Earnings Call Transcript - CBU Q4 2020

Operator, Operator

Welcome to the Community Bank System Fourth Quarter 2020 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the industry, markets and economic environment in which the Company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the Company’s annual report and Form 10-K filed with the Securities and Exchange Commission. Today’s call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer. They will also be joined by Joseph Serbun, Executive Vice President and Chief Banking Officer, for the question-and-answer session. Gentlemen, you may begin.

Mark Tryniski, President and Chief Executive Officer

Thank you, Tom. Good morning, everyone, and thank you all for joining our fourth quarter conference call. Joe will do a deeper dive on Q4. So, I’ll start with a couple of brief observations and then comment on 2020 as a whole. Fourth quarter earnings and operating performance were just fine, no surprises. It was about as we expected. Operating earnings were up a few pennies over last year’s fourth quarter and $0.01 better than Q3, so modest forward progress. Loan growth was slightly negative in the quarter, if not atypical, but deposits just continued to grow similar to others and were up $100 million for the quarter. Asset quality continues to be very good. We did report a spike in NPAs because of a policy judgment around deferrals that Joe will explain further. 2020 as a whole was certainly a challenging year. However, operating earnings were only off $0.05 or 1.5% from 2019. In hindsight, that’s much better than we were expecting earlier in the year. There are a lot of moving parts in the reconciliation between the years due to the pandemic, but there was a significant negative impact from the decline in our core margin and our retail banking revenues, which we were able to offset in a number of other ways, principally the operating expense reductions and performance of our nonbanking businesses, all of which had a tremendous year. The pretax operating earnings of our benefits business was up 11%. Wealth was up 13% and insurance was up 16%. The value of a diversified revenue model was readily apparent in 2020. From an operational perspective, it was an extremely productive year despite the challenges of the pandemic. We developed and implemented several new digital products and platforms. We consolidated 13 branches, and we closed on the acquisition of Steuben Trust in the second quarter. So, I’m relatively pleased with 2020 overall and our forward progress, pandemic notwithstanding. Looking ahead to 2021, our focus will be on effectively countering ongoing margin pressure, improving organic performance, continued growth, and investment in our nonbanking businesses and a continuation of our investment in digital and rationalization of analog. I also expect the strength of our earnings, balance sheet, and capital generation will serve us well going forward as we continue to evaluate high-value strategic opportunities across our businesses for the benefit of our shareholders. Joe?

Joseph Sutaris, Executive Vice President and Chief Financial Officer

Thank you, Mark, and good morning, everyone. As Mark noted, the earnings results for the fourth quarter of 2020 were very solid, especially in light of the economic challenges and industry headwinds we faced throughout the year. The Company recorded $0.86 in fully diluted GAAP earnings per share for the fourth quarter. Excluding acquisition expenses, acquisition-related provision for credit losses, unrealized gain on equity securities and gain on debt extinguishment net of tax effect, fully diluted operating earnings per share were $0.85 for the quarter. These results match third quarter 2020 results and were $0.02 per share higher than the fourth quarter of 2019 fully diluted operating earnings per share of $0.83. The Company recorded total revenues of $150.6 million in the fourth quarter of 2020, an increase of $0.8 million or 0.5% from the prior year’s fourth quarter. The increase in total revenues between the periods was driven by an increase in net interest income, higher non-interest revenues in the Company’s financial services businesses, and a gain on debt extinguishment offset in part by a decrease in banking-related noninterest revenues. Total revenues were down $2 million or 1.3% from the linked third quarter, driven largely by a $4.8 million decrease in mortgage banking revenues as the Company pivoted from selling its secondary market eligible residential mortgage loans during the third quarter to holding them for its own portfolio in the fourth quarter. The Company recorded net interest income of $93.4 million in the fourth quarter, up $0.7 million, or 0.7% over the fourth quarter of 2019. The increase was driven by a $2.28 billion or 22.7% increase in average earning assets between the periods, offset in part by a 66 basis-point decrease in net interest margin. The Company’s fully tax equivalent net interest margin was 3.05% in the fourth quarter of 2020 as compared to 3.71% in the fourth quarter of 2019. Net interest income increased $0.5 million or 0.5% over the linked third quarter, while net interest margin was down 7 basis points. During the fourth quarter, the Company recorded $3.5 million of PPP-related interest income as compared to $3 million of PPP-related interest income in the third quarter of 2020. At December 31, 2020, remaining net deferred fees associated with the 2020 PPP originations were $9 million, the majority of which the Company expects to realize through interest income in 2021. Noninterest revenues were up $0.1 million or 0.1% between the fourth quarter of 2019 and the fourth quarter of 2020. Employee benefit services revenues were up $1.7 million or 7% from $25 million in the fourth quarter of 2019 to $26.7 million in the fourth quarter of 2020 driven by increases in plan administration, record-keeping revenues and employee benefit trust revenues. Wealth management and insurance services revenues were also up $1 million or 7.3% over the same periods. These increases were partially offset by a $2 million, 11.2% decrease in deposit service and other banking fees due to lower deposit-related activity fees, including overdraft occurrences. We recorded $0.9 million loss on mortgage banking activities in the fourth quarter of 2020 as compared to a $0.2 million gain during the fourth quarter of 2019, resulting in $1.1 million decrease between the periods due to the change in the Company’s mortgage banking strategy as noted previously. Finally, during the fourth quarter of 2020, we redeemed $10 million of subordinated notes acquired in connection with the 2019 acquisition of Kinderhook Bank Corp and recorded a $0.4 million gain on debt extinguishment. The Company reported a $3.1 million net benefit in the provision for credit losses during the fourth quarter of 2020. This compares to a $2.9 million provision for credit losses during the fourth quarter of 2019. The net benefit recorded in the provision for credit losses was driven by several factors, including a $2 million reversal of a previously recorded allowance for credit losses in a purchase credit deteriorated loan, a significant improvement in the economic outlook, and a substantial decrease in loans under COVID-19-related forbearance agreements, offset in part by anticipated increases in nonperforming assets and the related specific impairment reserves on those nonperforming assets. For comparative purposes, the Company reported $1.9 million in the provision for credit losses during the third quarter of 2020, $9.8 million in the second quarter of 2020 including $3.2 million of acquisition-related provision for credit losses due to the acquisitions of Steuben, and $5.6 million of provision for credit losses during the first quarter of 2020. During the first two quarters of 2020, financial conditions deteriorated rapidly as state and local governments shut down a substantial portion of the business activities in the Company’s markets and unemployment levels spiked. These conditions drove the Company to build its allowance for credit losses during the first two quarters of 2020 to account for the expected life of loan losses and loan portfolio. During the third quarter, the economic outlook remained unclear as markets were uncertain as to the efficacy, approval and rollout of the COVID-19 vaccines. With a greater-than-anticipated decline in actual unemployment levels as well as the federal government’s approval of the COVID-19 vaccine and Congress’ recent approval of the additional federal stimulus funding, the near-term economic forecast improved driving a net release of the allowance for credit losses during the fourth quarter. The Company recorded loan net charge-offs of $1.3 million, or 7 basis points annualized during the fourth quarter of 2020. Comparatively, loan net charge-offs in the fourth quarter of 2019 were $2.4 million or 14 basis points annualized. On a full year basis, the Company recorded net charge-offs of $5 million, or 7 basis points of average loans outstanding. This compares to $7.8 million, or 12 basis points in net charge-offs for 2019. The Company recorded $94.6 million of total operating expenses in the fourth quarter of 2020, exclusive of $0.4 million of acquisition-related expenses. This compares to total operating expense of $94.4 million in the fourth quarter of 2019, exclusive of $0.8 million of acquisition-related expenses. The year-over-year $0.2 million, or 0.2% increase in operating expenses exclusive of acquisition-related expenses was attributable to a $1.7 million or 2.9% increase in salaries and employee benefits, a $1.5 million, or 13.5% increase in data processing and communications expenses offset in part by a $2.5 million or 19.4% decrease in other expenses and $0.4 million, or 11% decrease in the amortization of intangible assets. The increase in salaries and employee benefits was driven by merit related increases in employee wages and a net increase in full time equivalent employees between periods due to both the Steuben acquisition in the second quarter of 2020 and other factors, but were partially offset by lower employee benefit expenses primarily associated with the decrease in employee medical expenses due to reduced provider utilization. The increase in data processing and communication expenses was due to the Steuben acquisition and the implementation of new customer-facing digital technologies and back-office workflow systems. Other expenses were down due to a general decrease in the level of business activities as a result of the COVID-19 pandemic, including travel and entertainment, marketing and business development expenses. Comparatively, the Company reported $93.2 million of total operating expenses in the linked third quarter of 2020, exclusive of $3 million of litigation accrual expenses and $0.8 million of acquisition-related expenses. The Company closed the fourth quarter of 2020 with total assets of $13.93 billion. This was up $85.8 million or 0.6% from the end of the linked third quarter number and up $2.52 billion or 22.1% from the year earlier. Similarly, average interest-earning assets for the fourth quarter of 2020 of $12.31 billion were up $356.8 million or 3% from the linked third quarter of 2020, up $2.28 billion or 22.7% from one year prior. The very large increase in total assets and average interest-earning assets over the prior 12 months is driven by the second quarter 2020 acquisition of Steuben Trust Corporation and large inflows of government stimulus-related planning and PPP originations. Ending loans at December 31, 2020, were $7.42 billion, up $525.4 million, or 7.6% from one year prior due to the Steuben acquisition and the origination of PPP loans. Ending loans, however, were down $42.7 million, or 0.6% from the end of the linked third quarter due to a decline in business activity in the Company’s markets from seasonal factors, the COVID-19 pandemic and PPP forgiveness. During the quarter, the Company’s PPP loan balances decreased $36.5 million or 7.2% from $507.2 million at September 30, 2020 to $470.7 million at December 31, 2020. During the fourth quarter, the Company’s average investment securities book balances increased $636.9 million, or 20.2% from $3.15 billion in the third quarter to $3.78 billion in the fourth quarter due to the purchase of treasury and mortgage-backed securities during the quarter. Average cash equivalents decreased $221.7 million or 17% from $1.3 billion during the third quarter to $1.08 billion during the fourth quarter. During the fourth quarter, the Company purchased $1.02 billion of treasury and mortgage-backed securities at a weighted average market yield of 1.38%. The purchases were made to stabilize near-term net interest income and hedge interest rate risk against a sustained low interest rate environment. The Company’s average total deposits were up $275.9 million or 2.5% on a linked-quarter basis and up $2.1 billion or 23.2% over the fourth quarter of 2019. Total average deposits for the fourth quarter were $11.21 billion as compared to $9.1 billion in the fourth quarter of 2019. The Company’s capital reserves remained strong in the fourth quarter. The Company’s net tangible equity and net tangible assets ratio was 9.92% at December 31, 2020. This was down from 10.1% at the end of 2019, but consistent with the end of the linked third quarter. The Company’s Tier 1 leverage ratio was 10.16% at December 31, 2020, which remained over two times the well-capitalized regulatory standard of 5%. The Company has an abundance of liquidity resources and is extremely well-positioned to fund future loan growth. The combination of the Company’s cash and cash equivalents, borrowing availability at the Federal Reserve Bank, borrowing capacity at the Federal Home Loan Bank and unpledged available-for-sale investment securities portfolio provided the Company with over $5.25 billion of immediately available sources of liquidity. From a credit risk and lending perspective, the Company continues to closely monitor the activities of its COVID-19-affected borrowers and develop loss mitigation strategies on a case-by-case basis, including, but not limited to, the extension of forbearance arrangements. At December 31, 2020, 74 borrowers, representing $66.5 million or less than 1% of total loans outstanding remained in COVID-related forbearance. This compares to 216 borrowers, representing $192.7 million or 2.6% of loans outstanding active under COVID-related forbearance on September 30, 2020 and 3,699 borrowers, representing $704.1 million or 9.4% of loans outstanding at June 30, 2020. Although these trends are favorable, nonperforming loans increased in the fourth quarter to $76.9 million, or 1.04% of loans outstanding, up $44.6 million from the linked third quarter and up $52.6 million from the fourth quarter of 2019. During the fourth quarter, the Company determined that borrowers that were granted loan payment deferrals under forbearance beyond 180 days would be classified as nonaccrual loans unless they could demonstrate current repayment capacity or sufficient cash reserves to service their pre-forbearance payment obligation. The substantial majority of these borrowers operate in the hotel sector, including several that operate near the Canadian border, which have been additionally impacted by restrictions like cross-border travel. The specifically identified reserves held against the Company’s nonperforming loans totaled $3.9 million at December 2020, $3 million of which was attributed to a single nonperforming hotel loan. As mentioned in prior earnings calls, the weighted average estimated loan-to-value in the Company’s hospitality loan portfolio prior to the onset of COVID was approximately 55%. We continue to believe that the ultimate losses recognized in the current pool of nonperforming hotel loans will be well contained given the pre-COVID cash flow of these properties, the financial strength of the operators we have historically financed and the low loan-to-values on these assets. At December 31, 2020, the level of loans 30 to 89 days delinquent remained fairly consistent with pre-COVID levels. Loans 30 to 89 days delinquent totaled $34.8 million, or 0.47% of loans outstanding at December 31, 2020. This compares to loans 30 to 89 days delinquent of $40.9 million or 0.59% one year prior to $26.6 million or 0.36% at the end of the linked third quarter. Net charge-offs on loans were low at $1.3 million or 7 basis points annualized in the fourth quarter and $5 million or 7 basis points for the full year of 2020. The Company’s allowance for credit losses decreased from $65 million or 0.87% of total loans outstanding at September 30, 2020, to $60.9 million or 0.82% of total loans outstanding at December 31, 2020. The net $4.1 million release of allowance for credit losses was driven by improving economic outlook, a substantial decrease in loans in forbearance, a $2 million reversal of a previously reported allowance for credit losses and a purchase credit deteriorated loan, which was paid off during the fourth quarter. At December 31, 2020, the allowance for credit losses of $60.9 million represents over 12 times the Company’s trailing 12 months net charge-offs. Operationally, we will continue to adapt to changing market conditions and remain very focused on asset quality and credit loss mitigation. We anticipate assisting the substantial majority of the Company’s 2020 first draw of PPP borrowers with forgiveness requests throughout 2021 and granting new second draw PPP loans in advance. Although we began to redeploy portions of our cash equivalents balances into investment securities during the fourth quarter to increase interest income on a going-forward basis and provide a hedge against the sustained low interest rate environment, we also expect net interest margin pressures to persist or remain well below our historical levels. Furthermore, we anticipate the deposit levels to remain elevated for most of 2021, especially with potentially more federal stimulus on the horizon. Accordingly, we will look to deploy additional overnight cash equivalents to higher-yielding earning assets. Fortunately, the Company’s diversified noninterest revenue streams, which represented approximately 38% of the Company’s total revenues in 2020, remain strong and are anticipated to mitigate the continued pressure on net interest margin. In addition, the Company’s management team is actively implementing various earnings improvement initiatives, including revenue enhancements and cost-cutting measures intended to favorably impact future earnings. Thank you. Now, I will turn it back over to Tom to open the line for questions.

Operator, Operator

The conference is now open for questions. The first question comes from Alex Twerdahl with Piper Sandler. Please go ahead.

Alex Twerdahl, Analyst, Piper Sandler

Yes. Just first off wondering how you guys are thinking about loan growth for 2021. Other than adjusting the mortgage strategy to put production on the balance sheet, have you made any other tweaks, any other lines to try to get a little bit more in terms of balances and put some of that cash to work?

Joseph Serbun, Executive Vice President and Chief Banking Officer

Hey, Alex. It’s Joe Serbun. How are you this morning? I’ll take that. So, we’ll stay on the residential mortgage side for a moment. Mark mentioned in his comments about some digital strategies, and one of those strategies is to come out with a digital application and prequalification functionality, which we will go live with shortly. So, hopefully, that will benefit our mortgage portfolio. We’ll also redirect some folks to markets that might be a little hotter for us, markets with more activity and more opportunity. We’ll redirect some of our full-time employees that way as well. On the indirect side, which as you know is another meaningful portfolio, the industry expects an uptick, and so do we. We’re going to do a better job in managing between growth and yield. We were focused more on return in 2020 than we had in past years. I think in 2021, we’ll do a better job balancing the growth and the yield component. And we’ll also target some markets that are more robust than others. Then, on the commercial side, it’s soft and I suspect it’s going to continue to be soft as customers are either risk-averse or taking advantage of all of the stimulus money that is available for them and sitting back waiting to see what the new administration is going to do or how the vaccines are going to roll out. So, the expectation on the commercial side is that it will be active, but it will still be soft. To give you some sense of that, in the commercial portfolio, the pipeline typically runs $350 million to $400 million. Right now, we’re at $136 million. And that number is probably going to go down because we had a pretty active month in December. On the residential mortgage side, we’re about two times our normal run rate. So, while we typically run about $100 million, we’re twice that now. So, we fully expect to see growth in the mortgage portfolio, growth in the indirect portfolio, and it will be a struggle on the commercial side.

Alex Twerdahl, Analyst, Piper Sandler

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

Joseph Sutaris, Executive Vice President and Chief Financial Officer

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

Alex Twerdahl, Analyst, Piper Sandler

Okay. And then Joe Sutaris, I think I missed what you said in terms of securities purchases. I was hoping you could go over that one more time. And just I guess, if I did hear it correctly, I was having a hard time getting that to drive what the balance is, I saw on the balance sheet at the end of the quarter.

Joseph Sutaris, Executive Vice President and Chief Financial Officer

Sure. During the quarter, Alex, we purchased about $1 billion in securities, mortgage-backed and treasuries, but we also had some maturities of treasuries as well. So, on an average basis, the securities balances were up about $636.9 million quarter-over-quarter, but the purchase activities were closer to $1 billion.

Alex Twerdahl, Analyst, Piper Sandler

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

Joseph Sutaris, Executive Vice President and Chief Financial Officer

Yes, Alex. As we look forward into 2021, we’re going to continue to likely deploy some of those excess cash equivalents that are on the balance sheet. I think, as of the other day, we’re sitting on still about $1.6 billion of cash equivalents. So, we’re going to look to continue to deploy some of those into securities and try to effectively stabilize net interest income in a long-term flat rate environment. So, whether we get to it immediately or not, we’re hopeful to put at least $1 billion to work in the next several months. We have to get the right levels in terms of return opportunity to do that, but that’s the expectation that we still have some work to do on the investment security purchases in the second quarter.

Operator, Operator

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

Russell Gunther, Analyst, D.A. Davidson

I was hoping to follow up, Mark, on some comments you made with regard to potential cost-cutting measures for 2021. Just curious what you guys are contemplating if you’re able to quantify that or even more just big picture where that may come from?

Mark Tryniski, President and Chief Executive Officer

Sure. I’ll start and then Joe can add. As 2020 played out, it became clear that we were going to have to revisit our operating structure, our revenue streams, every element of our business and take a fresh look at where we had productive and constructive opportunities to enhance performance, whether that was additions to revenues and/or reductions in expenses. So, we convened a team of our senior folks—about 15 of us—and we spent a lot of time identifying opportunities to be more efficient, opportunities to reduce expenses, and opportunities to improve revenue. We have a plan to move forward and effect that. It’s really across the spectrum. Some of it is, as we continue to look at our branch footprint: we effected 13 consolidations this year and we’re looking at more for 2021. For the most part, these are near-distance consolidations and that brings with it modest reductions in ongoing operating costs. We are looking at all of our vendor contracts. Many of them have already been renegotiated in a productive way. A lot of that relates to technology, which is changing quickly in terms of cost structures. We’ve had good success renegotiating some of our contracts, technology and otherwise. We literally looked at every detailed item on the P&L and asked, what can we do to make it better and capture some costs. We did the same thing on the revenue side. So, you put that whole thing into place, and it’s not insignificant. The catalyst for that, frankly in mid-2020, was largely our forward assessment of margin and net interest income dollars into 2021. So, we felt the need to address that.

Russell Gunther, Analyst, D.A. Davidson

And then, I appreciate your thoughts, Mark. You kind of got to the revenue question, I was planning to ask and we spoke about the single-family digital application, maybe that’s one of the revenue enhancements you’re referring to. But are there any other details on that front that you could talk about? And then, as a follow-up, given your comment that the margin pressure really led you to this, I mean if we tie the revenue enhancements and the cost-cutting together, do you expect to be able to generate positive operating leverage this year? Is that the target?

Mark Tryniski, President and Chief Executive Officer

I’m not going to provide specific forward guidance, but we are expecting a reasonably significant impact from all of our efforts. On the mortgage and pre-qual question: that’s not primarily a near-term revenue opportunity. It’s more about competing on a digital basis. We have markets where we operate where we have very high deposit market share but lag mortgage origination share. We have to have a different approach to our mortgage model. Our team built out a platform that has two main components: the prequalification component, which will be rolled out publicly soon, and the online mortgage application, which customers are already using. The first piece is building out the platform. The second piece is how we drive customers to those platforms. Having a good platform won’t matter if nobody visits it. So, digital has two important elements: the platform and driving traffic to it. That’s not going to be a large near-term fee or revenue opportunity as much as a mechanism to capture greater mortgage share as consumer demand moves to digital channels.

Russell Gunther, Analyst, D.A. Davidson

And then, last one for me. You mentioned as part of the 2021 strategic focus would be high-value strategic opportunities. Just curious if you could expand upon that? Is it looking for depositories, opportunities within your differentiated fee verticals? Any commentary you could provide there would be great.

Mark Tryniski, President and Chief Executive Officer

The model won’t change much from history: we’ve always used higher-value M&A to supplement organic growth. We will continue to look for opportunities across all of our businesses. That would include depositories and opportunities in our benefits, insurance, and wealth businesses. We have a couple of items underway in insurance and we’re doing some organic things in wealth that have a lot of potential. We’ll continue to look for high-value strategic opportunities that are asymmetric with respect to risk-reward. The market feels like it’s opening up a bit—there’s more conversations and opportunities than in much of 2020 when multiples were down and uncertainty was high. One near-term catalyst is the interest rate environment and margin compression. Many banks operating at sub-3% margins likely do not earn their cost of capital, which could create opportunities. The second major factor is the cost of technology: the investment required for digital channels—customer-facing and back-office workflow systems—is significant and ongoing. Smaller banks especially may struggle to fund the necessary investment if margins remain low. We’re working on digital workflow initiatives and have had early successes, but building these platforms is expensive. All of these dynamics suggest more opportunity for strategic activity during 2021.

Operator, Operator

The next question comes from Matthew Breese with Stephens Incorporated. Please go ahead.

Matthew Breese, Analyst, Stephens Incorporated

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

Joseph Sutaris, Executive Vice President and Chief Financial Officer

Matt, historically, our loan growth is low single digits. Some years that’s commercially driven. Other years it might be mortgage-driven. Looking at those three pieces: we have a solid mortgage pipeline that may be slightly above that low single-digit level. On the indirect side, we expect the market to be good in the spring and the expectation for the indirect portfolio is in the low to mid single digits. We still see a lot of our customers with balances in their checking and savings accounts, which I think probably portends some spending activity. On the commercial side, the pipeline is a little smaller, and some demand is being crowded out by PPP opportunities. Our belief is that PPP reduces some commercial demand. So, on the commercial side we’re hopeful to keep our head above water at least in the early part of the year and then see a pickup later in the year. So, the expectation for early 2021 is low single-digit loan growth with some potential upside in mortgage and indirect and a softer commercial environment.

Matthew Breese, Analyst, Stephens Incorporated

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

Joseph Sutaris, Executive Vice President and Chief Financial Officer

There will be continued challenges on asset yields in 2021. Our loan portfolio yield in Q4 was about 4.17%, while new loan production yielded about 3.80%, so there will be some rollover pressure on asset yields. To counter that, we have $1.6 billion in cash equivalents and the opportunity to invest some of that overnight cash into earning assets, which can help offset yield compression. If the yield curve steepens later in the year, we could stabilize margin expectations. But we expect continued loan yield compression and will try to make up for it with investment securities activities.

Operator, Operator

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

Bryce Rowe, Analyst, Hovde Group

I wanted to ask about kind of the discussion around adding to the securities portfolio and then the comment you made about some of the stimulus funds remaining somewhat permanent on the balance sheet. So, when you talk about the excess cash or the cash balances being as high as they are—$1.6 billion—what’s the level you’re comfortable taking that down to given your view of the permanence of the stimulus dollars?

Joseph Sutaris, Executive Vice President and Chief Financial Officer

That is a very good question. All banks are trying to assess how long stimulus funds will stick around. At this point, we’re fairly comfortable that even if some of those funds run off, we can still be comfortable investing potentially up to another $1 billion over time in the securities portfolio. We also have maturities later in the year, but based on current balances, $1 billion is a reasonable expectation to put to work over the coming quarters. If there’s another round of stimulus, deposit levels could increase further and we’ll reassess. But $1.6 billion is a significant cash equivalents balance and we expect to deploy roughly $1 billion of that over the coming quarters.

Mark Tryniski, President and Chief Executive Officer

To add, we’re thinking about where that $1.6 billion will be at the end of the year. For example, if we do additional PPP originations maturing or changing, you could have roughly $2.5 billion in cash equivalents if we do nothing by year-end. So, we’re thinking about that trajectory as well. We won’t put ourselves in a position where we’re overexposed. Given our loan-to-deposit ratio in the 60s, liquidity is not a problem. So, a $1 billion deployment is a reasonable comfort level.

Bryce Rowe, Analyst, Hovde Group

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

Joseph Sutaris, Executive Vice President and Chief Financial Officer

That is the challenge right now—finding attractive opportunities. In the fourth quarter we primarily purchased treasuries. Our portfolio tends to be fairly plain vanilla, safe, and secure. So, likely investments will be treasuries, maybe some municipals and mortgage-backed securities. The 10-year treasury this morning was roughly 1.06%–1.07%, so yields are not high. We are hopeful that stimulus and other items might push yields higher and give us better opportunities when we invest $1 billion over the coming quarter.

Mark Tryniski, President and Chief Executive Officer

Just to add, all of this is considered within the context of asset-liability management and interest rate risk. If we buy $1 billion in securities at low yields, the decision is made in the context of managing interest rate risk and hedging against a sustained low-rate environment. Such purchases can be additive if rates remain low, and if rates rise, the duration profile will allow us to benefit as other assets reprice. We are trying to be sensible and manage interest rate risk, not simply chase yield.

Bryce Rowe, Analyst, Hovde Group

Understood. That’s good perspective. Maybe one more question for me. In terms of PPP round two activity, is there a sense of how much you might do relative to the first round, and what are you seeing in terms of the pace of forgiveness as we’ve moved into the year?

Joseph Sutaris, Executive Vice President and Chief Financial Officer

Regarding PPP 1 forgiveness pace: forgiveness activity should pick up as the SBA put out the short-form forgiveness for loans of $150,000 or less. I expect the pace to accelerate. With respect to PPP 2, activity is busy but not as hectic as PPP 1 originally was. Borrowers are not frantic; they’re filling out applications productively. We received around 1,300 applications on day one in PPP 1; PPP 2 was not as frenetic on day one. I think $400 million is a number we can get to or exceed for PPP 2, but we’ll see how activity unfolds.

Operator, Operator

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

Mark Tryniski, President and Chief Executive Officer

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

Operator, Operator

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