Q3 2021 Financial Institutions Inc Earnings Call
Hello, and welcome to the financial institutions third quarter earnings release and conference call. My name is Emma and I'll be your operator today today's call is being recorded and participants are currently in listen only mode. If you'd like to ask a question at the end of the presentation.
Please press star followed by one.
Oh, Yes, Please press star followed by two.
Alterra assistance. Please press star followed by is it right. It's now my pleasure to hand, the call over to Shelly Doran director.
Oh of Investor Relations to begin please go ahead.
Thank you for joining us for today's call, providing prepared comments will be president and CEO, Marty Birmingham, and CFO, Jack Playa Chief Community Banking Officer, Justin began and director of financial planning and analysis, Mike Grover will join us for Q&A.
Today's prepared comments and Q&A will include forward looking statements actual results may differ materially from forward looking statements due to a variety of risks uncertainties and other factors.
For you to yesterday's earnings release, and historical SEC filings available on our Investor Relations website.
Our safe Harbor description and a detailed discussion of the risk factors relating to forward looking statements.
We'll also discuss certain non-GAAP financial measures intended to supplement and not substitute for comparable GAAP measures.
Reconciliations of these measures to GAAP financial measures were provided in the earnings release filed as an exhibit to a form 8-K.
Please note that this call includes information that may only be accurate as of today's date October 29, 2021, I'll now turn the call over to President and CEO Marty Birmingham.
Thank you Shelly.
Good morning, and welcome to our third quarter 2021 earnings call.
Once again, our team was pleased to deliver strong results reporting net income of $17 2 million $4 five per diluted share net income was down for the second quarter's $20 2 million or $1.25 per share and significantly higher than third quarter 2020 that income of $12 3 million.
We're 74 cents per share.
Our earnings reflect incremental organic growth across our businesses as well as the third consecutive quarter, our reserve for loan loss release and corresponding provision for loan loss benefit.
Pre tax pre provision income for the quarter was 21 point tumor.
209000 inquiries from the second quarter of 2021, and a $1 9 billion of inquiries from the third quarter of 2020.
In early August we completed the relocation of our five Star Bank branch in the city of all Mira soon area included in the New York State downtown revitalization initiatives.
Redevelopment is underway and the city of Elmira for the first time in a decade and we are pleased to partner with other businesses to help revitalize this urban area.
The relocated Elmira branch features our new branch design, including advancements in financial technology paired with the comfort of community banking with five star certified personal bankers.
The branch move also reduces annual operating costs as a result of more favorable lease terms and lower square footage.
Our SDN insurance subsidiary completed a bolt on transaction in early August with the acquisition of North Woods capital benefits, a buffalo based employee benefits and human resources advisory firm.
This acquisition expands SDN as employee benefits business and adds important expertise to the organization.
North Woods founder and their director of client service have joined SDN to continue their long term client relationships and help us build new ones.
Now my pleasure to turn the call over to Jack So he can provide additional details on our results and guidance.
Thank you Marty good morning, everyone.
I'll begin today by providing commentary on key areas of performance with comparisons to the second quarter of 2021.
Net interest income for the quarter was $38 $3 million, an increase of 541000 from the linked quarter.
Due to one basis point of margin expansion.
Despite a lower level of average interest, earning assets and triple P. Loans, we grew noninterest income by Remixing, our investment assets as we deployed interest, earning cash into investment securities and reduced our overall cost of funds and interest expense.
Approximately $56 million and $95 million of Triple P loans were forgiven in the third and second quarters of 2021, respectively.
With a related fee accretion of $1 million in the third quarter compared to $1 5 million in the second quarter.
Net interest margin was 307 basis 0.1.
One basis point higher than the linked quarter.
We continue to manage through the excess liquidity on our balance sheet. However, the triple T forgiveness process provided incremental liquidity again this quarter.
Approximately $90 million when comparing average balances for the linked quarters.
Conversely, we experienced some relief from a decrease in public deposits.
Proximately $95 million when comparing average balances for the linked quarters.
Public deposits seasonally have a lower average balance in the third quarter as compared to the second quarter.
Our efforts to limit margin compression and have included a remixing of investment assets by reducing cash.
The average balance was down $92 million quarter over quarter.
Increasing investment securities.
The average balance was up $120 million quarter over quarter.
Our investment securities purchases have been focused on mortgage backed securities with low to moderate duration that provide ongoing cash flow.
<unk> reinvestment into loans or additional investment securities when rates begin to rise.
Lastly, our net interest margin benefited from a lower cost of funds dropped by one basis point from the second quarter to 24 basis points.
And I assume the opportunities for further reductions in cost of funds are somewhat limited we continue to manage our funding costs in this low interest rate environment.
Provision for credit losses on loans was a benefit of $334000 in the quarter compared to a benefit of $3 $9 million in the linked quarter.
Continued improvement in the national unemployment forecast positive trends in qualitative factors.
In a relatively low level of net charge offs resulted in a third consecutive quarterly release of credit loss reserves.
Net charge offs were $587000 in the quarter as compared to net recoveries of 394000 in the second quarter.
The second quarter benefited from commercial related net recoveries of 294000 and indirect net recoveries of 426000.
Our indirect business continued to experience a lower than historical level of charge offs in the third quarter at 265000.
As a result of all of these factors the allowance for credit losses decreased by $921000 in the quarter to $45 4 million.
In the fourth quarter of 2020, we identified the specific customers and industries, we believe to be most at risk because of the pandemic.
We moved these loans.
About 20 loans totaling $127 million.
Criticized assets and set aside a specific reserve of $4 7 million.
The specific reserve increased by $2 4 million in the first quarter decreased by about 200000 in each of the second and third quarters.
Resulting in a specific reserve of $6 7 million at September 30.
Approximately $108 million of the original loans remain in the criticized or classified asset classes at quarter end.
We continue to see improvement in the performance indicators of several of these credits and remain optimistic they will normalize post pandemic.
Do not plan to release specific reserves until the credits returned to normal paying status.
Allowance for credit losses on loans to total loans was 124% at quarter end.
Down four basis points from June 30.
Excluding triple P loans, the ratio increases to $1 two 8% a decrease of six basis points from the end of the second quarter.
Our total nonperforming loans to total loans ratio of 18 basis points was unchanged from June 30.
The allowance for credit losses for loans to nonperforming loans at quarter end was 681% down slightly from 699% at June 30.
Noninterest income of $12 1 million was $1 9 million higher than the second quarter of 2021.
Key drivers of the third quarter increase were our insurance business.
<unk> fees and limited partnership investments with the latter two items being fee income areas that fluctuate quarter to quarter and are difficult to forecast.
Insurance income was up $717000 due to the timing of commercial renewals and the impact of our August acquisition of Norwood capital benefits.
Income from derivative instruments was up $969000 based on the number of transactions and impact of changes in fair market value.
Income from limited partnerships was up $456000 based on the activity and performance of underlying investments.
Noninterest expense was $29 2 million, an increase of $2 $2 million from the linked quarter.
A $1 $3 million increase in salaries and employee benefits with the result of the impact of a true up of performance based annual incentive compensation and a higher commissions totaling approximately 690000.
Related to strong year to date performance.
Combined with the impact of investments in personnel to support strategic initiatives, including digital banking de.
De Novo bank branches.
And enhanced CRM platform cut.
Customer experience and banking as a service.
Occupancy and equipment was $548000 higher as a result of the purchase of security equipment for multiple locations timing of maintenance services related to the outsourcing of property management in the current year and expenses related to the two new bank branches opened in June.
Computer and data processing was $119000 higher due to investments in technology, including digital banking initiatives.
Income tax expense was $4 6 million in the quarter Rep.
Representing an effective tax rate of 21%.
Effective tax rate in 2021 have been higher than the previous year due to higher pre tax earnings.
Moving onto the balance sheet.
Total loans increased $22 million or 6% from June 30 <unk>.
Commercial business decreased six 2%.
Commercial mortgage increased two 5%.
Residential real estate loans were down one 1%.
And consumer indirect was up four 6%.
Triple P loans are included in commercial business loans.
Excluding triple P loans, the commercial business portfolio increased one 8% and total loans increased two 2%.
While growth in the commercial business portfolio has been challenged due to supply chain constraints M&A activity.
And borrowers maintaining significant cash positions.
The company's loan pipelines remain robust and healthy as we approach year end.
Total deposits at quarter end were $316 million higher than at June 30, due to the seasonality of public deposits returning at quarter end combined with growth in the reciprocal and broker deposit portfolio.
Our excess liquidity position continues to put pressure on net interest margin for both our excess federal reserve balance and additions to the securities portfolio.
We continued to expand our investment portfolio in the third quarter by deploying excess liquidity into investment classes with a risk adjusted yield profile that exceeds the interest on excess reserves.
We remain cautious of extending the overall portfolio duration. However, we're mindful of striking an appropriate balance between increasing net interest income and mitigating the impact of excess cash balances net interest margin, we experienced a decline in our TCE ratio from 758% to <unk>.
Two 5% the ratio was negatively impacted by growth in total assets up $328 million due to the seasonal inflow of public deposits at the end of the third quarter <unk>.
The ratio was also negatively impacted to a much lesser extent.
A decrease in OCI related to unrealized losses in the available for sale securities portfolio.
These negative impacts more than offset the positive impact of earnings.
We remain very comfortable with our capital position given that much of the asset growth we've experienced in the past year due to shorter term triple P loans and excess liquidity.
In addition, our asset growth has been concentrated in very low risk weighted asset.
Therefore, our regulatory capital ratios remain comfortably above the well capitalized minimums.
I'll now provide an update on our 2021 outlook.
We continue to expect mid single digit growth in our total loan portfolio, excluding the impact of Triple PLO as.
By the first three quarters of the year, the largest contributors to the increase or the commercial real estate and indirect portfolios.
Our original 2021 Triple P assumptions included approximately $125 million to $175 million of origination which came in below the low end of the range at $107 million.
We opened our 2021 forgiveness portal in October and early results have been very positive.
The process is much more streamline for customers and the SBA has been approving application and processing payments much faster than the first rock.
Approximately 18% of 2021 loans have been forgiven to date in October.
Therefore, we expect a higher percentage should be forgiven in the fourth quarter than originally anticipated.
There was approximately $4 6 million of unamortized fees remaining on the 2021 vintage of Triple P loans as of 930 <unk> 'twenty one.
Regarding the 2021 vintage of Triple T loans, we experienced forgiveness and payoffs of approximately $17 million in Q4 2020 $182 million in the first and second quarters of 2021, combined and $56 million in Q3 2021.
Totaling approximately 95% of the world, we expect the remaining 5% of loans to be forgiven or repaid in Q4 and into 2022.
There was approximately 190000 of unamortized fees remaining on the 2020 vintage of Triple T loans as of $903 21.
We continue to anticipate mid single digit growth in nonpublic deposits for the full year.
Largely driven by non maturity demand and saving deposits.
As runoff in time deposits has occurred and the low interest rate environment.
Guidance includes the two new five Star Bank branches opened in Buffalo in June 2021.
We've experienced stronger than expected growth in the first three quarters of the year for both reciprocal and public deposits and expect to maintain elevated deposit levels other than the typical fourth quarter seasonal outflow of public deposits.
We are leaving full year NIM guidance at a range of 305 to 310 basis points, excluding the impacts of Triple T. The impact on NIM relative to Triple B forgiveness will likely be significant in the fourth quarter given the streamlined process for the 2021 vintage of Triple T allows.
This level of guidance reflects our expectation of continued compression from excess liquidity and higher balances in interest bearing cash and investment securities.
It also reflects lower yields on interest, earning assets as loans and securities reprice fully partially offset by lower deposit funding costs.
As a reminder, our NIM fluctuates from quarter to quarter due to the seasonality of public deposits and its impact on both our earning asset and funding mix.
In quarters, where our average public deposit balances are higher due to seasonal inflows second and fourth quarters.
Our earning asset yields are lower given the short term duration of the deposits and limited opportunities to invest the funds.
Our NIM guidance remains highly dependent on the overall rate environment.
Full year noninterest income guidance is unchanged at high single to low double digit growth excluding gains on investment securities.
As previously discussed this category includes revenue, but it's difficult to forecast, but just swap fees and limited partnership income.
So we are providing a wider range of guidance.
We continue to anticipate an increase in noninterest expense in the low to mid single digit range for the full year.
Our guidance throughout 2021 has been for noninterest expense to range from $27 million to $29 million per quarter.
We reiterate this guidance for Q4.
As expected.
Spirit higher expense in the third quarter due to the investments, we're making in people and technology to improve relationships with our customers and enhance future profitability in areas, including digital banking.
De Novo bank branches.
And enhanced CRM platform.
Customer experience and banking as a service the third quarter also included a higher expense for Truing up annual incentive compensation, given our strong year to date performance.
Our 2021 efficiency ratio guidance remains in a range of <unk>, 56% to 57% for the full year.
However, given our year to date efficiency ratio of 55, 4% we.
We expect to be at the low end of the range.
We continue to expect that the effective tax rate for 2021 will be within a range of 20% to 21%.
Giving earnings results year to date.
This guidance reflects the impact of amortization of tax credit investments placed in service in recent years.
We will continue to evaluate tax credit prospects and our effective tax rate would be positively impacted by taking advantage of further investment opportunities.
Given the low level of net charge offs year to date.
We're revising full year guidance to a range of five to 20 basis points.
Further reduction to both the low and high ends of the range provided last quarter.
As we have stated in the past our focus remains on improved profitability and operating leverage.
We are in the process of developing our 2022 budget and expect to provide guidance with fourth quarter results in late January after we've obtained board approval consistent with past practice.
That concludes my prepared remarks, I'll now turn the call back to Marty.
Thanks, Jack at this point I would like to provide an update on our company's strategic evolution and a few of our technology initiatives.
In recent years, we took the steps necessary to align our strategic plan with our risk appetite.
Develop the roadmap to respond to and capitalize on industry changes.
<unk> invested in people process and technology.
We've talked extensively about the 2020 conversion to five Star Bank digital banking and.
And the success we've experienced.
How we are accelerating our offerings through this digital banking platform.
Another organizational initiative underway is the implementation of Salesforce.
Customer relationship management solution that brings companies and customers together.
This integrated CRM platform will give all lines of business.
<unk> retail banking lending cash management customer experience marketing product insurance and wealth.
A single shared view of every customer.
This will help us create a unified approach to customer engagement.
Connecting the bank around customer needs.
Resulting in journeys and not just transactions.
Implementation is proceeding on target and it's more than 70% complete.
This unified approach to customer engagement will help us deliver a differentiated customer journey through our ability to educate interact and expand relationships and community partnerships.
We are also actively pursuing and executing on opportunities to deliver banking as a service or bass.
Since the launch of this line of business in August 2021, we have established a pipeline of several potential fintech partnerships that are in various stages of development with.
With anticipated launches in the short and intermediate term.
Through legacy and ongoing investments in infrastructure talent technology and partnerships we.
We have created an operating system that enables us to deliver bass capabilities to Fintech partners and wealth management firms looking to offer banking products and services to their customers.
There are near term investments necessary to deliver services consistent with regulatory expectations with revenues expected to fall.
We are enthusiastic about the value proposition that our past initiatives brings to our company in the form of enhanced and diversified revenue.
Insights and innovative partnerships.
We also recently entered into an agreement to enable our customers to transact bitcoin seamlessly and securely inside the five star Bank digital banking platform.
Our partners on this initiative, our Q2, our digital banking platform provider and a leading provider of digital transformation solutions for banking and lending.
<unk>.
A leading bitcoin company.
This offering gives us the ability to offer bitcoin to our customers, while meeting necessary regulatory and security requirements.
We are pleased to be among the first banks to do.
Liver secure and seamless bitcoin services.
We can buy sell and hold bitcoin and their five star accounts.
I believe this initiative is a testament of our commitment to evolve and respond quickly the fast changing market conditions and opportunities.
We are pursuing other transformational opportunities and well announce them as they come to fruition.
The next iteration of our strategic plan will build on our accomplishments and the work already underway as we continue to evolve our operating model, we will ensure the continuation of effective community banking services that enhance the financial well being of our customers and overall well being of the communities we serve while pivoting to.
This innovation.
<unk> and data driven by smart investments and innovative partnerships. Our core focus is to continue to operate a strong and stable enterprise through collaboration and partnering amongst bank insurance and investment lines of business.
We will leverage the cultural momentum enhanced capabilities and experience of our team to embrace industry changes that represent opportunities for our company and all stakeholders related to digital transformation that complements traditional banking and new business activities associated with banking as a service.
I believe that our resilience nimbleness and commitment to process improvement from lessons learned during the pandemic enabled us to successfully address unprecedented operating conditions and positions us to continue to deliver short term results and long term value even under the most challenging conditions. These.
Very exciting times and I am incredibly proud of our accomplishments and the associates that make them possible.
Operator. This concludes my prepared comments and we are ready to open the call for questions.
Thank you if you'd like to ask a question today. Please press star followed by one on your telephone keypad.
Yeah.
Our first question today comes from Damon Delmonte from <unk>. Please go ahead Simon Your line is now open.
Hey, good morning, guys hope everybody's doing well today.
My first question.
Hi, My first question is regarding the outlook for loan growth.
Could you just give us an update on your on your commercial pipelines and kind of.
How they're looking at as far as the builder.
Building demand and if there's any headwinds or challenges related to supply chain and things of that nature.
Yes.
Hey, David This is Jack good morning.
Hey, Jay I think Thats a good question.
As we look at our if you look at our commercial loan pipelines, we feel very.
Which of those are very strong and healthy, particularly going into the fourth quarter.
<unk> has been.
Very strong platform for us during the pandemic it really wasn't impacted from our perspective.
C&I as opposed a little bit challenging.
The pipeline has been strong, but we've been contending with a little bit of M&A activity, which has created a little bit of higher runoff in the portfolio.
As well as just liquidity sitting on the sidelines for those borrowers and then the borrowers again as you mentioned are impacted by the supply chain constraints.
And then on the residential side, we've seen a little bit of normalization.
And originations, particularly in our market coming off of the 2022 highs and indirect has proved to be.
A significant headroom for us to be able to deploy some excess liquidity into a loan category that we feel has a strong risk adjusted.
Return on capital for the company in its short duration so all in.
We're pretty feeling pretty positive about commercial pipelines in the rest of our consumer pipelines going into the end of the year.
Okay. That's very helpful. Thank you and then with regards to credit you know you had three quarters in a row of reserve release, you noted that you still have a decent amount of specific reserved for those loans that you had.
But in the criticized bucket at the beginning of the pandemic. So how do we kind of think about the quarterly provision in the fourth quarter and as you go through 2020.
Do you think that it's realistic that you could have another release here in the fourth quarter.
Thanks, David Yeah. That's a good question, if we think about.
Our remaining specific reserves on those loans.
Before we don't really expect to release those reserves until the customers returned to a normal paying status and developed some consistency there, but if we continue on the current path of normalizing.
And the.
I guess positive outlook that we have on those particular credits once those come off deferral and we see stabilization we could expect the reserve releases over the course of the next few quarters and if that does happen. We would expect our ACL ratio to migrate towards kind of our day one seasonal estimate.
Normalized specific level, which would be around 115 basis points.
Got it okay. That's very helpful. That's all that I had thank you very much.
Thanks, David.
Our next question today comes from Alex <unk> from Piper Sandler. Please go ahead, Alex Your line is now open.
Thanks, Good morning.
Good morning Ross.
Just on the.
The last question on the ACL and some of these criticized loans you talked about earlier or is there a date that.
Like when would we expect that sort of normal paying status to resume its there.
Date in the fourth quarter that we should start seeing P&I and some of these loans.
Right. So as we've talked previously Alex we are process provided COVID-19 bridges to what was anticipated.
Japan and rest of Asia debated the potential timeframe at the end of the pandemic. So we provided bridges out through really at the end of the year. So our experience and what we're observing is that these companies and borrowers are demonstrating a return to normalcy and stability. So most likely we will start to see those number.
<unk> come down in the fourth quarter or early in the first quarter.
Yes, I think that's accurate Marty thank you.
Okay. That's helpful. And then I wanted to spend a little bit of time talking a bit more about the banking as a service that you were talking about at the end of your prepared remarks Marty.
I guess a couple questions there one.
In terms of your ability to kind of partner with some of these fintech is there some more tech build out or systems build out or software Buildout that you guys have to do internally kind of where are you in the process of.
Building out those capabilities. So that you can take on some of these partners.
Well well.
Internally declared this to be a new line of business for us in August of this year.
Really have been working on this over the course of 2020.
Ed.
We obviously saw the disruption coming as a result of Covid and other industry factors and we start to modernize our foundation last year relative to Q2 in our digital platform, which we've talked about Salesforce was a decision we made last year.
And it also has enabled us to start to deliver.
Digital solutions part of our PPP.
Portal that we stood up et cetera to our customers and.
We're in the process of building that out.
Last year.
We also joined the alloy labs consortium, which really was.
Exposure to a group of Likeminded community banks and Fintech.
Participants said it really was about helping us share the costs and risks of innovation that is preparing us to get to the market faster with digital enhancements in terms of across our platform. So.
We feel good about where we are today and as far as investments concern.
We feel well positioned to be able to build that into our capital planning yes.
Yes. This is Jack I'll just add that this is a journey we've been on since 2020.
Over the course of that timeframe, we've been made.
King.
And strides in the right direction and continued investments in technology and now the reason, we're ready to announce them today as we feel that we're positioned to.
And begin to integrate with our best partners that we've developed in the pipeline that we've established and we really have today the infrastructure or operating system.
Our position to be able to execute on those opportunities.
Great and then I'm just kind of curious you know.
If I remember correctly, the Buffalo market is a bit of a tech hub and I'm wondering if your positioning relative to that area with some of these capabilities.
Could potentially give you a little bit of an edge over just in terms of building relationships with with some tech companies for the for the Bas.
I think that is a fair statement.
We're going to take advantage of those opportunities that are there.
And.
In the interim it's also been an opportunity to attract talent.
Helping us move this initiative forward.
And.
So between the talent local partnerships I do think that we'll be able to.
Reflect that progress in the future.
Okay, and then I just also wanted to ask you about M&A we've seen.
Little bit of pick up of deal activity up in your markets, including from you guys on the fee side I'm, just sort of curious where your outlook is and appetite is for additional fee bolt ons and then when it comes to whole bank M&A. We've seen one that's kind of right smack Dab in the middle market recently at a pretty fair price. Those I was hoping maybe you can kind of run us through sort of the criteria.
What you guys are interested in for a potential partner.
And sort of pricing metrics geographic appetite things like that.
Well on the fee base.
I think we've been really consistent participant relative to enhancing our wealth and insurance.
Business lives.
Yes.
North what's capital was a great example of that it's really not a material.
Financial impact in the short term, but it's a really big pickup from our strategic capability and our insurance line of business. So we remain open and interested to that.
Opportunities were very aware of.
The acquisition that you talked about.
And from our perspective, the market continues to be picky.
Picking up activity and momentum.
And we're certainly open to all the possibilities that are out there that would allow us to continue to drive long term value for our shareholders and our stakeholders.
Yes, just to add on I mean from a strategic objective, we look at something that would be both geographically.
And economically accretive to the company and drive value so.
So there's a lot of factors that play into those type of opportunities are reflective.
Would you be actively looking at opportunities now I mean, it seems like there's a lot of small banks out there from from what we're hearing that that are kind of re looking at their budgets for next year.
We're obviously in a healthy position, making a lot of investments I'm sort of curious in terms of the timeframe if you'd like.
If we could see a whole bank acquisition should one fit those.
Those criterias and they are at some point in the next.
12 to 18 months.
Yes.
You can rule out a possibility I mean, it would have to be something that wouldn't distract us from our current initiatives and would provide.
Visible level of accretion over the long term value for both.
Both companies and their shareholders.
One of the aspects are attributes of that opportunity that you just referenced would be the ability to continue to broaden our geographic footprint and tap into markets that could be underserved relative to the delivery of solid community banking.
As we can.
As such a strong legacy of doing it.
Perfect. Thanks for taking my questions.
Thank you Alex.
Our next question today comes from Bryce Rowe from highest grape. Please go ahead Ross your line is nowadays.
Thanks, Good morning.
Jackson, Marty how are you doing.
Well thank you great.
Excellent.
I wanted to maybe maybe ask a little bit more about the hotel portfolio and not to not to beat a dead horse, but maybe you could speak to kind of the performance indicators that we've that you might've seen over the summer given that being the kind of the height of.
Of the tourist season, there and just any.
Any any or indications that you are seeing from from that.
That level of performance.
So our hotel portfolio has.
It's performing well.
And.
The borrowers and operators that we are.
Dealing with.
Really provide flags properties and generally lower service.
And those those hotels have been performing well.
Terms of return to normalcy activity that is happening in the markets.
We do have a small number of hotels that are more comprehensive in terms of bandwidth.
Facilities and services and higher end and they as well.
They have demonstrated.
Return to.
Normalcy.
Yes.
We feel the progress is picking up in that space.
Even for the ones that we place on the Covid deferral bucket they are on a positive outlook.
A portion of those to come off the next next few quarters.
Great. Okay. That's helpful.
Wanted to ask a little bit about that.
Yes, the margin dynamic here.
You've talked about deploying some of the excess liquidity into the bond portfolio you have.
Talked a little bit about kind of the loan pipeline.
I was I was curious.
If you think about where yields yields now earning asset yields are now within the loan bucket excluding PPP.
Within the bond portfolio how are you.
How do you think about kind of going forward yields where loans kind of pricing today relative to current COO.
Core loan yields and same question on the.
On the bond portfolio.
Okay.
Okay, Jack so from a pricing standpoint, as we've stated in the past our credit spreads have held up very well throughout the pandemic and we've.
Maintained a tremendous amount of discipline in that area so far.
But all in standpoint, I mean, you can see where the curve is at this point in time.
Wait on margin a little bit.
From a bond pricing standpoint.
Bond yields have come down dramatically over the past 24 months.
To put pressure on margin, but when we look at our forecast for cash flow coming off that portfolio given that we have made the majority of our investments in the mortgage backed security space, we're modeling approximately $200 million of cash flow to come off that portfolio plus the amount of excess liquidity, we're carrying just federal reserve balances that we have.
We can de lever from some brokered maturity brokered deposit maturities that are coming due in early 2022, and then holding all else equal if we see a normalization in deposit inflows, we can take some of that cash flow off the investment portfolio and redeploy it into loans.
Okay. Okay.
I appreciate that Jack and then.
Maybe one one more follow up on the expense side of things I appreciate the.
The guidance here for the fourth quarter and some discussion around some of the <unk>.
Some of the pressure on the expense side of things.
Given given the operating environment just curious how you how you extrapolate that as we look into 'twenty two is.
Is there a.
Just a normal level of expense growth that we should expect.
On an annual basis as we look into next year.
Do you think that the the operating environment might put upward pressure on that more normalized rate.
<unk> of the increase.
Yes, I'm going to take a step back here when we looked at our forecast for it.
And our guidance we provided for 2021, we've provided a range of $27 million to $29 million of per quarter for NII.
For the first half of the year, we were at the low end of that range and due to some delays in projects and on company performance.
We've come in towards the higher end, but on average we.
Expect to be around $28 million per quarter.
And I E. This year.
We're currently in the process of working through our 2022 budget and our goal is to drive positive operating leverage however.
Before I can provide guidance, we need to finalize that process.
Fully expect to be able to provide an update on our run rate during late January earnings call.
Okay. That's.
That's fair I appreciate it thanks for the thanks for the answers.
Thanks Bryce.
Our next question today comes from Marla Backer from Fidelity. Please go ahead Mueller your line is now open.
Thank you.
So I have a couple of questions.
I'd like to follow up on a response you gave to an earlier question about M&A.
The M&A space.
Where you noted that if there were something that could expand your geographic footprint you might consider.
What about.
What about something to enhance your strategy to gain market share in some of the larger markets can you talk.
Speak to that point a little bit.
Well certainly.
<unk>.
Notwithstanding the acquisition that was referenced earlier in the call that happened in our marketplace. There hasnt been a lot of M&A in our historical geographic footprint. We certainly would be interested in we think we'd be a great partner for those banks that were described by Alex that may be looking at their budgets and the outlook for 2022.
And to <unk>.
Partnering with us.
We've got a great platform, we've got a great track record.
Serving the markets that we're operating in as well as an employer of choice but.
And so.
As I said, we're open to those opportunities, but as well if there are others.
Other geographies that are contiguous to our existing footprint or otherwise.
One of those possibilities as Jack said.
We need to ensure that they are compelling from an accretion of <unk>.
<unk> and manageable from a dilution perspective.
As far as our existing geographies are concerned we continue to have market share to be gained in Buffalo and Rochester markets.
<unk> seen.
We've demonstrated in the past we've continued to expand our commercial teams in both footprints as well as to Novo branches that we opened up in Buffalo This summer.
So its obviously early really in terms of those new Buffalo practice, but do you have any sense right now in terms of takeaways that youre getting from your customer feedback in terms of what you think you could take out of those new configurations or possibly apply to other branches.
Throughout the network.
So I think the feedback has been very good relative to our engagement in those neighborhoods that we are now serving and utilizing more efficient smaller.
Space and.
Taking advantage of our University trained associates.
The feedback has been good relative to the customer experience and our own experience in terms of how we're operating branch.
Yes, Jonathan.
Yes.
Yeah, Hi, Merrill Lynch, Justin how are you.
Yes, I just actually was on.
I was just actually on a tour of our footprint in the feedback for these branches and how they were designed is actually quite strong in <unk>.
Ironically witnessed the customer come in and be pleasantly surprised that they were going to sit down in an office.
Conduct a transaction that she was performing and it resulted in a nice conversation and ultimately expanded banking services.
With us as a result of that conversation she had with the banker. So I do think it is working but it is very early as you pointed out.
And we're obviously going to continue to monitor them receive feedback over time, but so far so good.
Okay. So one last follow up is that those two branches that we've talked about in Buffalo and those have been in the works for a while and had obviously been put on hold because of the pandemic.
<unk>.
And you've done a good job.
Streamlining.
<unk> snapped work.
Two.
Optimize the structure and optimize costs.
What about potential other de novo branches.
Would you focus on those two key markets would you focus specifically on Buffalo.
Near term focus.
How are you thinking about that.
Well exactly the way you just described it we need to be aware enough too.
Optimize while at the same time because.
Buffalo and Raj to represent significant growth opportunities and they are two markets, where we have not operated at historically for hundreds of years that we also need to be willing to think about and consider additional branches very carefully and very thoughtfully.
That connect our own network that provide an opportunity for <unk>.
Reinforcing our brand and planting a flag and as well importance of the service outlet.
In terms of taking care of the financial needs of those markets every aspect of those markets.
Emerging.
Economic class.
As well as <unk>.
Income to affluent.
Okay. Thanks, so much.
Yeah.
We currently have no further questions today, so hum COO back to Monty Bamjan for closing remarks.
Thank you very much for participating on our call, we'll look forward to talking to everyone again in January thank.
Thank you operator.
Today's call. Please enjoy the rest of your day you may now disconnect your lines.
Yeah.
Okay.
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Okay.
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