Community Financial System Inc (CBU) 2021 Q2 法說會逐字稿

Good day, and welcome to the Community Bank System Second Quarter 2021 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, market and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from those results discussed in these statements. These risks are detailed in the company's annual report and on Form 10-K 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 be joined by Joseph Serbun, Executive Vice President and Chief Banking Officer, for the question-and-answer session. Gentlemen, you may begin.

Thank you, Cole. Good morning, everyone, and thank you for joining our second quarter conference call. Hope you're all well. I'll start with a brief comment on earnings, and Joe will provide more detail. The quarter was about as we expected with the reported earnings strength driven by our reserve release. Beyond that, the margin continues to be a headwind, but credit overall, deposit fees and the strength of our financial services businesses are tailwinds.

From a business line perspective, commercial is flat ex PPP and muni loans, but the pipeline is growing back post-COVID quicker than we expected. That's good news. The mortgage business is strong with the biggest pipeline we have ever had. The payoffs are elevated also, so the book is growing more slowly than it might otherwise. The indirect lending business had a great Q2 with outstandings up 8% over Q1. Deposit service fees continued to rebound from the pandemic impact and were up 18% from the depressed Q2 of 2020. And like the entire industry, deposits are up.

Our financial services businesses were the star performers in the quarter with combined revenues up 14% and pretax earnings up 25% over 2020. We are also pleased to have announced earlier this month the acquisition of Fringe Benefits Design of Minnesota, a provider of return plan administration and consulting services with offices in Minneapolis and South Dakota. The benefits space is very active right now in terms of opportunities, and we expect more to come.

The benefits of a diversified revenue model has never been so apparent. As we announced last week, our Board has approved a $0.01 per quarter increase in our dividend, which marks the 29th consecutive year of dividend increases, and we think is a validation of our disciplined and diversified business model.

As we announced in March, we have appointed Dimitar Karaivanov as our Executive Vice President for Financial Services and Corporate Development and he began in this role in June. He joined us from Lazard, where he was the Managing Director in the Financial Institutions Group and has over a dozen years of experience in investment banking, serving clients in the banking, benefits and fintech space. I've known and worked with Dimitar for nearly his entire career and thrilled to have him on board supporting our growth initiatives.

Looking ahead, we will be doing our best to manage the changing winds. We have the headwind margin pressure, with growth in credit, momentum of our financial services businesses and liquidity deployment are all tailwinds.

Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the second quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.88. The GAAP earnings results were $0.22 per share or 33.3% higher than the second quarter of 2020 GAAP earnings results and $0.12 per share or 15.8% better on an operating basis. Improvement in earnings per share was led by lower credit-related costs and a significant increase in noninterest revenues, particularly in the company's nonbanking businesses. Comparatively, the company reported GAAP earnings and operating earnings per share of $0.97 in the linked first quarter of 2021.

The company reported total revenues of $151.6 million in the second quarter of 2021, a $6.7 million or 4.6% increase over the prior year's second quarter revenues of $144.9 million. The increase in total revenues between the periods was driven by a $5.3 million or 13.7% increase in financial services business revenues and a $1.2 million or 8.6% increase in banking-related noninterest revenues. Net interest income of $92.1 million was up $0.2 million or 0.2% over the second quarter of 2020 results. Total revenues were down $0.9 million or 0.6% from the linked quarter first quarter driven by a $1.9 million decrease in net interest income, offset in part by higher noninterest revenues. Although net interest income was up slightly over the same quarter last year, the results were achieved on a lower net interest margin outcome.

The company's tax equivalent net interest margin for the second quarter of 2021 was 2.79%. This compares to 3.03% in the first quarter of 2021 and 3.37% 1 year prior. Net interest margin results continue to be negatively impacted by the low interest rate environment and the abundance of low yield cash equivalents being maintained on the company's balance sheet. The taxable yield on earning assets was 2.89% in the second quarter of 2021 as compared to 3.15% in the linked first quarter and 3.56% 1 year prior.

During the second quarter, the company recognized $3.9 million of PPP-related interest income, including $2.9 million of net deferred loan fees. This compares to $6.9 million of PPP-related interest income recognized in the first quarter, including $5.9 million of net deferred loan fees. The company's total cost of deposits remained low, averaging 10 basis points during the second quarter of 2021.

Employee benefit services revenues were up $3.4 million or 14.2% over the prior year second quarter, driven by increases in employee benefit trust and custodial fees. Wealth management revenues were also up $1.9 million or 29.2%, driven by higher investment management, advisory and trust services revenues. Insurance services revenues were consistent with the prior year's results. The increase in banking-related noninterest revenues was driven by a $2.3 million or 17.6% increase in deposit service and other banking fees, offset in part by a $1 million decrease in mortgage banking income.

During the second quarter of 2021, the company recorded a net benefit in the provision for credit losses of $4.3 million. This compares to a $9.8 million provision for credit losses reported in the second of 2020, $3.2 million of which was due to the acquisition of Steuben Trust Corporation, with the remaining $6.6 million largely driven by pandemic-related factors.

During the second quarter of 2021, the company reported 3 basis points of net loan recoveries and the post-vaccine economic outlook remains positive. In addition, at the end of the second quarter, there were only 12 borrowers, representing $2.4 million in loans outstanding that remained in the pandemic-related forbearance. This compares to 47 borrowers of pandemic-related forbearance representing $75.6 million at the end of the first quarter and 3,700 borrowers with approximately $700 million of loans outstanding 1 year earlier. These factors drove down the expected loan losses resulting in the recording of a net benefit of provision of credit losses for the quarter.

The company recorded $93.5 million in total operating expenses in the second quarter of 2021 as compared to $87.5 million in the second quarter of 2020, excluding $3.4 million of acquisition-related expenses. The $6 million or 6.9% increase in operating expenses was attributable to a $3.2 million or 5.8% increase in salaries and employee benefits, a $1.9 million or 17.8% increase in data processing and communications expense and a $0.7 million or 7% increase in other expenses and a $0.5 million or 5.3% increase in occupancy and equipment expense, offset in part by a $0.3 million or 7.9% decrease in the amortization of intangible assets. The increase in salaries and employee benefits expense was driven by increases in merit-related employee wages, higher payroll taxes including increases in state-related unemployment taxes, higher employee benefit-related expenses in the Steuben acquisition.

Other expenses were up due to the general increase in the level of business activities, including increases in business development and marketing expenses. The increase in data processing and communications expenses was due to the second quarter 2020 Steuben acquisition and the company's implementation of new customer-facing digital technologies and back-office systems between the comparable periods. The increase in occupancy and equipment expense was driven by the Steuben acquisition. In comparison, the company reported $93.2 million of total operating expenses for the first quarter of 2021, $0.3 million or 0.3% lower than the second quarter 2021 total operating expenses.

The effective tax rate for the second quarter of 2021 was 23.1%, up from 20.3% in the second quarter of 2020. The increase in the effective tax rate was primarily attributable to an increase in certain state income tax rates that were enacted in the second quarter of 2021. The company closed the second quarter of 2021 with total assets of $14.8 billion. This was up $181.1 million or 1.2% from the end of the linked first quarter and up $1.36 billion or 10.1% from the year earlier.

Average interest-earning assets for the second quarter of 2021 of $13.37 billion were up $680.6 million or 5.4% from the linked first quarter of 2021 and up $2.27 billion or 20.4% from 1 year prior. The very large increases in total assets and average interest-earning assets over the prior 12 months was driven by the second quarter 2020 acquisitions of Steuben and large inflows of government stimulus-related deposit funding and PPP originations.

The company's ending loan balances of $7.24 billion were down $124.2 million or 1.7% from the end of the first quarter. Excluding the net decrease in PPP loans of $126.1 million and the seasonal decrease in municipal loans totaling $41.2 million, ending loans increased $43 million or 0.6%. As of June 30, 2021, the company's business lending portfolio included 317 first draw of PPP loans with a total balance of $72.5 million and 2,254 second draw of PPP loans for a total count of $212.3 million. The company expects to recognize through interest income the majority of the remaining first draw deferred PPP fees totaling $0.9 million during the third quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $9.2 million over the next few quarters.

On a linked quarter basis, the average book value of the investment securities portfolio increased $290.2 million or 7.9% from $3.67 billion during the first -- during the first quarter to $3.96 billion during the second quarter. With this said, the company has largely remained on the sidelines with respect to deploying excess liquidity until market interest rates become more attractive.

During the second quarter, the company's average cash equivalents were $2.07 billion, representing approximately 16% of the company's average earning assets. This compares to $1.67 billion in average cash equivalents during the first quarter of 2021 and $823 million in the second quarter of 2020. The $408 million or 24.5% increase in average cash equivalents during the quarter was driven by the continued inflow of federal stimulus funds, the origination of second draw PPP loans and first draw of PPP loan forgiveness.

The company's capital reserves remained strong in the second quarter. The company's net tangible equity and net tangible assets ratio was 9.02% at June 30, 2021. This was down from 10.08% a year earlier, but up 8.48% at the end of the first quarter. The company's Tier 1 leverage ratio was 9.36% at June 30, 2021, which is nearly 2x the well-capitalized regulatory standard of 5%.

The company has an abundance of liquidity. The combination of the company's cash and cash equivalents, borrowing available in Federal Reserve Bank, borrowing capacity from the Federal Home Loan Bank and unpledged available for sale investment securities portfolio provided the company with over $6.1 billion of immediately available sources of liquidity.

At June 30, 2021, the company's allowance for credit losses totaled $51.8 million or 0.71% of total loans outstanding. This compares to $55.1 million or 0.75% of total loans outstanding at the end of the first quarter of 2021 and $64.4 million or 0.86% of total loans outstanding at June 30, 2020. The decrease in the allowance for credit losses is reflective of an improving economic outlook, the very low levels of net charge-offs and a decrease in delinquent loans and loans on pandemic-related forbearance.

Nonperforming loans decreased in the second quarter to $70.2 million or 0.97% of loans outstanding, down from $75.5 million or 1.02% of loans outstanding at the end of the linked first quarter of 2021, but up from $26.8 million or 0.36% of loans outstanding at the end of the second quarter of 2020 due primarily to the reclassification of certain hotel loans under exempted forbearance from accrual to nonacrual status between periods. The specifically identified reserves held against the company's nonperforming loans totaled only $2.8 million at June 30, 2021.

Loans 30 to 89 days delinquent totaled 0.25% of loans outstanding at June 30, 2021. This compares to 0.37% 1 year prior and 0.27% at the end of the linked first quarter. Management believes the low levels of delinquent loans and charge-offs has been supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.

We remain focused on new loan origination, and we'll continue to monitor market conditions to seek the right opportunities to deploy excess liquidity. Our pipeline -- loan pipelines increased considerably during the second quarter, and asset quality remains very strong. We also expect net interest margin pressures to persist and remain well below our pre-pandemic levels, but also believe our abundance of cash equivalents represent a significant future earnings opportunity. We're also fortunate and pleased to have the strong nonbanking businesses that supported and diversified our streams of noninterest revenue.

And lastly, to echo Mark's comments, we are pleased and excited to welcome the customers and employees of FBD to the Community Bank team. Thank you, and I'll turn it back to Cole for questions.

(Operator Instructions) And our first question today will come from Alex Twerdahl with Piper Sandler.

First off, I just want to ask about as I kind of look at 2022 over 2021, a couple of things like the reserve releases, PPP, some of those things, obviously, aren't going to be repeatable in 2022, setting up the possibility of earnings going lower. And I was wondering if that has any impact on how you think about M&A. I know when you guys crossed the $10 billion mark, there was a little bit more of an emphasis to kind of cover the Durbin by doing a slightly larger transaction. And I'm wondering if your outlook on M&A has changed at all just kind of as you look forward into what earnings may bring next year.

No, I think it's a fair question. There were some things this year that clearly are nonrecurring, and we're going to have to refill the bucket. I think organic growth is going to have to improve. We need to continue the momentum of our financial services businesses. Deposit fees continue to rebuild. As Joe mentioned, the liquidity deployment -- so I think we have some levers to pull in terms of continued momentum relative to earnings and offsetting some of the nonrecurring revenues over the course of the last year. And that's our job, is to grow earnings every year.

It doesn't really change our outlook as it relates to M&A. I think the M&A is more of a longer-term continual strategy to try to create above-average shareholder returns with below-average risk. And that's really -- so we're not going to forecast -- if we forecasted lower core operating earnings, I don't think a strategy to address that is going to be try to find something for that purpose. I think we look at M&A more strategically, what's the fit, what does it contribute into the future, how does it create sustainable and growing shareholder value. So I would say it doesn't really change at all our outlook on M&A, which is more of a strategic exercise, not really a technical exercise.

I think with Durbin, there was the $10 billion Durbin, I guess. That was a little bit different. That was a $10 million hit, a $12 million hit. There's no operational mechanism to absorb the $10 million or $12 million hit. So that was a little bit different. But with that said, I think our -- at the time, our articulation to shareholders was we expect to cross the $10 billion without reducing earnings, and that's our job as management.

So the only realistic way to do that is through good M&A opportunities. And we were fortunate, let's call it, to be able to, in that time frame, acquire 2 really strong franchises and merchants in Vermont and our asset benefits business in Boston, which continues to perform at an extremely high level with respect to growth in revenues and growth in margin. But ordinary course, M&A is more strategic and less taxing, so it doesn't really change our philosophy in how we think about M&A.

Okay. And then just kind of on the same -- along the same topic, you alluded to some opportunities in the benefit space in your prepared remarks. Are those going to continue to follow the same sort of -- similar transactions to what we've seen with the most recent one, kind of all be sort of relatively bite-sized and, over time, improve that business, but not necessarily huge needle movers in the near term?

I think that's the expectation right now. But with that said, if we had the opportunity to do another larger transaction like the NRS transaction that we did in Boston 4 years ago, we would definitely do it. So I think for the most part -- I mean, I think what's driving a lot of these nonbanking opportunities right now is just the concern over the cap gains rate. And some of these businesses were started 20 years ago with $1, and now they're worth $20 million or $30 million or more, and it's all cap gains. And if I sell now, I can pay 20%. If I sell sometime in the future, I pay 40%. So I may think it's as simple as that in terms of what's driving a lot of the activity right now. So -- and we're also getting a little bit bigger. This -- our benefits business right now, run rates over $110 million in revenues. In the profit margin, the operating margin is actually growing over the last couple of years nicely. So it's a great business for us.

And we've got a fair bit of critical mass in that business. I mean there's a couple of businesses, we are one of the lead players in the U.S. in those spaces, and they continue to have opportunities for us to partner with much larger financial institutions on the kind of the institutional trust side and in some other areas.

So that -- we've got a lot of momentum in that business, and we're going to continue to invest in it, whether it's organic, which we've done in some startup business. We start up a VEBA business a few years ago, it was 0 revenues. Now, I don't know, there's probably, what, $4 million, pushing $5 million, good margins. So we'll continue to invest in organically in terms of starting up either product lines or other organic start-ups and also look at what we think are high-value acquisition opportunities.

There's a lot of businesses in that space that we wouldn't be interested in for different reasons. We like to acquire. Acquiring revenues is great, but we also like to acquire a product line, technology or consulting resources. And so if we find a transaction that has some of those value drivers for us, they're much more attractive than just bolting on some revenues, which can also be -- I mean I'm not suggesting we wouldn't do more tactical acquisitions, but we also like really strong consulting or product line, knowledge, consulting talent, technical talent, sales talent, which is what we got with FBD sales and consulting talent. So it's not just a revenue stream. But it's active right now in that space and the target's been very busy. And we'll continue to hopefully be busy in that space for a while. But the operating momentum in that business is really tremendous right now, not just organically, but in terms of our opportunity to partner with much larger financial institutions and clients. I mean we have a number of Fortune 500 clients in our benefits business that we do institutional trust work for.

So we'll continue to invest in that business. And right now, the M&A opportunities are pretty good.

Awesome. And then just a final question for me. The strong consumer indirect growth you had this quarter, was that reflective of any sort of change in how you guys are thinking about that portfolio or any pricing changes or anything that we should be aware of for the -- as we kind of think how that portfolio could evolve over the next couple of quarters?

No, I don't think so. The pricing is really kind of -- you're at the mercy of the market. I mean the market goes up, the market goes down. We've been in that space for a long time. We don't get in and get out, get in, get out. A lot of players have gotten out post-COVID, which has been a little bit helpful. Our business is -- the biggest component is used auto, which right now is very good. There's not much new inventory plus valuable to finance new vehicles than it is used in any event. So it's just been a really -- last quarter was really good.

It also kind of gets hot and cold pretty quickly. So next quarter might even be better and can also be worse. It's just -- it's more like, call it, volatile. It's less predictable in some ways. We've never had to really deal with inventory before as an issue in that business, but now we're dealing with it. And as I said, I think it's, in some respects, working to our advantage because the used car market is pretty good and pretty active and it's the biggest component of what we finance in that business.

And our next question will come from Erik Zwick with Boenning and Scattergood.

You mentioned a couple of times in the prepared remarks that the pipeline -- the loan pipelines have increased significantly during the quarter. And you're acutely focused on new loan origination going forward. If we back out the expectation that the PPP loans continue to run off if they're forgiven, just curious if you could frame maybe what the opportunity is for net growth in the remaining portfolios in the back half of the year and into next year.

Joe, do you want to take that?

Erik, Joe Serbun.Yes. Let me give you a little bit of an insight into the pipeline activity first. Commercial pipeline, we're in the rebuilding stage, if you will. And the pipeline from June of '19, June of 2019 to June of 2021 is up about 35%. And if you look at it from June of 2020 to 2021, it's about 3.5%. I'll come back to that in a minute. You have to look at the first half of 2021 to understand what's going on in that business. So the first half of 2021, it was an 85% increase from the average of Q1 to the average of Q2. So the pipeline has grown significantly in the commercial business in the months of May and June, and hopefully, that will continue on for us. Like I said, since 2019, it's about 35%.

On the residential mortgage side, Mark had mentioned earlier, maybe it was shown that we're at the high point of our pipeline, which we are, since I've been ever we've never seen pipeline that large both in dollars but also in applications. So in dollars, we're up about 50% if you look at June of '19 to June of '21, we're up about 50%. If you look at just June of '20 to '21, we're up 36% in dollars, and we're up 35% in application. So it seems as though it's going in the right direction.

I would anticipate maybe another net $20 million in the indirect portfolio, maybe another $40 million in the residential portfolio as we come to close out the year. But like Mark said, particularly in the indirect portfolio, that's hot and cold. And so it could be a bigger number or a lesser number. But nonetheless, I think we're positioned nicely given the pipeline, given the application value that we'll see growth in -- continued growth in both of those portfolios.

The commercial, as you know, takes a little longer, but I think it's positioned nicely with the sized pipeline as well as the committed not funded rate loans that are already approved. That piece of the pie has increased by about 9% quarter-over-quarter. So I think we're poised for continued improvement.

Joe, I appreciate that color there. And then switching gears to the reserve and the outlook for provisioning going forward. It looks like the reserve now is backward was at the end of 2019 before the -- pretty much kind of released all the build that you had from last year. Is it safe to assume then that the provisioning going forward will reflect kind of net charge-offs and then growth in the loan portfolio? Or are there other items to kind of consider at this point?

Erik, this is Joe Sutaris. Based on kind of where we've been and where we are today, I think that's a reasonable expectation. I think the credit markets, obviously, with COVID were in turmoil, and we provisioned accordingly. We think we're kind of on the back end of that. I mean I suppose there could be another surge. I know we're concerned about that. But right now, I think we came out of the pandemic in very good shape from a credit perspective. So the growth of the portfolio and sort of charge-offs will likely drive some of the provisioning on a going forward basis.

The economic outlook, we don't anticipate having the same level of volatility that we had certainly going through the pandemic. So that component of the reserve calculation we anticipate at least as of right now to sort of stabilize. So yes, I think that provisioning of -- the volatility in provisioning should settle down as we look ahead.

Got it. And then thinking about the tax rate, I think it was mentioned in the press release and your comments that there were some changes at the state level, which led to the increase here in 2Q. Was any of that increase in 2Q a catch-up? Or is that 23% rate -- a decent run rate going forward?

Yes. So there was a bit of a catch-up because we had -- it was retroactive for the full year. So the run rate in and around 22% plus or minus is reasonable, excluding any sort of employee-related stock option exercise and the benefits related to that. So a core run rate probably in and around 22% on the effective tax rate.

And our next question will come from Russell Gunther with D.A. Davidson.

Would you guys, Joe, perhaps be able to give some color on the P&L impact of the more recently announced employee benefit deal from a fee and expense perspective over the next couple of quarters? And then kind of sticking with that being bigger picture, how the fee and expense outlook for the back half of the year is shaping up?

Yes. So it was a very -- Russell, it was a small transaction for us. We paid less than $20 million for the company. We expect the revenue run rate of that business to be less than $10 million on a going forward basis. So the overall impact of the business will be very marginal. I think as Mark was alluding to, we picked up some strategic benefit of that acquisition. It's a beachhead in the Midwest, a good direct sales force, just additive overall to our 401(k) practice within the employee benefit space. But pretty small acquisition for us, but I think strategically important. I think we believe there will be additional opportunities, kind of similar type transactions down the road. And we're hopeful that we bring some of those to the table going forward.

And then you guys had said previously the real focus on low single-digit expenses for the year, and there's been really good discipline here. You're certainly on track for that. As you look out into 2022, similar to a question earlier, is that a range you will continue to target that low single digit given some revenue challenges? Or are there targeted franchise investment or just inflationary pressures that would push that higher?

Russell, that is our hope. The challenge, obviously, as you kind of mentioned, is just keeping -- particularly payroll and wages, there's more pressure on wages than there's been in the past. That will be a challenge for us to continue to manage that appropriately and hire qualified and experienced staff. So there is some pressure on the wage front for sure. But we are actively managing all of the line items that we can from an operating expense basis.

As we've also mentioned, we kind of consolidated some branches over the last year, 1.5 years. And we're starting to see some of the benefits from a cost perspective kind of get baked in the quarterly earnings. So our expectation is kind of low single digits and excluding any sort of significant acquisitions. And so we're going to continue to manage that very prudently.

Last one for me is on the margin. You guys have mentioned, I think, a couple of times just the headwind that remains there. Can you give us a sense for the back half of the year? Is the expectation for pressure from this 2 79 prior to some excess liquidity getting deployed? Or how do you see the near-term trends?

Yes. Russell, from an overall margin perspective, it's going to continue to be a challenge to support any sort of growth in the margin, excluding, as you pointed out, the additional investment of securities. We are -- the loan pipeline is increasing, as Joe was indicating, we're starting to see a little bit of loan growth, that will help the margin, at least a bit. That roughly $2 billion of cash equivalents, if we tomorrow decided to invest that in the 10-year Treasury, represents about $22 million on a pretax operating basis. If the 10-year treasury were 1 50 and it's closer to a $30 million improvement in net interest income, but we need the market to kind of work with us a bit on that. And we kind of see that as a significant earnings opportunity and margin improvement opportunity.

And as you're aware, we don't really have anywhere to go on the cost of fund side. Our cost of funds and cost of deposits of 10 basis points is about as low as it's going to go. And so that's really been the challenge is deploying that excess liquidity. And obviously, we don't have a lot of room to go down on the deposit side because of the strength of our core deposit franchise.

So from a margin perspective, we certainly hope we're at the low point but potentially could grow up a bit lower. But we also expect that net interest income, at least, we could stabilize it with some loan growth and some deployment of the excess liquidity. On the back end of the year, too, I think it might be worth noting that we're sitting on about $9 million of net deferred fees on the PPP side that have not been recognized. So assuming that fourth quarter is the majority of the forgiveness activity, we'll see some of that hit in the back end of the fourth quarter. And that will at least show improvement in the posted margin if we do recognize most of that fee income.

The only thing I would add is if you look at the originations this quarter in our commercial book, our mortgage book and our indirect book, they were all lower than what the aggregate portfolio yield is right now. So kind of the core -- take out PPP and all the other stuff that kind of confuses the margin right now, the core operating margin is going to go down. I don't see how that doesn't happen if you look at just what happened this quarter.

With that said, we need to grow. So the rate is going to go down. The challenge for us and our team is to not with the dollars go down. So if the rate goes down, when we get enough growth that we can offset that and we can manage the dollars, that, I think, is really the goal.

So the idea of the $2 billion, yes, if we invested $1.5 million or $150 million, it's $30 million. That's great. Whole business strategy. So that'd be great if the market cooperates and we have the opportunity, that's wonderful. If it doesn't, we need to plan as to how we grow margin dollars in a declining rate environment. And that's the challenge that we're focused on.

(Operator Instructions) Our next question will come from Matthew Breese with Stephens Inc.

I just wanted to stick on the theme of liquidity. I just want to confirm. So the message for now is that you'll be on the sidelines in terms of investing on liquidity into securities just because of how low yields are. Do I have that right?

Yes. At 1 27, you have that right.

Okay. And has there been a turning point yet in terms of liquidity starting to roll off the balance sheet? Have you seen that quarter-to-date? Or is it continuing to stick around and/or grow?

We have not seen a trend yet in terms of a runoff of any of that excess liquidity. In fact, in the past quarter, we saw an increase. So we have not seen that occurring yet. So we think most of the $2 billion is here to stay. We don't think all of it necessarily, but most of it is probably here to stay on the balance sheet. So we do feel like we're going to need to deploy that at some point when the cycle is right for us.

I will say though, I think if you look at the quarterly run rate deposit, I think the deposit inflows, the rate of inflows is decreasing. So it's slowing down in terms of the inflow in liquidity.

Right. Okay. And then, Mark, you mentioned that stripping away PPP, new versus existing loan yields still show some pressure. Could you just give us an update on where you're seeing the most pressure, what that delta is?

I'm kind of going by memory here. It was across the board actually, and it was pretty consistent. So I'd say on the consumer mortgage side, the delta was about -- 80 basis points, business lending is 80 basis points. And the indirect business was 80 basis points. I thought -- so it's about 80 basis points. Second quarter origination yield versus the aggregate portfolio yield for the quarter, so it's about 80 basis points.

Okay. And then last one for me. Could you remind us how much of the portfolio is floating or and/or has really short duration. I just want to get a sense as talks about Fed hikes intensify, how well positioned you are for capturing some of that benefit out of the gate.

So our floating rate loan instruments were about $1.3 billion, $1.4 billion, in that neighborhood. So it's not a significant component of our overall loan portfolio. But obviously, if we do get rate hikes, then the excess liquidity comes into play as well. But from a loan perspective, it's about that level.

The other thing, too, is that indirect portfolio turns over really quick. What are the cash flows, Joe, about like $40 million a month or something in cash flow? So that portfolio turns over really quick also.

Right. Right. That's like a 12- to 24-month product, correct?

Yes, it's a little bit more than that, but you also get payoffs. So I'm not sure what the average maturity contractual versus -- but it's probably 24 to 36 months somewhere.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Mr. Tryniski for any closing remarks.

Thank you, Cole. Thank you all for joining, and we will talk again next quarter. Thank you. Have a good summer.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.