the – they did in the first quarter, when in the quarter were those and are those going to have some impact on NII in 2Q?

Yeah, you know, yeah Alex, I'd have to pull up the actual security purchase dates, but we've made security purchases throughout the quarter. So, some of that will assist the, you know will assist the second quarter results. You know, so I think just for modeling purposes, you know, assumption to mid-quarter is, I think, a fair assumption as to when we redeployed and invested some of those securities.

Okay, great. And then, you know, 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 CBU story, can you maybe give us some commentary on sort of what you're seeing in the M&A environment out there? And then a lot of the deals we've seen this year have been, you know, kind of different in terms of MOEs and bigger deals. And, you know, I'm just curious if your thought processes around M&A have changed at all, in terms of the types of deals that you guys would be considering in 2021?

No, Alex. It’s Mark. I don't think our thinking has changed. I don't know that it's changed much, really, ever; at least for an extended period of time around the general philosophy, which is to, you know, partner with high quality franchises that we feel can be sustainably additive to shareholder value. We're not going to do an MOE, we never say never, but it's highly unlikely we're going to do an MOE. It's highly unlikely that we're going to do a larger scale transaction that, you know to us just creates a lot more risks is inconsistent, you now kind of with our historical model, smaller deals that are more additive as opposed to bigger deals, which tend to be less additive. So, at least in terms of shareholder value, so I think we'll continue along the pathway of the, you know billion give or take, you know, size transactions, generally in market, contiguous markets and those kinds of franchises that are a good fit for us, you know, qualitatively and economically, in terms of sustainable earnings and shareholder value. So, I don't think anything has changed, yet the market seems to have been busy lately with larger deals, larger institutions, more MOEs. I think, you know, from what, you know, 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 and their liquidity. And I think that's where we have, you know, fairly significant, you know, opportunity. And so, I think right now, those, a lot of those franchises are not getting the, you know, the market recognition relative to larger cap companies. And so, I think there's 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 dialogue. So, you know, I, you know, as I told our team, I suspect, we will have the opportunity to do something constructive this year.

Okay. I think last time we spoke, maybe it was still a little bit too early to really be confident in due diligence around, kind of the impact of the pandemic on balance sheet, so are you now at the point where you feel like you've seen enough and seen how a lot of these economies have been impacted by the stimulus and whatnot to actually get comfortable through the due diligence process?

Yeah, I think what I'd said Alex was, I would not do a bigger deal in the middle of the pandemic, or at least last year at some point, but we'd still do a smaller transaction. We thought we had better visibility into the risk profile, credit portfolio. So, nothing's really changed there. I think a lot of the, you know the opportunities that we have over time are institutions that we know, and we followed for a long time, and we pay attention to and so have a pretty good feel already, or their portfolio, and you know, their discipline around credit and other operational aspects of their business. So, I'm not at all concerned about the impact, the lingering [let’s call] [ph] of the pandemic, so that will not – it has not affected 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.

Good morning, Russell.

Thanks guys. So, first question would be on the Employee Benefits Services, you know, good year-over-year growth, just curious to get your thoughts on the organic revenue projection there. And then, you know, following up on the question about M&A what a depository deal, kind of precludes you from looking at acquisitions within your fee verticals, and what those might be, whether it's in employee benefits or elsewhere?

Yeah, no, we had good growth in the employee benefits year-over-year. I think it was 8%, something like that. 6%? I don't know exactly. But it was pretty strong growth, and the expenses were flat, actually might have been down a little. So, you know, anytime you can grow revenues, and reduce expenses that has an exponential impact on margins. So very good quarter for employee [benefit business]. It continues to perform well. We expect they will continue to perform well. Interestingly enough, there are a lot of M&A opportunities in that space right now, there has been for the last 12 to 18 months. It's been a challenge to compete against private equity. We've had different valuation models, the [indiscernible], in some cases, in terms of valuations. But, you know, we have some things [percolating] right now, as well. And I think that this will be ongoing that that business is a very strong business. I think we, you know, we clearly have critical mass in that business, you know, the run rate on revenues this year is going to be $110 million or so, really good margin. So, I think that business should perform really well. As the question around, you know, whether acquisition opportunities in that space preclude us from kind of depository opportunities or vice versa? The answer is no, clearly not. We – I think historically, it's kind of done multiple transactions to cross disciplines, you know, historically, and we’d continue to do that. It is a different for the most part [stuffs out] of folks that, you know, that work, other than me and Joe, and, you know, a handful of other folks in HR, IT and some things, but it's not, it's a different level of effort, But generally different kind of, you know, teams, because, obviously, the, you know, the teams and those business lines are actively engaged in those efforts and kind of lead those efforts, in terms of identifying and supporting, you know, opportunities there. So, we clearly continue to, you know, work hard in both the depository side and the, you know, the non-banking side of our business. We have some – also some things, opportunities in the insurance business, as well that we're in the midst of pursuing expect to close out a small transaction. In fact, I think, next month and have some others that we're having discussions with as well. Wealth management is a little bit different. It's, we've never done a lot, you know, in terms of buying whole businesses in wealth management. The pricing is really extreme, and sometimes [about] the personalities are more difficult and challenging. And I mean, the other you know, to me, it's a risk, but in wealth management, you don't really own the assets. You know, the, you don't own the relationship. What you're buying is customer relationships, you don’t own those relations. In banking, the bank owns the relationship, for the most part insurance, the business owns the relationship. It's a little bit different wealth management. So, we just – we've never done a lot there. But we have bought some books of businesses, actually a lot of them and they've been very constructed [to buy 1 or million shop] that's more akin to kind of a significant signing bonus for bringing, you know one or two or three folks on. A lot of [indiscernible] those have worked out really well for us and I think our buyers are a little higher on doing something in terms of the wealth management businesses, but you know, clearly on the benefits, businesses in the insurance, we've been active and I expect we will, in fact we are active right now. So, we'll continue to do that to close businesses not really having a, you know, they had a good year last year, then look at the first quarter, it's impressive. So, 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, in the prepared remarks, you mentioned expense initiatives and results this quarter showed positive momentum or below consensus. So, just be curious to get a sense for your thoughts on the expense run rate going forward, and any detail on the type of initiatives you were referring to in your prepared remarks? Thank you.

Good question Russell. You know, we saw back last year, you know, second and third quarter that we were running into some margin headwinds, and you know, actually organized a management group to look hard at, you know, some of the expense line items and some opportunities on the revenue side. We started to actually implement some of those, you know, some of those initiatives in the fourth quarter, third and fourth quarters, and now into the first quarter, you know, which we're working with our vendors on certain, you know contract negotiations. We've done a handful of the branch consolidations to reduce expenses on that side. You know, we've looked at some other revenue line items, you know in some of the commercial space to try to generate some additional revenues there. You know, so that's kind of the initiatives we've put in place. On a going forward basis, we would expect to, kind of contain, you know the year-over-year growth rate around expenses to something in a very low single digits, you know, from a – on a annual quarter comparative basis. You know, whereas, you know, I’ll say in normal times, you know, we might – the line item for OpEx might grow, you know, 3% or 4% or 5% in a year. We're trying to continue below that. You know, really that make up for some of the challenges around the margin.

Thanks, Joe.

Just to add a bit to that, you know, Joe mentioned some branch consolidations, we've done about 20 in the past year. I think we're going to do some more, not a lot more, but – and so that some, you know, 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, you know, about 20 branches, and we'll do a handful more. 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, then they opened back up, and we looked at traffic again, and it was down about 17% pre-COVID. It's still down about 17%, pre-COVID. So, if we look at our plan around consolidation, it ends up being around that 17% number reduction in branch FTEs, which is a triple digit number of FTEs. So, there's some reasonable amount of expense and cost reduction here. And if you look at the branches we've consolidated, we go on S&L and look at our branch map. I mean, there's density there, and we have density in certain markets where I would characterize us as over dense. So, we have a fair bit of opportunity, I think, to, you know, consolidate in a prudent way. This isn't about the expense reduction. This is about, you know, essentially an outcome which is more broadly, you know branch traffic for us for 10 years, prior COVID is declined almost exactly 4% a year. And then COVID came and people found other channels, digital channels, and it gapped down another 17%. So what we are doing is, I would say broadly, we are divesting in analog and investing in digital. And so, ensuring that we have an appropriate branch structure consistent with the trends in the market, the trends of our, you know our customers, how they're using our channels, whether it be, you know analog channels like branches and drive-throughs, or whether it be digital channels like, you know mobile and ATMs, and remote deposit capture, and online banking, and all of those kinds of things, self-service functionality. So, we are just trying to mirror – we are trying to pair up the, you know, the continued decline in analog channels with our investment in digital channels. So, we've done a fair bit around the branches will, again, probably do a little bit more, but we're trying to do it prudently. This isn't an expense graph, trying to just, you know, close branches for the sake of closing, I think one of the things when you have, kind of a history of acquisitions, you know, both whole bank and branch transactions that we've had for the last 15 years, it's not that, you know, difficult to become over dense in markets. So, we're just trying to address, you know the over density we have in some of our markets as a result of the history of M&A activity.

Thank you both for taking my question.

Thank you, Russell.

The next question is from Matthew Breese with Stephens Inc. Please go ahead.

Good morning. Hey, just a question on the 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 deposit balances? And, you know, the follow up to that is how much do we expect to be, kind of put to work over the next few quarters, either securities and loans?

Yeah, it's a very good question Matt. In fact, you know, prior to the call, actually, we talked to our Chief Investment Officer. We were talking about deployment and what, you know, what opportunities might be out there over the coming year. And in essence we have – when we have the $2 billion, our open expectation is that we would have about half of that 50% of that invested over the next couple of quarters, you know, leaving some aside for, you know, potential runoff and future opportunities. You know, we're, I guess believing that there is some inflation in the market, which might drive up the long-end of the curve, you know, potentially, if the Fed ever talks about tapering, again, maybe toward the second half of the year, we could see a little bit of an increase there. So, we're looking at the, you know that $2 billion effectively as dry powder. You know, looking to invest maybe half of that over the coming three quarters or so. You know, obviously we’re watching the market daily, and just looking for those opportunities.

I would say, just to add, you know, beyond that, this isn't just about, you know, reinvestment of [2.2 billion] of liquidity, but it's also about the, you know, the out year impact and margin, and net-interest income, and we are extremely, like most banks, I suspect, highly asset sensitive. So, it does not work against our [indiscernible] models. In fact, it helps balance our [indiscernible] models, by investing some of that liquidity and reducing, giving away, in fact trading away some of that upside risk in rising rates to trade-off against lower margin and add them in declining rate environment. So, investing, I think, some of it clearly not all of it. [Indiscernible] mean, if we don't have the opportunity, we may be on the call in two years, and we still have 2.2 billion. So, I don't think we're necessarily going to be in a rush or undisciplined about how we, you know invest and I think Joe said over the next couple of quarters, which I think that would be fabulous, if that happened. You know, I questioned whether it will or it won’t, but I think half of it is probably an area where it would be helpful to, kind of current net interest income in them. But would help us from an [indiscernible] standpoint in terms of balancing the, you know, the risk, we have in falling rates and the benefit to rising rates. So, a lot of this is not – the discussions that we have is not driven by how do we use the 2 billion to, you know, create more earnings, it's not about that. You know, we'll be disciplined. We have a lot of other earnings levers that we can pull and our polling and have pulled in. So, we’ll be disciplined about it, but if we get the opportunity, we will pull the trigger, but it certainly wouldn't be on the entire 2 billion because, I mean, there's clearly still some risk that there is that over time, and I think the run off of the excess liquidity is going to take longer than [the bill], right? If you look at the balance sheet, year ago, two years ago, in particular, and liquidity didn't look anything like this, I think it'll take a little bit longer for the run off than it did for it to accumulate because the stimulus and PPP and those kinds of things. And, you know, people reducing, kind of their living expenses, business, and reducing operating expenses. So, it's going to take a while. So, that's I guess from my perspective, just wanted to make a point that, you know, our interest rate sensitivity, when I think about liquidity and liquidity deployment, I don't think about earnings, I think about the interest rate risk into the future, and how to manage that.

Understood. Okay. And maybe tying this discussion back into Alex's earlier question in regards to net interest income, if I strip away PPP, you know, I'm looking at core NII this quarter in around $86 million. As you deploy or think about deploying half of the 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]. You know, we do deploy some of that excess liquidity. You know, that certainly will help. And I think, you know, for Alex's question, you know, we had a – late in the fourth quarter, we had, you know, significant maturity of Investment Securities, and, you know, we redeployed some of that during the first quarter, you know, and it wasn't – not all of it was deployed right at the beginning of the quarter. So, we do have a little momentum from the deployment of that $400 million plus of investment securities. And I know, you know, we're looking at the PPP is, as you know, non-core, and I do understand that, I mean, you know, the other side of that it was [earned] and, you know, that was the [indiscernible] dealt, and we did, I think a pretty good job of playing that card and originating PPP. And we will have some, you know, recognition, I think of the deferred fees throughout this year. And, you know, if we continue to deploy some of that securities and have some loan growth, you know, we potentially, you know, start to restore some of that net interest income outcome. So, yeah, we’re obviously hopeful that [that 86] is the floor, and think that we do have some potential momentum, filling in behind the PPP recognition, after 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, was 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 and path towards recovery?

Hey Matt, it’s Joe. I’ll take that. So the, you mentioned residential, so the residential pipeline is about 30%, but growing about 30% quarter-over-quarter, and it's across most of our markets. And the expectation is that it will continue to be strong as we make our way through the second quarter and into the third quarter. So, good activity and as you may know, we rolled out beginning of the year, calendar last year, beginning of this year, a digital mortgage platform. So, we're in the digital age, and we're enjoying some upside potential from that as well. So, to give you a sense, the mortgage pipeline sits at about $170 million. I’m not sure the last time I saw that number in it, so that’s positive. The other positive on the retail side is the indirect portfolio, the car business. That's been growing this year as a result of a change in focus. On our part, we spent a little bit more time focusing in on volume and a little less time on return, recognizing that we need to make some more loans around here. So, the indirect portfolio is, although it doesn't have a pipeline, it's been growing terrifically, and it's up almost, almost 3% year to date. So, we like what we see. And again, it's across all of the footprints that 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. So, keep in mind, we took an approach around PPP, where we were doing it all internally. So, we took people off the street, if you will. The commercial bankers and retail bankers to handle all the PPP activity and that's been going on now for 14 months, 15 months. So, I'm not surprised that the portfolio or the pipeline is where it is. I’m also recognizing just the pandemic and the impact it's had on just general activity overall. It's been off. So, the commercial 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 all sums up nicely. And we expect those to continue. And as Mark said, we're in the process of rebuilding the commercial portfolio. That'll take some time. We're seeing a little bit of light at the end of the tunnel, all geographies [have some activity], so we're cautiously optimistic that we'll get the commercial pipeline heading in the right direction.

Great. I appreciate it. That's all I had. Thank you.

[Operator Instructions] Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mr. Tryniski for any closing remarks.

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.