Community Bank System Inc

NYSE:CBU

Earnings Call Transcript 2020-Q4

[Operator]

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 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 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 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.

[Mark Tryniski, President and CEO]

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 carry 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 $0.01 better than Q3, so modest forward progress. Loan growth was slightly negative in the quarter, if not being typical, 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 $0.05 or 1.5% in 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 the operating expense reductions and performance of our nonbanking businesses, all of which had a tremendous year. The pretax 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 nonbanking 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.

Joe?

[Joseph Sutaris, EVP and CFO]

Thank you, Mark, and good morning, everyone.

As Mark noted, the earnings results for the fourth quarter of 2020 were very solid, especially in light of the economic challenges and industry headwinds we faced throughout the year. The Company recorded $0.86 in fully diluted GAAP earnings per share for the fourth quarter. Excluding acquisition expenses, acquisition-related provision for credit losses, unrealized gain on equity securities and gain on debt extinguishment net of tax effect, fully diluted operating earnings per share were $0.85 for the quarter. These results match third quarter 2020 results and were $0.02 per share higher than the fourth quarter of 2019 fully diluted operating earnings per share of $0.83.

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 noninterest revenues in the Company’s financial services businesses and a gain on debt extinguishment, offset in part by a decrease in banking-related noninterest 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 eligible 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. 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 linked third quarter, while net interest margin was down 7 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.

Noninterest 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 plant administration of record-keeping revenues and employee benefit trust revenues.

Wealth management insurance services revenues were also up $1 million or 7.3% over the same period. These increases were partially offset by a $2 million, 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 $1.1 million decrease between the periods due to the change in the Company’s mortgage banking strategy as noted previously.

Finally, during the fourth quarter of 2020, we redeemed $10 million of subordinated notes acquired in connection with the 2019 acquisition of Hanover 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 in a purchase credit deteriorated 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 nonperforming assets, and the related specific impairment reserves on those nonperforming 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 credit losses due to the acquisitions of Steuben 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 the business activities in the Company’s markets and unemployment levels spiked. These conditions drove the Company to build its allowance for credit losses during the first quarter -- first two quarters of 2020 to account for the expected life 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’ recent approval of the additional federal stimulus funding, the near-term economic forecast improved driving a net release the allowance for credit losses during the fourth quarter.

The Company recorded loan net charge-offs of $1.3 million, or 7 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 recorded net charge-offs of $5 million, or 7 basis points of average loans 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 expense of $94.4 million in the fourth quarter of 2019, exclusive of $0.8 million of acquisition-related expenses. The year-over-year $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, a $1.5 million, or 13.5% increase in data processing and communications expenses offset in part by a $2.5 million or 19.4% decrease in other expenses and $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 equivalent of the employees between appears due to both the Steuben 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 communication expenses was due to the Steuben acquisition and the implementation of new customer-facing digital technologies and back-office work flow systems.

Other expenses were down due to general decrease in the level of business activities and the result -- as a result of the COVID-19 pandemic, including travel and entertainment, marketing and business development expenses. Comparatively, the Company reported $93.2 million of total operating expenses in the linked quarter -- linked 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 linked third quarter number and up $2.52 billion or 22.1% from the 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 linked third quarter of 2020, up $2.28 billion or 22.7% from one year prior. The very large increase in total assets and average interest-earning assets over the prior 12 months is driven by the second quarter 2020 acquisition of Steuben Trust Corporation and large inflows of government stimulus-related planning 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 Steuben 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 activity 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% or $507.2 million, at September 30, 2020 to $470.7 million, at December 31, 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 series 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. Company’s average total deposits were up $275.9 million or 2.5% on a linked-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 remained strong in the fourth quarter. The Company’s net tangible equity and net tangible assets ratio was 9.92% at December 31, 2020. This was down from 10.1% at the end of 2019, but consistent with the end of the linked third quarter. Company’s Tier1 leverage ratio was 10.16% at December 31, 2020, which remained over 2 times the well-capitalized regulatory standard of 5%.

Company has an abundance of liquidity resources and is extremely well-positioned to fund future loan growth. The 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 unpledged 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-affected 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 or 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 loan outstandings were active under COVID-related forbearance on September 30, 2020 and 3,699 borrowers, representing $704.1 million or 9.4% of loans outstanding at June 30, 2020. Although these trends are favorable, nonperforming loans increased in the fourth quarter to $76.9 million, or 1.04% of loans outstanding, up $44.6 million, from the linked third quarter and up $52.6 million from the fourth quarter of 2019.

During the fourth quarter, the Company determined that borrowers that were granted loan payment deferrals under forbearance beyond 180 days would be classified as nonaccrual loans unless they could demonstrate current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligation. The substantial majority of these borrowers operate in the hotel sector, including several that operate near the Canadian border, which have been additionally impacted by restrictions like cross-border travel. The specifically identified reserves held against the Company’s nonperforming loans totaled $3.9 million at December 2020, $3 million of which was attributed to a single nonperforming 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 pool of nonperforming hotel loans 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 31, 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 on outstanding at December 31, 2020. This compares to loans 30 to 89 days delinquent of $40.9 million or 0.59% one year prior to $26.6 million or 0.36% at the end of the linked third quarter.

Net charge-offs on loans were low at $1.3 million or 7 basis points annualized in the fourth quarter and $5 million or 7 basis 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 improving economic outlook, a substantial decrease in loans in forbearance, a $2 million reversal of a previously reported allowance for credit losses and a purchase credit deteriorated loan, which was paid off during the fourth quarter. At December 31, 2020, the allowance for credit losses of $60.9 million, represent 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 PPP loans in advance. 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 providing hedge against 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 equivalents to higher-yielding earning assets.

Fortunately, the Company’s diversified noninterest 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. Now, I will turn it back over to Tom to open the line for questions.

[Operator]

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

[Alex Twerdahl, Piper Sandler]

Yes. 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, any other lines to try to get a little bit more in terms of balances and put some of that cash to work?

[Joseph Serbun, EVP and Chief Banking Officer]

Hey, Alex. It’s Joe Serbun. How are you this morning?

[Alex Twerdahl, Piper Sandler]

Well, thanks.

[Joseph Serbun, EVP and Chief Banking Officer]

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 prequalification functionality, which we will go live here shortly. So, hopefully, that will benefit our mortgage portfolio. We’ll also direct some folks or redirect folks to markets that might be a little hotter for us, hotter in a good way, better, more activity, more opportunity for us. We 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 in the yield component. And we’ll also 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 -- and so 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 -- will be active, but it will still be soft.

To give you some sense of that, in the commercial portfolio, the pipeline typically runs $350 million to $400 million. Right now, we’re at $136 million. And 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 2 times our normal run rate. So, while 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 mortgage portfolio growth in the indirect, and it will be a struggle on the commercial.

[Alex Twerdahl, Piper Sandler]

And is the intention to put all of the residential production on the balance sheet for the foreseeable future?

[Joseph Sutaris, EVP and CFO]

The majority of it. We’ll keep the pipeline increased a little bit. But yes, more than the lion’s share will be kept on the balance sheet.

[Alex Twerdahl, Piper Sandler]

Okay. And then, Joe Sutaris, I think, I missed what you said in terms of 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 hearing that to drive what the balance is, I saw on the balance sheet at the end of the quarter.

[Joseph Sutaris, EVP and CFO]

Sure. During the quarter, Alex, we purchased about $1 billion in securities, mortgage-backed 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 number is $636 million on a quarter-over-quarter average, but the purchase activities were closer to $1 billion.

[Alex Twerdahl, Piper Sandler]

Okay. And then, as we look forward into 2021, are you going to...

[Joseph Sutaris, EVP and CFO]

Yes, Alex. Yes. 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. So, we’re going to -- 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 net interest income in a long-term flat rate environment. So, as to whether -- we’re hopeful to put at least $1 billion at work in the next several months. We have to get the right levels in terms return opportunity to do that. But, that’s the expectations that we still have some work to do on the investment security purchases and second quarters.

[Operator]

The next question comes from Russell Gunther with D.A. Davidson. Please go ahead.

[Russell Gunther, D.A. Davidson]

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?

[Mark Tryniski, President and CEO]

Sure. I’ll start and 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, our revenue streams, every element of our business and take a fresh look at where we had productive and constructive opportunities to enhance performance, whether that was additions to revenues and/or reductions in expenses. So, we convened the team of our senior folks, 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 -- it’s across the spectrum. I mean, some of it is, as we continue to look at our branch footprint, as I said, we’ve affected 13 consolidations this year, we’re looking at more for 2020. And for most part, these are near distance type consolidations. And that brings with it some modest reduction in ongoing operating costs. We are looking at our -- all of our vendor contracts. Many of them have already been, I’ll say, 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 had a good success in renegotiating some of our contracts, technology and otherwise. And 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 put that whole thing into place and 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, we felt the need to address that, so, we are.

[Russell Gunther, D.A. Davidson]

And then, -- I appreciate your thoughts, Mark. You kind of got to the revenue question, I was planning to ask and we 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, 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?

[Mark Tryniski, President and CEO]

Well, I’m not going to -- there’s a lot of moving parts here, Russ, as you know. So, I’m not going to comment specifically on kind of on that, only because we don’t issue forward guidance and so. But, we are expecting a reasonably significant impact from all of our efforts, lucky to say that.

On the -- the first question I think was related to the mortgage and pre-qual asked. 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 on 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, that’s not right. We have to have a different approach to our mortgage model. So, that’s the -- we spent -- our team did a lot of great work in developing 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 prequalification component, which I think we’re using right now internally to get rolled out pretty quick, really quick publicly. And then, the online mortgage application, which I think our customers are already 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 is visiting your digital store, then it doesn’t really -- 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 involve more to the digital channels.

[Russell Gunther, D.A. Davidson]

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.

[Mark Tryniski, President and CEO]

Yes. And I think the model isn’t going to change much from history, Russell, 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 into 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, where we have a couple of things going on right now in fact. We’re doing some things in the wealth business that’s more organic. I would say that has a lot of potential. So, 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 just feels a little bit like there’s -- 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. There’s a lot of fear and uncertainty. It’s not a great environment for M&A. 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.

If you look at the industry, I mean, I think the entire industry is operating at sub-3% margins. Well, I would venture a guess that most banks have sub-3% margins do not earn their cost of capital. So, I think that’s going to create some opportunities. I think, the potential second derivative of that --and as I said, the second challenge is going to be on the technology front because of the cost of all these -- the cost of technology. And, as you look to kind of transition over time and from analog to digital, it’s clear that the cost to invest in digital is significant, and it’s ongoing. And that’s either customer-facing digital channels or backroom. We’re doing a lot of things to try to make our backroom more efficient. And we’ve got a group that’s working on 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, particularly the smaller banks, we have to invest if we want to compete, they look to the cost of that technology. And if your NIM is 2.8%, having sufficient earnings strength 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 then there was in 2020.

[Operator]

[Operator Instructions] Our next question comes from Matthew Breese with Stephens Incorporated. Please go ahead.

[Matthew Breese, Stephens, Inc.]

Just following up on the dialogue in terms of tweaks to the model and then some of the upcoming challenges, I was hoping for a little bit more of a quantitative assessment of the headwinds and then with the changes what the outlook could be. And maybe to start with on the loan growth outlook. So, with the focus on indirect and mortgage, obviously, some weakness in commercial, what is the overall outlook for loan growth this year?

[Joseph Sutaris, EVP and CFO]

So, Matt, this is Joe Sutaris. I’ll take that question. So, as Mark alluded to, we don’t offer necessarily forward guidance. But, historically, our loan growth is low single digits. And some years, that’s commercially driven. Other years, it might be [Technical Difficulty] driven. I would say when looking at kind of those three pieces, as Joe alluded to, Joe Serbun alluded to, is the mortgage -- pipeline is solid right now. We have some growth opportunities on the mortgage pipeline that maybe is slightly above those levels [Technical Difficulty] 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 [Technical Difficulty] in their checking and savings accounts, which I think probably portends some spending [Technical Difficulty]. So, the expectation around the indirect portfolio is probably in kind of the low to mid single digits as well.

On 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. So, on the commercial side, 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 across that [Technical Difficulty]. So, that’s kind of the expectations around loan growth for early 2021.

[Matthew Breese, Stephens, Inc.]

And then, if I think about net interest income, strip away accretable yield, but to exclude the PPP fees and income and the FRB dividend, actually got with core net interest income right around $88 million. With some of the changes, do you think you can hold that quarterly number in 2021, or do you think given the margin challenges that it’s likely to decline?

[Joseph Sutaris, EVP and CFO]

Well, there will be continued challenges on asset yields in 2021. And I’d say that in the sense that our loan portfolio for the fourth quarter, we yielded about 4.17. New volume for loans that were put on the books in the fourth quarter was at 3.80. So there’s some rollover of loan portfolio and that will put pressure on asset yield. To counter that, however, as I mentioned, we do have $1.6 billion sitting in cash equivalents [Technical Difficulty] and we have an opportunity to make up that decrease by just through sort of a volume play and just investing some of that overnight cash [Technical Difficulty]. So, obviously, this environment, the current environment persists for a very long period of time, is 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 sort of level out our margin expectations on a going-forward basis. But, I think, we’re going to continue to see some asset, particularly loan yield compression, and we’re going to try to make it up with some of the investment securities activities.

[Operator]

Our next question comes from Bryce Rowe with the Hovde Group. Please go ahead.

[Bryce Rowe, The Hovde Group]

I wanted to ask about kind of the discussion around adding to the securities portfolio and then the comment you made about some of the 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, 1 point, $6 billion, give or take, what’s the level you’re comfortable taking that down to kind of given your view of the permanence of the stimulus dollars?

[Joseph Sutaris, EVP and CFO]

Yes. No, that is a very good question, Bryce. I think all the banks right now are struggling with how long the stimulus money sticks around, so to speak. But, I think we’re, at this point fairly comfortable that even if we projected some runoff on some of those funds, we still will be comfortable investing potentially up to another $1 billion over time in the securities portfolio. Keep in mind, we also have some maturities later in the year. But, based on what’s sitting on the balance sheet right now, $1 billion, we 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 and overnight cash. So, we’re continuing to evaluate that. But, I don’t think we go too far beyond that. Obviously, there is potentially another round of stimulus coming, which could inflate the deposit levels even higher. So, we’ll have to evaluate that as that sort of unfolds in front of us. But $1.6 billion, we think is a pretty significant cash equivalents balance right now. So, we [Technical Difficulty] roughly $1 billion of that over the coming quarters.

[Mark Tryniski, President and CEO]

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 of billion. We have, what, maturing?

[Joseph Sutaris, EVP and CFO]

Another $400 million.

[Mark Tryniski, President and CEO]

Another $400 million maturing, there’s two-fourth. So, you have about $2.5 billion, if we 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. And not just we have $1.6 billion right now, but where is that $1.6 billion 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 not [Technical Difficulty]. When you look at our liquidity, as always because the nature of our balance sheet and branch transactions we’ve done, we -- the lower growth on the loan side, so we -- there’s -- we have enormous liquidity. So, we’re not really -- when your loan-to-deposit ratio is in the 60s, liquidity is not your problem. So, as a comfort level, as Joe said, as we’ve kind of discussed this early, it’s right now at the $1 billion level.

[Bryce Rowe, The Hovde Group]

Okay. And then maybe, Joe, you could speak to where you’re seeing investment yields opportunities to put money to work within that securities book?

[Joseph Sutaris, EVP and CFO]

Yes. Well, Bryce, that is the challenge as we sit here right now, is trying to find those opportunities. Like I said in the fourth quarter, we were primarily treasury instrument. So, that’s kind of we typically have had a pretty plain vanilla safe, secure portfolio. So, it will likely be in treasuries and maybe some municipal and/or mortgage-backed securities. Relative to yield, I mean, the 10-year treasury, I think, this morning was 1.06 or 1.07. That’s not quite the levels we’d like them to be, obviously. So, we think potentially, some stimulus and other items might drive off of that net yield curve a bit in the coming quarter. And so, hopefully, we can get a little bit better net levels when we invest $1 billion over the coming quarter.

[Mark Tryniski, President and CEO]

Yes. Just one quick follow-up. This discussion of the yields and asset classes of securities, and -- we don’t -- this discussion is all within the greater context of asset liability [Technical Difficulty]. So, Joe made reference to it, but we have -- our risk is to fall [Technical Difficulty] right. So, in the event we buy $1 billion or something in a buck and half or buck and a quarter, whatever it is, it’s not very much. Does it feel good from an earnings 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 [Technical Difficulty] and you get an increase in interest rates, we’re going to be fine with that $1 billion in the buck and a quarter because the speed at which other things reprice, so, you get upward accretion to NIM. So, it’s not just about we -- we would not put $1 billion of securities out of the books at a low interest rate, if it did protect us with respect to our interest rate risk profile, which is what this does. If it didn’t do that, we would -- we’d sit on the liquidity. But actually, that hurts us because like other banks are -- central banks around the world have gone negative. And so, that’s -- I mean, I think Janet Yellen has even kind of got on record historically saying that she made reference to negative rates being a potentially useful tool. So, I think, we’re just trying to be sensible, but, understanding that this is all within the context of interest rate risk, not earnings management.

[Bryce Rowe, The Hovde Group]

Understood. That’s good perspective. Maybe one more question for me. In terms of -- and Mark, you touched on the round three here of PPP, and whether there is a guess in terms of how much you might do relative to the first round. But, 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, just wanted to get a feel for if it’s picked up or not as we’ve moved into the year.

[Joseph Sutaris, EVP and CFO]

Hey Bryce, I’ll take that. This is Joe. So, PPP 1, will start there. PPP 1, the forgivingness pace was clicking along pretty well. And will pick up as a result of the SBA putting out their short-form forgiveness for loans of 150 -- or $150,000 or a little less. So, I would expect the pace to accelerate as a result of that.

With respect to PPP 2 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 PPP 1. The borrowers don’t seem to be frantic or the -- 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 PPP 1 round. So, PPP 1 forgiveness will pick up, and PPP 2 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.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Tryniski for any closing remarks.

[Mark Tryniski, President and CEO]

Thank you, Tom. Thanks everybody for joining. And we will talk to you again in April. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.