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Community Bank System, inc (NYSE:CBU)
Q2 2021 Earnings Call
Jul 26, 2021, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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 involves 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.

Mark E. Tryniski -- President and Chief Executive Officer

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 a reserve release. Beyond that, the margin continues to be a headwind but credit [Phonetic], 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've 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 continue 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 of the quarter with combined revenues up 14% and pre-tax earnings of 25% over 2020. We are also pleased to announce, earlier this month, the acquisition of Fringe Benefits Design of Minnesota, a provider of retirement 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 have 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 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 a 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 am 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 in margin pressure but growth, credit, the momentum of our financial services businesses and liquidity deployment are all tailwinds. Joe?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

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. The improvement in earnings per share was led by lower credit-related costs and a significant increase in non-interest revenues, particularly in the company's non-banking businesses. Comparatively the company recorded 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 non-interest revenues.

Net interest income of $92.1 million was up $0.2 million or 0.2% over the second quarter 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 non-interest 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% one 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 we maintain on the company's balance sheet.

The tax equivalent 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% one 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's 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 a higher investment management advisory and trust services revenues. Insurance services revenues were consistent with prior year's results.

The increase in banking-related non-interest 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 reported 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 quarter 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 remain positive. In addition, at the end of the second quarter, there were only 12 borrowers representing $2.4 million in loans outstanding and that remained in the pandemic-related forbearance. This compares to 47 borrowers in 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 one year earlier. These factors drove down the expected loan losses resulting in the recording of a net benefit in the 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 expenses, and a $0.7 million or 7.7% 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 the state-related unemployment taxes, higher employee benefit-related expenses and the Steuben acquisition.

Other expenses were up due to the general decrease 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 expenses was driven by the Steuben acquisition. In comparison, the company recorded $93.2 million of total operating expenses in 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 a 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 one 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 acquisition of Steuben and margin flows of government stimulus-related deposit funding 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 $43.1 million or 0.6%.

As of June 30, 2021, the company's business lending portfolio included 317 first draw PPP loans with a total balance of $72.5 million and 2,254 second draw PPP loans with a total balance $212.3 million. The company expects to recognize, through interest income, the majority of its remaining first draw net 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 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 and for market interest rates to become more attractive.

During the second quarter, the company's average cash equivalents of $2.07 billion represented 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 and the origination of second draw PPP loans and first draw PPP loan forgiveness.

The company's capital reserves remained strong in the second quarter. The company's net tangible equity to 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 2 times the well-capitalized regulatory standard of 5%.

The company has an abundance of liquidity with the combination of 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 provides 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 of 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 on pandemic-related forbearance.

Non-performing 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 extended forbearance from accrual to non-accrual status between the periods. The specifically identified reserves held against the company's non-performing 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% one 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 a strong non-banking businesses that supported and diversified our streams of non-interest 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. I'll now turn it back to Cole for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question today will come from Alex Twerdahl with Piper Sandler. Please go ahead.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Alex.

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Good morning, Alex.

Alexander Twerdahl -- Piper Sandler -- Analyst

First off, I just wanted 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.

Mark E. Tryniski -- President and Chief Executive Officer

No, I think it's a fair question. There were some things this year that clearly are non-recurring 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, that Joe mentioned, the liquidity deployment potential. So I think we have some levers to pull in terms of continued momentum relative to earnings and offsetting some of the non-recurring 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 mean 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 aren't going to -- 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 spec, 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 tactical exercise.

I think with Durbin, the $10 billion -- yeah, Durbin, I guess, that was a little bit different. That was a -- what, Joe, $10 million?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Yeah.

Mark E. Tryniski -- President and Chief Executive Officer

$12 million?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Yeah.

Mark E. Tryniski -- President and Chief Executive Officer

There is 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 the shareholders was, we expect to cross the $10 billion without reducing earnings and that our job is managing. So the only realistic way to do that is through good M&A opportunities. We were fortunate, let's call it, to be able to, in that timeframe, acquire two really strong franchises and merchants in Vermont and NRS, the 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 tactical. So it doesn't really change our philosophy and how we think about M&A.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And then just kind of on the same -- along the same topic, you alluded to some opportunities in the benefits 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 be necessarily huge needle movers in the near term?

Mark E. Tryniski -- President and Chief Executive Officer

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 four years ago, we would definitely do it. So it may I think for the most part -- I mean, I think what's driving a lot of these non-banking opportunities right now is just the concern over the cap gains rate and some of these businesses were started 20 years ago with a $1 and now they're worth $20 million or $30 million or more, and it's all cap gain, and if I sell now, I can pay 20% by -- so sometime in the future I pay 40%. And so, I mean I think it's as simple as that in terms of what's driving a lot of the activity right now. So -- and we'll also get a little bit bigger. This -- our benefits business right now, the run rate's over $110 million in revenues and the profit margin -- the operating margin is actually grown 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 and there is 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, some start-up business. We started up the [Indecipherable] business few years ago with zero revenues, now the run rate's probably about $4 million, pushing $5 million; good margin. So we'll continue to invest 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 that are much more attractive than just bolting on some revenues, which can also be -- I mean, I'm not suggesting we wouldn't do a more tactical acquisition, but we also like really strong consulting, core-on-core [Phonetic] more product line knowledge, consulting talent -- practical talent, sales talent, which is what we got with FBD sales and consulting talent.

So it's not just the revenue stream, but it's active right now in that space and HR has 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's 500 clients in our benefits business that we do institutional trust work for. So we continue to invest in that business and right now the M&A opportunities are pretty good.

Alexander Twerdahl -- Piper Sandler -- Analyst

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 further as we kind of think how that portfolio could evolve over the next couple of quarters?

Mark E. Tryniski -- President and Chief Executive Officer

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 -- we didn't 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. It's less 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 get tight and cold pretty quickly. So the next quarter might even be better and it can also be worse. It's just -- it's more, I'd 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 respect, working to our advantage because the used car market's pretty good and pretty active and it's the biggest component of what we finance in that business.

Alexander Twerdahl -- Piper Sandler -- Analyst

Awesome. Thanks for taking my questions.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Alex.

Operator

And our next question will come from Erik Zwick with Boenning & Scattergood. Please go ahead.

Erik Zwick -- Boenning & Scattergood -- Analyst

Good morning, guys.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Erik.

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Good morning, Erik.

Erik Zwick -- Boenning & Scattergood -- Analyst

You mentioned a couple of times in the prepared remarks that the pipelines -- the loan pipelines had 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.

Mark E. Tryniski -- President and Chief Executive Officer

Joe, you want to take that one?

Joseph F. Serbun -- Executive Vice President and Chief Banking Officer

Erik, Joe Serbun, and how are you this morning?

Erik Zwick -- Boenning & Scattergood -- Analyst

Hey, Joe.

Joseph F. Serbun -- Executive Vice President and Chief Banking Officer

Yeah, let me give you 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, it's only about 35% and if you look at it from June of 2020 to 2021, it's about 3.5% up compared to the [Indecipherable]. 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 will show that we're at the high point of our pipeline, which we are. And [Indecipherable] to that, [Indecipherable] we're just seeing pipeline at large, both in dollars, but also in applications. So in dollars we're up about 50% if you look at it, June of '19 to June of '21, we're up about 50%. And if you look just June of '20 to '21, we're about 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, they're tight and cold. So it could be a bigger number or lesser number, but nonetheless, I think we're positioned nicely, given the pipeline, given the application volume that we will see growth -- 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 size pipeline, as well as the committed-not-funded rate loans already approved. That portfolio -- that piece of the pie is increased by about 9% quarter-over-quarter. So I think we're poised for continued improvement.

Erik Zwick -- Boenning & Scattergood -- Analyst

Thanks, 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, it 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?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

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, amid with COVID were in turmoil and we provisioned accordingly. And we think we're kind of on the back end of that. I mean, I suppose there could be another surge, I know were concerned about that, but right now I think we came out of the pandemic in very good shape from a credit perspective. So 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, yeah, I think that provisioning or the volatility of provisioning should settle down as we look ahead.

Erik Zwick -- Boenning & Scattergood -- Analyst

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?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Yeah, so there was a bit of a catch-up because you had it with 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, total run rate, probably in and around 22% on the effective tax rate.

Erik Zwick -- Boenning & Scattergood -- Analyst

Great, thank you for taking my questions today.

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

You're welcome.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Erik.

Operator

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

Russell Gunther -- D.A. Davidson -- Analyst

Hey, good morning, guys.

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Good morning.

Joseph F. Serbun -- Executive Vice President and Chief Banking Officer

Good morning.

Mark E. Tryniski -- President and Chief Executive Officer

Good morning, Russell.

Russell Gunther -- D.A. Davidson -- Analyst

Would you guys -- Joe, perhaps should 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 theme, bigger picture, how the CE [Phonetic] and expense outlook for the back half of the year is shaping up.

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

So it was a very -- Russ, 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 [Phonetic] in the Midwest with 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 accretive acquisitions down the road and we're hopeful that we'd bring some of those to the table going forward.

Russell Gunther -- D.A. Davidson -- Analyst

Thanks, Joe. And then you guys had said previously, the real focus on low single-digit expenses for the year. And there has been a really good discipline here, you're certainly on track for that. As you look out into '22, 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?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Russell, that is our hope. The challenge, obviously, as you kind of mentioned, is just keeping, particularly, payroll and wages -- there is 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 higher 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, year and a half and we're starting to see some of the benefits from a cost perspective, kind of, get baked into 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.

Russell Gunther -- D.A. Davidson -- Analyst

Thanks, Joe. Last one for me is on the margin. You guys have mentioned I think a couple of time just the headwind that remains there. Can you give us a sense for the back half of the year, expectation for pressure from this 2.79% prior to some excess liquidity getting deployed or how do you see the near-term trends?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Yeah, 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, any additional investment of securities. We are -- the loan pipeline is increasing as Joe was indicating. We're starting to see a lot of the loan growth that will help the margin, at least the VAT [Phonetic]. That roughly $2 billion of cash equivalents, if we, tomorrow, decided to invest that in a 10-year treasury, represents about $22 million on a pre-tax operating basis. At the 10-year treasury where 1.50% [Phonetic], that'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 are aware, we don't really have anywhere to go on the cost of fund side. Our cost of funds and cost of deposits is 10 basis points. It's about as low as it's going to go. And so that's really been the challenges 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 strengths reported by the franchise. So from a margin perspective, we certainly hope we're at the low point, but it potentially could drift 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 out 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 that 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.

Russell Gunther -- D.A. Davidson -- Analyst

Got it.

Mark E. Tryniski -- President and Chief Executive Officer

The only thing I'd 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 of 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 in 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, do not let 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 ball [Phonetic]. So the idea of the $2 billion, yes, if we invested $1.5 million [Phonetic] or 1.50%, 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.

Russell Gunther -- D.A. Davidson -- Analyst

Yeah. Understood. Thanks, Mark. Thanks, Joe.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Russell.

Operator

[Operator Instructions] Our next question will come from Matthew Breese with Stephens, Inc. Please go ahead.

Matthew Breese -- Stephens, Inc. -- Analyst

Good morning. Hey, I just wanted to stick on this 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 that liquidity into securities just because of how low yields are. Do I have that right?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Yes, at 1.7 [Phonetic] you have that right.

Matthew Breese -- Stephens, Inc. -- Analyst

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?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

We have not seen a trend yet in terms of run-off 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.

Mark E. Tryniski -- President and Chief Executive Officer

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

Matthew Breese -- Stephens, Inc. -- Analyst

Right, OK. 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 the delta is?

Mark E. Tryniski -- President and Chief Executive Officer

Kind of going by the number 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. So it's about 80 basis points.

Matthew Breese -- Stephens, Inc. -- Analyst

Okay.

Mark E. Tryniski -- President and Chief Executive Officer

The second quarter origination yield versus the aggregate portfolio yield for the quarter. So it's about 80 basis points.

Matthew Breese -- Stephens, Inc. -- Analyst

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? So 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?

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

So our floating rate loan instruments, we're 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.

Matthew Breese -- Stephens, Inc. -- Analyst

Okay, great.

Mark E. Tryniski -- President and Chief Executive Officer

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

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Yeah.

Mark E. Tryniski -- President and Chief Executive Officer

So that portfolio turns over really quick also.

Matthew Breese -- Stephens, Inc. -- Analyst

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

Mark E. Tryniski -- President and Chief Executive Officer

Yeah, it's a little bit more than that, but you also get pay offs. So I am not sure what the average maturity contractual versus [Speech Overlap]. It's probably 24 to 36-month, somewhere.

Matthew Breese -- Stephens, Inc. -- Analyst

Okay. Very good. That's all I had. Thank you for taking my questions.

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Thank you, Matt.

Mark E. Tryniski -- President and Chief Executive Officer

Thanks, Matt.

Operator

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.

Mark E. Tryniski -- President and Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 44 minutes

Call participants:

Mark E. Tryniski -- President and Chief Executive Officer

Joseph E. Sutaris -- Executive Vice President and Chief Financial Officer

Joseph F. Serbun -- Executive Vice President and Chief Banking Officer

Alexander Twerdahl -- Piper Sandler -- Analyst

Erik Zwick -- Boenning & Scattergood -- Analyst

Russell Gunther -- D.A. Davidson -- Analyst

Matthew Breese -- Stephens, Inc. -- Analyst

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