Q3 2021 Mercantile Bank Corp Earnings Call
Good morning, and welcome.
To the Mercantile Bank Corporation third quarter 2021 earnings results Conference call.
Please note this event is being recorded.
We will now begin the call with management's prepared remarks, and a presentation to review the quarters results then open up the call to questions.
To ask a question you May press Star then one on your telephone keypad to withdraw your question.
Please press Star then two.
Before I turn the call over to management. It is my responsibility to inform you that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives of the Companys business.
The company's actual results could differ materially from any forward looking statements.
Today.
Due to the factors described in the Companys latest Securities and Exchange Commission filings.
The company assumes no obligation to update any forward looking statements made during the call. If anyone does not already have a copy of the third quarter 21 press release and presentation deck issued by mercantile today, you can access it at.
Companies at the company's website Www Dot Merrick bank Dot com at this time I would like to turn the call over to mercantile is president and Chief Executive Officer, Bob Kaminski.
Thank you Anthony good morning, everyone. Thank you for joining our call today.
Our team continues to generate outstanding financial results.
To illustrate the strength of the high touch relationship based approach to banking and has allowed us to build long term relationships with our clients.
For the third quarter, we earned net income of $15 1 million or <unk> 95 per share.
Nearly 41% increase from the third quarter of 2020.
With the first nine months of the year net income of $47 4 million is up more than 57% from the prior year period.
Dropping those strong bottom line results are two key components robust organic double digit loan growth leading to healthy net interest income expansion and very strong.
Honey noninterest income generation that contributes nearly a third of our total revenue.
The success of these two revenue components starts with one thing our people mercantile has a clear strategy.
<unk> centric culture that permeates all levels of the organization.
Our.
<unk> executed on that strategy and our markets each and every day.
We believe mercantile will again be distinguished by our commercial loan production in the third quarter with a 25% annualized growth rate excluding PPP loans.
The growth is well balanced and diversified among the various loan categories.
Our team Ray will explore our loan portfolio in more detail later in this call, but I would like to provide some insights into how we achieved these results and why we have confidence in our ability to continue doing so.
Supporting our local communities at the forefront of who we are.
Kelly.
As it has been the pandemic gave us the opportunity to prove that we can service our clients at the highest level under any circumstances, we answered the call for Michigan businesses, sometimes when their incumbent banks did not and these companies are able to experience the mercantile way firsthand.
Our responsive local.
Decision, making and high touch approach is clearly resonating with business leaders.
Many of them need more from their bank and simply it place to conduct transactions they need to issue a financial partner.
Our core commercial loan growth in the third quarter are solid and sustained pipeline show that our approach is in.
The effective one.
I'd like to note that even as we.
We grow loans and navigated the ongoing pandemic, our asset quality remains strong.
We continue to report low levels of past due loans and nonperforming assets illustrating our commitment to sound underwriting as well as strong performance.
Commercial borrowers and their management teams.
On the mortgage side, our nimbleness and in market local lenders also contribute significantly significantly to our success.
That leads me to a second key element of our success I would like to highlight the strength and diversity of our noninterest.
Of our come upwards mortgage banking is the largest component.
Our mortgage banking income totaled $6 $6 million for the third quarter and $23 million year to date up 17% for the first nine months over the last year.
These results are driven by our ability to.
To generate purchase originations, which in turn resulted in our success from our success in hiring mortgage bankers, who are well connected in their communities.
We believe we are well positioned to capture more market share in upcoming periods based upon our team's proven efforts and the positive application and pipeline volume trends.
And continue to see.
Another strategic decision that has proven beneficial was the interest rate swap program, we launched in late 2020.
This new revenue stream helps us ensure we mean, we remain competitive with a broader base of commercial customers.
<unk> generated $3 $9 million in.
And we can close for the three months ended September 32021, making up a quarter of our non interest income in this period.
Total noninterest income was up more than 17% from a from the prior year third quarter.
We remain committed to the strategic focus on diversifying and growing our fee income sources.
For the last 12 months noninterest income has made up more than 31% of operating revenue compared to 22% at the median $5 billion to $10 billion Bank range and the most recent quarter.
As I mentioned earlier, our people are behind these results and we've long supported them through investment in technology.
Okay.
Digital adoption accelerated since 2020, and some banks find themselves playing catch up.
Within our operations, we adapt industry best practices, while leveraging available data to capture efficiency customize unique client interaction and refine our internal systems, we have long.
<unk> made an investment in technology and important aspect of our business model and we'll continue to do so as our customers' needs continue to evolve.
Our combination of people products services and technology are clearly driving our financial strength and organic growth importantly, this supports our ongoing focus on creating.
Creating shareholder value and a truly sustainable organization.
Today, we announced a fourth quarter cash dividend of <unk> 30 per share.
Regarding our stock buyback program were able to repurchase an additional 288900 shares of mercantile stock, bringing year to date purchases to.
635800 shares.
Overall, we believe our strategy talent culture and business model also part of our continued and consistent high performance for the benefit of our clients communities and shareholders.
We have a strong foundation momentum headed into the fourth quarter.
And 2022 and are prepared to capitalize on the ongoing M&A related disruption in our markets. Both in terms of attracting talent and expanding client relationships.
That concludes my introductory introductory remarks, I'll now turn the call over to Ray.
Thanks, Bob today My comments will.
Center around three topics and evidenced in the third quarter results.
Strong core commercial loan growth.
Future growth in sustainable noninterest income and increasing efficiency in our operations.
First core commercial loan growth for the third quarter, we are reporting core commercial loan growth of 162.
$1, representing a 25% annualized growth rate.
62% of which is C&I credit.
Year to date core commercial loan growth was $298 million representing.
Representing a 16% annualized growth rate, 60% of which is C&I credit I'd like to stress that the growth.
Consists primarily of C&I credit in line with our strategic objectives.
This growth has been possible due to the efforts of our commercial team and their focus on relationship building in the business community bank value proposition.
<unk> and the PPP program gave us the opportunity to prove an action we have marketed in concept.
Namely that mercantile represents the capacity and technology, they need coupled with timely local decision, making and exceptional service we.
We delivered with many faltered as a result of our robust growth we increased our provision expense largely to support that growth. We've also dialed back our stock repurchases.
Program and recognition of the fact that this robust level of growth requires robust capital support.
Our backlog remains consistent with prior periods as we fund this impressive level of core growth.
Second lien strategic growth and sustainable noninterest income.
During the first nine months of 2021.
We reported year to date noninterest income of $42 $5 million net of gain on a branch sale compared to $30 $8 million last year, an increase of 38% and $11 $7 million.
How do we make the case that this is sustainable performance swaps represented $6.
$1 million of the growth and represent meeting customer demand for fixed rates without taking on the balance sheet risk of a conventional fixed rate, which is very important to margin sustainability in the present environment.
Our teams are turned that funding has been nearly 50% fixed over a long period of time.
And we do not expect the mix to change meaningfully.
Our mortgage activity represents a $3 $3 million of the growth in noninterest income year to date as our team has grown production from $645 million last year to $742 million this year.
For sustainability in this business to support.
Supported by the fact that last year's volume represented a mix of 30% purchase activity the 70% refinance activity, while the present year mix. There's a 50 50 split between purchase and refinance activity.
And of course purchase activity is far more sustainable than refi activity.
Lesser but important country contributors to the noninterest income picture or the role of service charges on accounts and <unk>.
And debit card income, which increased by 17% and 19% respectively. During the third quarter.
Reflecting the growth in the number of relationships serve as well as increased active.
Within the accounts as the economy recovers from the pandemic.
Noninterest income made up 32% of revenue for the first nine months of 2021 up from 25% in the prior period.
The final topic of my comments is increasing efficiency in operations year to date, we are reporting.
<unk> and efficiency ratio of 57, 4% compared to 59, 9% from the comparable period last year.
Consistent spending on technology over the years it served us well.
Allowing our customers to utilize numerous digital channels as alternatives to visiting a branch and providing the ability to reallocate.
Kate resources towards further enhancements in an already up to date digital platform. It's worth noting that during this period of robust loan and noninterest income growth. Our FTE increased by only 11 from the prior year period to a total of 629 and that year to date revenue.
New growth of 11, 4% outpaces noninterest expense growth of six 8%.
That concludes my comments I will now turn the call over to chip.
Thanks, Ryan and good morning to everybody as.
As noted on slide 22. This morning, we announced net income of $15 $1 million or <unk> 95 cents per diluted share.
In the quarter of 2021 up over 40% from the $10 $7 million or 66 cents per diluted share for the respective prior year period net.
Net income during the first nine months of 2021 totaled $47 $4 million or $2 95 per diluted share up over 50.
7% from $31 million or $1 85 per diluted share during the first nine months of 2020.
Turning to slide 23 interest income on loans during the three and nine months 2021 periods was relatively consistent with the prior year period as growth in.
In core commercial loans and residential mortgage loans has largely mitigated the negative effect of the F. O M. C rate cuts totaling a 150 basis points through March of 2020, and ongoing low interest rate environment since that time.
Interest income on securities in the third quarter of 2021, 9%.
Higher than the same period compared to the same period in 2020 in large part reflecting growth in the securities portfolio over the past 12 months.
Interest income in the first nine months of 2020 2021 is relatively unchanged from the respective time period in 2020.
Accelerated.
Discount accretion on called U S Government agency bonds in 2020 is excluded.
In total interest income for the most recent quarter increased zero point $3 million for the third quarter of 2020. However, it was down $4 $2 million for the first nine months of 2021 as compared to the respective.
The prior year period in large part, reflecting the lower interest rate environment that could not be fully offset with the growth in earning assets.
Interest expense declined or remained relatively unchanged in all categories, starting in 2021 period compared to the prior year period with the reduction reflecting the low interest rate environment.
Total interest expense declined $1 $3 million during the third quarter of 2021 compared to the third quarter of 2020, it was down $5 $4 million between the comparable year to date periods.
Net interest income increased $1.6 million during the third quarter of 2020.
Compared to the third quarter of 2020, it was up $1 $1 million during the first nine months of 2020, one compared to the respective prior year period.
They're all growth in earning assets was able to essentially offset a lower net interest margin.
We recorded a provision expense of $1 nine.
A million dollars for the third quarter of 2021 compared to provision expense of $3 $2 million for the prior year.
For the first nine months of 2021, we recorded a negative provision expense of zero quite $90 million.
Paired to provision expense of $11.6 million during the respective.
Prior year period.
The provision expense recorded for the third quarter of 2021, mainly reflects the growth in core commercial loans, while the prior year provision expense was primarily comprised of increased allocation associated with the downgrading of certain non impaired commercial loan relationships to reflect stressed economic.
Economic conditions stemming.
Stemming from the COVID-19 environment.
The negative provision expense recorded during the first nine months of 2021.
Primarily reflects increased reserves needed for the core commercial loan growth that was fully mitigated by a lower reserve allocation associated with the.
Make in business conditions environmental factor that was upgraded during the second quarter, reflecting improved demand in.
In both current and forecasted economic conditions.
The relatively large provision expense during the 2020 year to date period, primarily reflected an increase reserve allocation associated with the economic and business.
Business conditions environmental factor the introduction of the COVID-19 pandemic environmental factor.
And the aforementioned third quarter 2020 commercial loan downgrades.
We elected to postpone the adoption Cecil until January one 2022, however.
However, we continue to run out.
So model concurrently with our incurred loss model.
Based on preliminary results the reserve balance under the system methodology would be about $7 $2 million lower than our reserve balance as of September 32021, as determined using the incurred loss methodology. This is an increase from the $6.
$1 million difference at June 30.
And a $2 6 million dollar difference at year end 2020.
The primary difference between the two reserve models over the last few quarters as it related to the economic forecast aspect of the calculation.
Under Cecil B employed economic forecasts have shown significant.
<unk> improvement under the incurred model, our view of economic and business conditions, as generally positive and improving but less so than what is reflected in market economic forecast.
We will continue to assess all of the qualitative factors at the end of each quarter and we will adjust the loan loss reserve balance via the provision expense line item.
Second the income statement.
Continuing on to slide 25.
Go ahead cost during the third quarter of 2021 relatively unchanged when compared to the year ago quarter, while increasing to $4 $9 million. During the first nine months of 2021 compared to the first nine months of last year.
During the third.
Of 2020, we recorded a large bonus accrual due to a change in estimate associated with the bonus plan metrics. There's no bonus accruals were recorded during the first and second quarters.
Due to COVID-19, and the associated weakened economic environment.
A bonus accrual in the third quarter of 2000.
$21 $1 million higher than what was recorded during the third quarter of this year.
The lower bonus accrual in the third quarter 2021, mitigated the impacts of higher salary expense stemming from annual employee merit pay increases higher medical insurance cost.
Third quarter and increased FDIC insurance premiums largely resulting from an increased deposit base.
About 60% of the increase in year to date overhead costs reside in salary and benefits with almost half of that figure being comprised of increased medical insurance costs.
The remaining portion is primarily comprised.
The increased FDIC insurance costs.
And former facility valuation write downs.
Currently we expect fourth quarter 2021 overhead cost to approximate third quarter expense.
As far as 2022 overhead costs, we are in the initial stages of developing our 2000.
22 budget.
Don't have any specific guidance to provide at the current time. We are we are expecting larger than typical increases in salary costs due to inflationary pressures in our markets and the addition of new employees to support expected ongoing loan growth and revenue initiatives.
<unk> continued on slide 26, our net interest margin was 271% during the third quarter of 2021 down five basis points from the second quarter and first quarters of 2021, and down 15 basis points when compared to the third quarter of 2020.
Compared to the year ago third quarter CEO.
Hold on.
On earning assets decreased 32 basis points, while the cost of funds declined 17 basis points.
For the most recent quarter.
Our yield on loans has been relatively consistent over the past five quarters.
During the fourth quarter of 2020, when we recorded a larger than typical P. P. P b income accretion.
As seen on slide 21, net P. P. P. P income accretion of $2 $8 million during the third quarter has been very consistent since the origination of the program.
For the aforementioned fourth quarter of 2020.
As of quarter end unrecognized P. P. P net fee income totaled $3 $4 million.
A vast majority of which is related to PPP round number two fundings.
Assuming P. P. P forgiveness trends remain unchanged, we expect a large majority of the remaining unrecognized PPP net fee income.
Be reported recorded as income during the fourth quarter of this year.
Our net interest margin continues to be negatively impacted by a significant volume of excess on balance sheet liquidity depicted by low yielding deposits with the federal reserve bank of Chicago. The excess funds are apprised of increased local deposits, which are primarily a product of a federal government stimulus programs as well as lower business.
And then consumer investing and spending.
Total local deposits and sweep balances increased $538 million or 15% during the first nine months of 2021.
We're up $1.4 billion or 51% since year end 2019.
Approximately.
One half of the growth in local deposits since year end 2019 is comprised of increased noninterest bearing checking account balances.
Overnight deposits averaged $734 million during the third quarter and $649 million during the first nine months of 2021.
Substantially higher than our typical average balance of around $75 million.
This excess liquidity lowered our net interest margin during the third quarter and first nine months of 2021 by about 40 to 45 basis points, we expect the level of overnight deposits to stay elevated well into the foreseeable future.
The cost of funds has been on an improving trend primarily reflecting the falling interest rate environment, and we expect that trend to continue throughout the remainder of 2021 and into 2022 as time deposits and <unk> advances originated in higher interest rate environment in prior periods mature.
As shown.
On slide 30, we remain in a strong and well capitalized regulatory capital position.
Tier one leverage capital ratio was nine 3% and a total risk based capital ratio was 12, 5%.
September 32021.
The tier one leverage capital ratio continues to be impacted by the PPP loan.
Loan portfolio and excess liquidity with no similar impact on our total risk based capital ratios.
As both components are assigned a zero percent risk weighting.
Both our tier one leverage capital ratio and the total risk based capital ratio have been impacted by the solid core commercial loan growth over the past several quarters.
As well as stock repurchase activity.
Our bank's total risk based capital ratio was $94 million above the minimum threshold be categorized as well capitalized.
We repurchased about 289000 shares for $8 $9 million at a weighted average cost of $30 97.
<unk> per share during the third quarter of 2021, bringing our year to date total up to 636000 shares for $19 $8 million at a weighted average cost of $31 14 per share.
The year to date weighted average cost equates to about 125%.
Average tangible book value.
During the second quarter of 2021, our board of directors approved a new $20 million stock repurchase plan as we were close to exhausting. Our then outstanding plant.
As of September 30th.
Had $8 $4 million available and our repurchase plan.
In closing we are pleased with our operating results for the first nine months of 2021 and financial condition as of quarter end and believe we are well positioned to continue to navigate through the unprecedented environment created by the coronavirus pandemic and other events.
Those are my prepared remarks, I'll now turn the call back over to Bob.
Thank you Josh that concludes management's prepared remarks, and we will now open the call to the Q&A.
We will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Okay.
Our first question comes from Brendan Nosal from Piper Sandler you May go ahead.
Hey, good morning folks how are.
Are you when I read it was fine how are you.
Maybe starting off on the loan growth side of things.
You guys have managed to kind of work your way through what was a slow growth environment for most other banks are incredibly well, but even this quarter number just seemed exceptionally strong to me.
Could you.
Could you talk a little bit more detail on kind of what you're seeing in your commercial customer base, it's allowing for such strong credit generation and then maybe your thoughts on you know.
Where the pace of growth goes from here.
Yeah. This is ray I'd be happy to address that.
The.
The.
The case for where it goes from here is pretty strong right. Now you know, we've obviously funded pretty heavily over the last quarter, but the backlog that we have to fund going into this quarter is very strong as well so the activity.
Continues I'd say unabated from what.
We've recorded in the historical quarters, and it's it's largely comprised of adding new relationships to the roster our existing customer base is growing.
Some degree, but the lion's share of the growth comes from adding new relationships for the reasons that we've.
Outlined in all of our comments that.
The relationship banking approach and the ability to deliver that.
In spite of a challenging environment as just resonated very well in the communities that we serve and as simple as that sounds that has been the key because if you don't get to serve.
Service you are looking for it sends you looking and we've been there on the receiving end of that time after time.
It's really strong.
A tribute to our team and despite the challenging work conditions for them, whether working remotely or a hybrid approach or in the office.
Dave.
Stan the importance of providing timely responses to customers.
And continuing to bring those new relationships to the finish line they've worked very hard to do that and again. This is distinguishing factor that.
That's a customer that are seen as a compare mercantile too.
I've said our markets.
Alright, great. That's that's super helpful color, maybe one more for me I'm, just trying to think about your asset sensitivity and the positioning of the balance sheet today for rising rates, just given how much the structure of the balance sheet changed.
That's a year and a half so with the fed in the market to me to anticipated rate hikes, maybe at some point late next year can you just remind us what each rate hike means for either NIM or net interest income.
Yeah. This is Charles I don't have those specific numbers in front of us.
Definitely our balance sheet.
So we're going to be <unk>.
Is structured to provide for increased net interest income and margin.
Under increasing interest rate environment and.
Those numbers, but I know those numbers are available in our form 10, Qs. If you wanted to get done quicker or I can I can get them to you offline here.
Yeah, Yeah that's.
So I just kind of more conceptually wanted to see how you think about it all right. Thanks for taking the questions.
Sure.
Our next question comes from Daniel Tamayo of Raymond James You May go ahead.
Yeah.
It would be I know Youre your line may be muted.
Oh, sorry about that can you hear me now.
Yep Yep.
Alright.
So good morning, everybody just wanted to maybe dive into the allowance a little bit you talked about the Covid factor that's now in that.
That allowance.
How much of that remains and assuming that comes out eventually where do you think reserves could shake out.
Over the next couple of years.
Yes, the Covid environmental factors, probably about 20% to 25% of our balance of our reserve as of September 30th.
And.
Again, that's just one of the qualitative.
Items that we have on the calculation along with all the other ones and.
We're obviously hopeful that we get to a point in time, where we can start upgrading that environmental and centered on later hopefully.
Eliminate that altogether.
Okay.
So safe to say, we get a sense, if we pulled that that amount out that would be a reasonable.
I guess normally.
Also including what you said about the about the seasonal adoption that might be a normalized.
Our reserve ratio in the future.
Yeah, I mean, it certainly gets to a pretty low number and that's not something that I think we're comfortable with.
That's what the world is seasonal as dictated to us that's one of the reasons why we did pull the range back as long as we could on adopting that one.
Because it's a duration based model and of course our.
Portfolio is dominated by commercial loans, which by nature are relatively short term.
The duration of our commercial loan portfolio is probably just a little bit above two years.
And that those results on a relatively it results in a lower level of reserves against our commercial loan portfolio, what's been what the incurred model does.
Couple that with very pristine asset quality.
It makes it a challenge to keep your reserves up.
As much as what you think that they shouldn't be looking to see some model.
No that makes sense and then and then switching gears here your comment.
Comment on the increased.
Overhead costs are related to higher salary from wage inflation and incremental hires.
On the loan growth.
Understandable on both on both sides, there, but how how do you think that impacts kind of overall efficiency is that is that something.
I think the revenue.
Growth can outpace or how does that impact the overall.
Thoughts on profitability.
Yeah, I'll, probably I know, we'll have some more specific commentary on January what they can get through the budget season in and put some longer term forecast together given the environment.
But we're in currently and what.
You're still going to happen in the future.
I think in the near term my comment was basically to say, we think theres going to be some.
Order than typical growth in overhead costs.
Pretty much next year when the pay raises flow through in <unk> and the hiring continues.
Certainly long term.
We think that the leverage off of the new employees.
That are coming in to support that loan growth and fee revenue and as Ray was pointed out we've been able to demonstrate.
That our revenue is growing faster than what our overhead costs, our selling they might get a little bit choppy on a quarter to quarter basis, but we think that we are well structured.
We expect.
To continue to grow like we have been and make sure that that revenue is growing faster.
That our overhead costs are.
And I think one thing I would add as well on the technology side and Bob had a couple of comments echo in this in his opening remarks is we stay as you know I'll call. It the state of the art.
Sure since day, one this bank was formed.
And we continue to do so.
We've got a platform that.
These are exceeds any other banks that are out there that we're competing against and.
And more importantly, we continue we have to continue to fund that program all along and so we are we are current that everything.
But we need to be.
So we don't have any big catch up expenses or investments that we have to do from a technology side.
The continued ongoing upgrades and the introduction of new products and services as those become available.
Hmm.
All right well that makes sense I appreciate.
All the color. Thank you that's all for me.
Thank you.
Yeah.
Yeah.
Our next question comes from Damon Delmonte of K B W.
You May go ahead.
I hope everybody is doing well today.
So my my first question regarding fee income.
Could you just talk a little bit more about the the outlook for mortgage banking and kind of.
How you see the pipeline here early in the fourth quarter.
Sure.
Early in the fourth quarter, the pipeline is stronger than you'd expect from a seasonal pattern standpoint.
Hum.
Typically at this time of year, the volume starts to ramp down a little bit and our trend line has resisted that so the early indications for the remainder of the quarter are pretty good at this point.
You know the market remains strong and.
The communities that we serve.
As it relates to purchase activity, we've made successfully the shift from refi to purchase activity.
I would submit maybe a little bit faster than our peers and so feel pretty good about what the quarter will bring.
Okay great.
And then as far as the the swap income that you guys booked this quarter, obviously very strong.
You see that pulling back a little bit and coming down to a little lower level or do you think that the growth in this business is going to be sustainable at this you know near $4 million level.
Yes.
As I mentioned.
In my comments I view that as sustainable for a couple of reasons. One is over a very long period of time half of our term funding has been in the form of fixed rates, which is what the swap accomplishes for the customer while providing our balance sheet with a debt with floating rate characteristics. So.
Mentioned.
There is plenty of opportunity to continue that the swap doesn't fit every situation.
You need a certain amount of size in customer sophistication and wherewithal to bring it all together however, our opportunities in that arena do.
<unk> appeared to be diminishing in the near future and I would expect that we continue at a similar pace.
Out into the foreseeable future.
Great comments.
I'm going to be lumpy on a quarter to quarter basis, just the nature of the program that's out there.
Do not have the income that we recorded during the during the third quarter excuse me was related to prepayment fees. We had a couple of larger customers refinance existing fixed rate debt into floating rate debt with a swap.
And what generally in our program, what we do instead of having the customer.
Customer pay that prepayment penalty in cash in the record that is interest income.
Instead embed that into the swap metrics and then when we get the fee paid by the correspondent banks that we can swap out with.
We get a I can say at an oversize sea. If you will wherever you want to call it.
About so there's two things that are going on with swap income activity.
Other question is going to be to what degree is the refinancing of existing fixed rate loans, which virtually all of them have prepayment penalties that and we are going to collect those.
How those play out.
David This is Bob I'll guess I'll wrap up on this topic.
I'm, saying that the swap is not a good.
Necessarily for every customer, but our lending team has done a really good job of identifying those client situation or this is a good fit and the sophistication of their and they attribute that ray alluded to our present to be able to benefit the customer and a while.
All of them to get what thereafter in a at a rate for a term loan and help us accomplish that.
<unk> accomplished our balance sheet objectives for the banking standpoint.
Got you that's good color. Thank you and then just kind of one follow up question on overall noninterest income the other noninterest line.
But you know a little bit over a million this quarter, which was higher than normal Chuck was there anything kind of one time in there yes.
Yes, it's about $600000 in one time.
We finally went through finalize the collection efforts on a credit that we have been working on.
Since the great recession, so it finally made.
Its way through the court system that all of the appeals and and we finally got our payments. So about 600 grand of that is onetime.
Okay, Great and then just kind of quickly here on.
You know the size of the securities portfolio, obviously has a decent increase quarter over quarter do you expect to keep that level.
Whereas securities on the books or is that just going to be dictated by the pace of loan growth or how do we how do we think about that.
Yeah, I think the growth that we've done that we did in the third quarter, it's pretty similar to the growth that we've had over the last four quarters.
Probably about this time last year, we really started to add into the portfolio when it became.
All of the obvious to us at the absolute liquidity is going to stay on the balance sheet for quite some time.
The excess liquidity is actually built since then even with the securities purchases and loan growth.
So I would expect that certainly here in the fourth quarter of the growth will continue as it has been over the last four quarters or so.
He came for at some point that will slow down.
Especially when we see.
Commercial loan growth continuing and a lot of that's been often dependent on the behavior of the deposits, which is really the driver of the excess liquidity overall, yeah. We continue to put most of that money is going into government agency bonds generally.
With a.
Three to seven to eight year three the three to eight year time bucket. So what we've been doing is basically just staying with the ladder maturity.
Just drawing those ladders and.
We certainly want as time goes out we certainly would like to have that.
That buildup with us.
You have the portfolio that we've done.
Would love nothing else than to take those investments as they mature and put those into the loan portfolio. So we will definitely have that opportunity from a cash flow standpoint.
It was not we didn't need it for loan growth.
I would think rates are probably going to be up over the next few years.
Security and then we'll be able to refinance those monies at higher rates. So we think it's a good use of that liquidity not that being overly aggressive in trying to reach for yield.
Given extended maturities, we have not bought any types of different types of investments than what we've ever built bought before.
So we're staying discipline.
Air and think we've got a good program in the future.
Got it okay, great and then just one final question.
Just to circle back on the provision Slash reserve outlook.
We saw a larger than expected provision this quarter more so than what we've seen last few quarters.
And that was in response to loan growth.
But given the optimism and continued loan growth should we expect the provision level similar to kind of what we saw this quarter.
Yes, I think like we said the vast majority of that million nine was for loan growth.
We did not touch on any of the environmental this quarter. So I think that's important we had loan growth in the second quarter that we had to provide.
We ended up with a negative provision for the quarter because the change in the economic environmental was more than offset the growth.
The growth we had in the commercial loan portfolio and therefore, the provision expense associated with that.
But all things being equal yes.
I think that commensurately the loan growth.
For us for a similar level of provision expense going forward.
Got it.
Without without messing with any of the environmental.
Got it okay. That's all I had thanks a lot appreciate it.
Thanks, David.
Yeah.
Our next question comes from Bryce Rowe.
We'll provide you.
You May go ahead.
Thanks, a lot.
Maybe one follow up here on the swap income side of things.
What I wanted to get a feel for the level of prepayment income that it's affected.
This year not just this quarter, but this year and then if you could speak to.
Maybe the the the potential for more prepaid type income within that line as we move forward just trying to get a feel for how much how much fixed rate.
Yeah.
Activity.
Do you still have within within the portfolio.
Yeah, but I feel like I've mentioned before that was going to be a tough one to budget for especially on a quarter to quarter basis, just given the nature of what we're dealing with I would say like I like I said from the third quarters, but.
Specifically about half the income was related to prepayment fees.
That's definitely a higher percentage than what it was $6 $1 million.
Present, so I'd, probably say, maybe a third of the $6 $1 million. So far this year is associated with the collection or the embedding of prepayment fees.
The swap and the question of it through that means.
And I think Ray mentioned, that's about half of our portfolio.
There are just commercial loan portfolio is fixed rate.
And Robert you know, we don't look to flip all of those into a floating rate with a swap of pets.
Definitely some opportunities there.
This management team is and I don't know if the word concerned of how much I hate that you know rates are very very low and we definitely see a lot of inflationary pressures.
Let's see where the unprecedented environment that is causing some of those inflationary pressures.
But we are very cognizant of what could happen to R.
Our income statement interest longer medium to longer term interest rates were to rise appreciably and were definitely through this program and other things trying to make.
And not be positioned our balance sheet that would be that would perform well in that environment clearly, there's a little bit.
Paint on the front end.
Actually on the refinance activities when we when we take the higher rate fixed rates and put them in a floating rate, but we think that that insurance policy. If you will is definitely.
Sure.
The right thing to do.
As both Bob and Ray mentioned already.
The final program isn't for everybody. So we're not we don't really even have the opportunity to take that.
The fixed rate commercial loans and put them into floating rates, we don't really want to do that but we definitely look at the larger balance loans those with more severe.
Definitely hated management teams.
We want to make sure that our borrowers understand.
The work is around the swap how it works and then some of the handcuffs that puts out that could potentially put on them.
As they continue to run their businesses.
So there's plenty of opportunity there.
We're talking to so far about existing loans.
But certainly what we're looking at new loans to the bank new borrowings from existing customers.
Many of them are again really.
Maybe those.
Size and sophistication goalposts.
They want a fixed rate product, we're definitely talking with them.
The swap program.
A lot of opportunity out there both in the existing portfolio as well as the growth.
But you know trying to determine how much that's gonna equal on a quarterly or even an annual basis. It's just it's a hard one to project just given the nature of the product it's difficult as Chuck said to at the forecast certainly in the way we look at the swaps it it's.
There's lots of tool and tool box and we have been trying to assess what's best for the customer and what are their needs are structuring our credit package that makes sense for them. It makes sense for us as well so it's a great program.
That's off to the team for for part of this program into place because if it meets a need.
It's another environment and it's something that provides us with a nice benefit on the income side it.
And as importantly, it puts the customer in a situation that meets their needs as far as their credit request.
Great a couple a couple more questions here from me I'm, just curious what you're seeing you're obviously P. P. P.
This somehow introducing quite a bit of a new.
And noise and volatility around kind of loan yields and now could you could you give me give some commentary around what you're seeing tremendous originated yield perspective, and this quarter versus versus recent quarters.
Yeah, I've got the at least.
I got that the PPP program. This year has been pretty consistent.
Or is the impact on income statement and on our overall net interest margin. It's about a 15 basis point positive impact the accretion.
Right. Okay, I would expect as I mentioned I think I mentioned in my prepared remarks.
Based on the trends that we see.
We would expect the vast majority of the remaining dollars to be forgiven and paid off here in the fourth quarter, but that's something we have very little control over because it's all about our borrowers, making the applications and the SBA funding.
Finding things, but the trends seem pretty steady.
So I think well have.
Sort of a tail I think going into next year, but.
But for the most part will be done with the program to you at the end of the year.
Okay. Okay, and then maybe last one for you Chuck in terms of seats or is it still kind of go for January 2020 to them with that with that adoption.
Yes, unless they give.
I have a little bit of extension not perfectly, but I don't think I'm going to get that one so yes.
January one of 2022 and today, we will convert the C zone.
Okay. Thanks, guys.
Thank you.
Again, if you have a question. Please press Star then one.
Our next.
Let me now turn comes from Brendan Nosal with Piper Sandler you May go ahead.
Hey, just one follow up for me.
Just on the Covid factors still in the reserve and then the kind of day, one seasonal reduction in reserve I just wanted to make sure that there is some overlap presumably between those two numbers.
Right.
Upon peaceful adoption, you'll be releasing some of that remaining Covid reserve factor is that the right way to think about it.
Look at those as two totally separate we do have the Covid factor is part of our model and.
And as we go from incurred to see so.
It's a separate decision.
And so what we really want to do with that the Covid environment.
So if we keep the COVID-19 environment that all of the environmental.
Study.
And we would have adopted October one.
We got a little over $7 million excess there that we would run through capital and make that adoption.
So.
Yeah, that's the way it plays out right now, but the adoption of <unk> and what we do with the Covid factor are really two separate decisions are two separate impacts.
Okay. That's a very helpful clarification. Thanks, Joe.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Thanks, Anthony and thank you all very much for your interest in our company.
We hope you and your families stay healthy and safe and we look forward to speaking with you again at the conclusion of the fourth quarter at our conference call in January.
And does he calls now in it.
Okay.
The conference.
<unk> has now concluded. Thank you for attending today's presentation you may now disconnect.