Community Financial System Inc (CBU) 2021 Q1 法說會逐字稿

Welcome to the Community Bank System First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause results to differ materially from the results discussed in these statements. These risks are detailed in the company's annual report and Form 10-K filed with the Securities and Exchange Commission.

Today's call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. They will be joined by Joseph Serbun, Executive Vice President and Chief Banking Officer, for the question-and-answer session.

Gentlemen, you may begin.

Thank you, Gary. Good morning, everyone, and thank you all for joining our first quarter conference call. The quarter was generally pretty good and maybe even modestly better than we expected on a recurring basis.

GAAP earnings were obviously very strong, but positively impacted by a $0.10 per share reserve release and an $0.08 per share benefit from PPP fees, so about $0.79 for the quarter on a recurring basis. The margin came in a bit better than we forecasted, and our nonbanking businesses continue to accelerate growth on both the revenue and margin lines. Our benefits business was up 12% in EBITDA over the last year. The wealth management business was up 35%, and the insurance business was up 28%. We also had an ever so slight bit of organic loan growth in the quarter, ex-PPP, which is atypical for us in any first quarter and loan quality is in as good as shape as I've ever seen it.

Our consumer lending businesses are very strong right now, and we expect a solid second and third quarter performance there. On the challenges front, the margin may continue to contract, and we need to rebuild our commercial pipeline, which is recovering slowly from the impact of the pandemic. In general, I think we had a very good start to the year. Joe?

Thank you, Mark, and good morning, everyone. As Mark noted, the first quarter earnings results were solid with fully diluted GAAP and operating earnings per share of $0.97. The GAAP earnings results were $0.21 per share, or 27.6%, higher than the first quarter 2020 GAAP earnings results and $0.20 per share, or 26%, better on operating basis. The increase was attributable to a significant decrease in the provision for credit losses, higher revenues and lower operating expenses, offset in part by increases in income taxes and fully diluted shares outstanding. Comparatively, the company reported GAAP earnings per share of $0.86 and operating earnings per share of $0.85 in the linked fourth quarter of 2020.

The company recorded total revenues of $152.5 million in the first quarter of 2021, a $3.8 million, or 2.6%, increase over the prior year's first quarter revenues of $148.7 million. The increase in total revenues between the periods was driven by an increase in net interest income and a higher noninterest revenues in the company's financial services businesses, offset in part by lower banking noninterest revenues.

Total revenues were also up $1.9 million, or 1.2%, from the linked fourth quarter, driven by increases in net interest income, banking noninterest revenues and financial services business revenues. Although several factors contributed to the net improvement in net interest income, the results were aided by the recognition of net deferred PPP loan origination fees of $5.9 million in the quarter due largely to the forgiveness to $251.3 million of Paycheck Protection Program loans.

The company's tax equivalent net interest margin was 3.03% in the first quarter of 2021 as compared to 3.65% in the first quarter of 2020 and 3.05% in the linked fourth quarter of 2020. Net interest margin results continue to be negatively impacted by the significant increase in low yield cash equivalents between the comparable annual quarters. Average cash equivalents increased $1.55 billion between the first quarter of 2020 and the first quarter of 2021 due to the net inflows of stimulus funds and PPP between the periods.

The tax equivalent yield on earning assets was 3.15% in the first quarter of 2021 as compared to 3.93% in the first quarter of 2020, a 78 basis point decrease between the capital periods. The company's total cost of deposits remained low, averaging 11 basis points during the first quarter of 2021.

Noninterest revenues were down $0.1 million, or 0.2%, between the first quarter of 2021 and the first quarter of 2020. The decrease in noninterest revenues was driven by a $2.4 million, or 13.4%, decrease in banking-related noninterest revenues, which was largely offset by a $2.3 million, or 5.7%, increase in financial services business noninterest revenues. The decrease in banking-related noninterest revenues was driven by a $2.2 million decrease in deposit service fees, including customer overdraft occurrences, a $0.2 million decrease in mortgage banking income.

Employee benefit services revenues were up $1.2 million, or 4.6%, over the first quarter 2020 results driven by increases in employee benefit trust and custodial fees. Wealth management revenues were also up $1.1 million, or 14.9%, over the same periods due to higher investment management, advisory and trust services revenues. Insurance services revenues also increased slightly over first quarter 2020 results.

The company recorded a $5.7 million net benefit in the provision for credit losses during the first quarter of 2021 due to a significant improvement in the economic outlook at very low levels of net charge-offs. Conversely, the company reported a $5.6 million provision for credit losses during the first quarter of 2020 as the economic outlook worsened due to the pandemic.

Net charge-offs for the first quarter of 2021 were $0.4 million, or 2 basis points annualized, as compared to $1.6 million, or 9 basis points annualized, of net charge-offs recorded during the first quarter of 2020. For comparative purposes, the company recorded a $3.1 million net benefit and provision for credit losses during the linked fourth quarter of 2020. The company reported $93.3 million in total operating expenses in the first quarter of 2021 as compared to $93.7 million in the first quarter of 2020. The $0.4 million, or 0.4%, decrease in operating expenses was attributable to a $0.6 million, or 1.1%, decrease in salaries and employee benefits; a $1.7 million, or 16.4%, decrease in other expenses; a $0.3 million, 8.6%, decrease in the amortization of intangible assets; a $0.3 million decrease in acquisition-related expenses, partially offset by a $2 million, 19%, increase in debt of processing and communication expenses; and $0.6 million, or 5.2% increase in occupancy expenses.

The decrease in salaries and benefits expense was driven by a decrease in retirement-related severance and medical benefit costs offset in part by increases in merit and incentive-related employee wages and payroll taxes. Other expenses were down due to the general decrease in the level of business activity that is the result of the COVID-19 pandemic. The increase in data processing and communication expenses was due to the second quarter 2020 Steuben acquisition and the company's implementation of new customer-facing digital technology and back office systems during 2020. The increase in occupancy costs was driven by the Steuben acquisition. Comparatively, the company reported $95 million of total operating expenses in the linked fourth quarter of 2020.

The company closed the first quarter of 2021 with total assets of $14.62 billion. This was up $689.1 million, or 4.9%, from the end of the linked fourth quarter and up $2.81 billion, or 23.8%, from a year earlier. Similarly, average interest-earning assets for the first quarter of 2021 of $12.69 billion were up $377.6 million, or 3.1%, form the linked fourth quarter of 2020 and up $2.65 million, or 26.4%, from 1 year prior. The very large increase in total assets and average interest-earning assets over the prior 12 months was driven by the second quarter 2020 acquisition of Steuben Trust and large inflows of government stimulus-related deposit funding of PPP originations.

As of March 31, 2021, the company's business lending portfolio included 874 first draw PPP loans with a total balance of $219.4 million and 1,819 second draw PPP loans with a total balance of $191.5 million. This compares to 3,417 first draw PPP loans with a total balance of $470.7 million at the end of the fourth quarter of 2020. The company expects to recognize, through interest income, the majority is remaining for first raw net deferred PPP fees totaling $3.4 million during the second quarter of 2021 and the majority of its second draw net deferred PPP fees totaling $8.3 million in the third and fourth quarters of 2021.

Ending loans at March 31, 2021, were $7.37 billion, $47.6 million, or 0.6%, lower than the linked fourth quarter ending loans of $7.42 billion, but up $502.2 million, or 7.3%, from 1 year prior. The growth in ending loans year-over-year was driven by the acquisition of $339.7 million of Steuben loans in the second quarter of 2020 and $399.2 million net increase in PPP loans between the periods. The decrease in loans outstanding on a linked-quarter basis was driven by a $48.3 million decrease in business lending due to the decline in PPP loans. Exclusive of PPP loans, net of deferred fees, the company's ending loans increased $14.9 million, or 0.2%, during the first quarter.

On a linked-quarter basis, the average book value of the investment securities decreased $118.3 million, or 3.1%, due to the maturity of $666.1 million of investment securities during the fourth quarter. A significant portion of which occurred late in the quarter, offset in part by investment security purchases during the first quarter of 2021 totaling $546.8 million.

Average cash equivalents increased by $587.5 million, or 54.4%, due to continued growth in deposits. The average tax with the yield on the investments during the first quarter of 2021 was 1.42% including 2.02% taxable yield on the investment securities portfolio and 10 basis points of yield on cash equivalents. At the end of the quarter, the company's cash equivalents balances totaled $2 billion.

During the first quarter, the company redeemed $75 million of floating rate junior subordinated debt and $2.3 million of associated capital securities, which was initially issued by the company in 2006. Company's capital reserves remained strong in the fourth quarter. The company's net tangible equity and the net tangible assets ratio was 8.48% at March 31, 2021. This was down from 10.78% a year earlier and 9.92% at the end of 2020. The decrease in net tangible equity to net tangible assets ratio was driven by the stimulus-related asset growth, a decrease in accumulated other comprehensive income and increase in intangible assets.

Company's tier 1 leverage ratio was 9.63% at March 31, 2021, which is nearly 2x the well-capitalized regulatory standard of 5%. The company has an abundance of liquidity, the combination of company's cash, cash equivalents (inaudible) availability of the Federal Reserve Bank, card capacity for Federal Home Loan Bank, and unpledged available for sale investment securities portfolio provided the company with over $5.67 billion of immediately available sources of liquidity.

At March 31, 2021, the company's allowance for credit losses totaled $55.1 million, or 0.75%, of total loans outstanding. This compares to $60.9 million, or 0.82%, of loans outstanding at the end of the linked fourth quarter of 2020 and $55.7 million, or 0.81%, of loans outstanding at March 31, 2020. The decrease in the company's allowance for credit losses is reflective of an improving economic outlook, low levels of net charge-offs and a decrease in delinquent loans. Nonperforming loans decreased in the first quarter to $75.5 million, or 1.02%, of loans outstanding, down from $76.9 million, or 1.04%, of loans outstanding at the end of the late linked fourth quarter of 2020, but up from $31.8 million, or 0.46%, of loans at the end of the first quarter of 2020 due primarily to the reclassification of certain hotel loans that are extended forbearance from accrual to nonaccrual statistics between the periods.

The specifically identified reserves held against the company's nonperforming loans totaled $3.6 million at March 31, 2021. Loans 30 to 89 days delinquent totaled $19.7 million, or 0.27%, of loans outstanding at March 31, 2021. This compares to loans 30 to 89 days delinquent of $44.3 million, or 0.64%, 1 year prior and $34.8 million, or 0.47%, at the end of the linked fourth quarter.

Management believes a decrease in the 30 to 89 delinquent loans and a very low amount of net charge-offs recorded in the first quarter was supported by the extraordinary federal and state government financial assistance provided to consumers throughout the pandemic.

From a credit risk and lending perspective, the company continues to closely monitor the activities of its COVID-19-impacted borrowers and develop loss mitigation strategies on a case-by-case basis, including, but not limited to, the extension of forbearance arrangements. As of March 31, 2021, the company had 47 borrowers in forbearance due to COVID-19-related financial hardship, representing $75.6 million in outstanding loan balances, or 1%, of total loans outstanding. This compares to 74 borrowers and $66.5 million in loans outstanding in forbearance at December 31, 2020.

Operationally, we will continue to adapt to the changing market conditions and remain focused on credit loss mitigation, new loan generation and deployment of excess liquidity. We also expect net interest margin structures to persist to remain well below our pre-pandemic levels. Fortunately, the company's diversified noninterest revenue streams, which represent approximately 38% of the company's sought revenues, remain strong and are anticipated to mitigate the continued pressure on the net interest margin.

In addition, the company's management team is actively implementing various earnings improvement initiatives, including revenue enhancements and cost-cutting measures intended to favorably impact future earnings.

Thank you. I will now turn it back to Gary to open the line for questions.

(Operator Instructions) Our first question is from Alex Twerdahl with Piper Sandler.

First off, Joe, you ran through a number of items on NII and impacting the NIM that hit in the first quarter and going to impact the second quarter, including the PPP fees, securities purchases, the redemption of the sub debt, et cetera. Can you just slow down and go through those one more time and just kind of give us a sense for where -- not necessarily the NIM, but where NII might be going into 2Q '21?

Yes. It's a very good question, Alex. So in the first quarter, we recorded -- we had significant payoff of PPP loans for the first draw of PPP loans, about $250 million. And so not only do we have amortization of those net deferred fees, we also had an accelerated recognition of some of those fees. And that contributed about just under $6 million in net interest income in the first quarter.

We do expect that the remaining -- some of the remaining PPP net deferred fees, which on the first draw of PPP is about $3.4 million, we expect the majority of that to be recognized. So just on a PPP deferred fee basis, we would expect that to negatively impact net interest income by about $3 million. On the other side is we've continued to lower deposit funding. It's trickled down. It was about 11 basis points last quarter. It's continued to come down a bit, which may provide some modest offset to that reduction.

We've also had a pretty good first quarter for -- given our seasonality around new loan origination was effectively flat, exclusive of the -- of PPP, and we have pretty good consumer portfolios -- pipelines right now, which will contribute, I think, favorably to net interest income next quarter. And also, we continue to evaluate opportunities to deploy additional monies in the securities portfolio. I think the expectation is there is some inflation market and we hope that we get the intermediate area of the curve, and the long end of the curve continues to move up a bit.

And so we have some dry powder, more than some $2 billion of dry powder at the end of the quarter to deploy into the securities portfolio, which right now we're getting 10 basis points on that. So there are effectively empty calories on our balance sheet. But we're looking for the right opportunities. As the year plays out, we invest some of that excess cash.

So I think, Alex, it is difficult to give you the exact call relative to next quarter. But I think we have a couple of things that, particularly around cash equivalent opportunities, investment opportunities and a little bit of loan growth to support the second and third and fourth quarters.

Okay. And in terms of the securities purchases for the -- that you did in the first quarter, when in the quarter were those? And are those going to have some impact on NII in 2Q?

Yes. Alex, I have to pull up the actual security purchase dates, but we've made security purchases throughout the quarter. So some of that will assist the second quarter results. So I think just for modeling purposes, assumption mid-quarter is, I think, a fair assumption as to when we redeploy and invest in some of those securities.

Okay. Great. And then it's been a little bit -- around a year or so since you guys closed the Steuben deal. Obviously, M&A is a big part of the CBU story. Can you maybe give us some commentary on sort of what you're seeing in the M&A environment out there? And then a lot of the deals we've seen this year have been kind of different in terms of MOEs and bigger deals. And I'm just curious if your thought processes around M&A have changed at all in terms of the types of deals that you guys would be considering in 2021.

No. Alex, it's Mark. I don't think our thinking has changed. I don't know that it's changed much fairly ever, at least for an extended period of time around the general philosophy, which is to partner with high-quality franchises that we feel can be sustainably additive to shareholder value. We're not going to do an MOE.

Never say never, but it's highly unlikely we're going to do an MOE. It's highly unlikely that we're going to do a larger-scale transaction that to us just creates a lot more risk. It is inconsistent kind of with our historical model of smaller deals that are more additive as opposed to bigger deals, which tend to be less additive. So at least in terms of shareholder value. So I think we'll continue along the pathway of the $1 billion, give or take, size transactions. Generally, in market, contiguous markets, in those kind of franchises that are a good fit for us, qualitatively and economically in terms of sustainable earnings and shareholder value.

So I don't think anything has changed. Yes, the market seems to have been busy lately with larger deals, larger institutions, more MOEs. I think from what my take is on it, a lot of the banks in our, let's call it, target kind of profile are still trading at lower multiples because of their market cap and their liquidity. And I think that's where we have fairly significant opportunity. And so I think right now, those -- a lot of those franchises are not getting the market recognition relative to larger cap companies. And so I think there's going to be a fair bit of opportunity for us in the space that we're interested in and we continue to be active in and have conversations and dialogues and so I -- as I've told our team, I suspect we will have the opportunity to do something constructive this year.

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

Yes. I think what I said, Alex, was I would not do a bigger deal in the middle of the pandemic or at least last year at some point, but we'd still do a smaller transaction where we felt we had better visibility into the risk profile of the credit portfolio. So nothing's really changed there. I think a lot of the opportunities that we have over time are institutions that we know and we've followed for a long time and we pay attention to.

And so we have a pretty good feel already for their portfolio, and they're disciplined around credit and other operational aspects of the business. So I'm not at all concerned about what would be the impact, the lingering, let's call it, of the pandemic. So that will not -- it has not affected our thinking in any way on M&A opportunities.

The next question is from Russell Gunther with D.A. Davidson.

So first question would be on the employee benefit services line, good year-over-year growth. But curious to get your thoughts on the organic revenue projection there. And then following up on the question about M&A, would a depository deal kind of preclude you from looking at acquisitions within your fee verticals and what those might be, whether it's an employee benefits or elsewhere?

Yes. No, we had good growth in the employee benefits year-over-year. I think it was 8%, something like that, 6%. I don't remember exactly. But it was pretty strong growth, and the expenses were flat -- actually it might have been down a little bit. So anytime you can grow revenues and reduce expenses, that has an exponential impact on margin. So very good quarter for employee benefits is that it continued to perform well.

We expect they will continue to perform well. Interestingly enough, there are a lot of M&A opportunities in that space right now that has been for the last 12 to 18 months. It's been a checked balance to compete against private equity. We've had different valuation models than us in some cases in terms of valuations.

But we have some things percolating right now as well. And I think that just will be ongoing in that business. It's a very strong business. I think we clearly have critical mass in that business. The run rate on revenues this year is going to be $110 million or so at really good margins. So I think that, that business will continue to perform really well.

As the question around whether acquisition opportunities in that space preclude us from kind of depository opportunities or vice versa. The answer's no, clearly not. We, I think, historically have kind of done multiple transactions across discipline historically and we continue to do that. It is different for the most part, subset of folks that work other than me and Joe and a handful of other folks in kind of HR, IT and some things. But it's not -- it's a different level of effort with a generally different kind of teams because, obviously, the teams in those business lines are actively engaged in those efforts and kind of lead those efforts in terms of identifying and supporting opportunities there. So we clearly continue to work hard in both the depository side and the nonbanking side of our business.

We have some -- also some things -- opportunities in the insurance business as well that we're in the midst of pursuing. We expect to close on a small transaction, in fact, I think, next month and have some others that we're having discussions with as well. Wealth management is a little bit different. It's -- we've never done a lot in terms of buying whole businesses in wealth management. The pricing is really extreme. And sometimes -- I'll call it the personnel. These are more difficult and challenging.

I mean the other -- to me, it's a risk. But in wealth management, you don't really own the assets. You don't own the relationship. What you're buying is customer relationship so don't own those relationships. In banking, the bank owns the relationship for the most part of insurance. The business owns the relationship. It's a little bit different in wealth management. So we just -- we've never done a lot there. But we have blocks and books of businesses. Actually, a lot of them. They've been very constructive.

So you by $1 million or $2 million shop that's more akin to kind of a significant signing bonus for bringing 1 or 2 or 3 folks on. A lot of it have already been structured as M&A. So those have worked out really well for us. And I think our bar's a little higher on doing something in terms of the wealth management businesses.

But clearly, on the benefits businesses in the insurance, we've been active, and I expect we will -- in fact, we're active right now. So we'll continue to do that. Those businesses aren't really having a -- they had a good year last year and then you look at the first quarter, it's impressive. So operating at a very high level right now.

I really appreciate the detail thoughts there, Mark. And then my last question, guys, is on the expense side of things. So in the prepared remarks, you mentioned expense initiatives and results this quarter showed positive momentum and were below consensus. So I would just be curious to get a sense for your thoughts on the expense run rate going forward. And any detail on the type of initiatives you were referring to in your prepared remarks.

Good question, Russell. We saw back last year, second and third quarter, that we are running into some margin headwinds and actually organized a management group to look hard at some of the expense line items and some opportunities on the revenue side. We started to actually implement some of those initiatives in the fourth quarter -- third and fourth quarters and now into the first quarter, which we're still working with our vendors on certain contract negotiations. We've done a handful of branch consolidations to reduce expenses on that side. We've looked at some other revenue line items in some of our -- some of the commercial space to try to generate some additional revenues there.

So that's kind of the initiatives we put in place. So on a going-forward basis, we would expect to kind of contain, say, the year-over-year growth rate around expenses to something in the very low single digits from a -- on an annual quarter comparative basis. Whereas, I'll say, in normal times, we might -- the line item for OpEx might grow 3% or 4%, 5% in a year, and we're trying to continue below that really to make up for some of the challenges around the margin.

Just to add a bit to that, Joe mentioned some branch consolidations. We've done about 20 in the past year. I think we're going to do some more, not a lot more, but -- and so we've got some expense benefit from that. We have relied solely on attrition, which has worked out well to reduce the workforce there. So I mean that -- despite the fact we consolidated about 20 branches and we'll do a handful more, we haven't taken out directly any FTEs other than through attrition. I think this year, we're forecasting based on branch traffic.

If you look at before the pandemic, our run rate on branch transactions, we closed the branches, then they open back up and we looked at traffic again, and it was down about 17% pre COVID. It's still down about 17% pre COVID. And so if we look at our plan around consolidation, it ends up being around that 17% number reduction in branch FTEs, which is a triple-digit number of FTEs. So there's some reasonable amount of expense and cost reductions here.

And if you look at the branches we consolidated, we go on SNL and look at our branch map. I mean there's density there. We have density in certain markets where I would characterize us as over dense. So we have a fair bit of opportunity, I think, to consolidate in an improved way. This isn't about the expense reduction. This is about essentially, and I'll comment on it more broadly. Branch traffic for us for 10 years prior to COVID had declined almost exactly 4% a year. And then COVID came and people found other channels, digital channels, and it gapped down another 17%.

So what we are doing is, I would say, broadly, we are divesting in analog and investing in digital. And so ensuring that we have an appropriate branch structure, consistent with the trends in the market, the trends of our customers how they're using our channels, whether it be analog channels, like branches and drive-throughs or whether it be digital channels like mobile and ATMs and remote deposit capture and online banking and all of those kinds of things, self-service functionality.

So we are just trying to mirror. We are trying to pair up the continued decline in analog channels with our investment in digital channels. So we've done a fair bit around the branches. We'll, again, probably do a little bit more, but we're trying to do it prudently. This is an expense, we're perhaps trying to just close branches for the sake of closing.

I think one of the things when you have kind of the history of acquisitions, both whole bank and branch transactions that we've had for the last 15 years, it's not that difficult to become over dense in markets. So we're just trying to address the over density we have in some of our markets as a result of the history of M&A activity.

The next question is from Matthew Breese with Stephens, Inc.

Just a question on the cash position and how you're thinking about it. So of the $2.2 billion, how much of that are you defining as required versus maybe we need to hold on to because there's going to be some volatility in PPP and deposit balances? And the follow-up to that is how much do we expect to be kind of put to work over the next few quarters, a year for securities and loans?

Yes. It's a very good question, Matt. In fact, prior to the call, actually, we talked to our Chief Investment Officer about deployment and what opportunities might be out there over the coming year. And in essence, we have the $2 billion, our open expectation is that we would even have about half of that 50% of that investment over the next couple of quarters, leaving some aside for potential runoff and future opportunities.

We're, I guess, believing that there is some inflation in the market, which might drive off the long end of the curve, potentially, if the Fed ever talks about tapering again, maybe towards the second half of the year. We could see a minimum increase there. So we're looking at the -- that $2 billion effectively as dry powder, looking to invest maybe half of that over the coming 3 quarters or so. Obviously, we're watching the market daily and just looking for those opportunities.

I would say just to add, beyond that, this isn't just about reinvestment of $2 billion, $2.2 billion, I think, of liquidity, but it's also about the out-year impact on margin and net interest income. And we are extremely, like most banks, I suspect, highly asset sensitive. So it does not work against our ALCO models. In fact, it helps balance our ALCO models by investing some of that liquidity and reducing -- giving away, in fact, trading away some of that upside risk in rising rates to trade-off against lower margin and then in the declining rate environment.

So investing, I think, some of it, clearly, not all of that -- (inaudible) specifically. Meaning if we don't have the opportunity, we may be on the call in 2 years saying we still have $2.2 billion. So I don't think we're necessarily going to be in a rush or undisciplined about how we invest. And I think Joe said over the next couple of quarters, which, I think, that would be fabulous if that happened. I question whether it will or it won't. But I think half of it is probably an area where it would be helpful to kind of current net interest income in NIM. But would help us from an ALCO standpoint in terms of balancing the risk we have in falling rates and the benefit to rising rate.

So a lot of this is not -- the discussions that we have is not driven by how do we use the $2 billion to create more earnings. It's not about that. We'll be disciplined. We have a lot of other earnings levers that we can pull and are pulling and have pulled. And so we'll be disciplined about it. But if we get the opportunity, we will pull the trigger, but it certainly wouldn't be on the entire $2 billion because -- I mean, there's clearly still some risk there -- that over time, I think, the runoff of the excess liquidity is going to take longer than the buildup, right?

When you look at the balance sheet a year ago, 2 years ago, in particular, and there was the liquidity didn't look anything like this. I think it will take a little bit longer for it to run off as it did for it to accumulate because growing the stimulus and PPP and those kinds of things. And people reducing time and the living expenses and business and reducing operating expenses. So it's going to take a while. So that's, I guess, from my perspective, just wanted to make the point that our interest rate sensitivity, when I think about liquidity and liquidity deployment, I don't think about earnings, I think about interest rate risk into the future and how to manage that.

Okay. And maybe tying this discussion back into Alex's earlier question in regards to net interest income. If I strip away PPP, I'm looking at core NII this quarter in around $86 million. As you deploy or think about deploying half of the liquidity, do you think that number, that $86 million, represents a floor for where we are in this current economic and interest rate environment?

Good question, Matt. I think it's pretty close to the floor. If we do deploy some of that excess liquidity, that certainly will help. And I think for Alex's question, we had a -- late in the fourth quarter, we had a significant maturity of investment securities and we redeployed some of that during the first quarter when it wasn't -- not all of it was deployed right at the beginning of the quarter. So we do have a little momentum from the deployment of that $400-plus million of investment security.

And I know we're looking at the PPP as noncore, and I do understand it. I mean the other side of that it was earned, and that was the card that we dealt. And we did, I think, a pretty good job of playing that card and originating PPP. And we will have some recognition, I think, of the deferred fees throughout this year. And if we continue to deploy some of that securities and have some loan growth, we potentially start to restore some of that net interest income/outcome. So we're, obviously, hopeful that, that 86% is the floor and think that we do have some potential momentum filling in behind the PPP recognition after we conclude 2021.

Okay. Last one is just in regards to the loan pipelines. You talked about the consumer pipeline. It sounded a bit more optimistic. What are the components? Is it auto-heavy or residential-heavy? And then you mentioned that you have some work to do on the commercial side. So just curious about the components and what does the pipeline tell you about your local economy and path towards recovery.

Matt, it's Joe. I'll take that. So the -- you mentioned residential. So the residential pipeline is about 30%, but growing about 30% quarter-over-quarter. And it's across most of our markets. And the expectation is that it will continue to be strong as we make our way through the second quarter and into the third quarter. So good activity. And as you may know, we rolled out at the beginning of the year, tail end of last year, beginning of this year, a digital mortgage platform. So we're in the digital age and we're enjoying some upside potential from that as well. So to give you a sense, the mortgage pipeline, it sits about at $170 million. I'm not sure the last time I saw that number. And so that's positive.

The other positive on the retail side is the indirect portfolio, the card business. That's been growing this year as a result of change in focus on our part. We spend a little more time focusing in on volume and a little less time on the return, recognizing that we need to make some more loans around here. So the indirect portfolio is -- although it doesn't have a pipeline, it's been growing terrifically, and it's up almost 3% year-to-date. So we like what we're seeing again. It's across all of the footprints that we're in.

On the commercial side, it's a little different story. We're about half of where we were this time last year. But keep in mind, we took an approach around PPP where we were doing it all internally. So we took people off The Street, if you will, the commercial bankers and retail bankers, to handle all of the PPP activity. And that's been going on now for 14, 15 months. So I'm not surprised that the portfolio or the pipeline is where it is. And also, recognizing just the pandemic and the impact we've had on just general activity overall, it's been off.

So the commercial pipeline, about half of what it was this time last year. Residential pipeline, up nice -- residential mortgage pipeline up nicely. And the application volume in the indirect portfolio also is up nicely. And we expect those to continue. And as Mark said, we're in the process of rebuilding the commercial portfolio. That will take some time. We're seeing a little bit of light at the end of the tunnel. All geographies have some activity. So we're cautiously optimistic that we'll get the commercial pipeline heading in the right direction.

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

Nothing other than we will talk to you at the end of the next quarter. Thank you all for joining again.

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