Community Financial System Inc (CBU) 2010 Q1 法說會逐字稿

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  • Operator

  • 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 10K filed with the Securities and Exchange Commission.

  • Today's presenters are Mark Tryniski, President and Chief Executive Officer, and Scott Kingsley, Executive Vice President and Chief Financial Officer of Community Bank Systems. Gentlemen, you may begin.

  • Mark Tryniski - Pres and CEO

  • Thank you. Good morning and thank you all for joining our first quarter conference call. We are pleased with our first quarter start to 2010 with earnings per share up over 30% from 2009.

  • In summary, revenues are up, expenses are down and asset quality remains strong. The other point I would make on operating performance relates to earnings quality. There is nothing of consequence in our results by way of unusual revenue or expense recognition for the quarter.

  • Revenue improvement came from higher banking margins, growth in earning assets and double-digit improvements in banking fees, Wealth Management revenues and Benefits Administration revenues. Higher earning assets resulted from solid core deposit growth and we deployed significant excess liquidity balances into higher yielding treasury securities during the quarter.

  • Operating expenses were down as a result of our 2009 cost reduction initiatives, a focus that will continue. Asset quality metrics remain favorable with lesser than expected charge-offs and lower delinquencies with slight growth in nonperforming assets.

  • Our objectives around core deposit gatherings continue, with growth of nearly 5% for the quarter and organic growth of 20% since the first quarter of 2009.

  • The only soft spot in the first quarter from our perspective was weak customer credit demand. Loans were down $36 million due to the declines in the business in consumer installment portfolios. The first quarter is typically our slowest for seasonal reasons, but our results were not consistent with our business development efforts.

  • On a more positive note, the business credit pipeline is at its highest level since September 2009. So we are a bit more optimistic of the trajectory of credit demand heading into the second quarter.

  • Lastly, and just as important, we also announced a $0.02 per quarter increase in the cash dividend, reflective of the strength of our current and expected operating performance. Scott?

  • Scott Kingsley - EVP and CFO

  • Thank you, Mark, and good morning, everyone. First as previously mentioned, our first quarter earnings of $0.42 per share were 31% better than the $0.32 reported in the first quarter of 2009. Cash earnings per share which excludes the after-tax effect of the amortization of intangible assets, acquisition-related adjustments were $0.46 per share for the quarter or 10% above GAAP reported results.

  • These favorable and improving operating results continue to contribute to meaningful capital growth.

  • I will first discuss some balance sheet items. Our business lending portfolio declined $20.1 million in the first quarter, a result of generally soft market demand characteristics as well as seasonal reductions in utilized business lines of credit. While acknowledging some additional increases in nonperforming loans, this portfolio's overall asset quality results remain solid.

  • First quarter business lending net charge-offs were at 0.41% of total business loans compared to 39 basis points in the first quarter of 2009. Our consumer mortgage portfolio was up $7.1 million from December but still reflected our continuing decision not to portfolio certain lower rate, longer-term assets and still -- and instead sell those originations to Fannie Mae.

  • Asset quality results continue to be very favorable in this portfolio with total net charge-offs over the last nine quarters of under $600,000 for less than 3 basis points of loss.

  • Our home equity portfolio of approximately $312 million declined by $8 million in the first quarter of 2010 and was also likely influenced by low, longer-term mortgage rates. In addition we did again experience lower line utilization in the first quarter, indicative of our customers' desire to continue to delever despite the low rate environment.

  • Asset quality results continue to be very favorable in this portfolio with very low loss rates, consistent with our consumer mortgage portfolio.

  • Our consumer indirect portfolio of nearly $513 million was also down from December and reflected another difficult yet modestly improving quarter for most participants in the automotive industry, as well as the expected seasonal slowdown in demand in our markets. A byproduct of very low new vehicle sales has been an improvement in used car valuations where the largest majority of our lending is concentrated.

  • Net charge-offs for the last seven quarters have averaged 52 basis points which is higher than we experienced for the six quarters ended June 30, 2008, but still reasonable in manageable levels. With our continued bias toward A and B paper grades, yields have trended down slightly since last year's first quarter.

  • Quarter-end deposits were up $64 million from December, comprised of $124 million increase in core accounts and a $60 million reduction in time deposits. Core deposits now represent nearly 73% of total deposits, a continuation of a very favorable funding mix we have worked diligently at.

  • Quarter-end investment assets increased $259 million from the end of 2009 while overnight invested cash equivalents were down $153 million from year-end, reflective of our decision to deploy a portion of our excess liquidity in intermediate-term US Treasury securities. The weighted average life to maturity of our investment portfolio stood at 5.8 years at the end of March, compared to 5.3 years at the end of December.

  • Net unrealized gains in our portfolio at quarter-end were $17.7 million despite the carrying value of our Level 3 investment assets, which is almost entirely comprised of pooled trust preferred securities being nearly $27 million below book value. The valuation of these assets continues to reflect market volatility and uncertainty as well as the absence of an active market for these types of securities.

  • Despite continued increases in the interest deferral and default rates of collateral in our pools over the last several quarters, our holdings -- which are super senior -- continue to fully perform. Our capital levels in the first quarter remain strong. The Tier 1 leverage ratios stood at 7.56% at quarter-end and tangible equities to net tangible assets was 5.43% at quarter-end, a 69 basis improvement point from last March.

  • Shifting now to the income statement, our reported net interest margin for the first quarter was 3.93%, up 7 basis points from the fourth quarter of '09, and 11 basis points better than last year's first quarter. Proactive management of deposit funding costs has continued to have a positive effect on results.

  • First quarter non-interest income was up 6.7% over the prior year, despite a $1.5 million decline in mortgage banking-related revenues, reflective of the record secondary market activities experienced in the first quarter of last year. Deposit service fees increased 17% over last year, derived from our organic core deposit growth over the last several quarters.

  • Our Employee Benefits Administration and consulting businesses posted a 12.7% increase in revenue over the first quarter of 2009, a combination of new client generation, expanded service offerings and increased asset-based fees. First quarter Wealth Management revenues increased 16.9% from a weak first quarter of 2009, reflective of favorable market comparisons and generally improving conditions.

  • Operating expenses of $44.2 million were $200,000 below the first quarter of 2009 and reflected solid cost management across all areas of the Company. Implementation of several expense reduction programs allowed the Company to report lower total operating expenses, despite year-over-year increases in merit-based compensation as well as higher technology and processing-related costs.

  • The Company continues to have significant resources dedicated to the conversion of its core banking systems scheduled for the third quarter of this year.

  • Our effective tax rate in the first quarter of 2010 was 26.3% compared to 21.5% in the first quarter of 2009, reflective of a higher level of income from fully taxable sources.

  • In summary, our high-quality first quarter earnings were the result of our continued focus on both the right and the left side of the balance sheet, as well as productive improvement from both the top and bottom of our income statement. Our ability to reward shareholders with a 9% increase in their cash dividend stems directly from this commitment to a disciplined and balanced approach to our business, regardless of market conditions.

  • I will now turn it back over to Betty to open the lines for questions.

  • Betty, are you there?

  • Operator

  • I'm still here.

  • Scott Kingsley - EVP and CFO

  • Okay, we finished up. We were trying to get it back to you for questions.

  • Operator

  • (Operator Instructions). Damon DelMonte.

  • Damon DelMonte - Analyst

  • Good morning, Mark and Scott. Just a couple quick questions for you. I guess, first, with respect to the margin, could you just give us a little color on your outlook going forward from this level?

  • Scott Kingsley - EVP and CFO

  • I'll take that one. I think that we probably improved a little bit more in the quarter than most people were projecting and I think that was directly related to the deployment of some of that excess liquidity during the quarter.

  • We have probably said this now a couple quarters in a row, but I don't think we think we are going to get much of an improvement from deposit funding costs going forward. Make it a little bit of modest improvements into the next couple of quarters, but I don't think it will be the 6 or 8 or 10 basis points improvement that we have been seeing for consecutive quarters.

  • We just need -- the expiring CDs' numbers is a smaller and smaller number every single quarter. Even though they are being replaced by lower rate instruments, the number from a turnover standpoint is just smaller.

  • Damon DelMonte - Analyst

  • Okay and then what about from a liquidity strategy going forward? How are you positioned as of this quarter and how do you see that playing out over the next couple of quarters?

  • Scott Kingsley - EVP and CFO

  • I think we are -- from a liquidity position, we are still comfortable right now, that we have got plenty of balance sheet liquidity to fund our expectations of organic loan growth for the next couple of quarters. We also have some pretty meaningful investment cash flows coming off the portfolio for the next six to nine months.

  • So I think we feel like we are in a pretty good position, and if productive, we could add a little bit to our invested asset position. But we feel pretty good about it right now.

  • Damon DelMonte - Analyst

  • Okay. And then just lastly, can you just give some commentary on your outlook for M&A? You know, historically, you guys have been acquisitive, picking up smaller institutions and with the lack of FDIC-assisted opportunities throughout the Northeast, I didn't know if your views have changed at all with M&A.

  • Mark Tryniski - Pres and CEO

  • Well, I think I would start, Damon, just to respond to your comment about our historical acquisitiveness. And one point I would make, relative to the strength of our earnings for this quarter, I think, in many ways is reflective of the value of the Citizens branch acquisition we did at the end of 2008.

  • And as you know, a lot of liquidity that we received as part of that branch acquisition was not fully deployed in 2009. And we've begun to deploy that. So I think some of the liquidity deployment you are seeing is really the result of the accretive value of that transaction, which was not fully realized in 2009 but now is coming to impact earnings for us.

  • I think in terms of the outlook, we have historically focused on a combination of organic and acquired growth, as you know, not just in the banking side, but also with respect to high-value financial services opportunities. That will continue to be the case in terms of our strategy.

  • I would say we are seeing somewhat of an un-thaw in the environment, and the willingness of other parties to have conversations around partnership opportunities. So I think that will continue.

  • I think the events of the environment of the last couple of years have, in some ways, made the stronger banks a little bit stronger and the weaker banks maybe a little bit more challenged. I think that and the concern over the regulatory environment going forward and the fatigue maybe associated with what many banks have experienced over the last couple of years will continue to help un-soft this M&A environment, but I -- we are seeing a nascent improvement in the velocity of those opportunities.

  • Damon DelMonte - Analyst

  • Okay, great. Thank you very much.

  • Operator

  • Jason O'Donnell.

  • Jason O'Donnell - Analyst

  • Good morning. Congratulations on a good quarter. Just wanted to -- just got a couple of questions here I wanted to ask. Can you just tell us what type steps you have taken to mitigate the impact of the overdraft legislation in the second half of this year?

  • Mark Tryniski - Pres and CEO

  • Sure. Well we've done a number of things. One is to get our arms around exactly what the legislation is and what we think the impact is going to be to us. Part of it kicks in in the beginning of June or July. Another piece of it for us, the biggest piece, which impacts existing account holders are going to kick in in the beginning of August. We put together a relatively robust action plan to address the potential issues surrounding Reg E, principally because of the significance to us of our core deposit base and the fee income that that deposit base generates for us.

  • So we put in place a pretty robust plan, as I said, to address this which has already begun. It involves separating our customer base into really three different tranches. One would be the high user tranche. Another is kind of the moderate users. And then a third group, which is the low-or-no-using groups and we developed an approach that is really a bit different for each of those three different groups and we are in the process of communicating with those different groups in different ways, directly and indirectly, trying to obtain as much opt in as we can.

  • Interestingly enough, for the -- for a lot of the direct conversations that we have had so far with customers as part of the in branch approach, and there's a number of different mechanisms we are using to reach out, but the opt-in rate is in the high 90s. So I think we have got a fairly high level of trust and loyalty within our customer base. I think it is also a product category that many of our customers view as highly valuable and understand in terms of the transparency.

  • So we are having a fair bit of success. I am cautiously optimistic that the impact, ultimately, which we will see here, probably the fourth quarter for the most part and part of the third quarter, will be hopefully muted.

  • Jason O'Donnell - Analyst

  • Okay. Great. Yes, that's very helpful. Thank you. And then in terms of the -- on operating expenses, could you just give us a little more color on, namely, what specific initiatives were responsible for the linked quarter decline in other expenses this quarter?

  • Mark Tryniski - Pres and CEO

  • Other expenses specifically?

  • Scott Kingsley - EVP and CFO

  • Sure. On a linked quarter basis, just a couple of things to remind you of. In the fourth quarter of last year, we had a $1.4 million special charge for the termination of our core Fiserv banking contract. You know where we had entered into a decision to change our systems and as part of that contractual obligation there effectively was a termination cost. So that was a $1.4 million.

  • On a linked quarter basis, our marketing expenditures and development expenditures were down about $250,000 which is consistent from a seasonal standpoint. We were down about $350,000 in some property write-downs including OREO-carried properties and the taxes associated with some of those OREO properties.

  • There really isn't anything else that is significant. You know, that was a fluctuation of more than $100,000 or $125,000, but that's what really drove the change.

  • Jason O'Donnell - Analyst

  • Okay, great. So the $44 million run rate in operating expenses, is that good going forward?

  • Scott Kingsley - EVP and CFO

  • I think it's pretty fair. I think we do have to -- you know, this will sound too granular, but the second, third and fourth quarters have more payroll days than the first quarter just because of the way the calendar falls. So there is a likely pick up there.

  • But that being said, we have said this, it sounds too simplistic, but it is clearly more expensive to turn on the heat and plow the snow in our area than it is to turn on the lawn-mower and turn on the air conditioner. So we have some seasonal costs. So I think you would probably -- that sort of $44 million to $44.5 million is a pretty comfortable number for us.

  • Jason O'Donnell - Analyst

  • Great. And then finally, just real quick on the charge-offs were pretty nominal again this quarter. Could you just give us a break out, I apologize if I missed it, on where you were taking charges this quarter?

  • Mark Tryniski - Pres and CEO

  • Sure. About 60% of the charge-offs were in the business lending portfolio with --. So roughly $1 million of the $1.6 million with the other $600,000 being in the consumer installment portfolio. You know, the auto portfolio and our direct in branch lending.

  • Our charge-offs, on the home equity and the mortgage site, are virtually zero.

  • Jason O'Donnell - Analyst

  • Very well. Great. Thank you.

  • Operator

  • (Operator Instructions). Rick Weiss.

  • Rick Weiss - Analyst

  • Good morning. I was wondering how you guys think about possible changes in interest rates? I know I change my mind every day whether rates are going to go up or stay where they are. Just kind of what is your thinking in terms of future interest rates and how do you position your securities book in liabilities?

  • Mark Tryniski - Pres and CEO

  • That's a very good question. I think, first, I would say overall our ALCO management, we try to have a very balanced book in terms of durations and maturities between the assets and liabilities side of the balance sheet. So we are not -- regardless of the interest rate environment, we are trying to manage within a reasonably tight range of interest-rate risks, either up or down.

  • So we are not trying to assume which way rates are going to go and then manage our balance sheet accordingly. So it frankly doesn't matter if rates, we think -- our opinion is -- are going to go up or are going to go down. We manage the balance sheet within a pretty tight range of impact from either a move up or down in interest rate.

  • Right now, we happen to be a bit asset-sensitive. So if rates went up, that would likely work to our advantage in terms of net interest margin. But there are times when we are slightly liability-sensitive, as we were a couple of years ago.

  • So we try to manage it within a reasonably tight range according to policies and whether rates move up or move down. You know we don't get affected beyond what we try to manage to as a relatively limited range and as I said right now we are slightly asset-sensitive. So an increase in rates would probably work to our advantage, but we never manage ALCO or the balance sheet as though -- we don't let the bias of where we think rates might go affect the ALCO management decision. It is a fairly disciplined process based on managing the balance sheet within a tight range.

  • Rick Weiss - Analyst

  • Okay. And most of your asset-sensitive, would that be because -- what percentage, I guess, of your loans are adjustable? Would that be why?

  • Scott Kingsley - EVP and CFO

  • Yes. Actually we are probably a little over a third. Our "variable instruments" are subject to re-mark, based on some type of an index that's --. The understanding would be that index would likely move.

  • I think the other thing that is probably worthy of a reminder for ours is that $0.5 billion in [indirect] auto business had such fast cash flows coming off that, that the expectation is $17 million to $18 million of cash flows a month off that portfolio. So that in and of itself probably operates like a 2.5 year or 2.75 year instruments in terms of the expected cash flows.

  • And the same type of thing, you know, our investment portfolio includes amortizing types of investments as well as certains that are bullet based. So to Mark's point, I think we are certainly not out of sync relative to the cash flow of expectations, and how that also relates to our expectations of what happens to core deposits in a rising rate environment.

  • Mark Tryniski - Pres and CEO

  • And I think the core deposits fee is probably a significant element of that as well, because as rates move up, or down, I guess, you've got some historical experience and ability to control those rates on the way up and the way down which creates a bit of asset sensitivity as well.

  • Rick Weiss - Analyst

  • Got it. So it is really the shape of the curve that matters more to you than --

  • Mark Tryniski - Pres and CEO

  • It does.

  • Rick Weiss - Analyst

  • anything else?

  • Mark Tryniski - Pres and CEO

  • Today it's actually an excellent point because I think a lot of people today don't even see a disclosure of what happens in a rates down environment. Because the perspective is, there can't be one. But there certainly can be a lowering of that yield curve. And we actually do disclose that.

  • Rick Weiss - Analyst

  • Okay. Thank you very much.

  • Operator

  • David Darst.

  • David Darst - Analyst

  • Good morning. What do you consider a normalized level of liquidity that you will reach once you are finished redeploying the excess cash?

  • Mark Tryniski - Pres and CEO

  • Well, that's a fair [reflection] and frankly over the last several years, it's really wandered all over the map. Sometimes we are in a net borrowing position overnight for periods of time. And other times -- for example, over the past year or so -- we have been in a significant overnight invested position.

  • I think right now, we just want to remain more in a liquid position than a borrowing position. So I think we will probably look to discuss as we continue to look at opportunities with liquidity, based on where we see maturities coming off the portfolio over the course of the next couple of months in our existing liquidity. But I think our plan would be to remain in a net invested overnight position as opposed to a net borrowed overnight position.

  • David Darst - Analyst

  • Okay. But is that around $200 million or could it go into $100 million or lower?

  • Scott Kingsley - EVP and CFO

  • I think it could go to $100 million. It could go to $50 million. It could go to $250 million, I think. A positive number is something that we would be comfortable with at this point.

  • David Darst - Analyst

  • Okay. So based on your outlook for the curve, do you foresee deploying another $100 million in the next six months?

  • Scott Kingsley - EVP and CFO

  • I think that's a possibility, given the cash flows off the portfolio will approximate, I think, about $100 million over the next handful of months or so. So I think that is not an unreasonable assumption.

  • David Darst - Analyst

  • Okay. And then, on the Benefit Plan Administration business, was most of that a seasonal increase this quarter? Or is that new business or market-driven?

  • Scott Kingsley - EVP and CFO

  • Yes. I think there are some things that are seasonal in that business where the first quarter tends to be the strongest revenue quarter of the year in that business. And that was consistent with this year's first quarter. That is more on the actuarial services side, because as much as that has -- you know, the workload there has spread itself out, the reality is that there is still a lot of valuation work and a lot of consultative support for our customers that does happen in the first quarter, consistent with the first quarter reporting that most public enterprises have to do.

  • So I would say that our expectations would be that it's difficult to repeat a quarter like that in the next linked quarter. But that being said, hopefully we are getting new client generation as we go into the second half of the year that picks up that differential.

  • David Darst - Analyst

  • Okay. And is the growth rate that we saw in 2009 a better representation of what you might expect in the future as opposed to the two to three years prior to that?

  • Mark Tryniski - Pres and CEO

  • I think 2009 was certainly a little bit muted because you had very -- you know, you had the inconsistent application of asset-based fees to the extent that 2009 was not a robust year on a comparable basis, because pure assets were down. You know, people's 401(k) balances were down.

  • So, I think somewhere between what we had seen historically in 2009, it's -- you know, as you know as that business now has hurdled $30 million of revenues, it is harder to grow at a double-digit rate when you get to that size than maybe it was three or four years ago. But I still think we are comfortable at, given the breadth of the services we offer and the width of that business from a national platform standpoint, that we should have an accelerated growth rate going forward.

  • David Darst - Analyst

  • Okay. And then on the efficiency initiatives that you have completed, is there anything else you've got that you are considering any other opportunities to improve the efficiency ratio from where it is?

  • Mark Tryniski - Pres and CEO

  • Well, I think we continue to work through the plan that we developed in 2009 to be sure that that is fully implemented. And at this point, we are in very good shape for that. And we've got the -- pretty close to $6 million of cost reductions out of that plan. It clearly gets offset by other things, as Scott commented on, that certain merit increases, and technology costs continue to be expensive. Our debit card business really has grown like crazy into the top line.

  • But the cost structure, the interchange costs also have grown dramatically. So there's things like that that affect those numbers on a net basis. But I think our goal is to drive $6 million in costs out of the permanent cost structure. And that would get us to a lower cost base in 2010 than we had in 2009. I think we are still confident we can continue to execute on that plan.

  • I think beyond that, David, one of the things that we've looked at, because we think it is strategically and significantly quantitatively important for the future, is this new IT conversion that we are in the process of doing right now. And we are converting to an IT course system that is much more effective and much more efficient and much more integrated, gives much greater tools to our people on the front line to serve our customers, and is going to be significantly less expensive.

  • Now we won't see that probably this year for sure. The implementation and the conversion is scheduled for the beginning of September. We won't see that this year. We probably won't see much in 2010. But we will start to see it in 2012 for the most part, '13, '14 and we've forecasted it out five years -- the fifth year after conversion that the run rate on the cost reduction relative to where our current system would have put us, that cost savings is in the $4 million to $5 million a year range.

  • David Darst - Analyst

  • Okay. Thank you.

  • Operator

  • [John Stewart].

  • John Stewart - Analyst

  • Good morning. A quick question. Just a follow-up on Rick's line of questioning earlier with regard to the margin, can you tell us what the average duration is of your CD book at this point?

  • Scott Kingsley - EVP and CFO

  • I do not have it in front of me, but it is short. It has got to be -- if it's a year that is probably a long number.

  • John Stewart - Analyst

  • And, Scott, you said that there is not much in the way of repricing left there?

  • Scott Kingsley - EVP and CFO

  • There would be, but I kind of look at it this way, that if the average duration of the CD portfolio is at a year or modestly above a year, stuff that repriced last March, April, May is probably subject to repricing again over the next say, two, three, four months. But rates that were in place at that point in time last year are not significantly higher for us in our marketplaces than where they stand today.

  • So, you know, there was -- I think that in our marketplaces getting to that lower, lowest denominator point happened pretty readily.

  • John Stewart - Analyst

  • Okay. And then is there any -- are there any initiatives on your behalf to specifically look to extend any of that at this point? Or are you pretty comfortable where it is?

  • Scott Kingsley - EVP and CFO

  • We are looking at that as part of our ALCO process, John, very good question. And we are looking at whether that it would be productive to extend pieces of that. We look at that in a holistic strategy.

  • As you know, we have not been the beneficiary of the rates down over the last year or year and a half, because we basically had fixed rate debt. Now as the -- with the assumption of an increase in interest rates, that reintroduces the concept of some of our debt actually being callable which may put us in a position to say, maybe we would like to secure some longer term deposits funding as a replacement for some of those debt instruments. So that is certainly part of our holistic planning.

  • John Stewart - Analyst

  • And then back to the bond cash flows, you suggested that -- I think the word you used was 'meaningful' bond cash flows for the next six to nine months. Can you put a number around that for us?

  • Scott Kingsley - EVP and CFO

  • I probably can. Ask another question and I will keep looking.

  • John Stewart - Analyst

  • Okay. You disclosed the average duration of the bond portfolio, I think, has moved from [5.8] from [5.3]. Is that right?

  • Scott Kingsley - EVP and CFO

  • Yes, it was 5.8, you are exactly right.

  • John Stewart - Analyst

  • And what specifically were you guys buying in the first quarter and what duration was that?

  • Mark Tryniski - Pres and CEO

  • We were buying intermediate term US Treasury securities virtually only and the average duration was about six years.

  • John Stewart - Analyst

  • Okay. And with the cash flows that you do anticipate coming, I guess while you are looking for that number, what will be the prospective uses of those cash flows? Will you reinvest them at a similar kind of 6 plus year duration? Will you use them to let some CDs go? Kind of how are you thinking about positioning the balance sheet with those cash flows?

  • Mark Tryniski - Pres and CEO

  • Well, I mean we -- as I said earlier, the first premise is that we want to maintain a net invested liquidity position as opposed to a net borrowing position at this point. I think some of that is going to depend on --.

  • The answer to that question will depend on what the loan growth is in the second and third quarters. It's likely that there will be some reinvestment of those cash flows. And I guess we don't -- I don't have the monthly numbers and (multiple speakers).

  • Scott Kingsley - EVP and CFO

  • I think that we think for the balance of the year that those cash flows are in the $125 million to $140 million range off the portfolio. Again based on our expectations of the likely early -- including the likely early call of certain securities in the portfolio.

  • Mark Tryniski - Pres and CEO

  • My recollection is that it is close to $100 million over the next three months so that the -- I can't remember -- it was April, May, and June or March, April, and May, but it is about $100 million or so over the course of the next handful of months.

  • John Stewart - Analyst

  • So it's $125 million to $140 million for the remainder of the year, but you think the bulk of that is the next three months?

  • Mark Tryniski - Pres and CEO

  • Yes and then it dips down and I think that some of it comes in at the end of the year as well, but I just -- I apologize we don't have that.

  • John Stewart - Analyst

  • No, that's fine. That's fine. So you are about to say with little loan growth that you will reinvest?

  • Mark Tryniski - Pres and CEO

  • Well I think it depends on loan growth. I mean, we are hoping, as I said, our business pipeline is as strong as it has been since September of 2009. We have been working pretty aggressively and diligently trying to determine and capitalize on the demand that is in the market so that it depends on, you know, if loan growth is $100 million for the next couple of quarters that is going to impact the capital market transactions.

  • But right now, we still have a fair bit of liquidity left. We still continue to grow deposits quite significantly, although there is some seasonality at the beginning of the year in the deposit flows because a lot of first quarter is municipal deposits. And then a lot of that flows out in the second and third quarters. So you get some seasonal impact of the municipal deposit flows as well.

  • But we think we are going to have some continued deployment of liquidity likely in the second quarter without becoming a net borrower in terms of fed funds.

  • John Stewart - Analyst

  • And will you invest to keep the duration roughly where it is today, 5.8?

  • Mark Tryniski - Pres and CEO

  • I think right now we are thinking that given you saw that the tax rate actually moved up a fair bit, our municipal portfolio has been paying down. We have not reinvested there in a while. And so, we are thinking right now that the municipal market is pretty attractive. So we are probably looking more towards the municipal market.

  • I can't speak to what the duration of those might be. I know historically I think we acquired, in the municipal market, we've bought new issuance not existing issues. So I can't speak right now as to what the duration of those might be.

  • But I think that, in terms of asset class, we would be looking more towards municipals than other asset classes at this point.

  • John Stewart - Analyst

  • Okay so I mean, those are usually fairly long, right?

  • Mark Tryniski - Pres and CEO

  • Typically they are longer than the moderate duration treasuries we just acquired, yes.

  • Operator

  • (Operator Instructions). [Ben Tarantino].

  • Ben Tarantino - Analyst

  • Thank you and good morning, guys, and congratulations on a great quarter. Just a couple of questions. One is about the float of the Company stock. Have you noticed a change there in terms of more institutional ownership versus individual ownership?

  • Mark Tryniski - Pres and CEO

  • No. Actually, our institutional versus 'retail' holdings over the last four years have been very steady. I mean we -- after we went into a couple of the wider held indexes, we were approaching 60% institutionally held for a little bit over that today. But it stayed pretty constant.

  • And I think the pure daily trading volume of our securities reflects the outcome that is being -- that you are seeing in the broad market today. Meaning that, I think over the last two quarters our floated closer to 200,000 shares a day as opposed to the 300,000 that might have been a year ago.

  • Ben Tarantino - Analyst

  • And I guess the second question is, how concerned are you guys about the economic climate in the state of New York, given what is going on in Albany and things -- places like that?

  • Mark Tryniski - Pres and CEO

  • If you are looking for a one-word answer, I would say very. You know, I think New York has got its challenges in terms of the budget. The taxes, I think, all-in property, sales and income are the second-highest in the country.

  • There continues to be some level of inability in Albany to really address the issues. I don't think that is unusual in terms of the things that other states are going through. But at the same time, it is not productive for us in our markets.

  • We also have a third of our business in northeast Pennsylvania. I think Pennsylvania does not have the same budget and taxation and spending issues that New York does, which is probably a good thing.

  • On the other hand, I think New York as the financial capital of the world and an engine of commerce and international exposure and opportunity, I think has greater assets to use to recover from than many other states. So I'm -- you know, I would like to see a better economic and business environment for the state.

  • I am not going to predict whether that will happen or not. But, hopefully, we will see some improving legislation and some improving news out of Albany as we try to work through the budget and the related issues.

  • Ben Tarantino - Analyst

  • Thanks.

  • Operator

  • (Operator Instructions). [Whitney Young].

  • Whitney Young - Analyst

  • Most of my questions were answered, I just have a follow-up on that, the strong commercial loan pipeline. How meaningful was the improvement versus fourth quarter? And what is driving that and to what extent do you think you are gaining market share from competitors versus seeing an improvement in general? Thank you.

  • Scott Kingsley - EVP and CFO

  • I don't have that pipeline report in front of me. But I think from the end of the year to the end of the first quarter, it was up about probably more than 20%. Yes, it was more than 20%. It is about the same as it was in September of 2009. And you recall, I think that the fourth quarter for us was pretty good in terms of commercial lending.

  • So I'm cautiously hopeful that the next couple of quarters will be reasonably good. I mean, we have been working very hard on the business side to get opportunities. It's just, it's difficult. It is sometimes frustrating to hear the politicians speak about the fact that the banks aren't lending. Because I can tell you from our standpoint we are out there hitting the bricks pretty hard.

  • And it is really a function of -- it is a function of soft demand. It really is. A lot of customers are hesitant. They aren't going to -- they see recovery but they are point to wait to the last minute to invest in equipment, people, plants, acquisitions and the like.

  • So things are a bit soft, but we have been working very hard. And as I said, the pipeline is a fair bit bigger than it was at the end of the year. And we are hopefully optimistic, relative to results in the second and third quarters.

  • Whitney Young - Analyst

  • Okay and two more questions, sorry. Do you see sort of an improvement in a particular industry or region? And finally, what can we expect the impact to be on the margin there, if that loan growth on the commercial side of things does materialize?

  • Scott Kingsley - EVP and CFO

  • Well, I think the first part of your question, relative to sectors and industries, I don't know that we have seen anything particular that would be worth necessarily commenting on anything that's atypical. I will say that the ag industry right now is not investing and that is about 8% or so of our commercial portfolio. And that is one sector or industry that's been a little bit soft in terms of reinvestment.

  • Other than that, nothing really that would jump out at me in terms of different sectors or industries.

  • The second part of your question related to the margin. You know, we've got $4 plus billion in earning assets. So I think if we grow our commercial business $100 million over the next couple of quarters, if we did, I don't think you would see a significant impact on the margin. I mean, the fact that a lot of those are kind of prime based with floors of -- right now, we try to get floors of 4 and to use that as a number 4 or 5.

  • That's probably relatively consistent with what the earn, the yield on our earning asset portfolio was [in total]. So I guess the short answer would be, I don't know if that would have really much impact at all on the margin in the second and third quarters.

  • Whitney Young - Analyst

  • Thank you.

  • Operator

  • (Operator Instructions). And it appears we have no other questions.

  • Mark Tryniski - Pres and CEO

  • Very good. Thank you, Betty. Thank you, everyone, for joining us and we look forward to next quarter. Thank you.

  • Operator

  • That concludes today's conference. Thank you for participating. You may now disconnect.