Mercantile Bank Corporation (NASDAQ:MBWM) Q3 2021 Earnings Conference Call October 19, 2021 10:00 AM ET
Robert Kaminski - President and CEO
Charles Christmas - Executive Vice President and CFO
Ray Reitsma - President, Mercantile Bank of Michigan
Conference Call Participants
Brendan Nosal - Piper Sandler & Co
Daniel Tamayo - Raymond James
Damon DelMonte - Keefe, Bruyette & Woods
Bryce Rowe - Hovde Group
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 presentation to review the quarter's results and open up the call to questions. [Operator Instructions]
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 company's business. The company's actual results could differ materially from any forward-looking statements made today due to the factors described in the company's 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 2021 press release and presentation deck issued by Mercantile today, you can access it at the company’s website www.mercbank.com.
At this time, I would like to turn the call over to Mercantile’s President and Chief Executive Officer, Bob Kaminski.
Thank you, Anthony. Good morning, everyone. Thank you for joining our call today. Our Mercantile team continues to generate outstanding financial results that illustrate the strength of the high touch relationship based approach to banking and is allowing to build long-term relationships with our clients.
For the third quarter we earned net income of $15.1 million or $0.95 per share and nearly 41% increase from the third quarter of 2020. Through the first nine months of the year net income of $47.4 million is not more than 57% from the prior year period. Driving our strong bottom line results are two key components; robust organic double-digit loan growth leading to healthy net interest income expansion, and very strong 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 and client centric culture that permeates all levels of the organization. Our team executes our strategy in 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.
Ray will explore our loan portfolio in more detail later in this call, but I would like to provide some insights into how we achieve these results and why we have confidence in our ability to continue doing so.
Supporting our local communities is at the forefront of who we are. Challenging 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 bank did not and these companies were able to experience the Mercantile way first hand. Our responsive local decision making and high sense approach is clearly resonating with business leaders. Many of them need more from their banks than simply a place to conduct transactions. They need a true financial partner. Our core commercial loan growth in the third quarter, our solid and sustained pipeline shows that our approach is an affective one.
I'd like to note that even as we grow loans and navigated the ongoing pandemic, our asset quality remained strong. We continued to report low levels of passive loans and nonperforming assets illustrating our commitment to sound underwriting as well as strong performance of our commercial borrowers and their management teams.
On the mortgage side, our nimbleness and in-market global lenders also contribute 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 income of which mortgage banking is the largest component. Our mortgage banking income totaled a solid $6.6 million for the third quarter and $23 million year-to-date, up 17% for the first nine months of last year.
These results are driven by our ability to generate purchase originations which in turn result in our success, from our success in how the mortgage bankers were well connected in their communities. We believe we are well positioned to capture a larger share in upcoming periods based upon our teams proven efforts and the positive application and pipeline buying trends we 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 remain competitive with a broader base of commercial customers. Swaps generated $3.9 million in fees for the three months ended September 30, 2021 making up a quarter of our noninterest income in this period. Total noninterest income was up more than 17% 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 all of 31% of operating revenue compared to 22% at the median $5 billion to $10 billion bank range in the most recent quarter.
As I mentioned earlier, our people are behind these results and we've long supported them through investments in technology. Digital adaption 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 efficiencies, customize unique client interactions, and refine our internal systems. We have long made investments in technology an important aspect of our business model and will continue to do so as our customers' needs continue to evolve.
Our combination of people, products, services and technology are clearly driving financial strength and organic growth. Important, this supports our ongoing focus on creating shareholder value and a truly sustainable organization. Today we announced a fourth quarter cash dividend of $0.37 per share. Regarding our stock buyback program, we were able to repurchase an additional 289,000 [ph] shares of Mercantile stock brining year-to-date purchases to 635,800 shares.
Overall we believe our strategy, talent, culture and business model, all support 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, all in terms of attracting talent and expanding client relationships.
That concludes my introductory remarks. I'll now turn the call over to Ray.
Thanks Bob. Today my comments will center around three topics and evidence in the third quarter results; strong core commercial loan growth, strategic growth and sustainable management income and increasing efficiency in operations.
First, core commercial loan growth. During the third quarter we are reporting core commercial loan growth of $162 million representing a 25% annualized growth rate, 52% [ph] of which is C&I credit. Year-to-date core commercial loan growth is $298 million, representing a 16% annualized growth rate, 60% [ph] of which is C&I credit and I could stress that the growth consists primarily of C&I credit in line with our strategic objectives. This growth was made possible due to the efforts of our commercial team and the focus on relationship building and the business community bank value proposition.
The pandemic and the PPP program gave us the opportunity to prove in action what we have marketed and contracted, namely that Mercantile represents the capacity and technology they need coupled with timely local decision making and exceptional service. We delivered when may faltered. As a result of our robust growth, we increased our provision expense largely to support that growth. We have also dialed back our stock repurchase program in recognition of the fact that this robust loan growth requires robust capital support. Our backlog remained consistent in prior periods as we funded impressive level of core growth.
Secondly, strategic growth and sustainable noninterest income. During the first nine months of 2021, we reported year-to-date noninterest income of $42.5 net of gain on a branch sale compared with $30.8 million last year, an increase of 38% and $11.7 million. It remains the case that this is sustainable performance. Swaps represented $6.1 million of the growth and represented meeting customer demand for fixed rates without seeking the balance sheet risk of a conventional fixed rate which is very important to margin sustainability in the present environment.
Our term debt 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 $3.3 million of the growth in noninterest income year-to-date as our team has grown production of $645 million last year to $742 million this year. The case for sustainability in this business is supported by the fact that last year's volume represented a mix of 30% purchase activity with 70% refinance activity, while the present year mix there is a 50-50 split between purchase and refinance activity and of course purchase activity is far more sustainable than refi activity.
Lesser but important contributors to the noninterest income picture of are the overall services charges on accounts and credit and debit card income which increased by 17% and 19% respectively during the third quarter, reflecting the growth in a number of relationships served with more increased activity within the accounts as the economy recovers from the pandemic. In sum, noninterest income made up 32% of revenue for the first nine months of 2021, up from 25% in the prior period.
The sum of topic of my comments is increasing the efficiency in our operations. Year-to-date we are reporting and efficiency ratio of 57.4% compared to 59.9% from the comparable period last year. Our consistent spending on technology over the years has served us well, allowing our customers to utilize numerous digital channels as alternatives to visiting a branch and providing the ability to reallocate resources towards further enhancements in an already up to date digital platform. It is worth noting that during this period our robust loan and noninterest income growth our FTE increased by only 11 from the prior year period to a total of 629 and the year-to-date revenue growth of 11.4% outpaces noninterest expense growth of 6.8%.
That concludes my comments. I will now turn the call over to Chuck.
Thanks Ray and good morning everybody. As noted on Slide 22, this morning we announced net income of $15.1 million or $0.95 per diluted share for the third quarter of 2021 up over 40% from the $10.7 million or $0.66 per diluted share over the respective prior year period. Net income during the first nine months of 2021 totaled $47.1 million or $2.95 per diluted share, up over 57% from $30.1 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 month 2021 periods was relatively consistent with the prior year periods as growth in core commercial loans and residential mortgage loans has largely mitigated the negative effect of the FOMC rate cuts totaling 130 basis points during March 2020 and ongoing low interest rate environment since that time. Interest income on securities in the third quarter of 2021 is 9% higher compared to the same period in 2020 in large part reflecting growth in the securities portfolio over the past four months.
Securities interest income in the first nine months of 2021 is relatively unchanged from the respective time period of 2020 that accelerated this non-accretion on call U.S. Government agency bonds in 2020 year excluded. In total, interest income for the most recent quarter increased $0.3 million from the third quarter of 2020; however, it was down $4.2 million for the first nine months of 2021 as compared to the respective prior year period, a large part reflecting a lower interest rate environment that could not be fully offset with growth and earning assets.
Interest expense declined or remained relatively unchanged in all categories during the 2021 period compared to the prior year period with reduction reflecting a low interest rate environment. In total, interest expense declined $1.3 million during the third quarter in 2021 compared to the third quarter of 2020 and was down $5.4 million between the comparable year-to-date periods.
Net interest income increased $1.6 million in the third quarter of 2021 compared to the third quarter of 2020 and was up $1.1 million during the first nine months of 2021 compared to respective prior year period. Overall, growth in earning assets was able to essentially offset a lower net interest margin.
We reported provision expense of $1.9 million 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 $0.9 million compared to provision expense of $11.6 million during the respective prior year period. The provision expense recorded for the third quarter of 2021 mainly reflected growth in core commercial loans while the prior year provisions does primarily comprise of increased allocations associated with the downgrade of certain non-impaired commercial loan relationships to reflect stressed economic conditions 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 economic and business conditions environmental factor that was upgraded during the second quarter provide an improvement in both current and forecasted economic conditions.
The relatively large provision expense for the 2020 year-to-date period primarily reflected an increased reserve allocation associated with the economic and business conditions environment 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 of CECL until January 1, 2022. However, we continue to run our CECL model concurrently with our incurred loss model.
Based on preliminary results, the reserve balance under the CECL methodology will be about $7.2 million lower than our reserve balance as of September 30, 2021 as determined using the incurred loss methodology. This is an increase from the $6.6 million difference at June 30, and a $2.6 million difference at year end 2020. The primary difference between the two reserve balance over last few quarters is related to the economic forecast aspect of the calculation.
Under CECL the employed economic forecast has shown significant improvement. Under the incurred model, our economic and business condition is generally positive and improving, but less so than what is reflected in market and economic forecasts. We will continue to assess all the qualitative factors at the end of each quarter and will adjust loan losses or balance via the provisions expense line item on the income statement.
Continuing on next Slide 25, overhead costs during the third quarter of 2021 relatively unchanged when compared to the year ago quarter while increasing $4.9 million during the first nine months of 2021 compared with nine month of last year. During the third quarter of 2020 we recorded a large bonus accrual due to a change in customers associated with the bonds by metrics and no bonus accruals are reported during the first and second quarters due to COVID-19 and the associated weakened economic environment. The bonus accrual in the third quarter of 2020 was $101 million higher than what we recorded during the third quarter of this year.
The lower bonus accrual in the third quarter of 2021 mitigated the impact of higher salary expense spending from annual employee merit pay increases, higher medical insurance costs, and increased FDIC insurance premiums, largely resulting from an increased deposit base. About 60% of the increase in year-to-date overhead costs resulted in salary and benefits, with almost half of that figure being comprised of increased medical insurance costs. The remaining portion is primarily comprised of increased FDIC insurance costs and former facility evaluation rate balance. Currently we expect fourth quarter 2021 overhead costs to approximate the third quarter expense.
As far as 2022 overhead costs, we are in initial stages of developing our 2022 budget, and while I don't have any specific guidance to provide at the current time, 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.
Continued on Slide 26, our net interest margin was 2.71% during the third quarter of 2021, down 5 basis points in 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 the yield 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 have been relatively consistent over the past five quarters except during the fourth quarter of 2020 when we recorded larger than typical PPP income accretion.
As seen on Slide 21, net PPP income accretion of $2.8 million during the third quarter has been very consistent since the origination of the program except for the aforementioned fourth quarter of 2020. As of quarter end, unrecognized PPP net fee income totalled $3.4 million, a vast majority of which is related to PPP of round number 2 fundings. Assuming PPP forgiveness trends remain unchanged, we expect a large majority of the remaining unrecognized PPP net fee income to be 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 a product of increased local deposits which are primarily a product of the Federal Government stimulus programs as well as lower business and consumer investment and spending.
Total local deposits and fee [ph] balances increased $538 million or 15% during the first nine months of 2021 and are up $1.4 billion or 51% since year end 2019. Approximately one half of the growth of local deposits since year end 2019, this 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 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 in the 2022 as time deposits and FHLB advances originated a higher interest rate environment in prior periods matured.
As shown on Slide 30, we remain in a strong and well capitalized regulatory capital position. The Tier 1 leverage capital ratio was 9.3% and the total risk-based capital ratio was 12.5% as of September 30, 2021. The Tier one leverage capital ratio continues to be impacted by the PPP loan portfolio and excess liquidity with no similar impact on the total risk-based capital ratios as both components are assigned a 0% risk rating. Both our Tier 1 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 we categorized as well capitalized.
We repurchased about 289,000 shares for $8.9 million at a weighted average cost of $30.97 per share during the third quarter of 2021, bringing our year-to-date total up to 636,000 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% of 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 plan. As of September 30, we have $8.4 million available in our repurchase plan.
In closing, we are pleased with our operating results in the first nine months of 2021 and financial condition as of quarter end and we believe are well positioned to continue to navigate through the unprecedented environment created by the corona virus pandemic and other events.
Those are my prepared remarks. I’ll now turn the call back over to Bob.
Thank you, Jeff. That concludes the management's prepared remarks and we will now open the call to the Q&A.
We will now begin the question-and-answer session [Operator Instructions] Our first question comes from Brendan Nosal from Piper Sandler. You may ahead.
Hey good morning, folks, how are you?
Good morning, Brendan. Fine and how are you?
Good thanks. Maybe starting off on the longer side of things, I mean you guys have managed to kind of work your way through what was a slow growth environment for most other banks incredibly well, but even so this quarter's number just seemed exceptionally strong to me. Could you just offer a little bit more detail on kind of what you're seeing in your commercial customer base that's allowing for such strong credit generation? And then maybe your thoughts on where the pace of growth goes from here?
Yes, this is Ray. I'll be happy to address that. The case for where it goes from here is pretty strong right now. We've actually 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 have recorded in the historical quarter, and it's largely comprised of adding new relationships to the roster. Our existing customer base is growing to 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 has 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 the service you're looking for it sends you looking, and we've been there on the receiving end of that time after time.
That's really is a strong attribute to our team and despite the challenging work conditions for them, whether working remotely, with a hybrid approach or in the office, they understand the importance of providing timely responses to customers and continuing to bring those new relationships to the finish line. They work very hard to do that and again this is distinguishing factor that the customer is seeing as they compare Mercantile to other banks in our markets.
All right great that’s super helpful colour. Maybe one more from me, 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 over the past year and a half with the fed and the markets you need to anticipate rate hikes maybe at some point late next year, can you just remind us what each rate hike means to either NIM or net interest income?
Yes, this is Chuck. I don't have those specific numbers in front of us, but definitely our balance sheet would be the structure to provide for increased net interest income and margin and increase in interest rate environment, and yes I think those numbers, I don't know if those numbers are available in our in our Form 10-Q, so if you want to get them quicker or I can get them to offline here.
No, that's fine. Just kind of more conceptually wanted to see how you think about it. All right, thanks for taking the questions.
Our next question comes from Daniel Tamayo of Raymond James. You may go ahead. Daniel, your line may be muted.
Oops, sorry about that. Can you hear me now?
All right. 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 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 factor is probably about 20% to 25% of our balance of our reserve as of September 30. And, again, that's just one of the qualitative items that we have in the calculation along with all the other ones. And so, rather we feel hopeful that we get to a point in time where we can start upgrading that environmental and sooner than later hopefully, eliminate that altogether.
Okay, so it's safe to say we could essentially, if we pulled that that amount out, that would be a reasonable, I guess normal, also, including what you said about the CECL adoption, that might be a normalized reserve ratio in the future?
Yes, I mean it certainly gets to a pretty low number. And that's something that I think we're comfortable with. But that's what the world of CECL is dictating to us. That's one of the reasons why we did pull the reins back as long as we could on adopting that one, because it's a duration based model and of course, our loan 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 about two years. And that those results in a relatively, it results in a lower level of reserves against our commercial loan portfolio than what the incurred model does. And a couple of that with very pristine asset quality, it makes it a challenge to keep their reserves up as much as what you think that they should be with the CECL model.
That makes sense. And then switching gears here, your comment on the increased overhead costs related to higher salary from wage inflation and incremental hires that were due to your strong loan growth, understandable on both sides there, but how do you think that impacts kind of overall efficiency? Is that something you still think that revenue growth can outpace or how does that impact the overall thoughts on profitability?
Yes, I'll probably, I know I have some more specific comments for you in January once I can get through the budget [ph] season and put some longer term forecasts together, given the environment that we're in currently and what we think is going to happen in the future. I think in the near term, my comment was basically to say, we think there's going to be some larger than typical growth and overhead costs starting pretty much next year, when the pay raises go through and the hiring continues. Certainly long-term, we expect to leverage off of, the new employees and that are coming in to support that loan growth and fee revenue. And as Ray was pointing out, we've been able to demonstrate that our revenue is growing faster than what our overhead costs are.
So they might get a little bit choppy on a quarter-to-quarter basis, but we think that we are well structured to continue to grow like we have been, and make sure that, that revenue is growing faster than our overhead costs are. And I think one thing I would add is, on the technology side, Bob has a couple of comments echoing this in his opening remarks is, we've stayed across the state-of-the-art since day one this bank was formed and we continue to do so. And we've got a platform that meets or exceeds any other banks that are out there that we're competing against. And more importantly, we continue we have continued to fund that program all along and so we are current on everything that we need to be. And so we don't have any big catch-up expenses or investments that we have to do from a technology side, just the continued ongoing upgrades and the introduction of new products and services as those become available.
All right, well, that makes sense. I appreciate all the color. Thank you. That's all from me.
Our next question comes from Damon DelMonte of KBW. You may go ahead.
Hi, hope everybody is doing well today. So my first question regarding fee income, could you just talk a little bit more about the outlook for mortgage banking and kind of, how you see the pipeline here early in fourth quarter?
Sure. Early in the fourth quarter, that the pipeline is stronger than you'd expect from a seasonal pattern standpoint. 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. And the market remains strong in the communities that we serve. As it relates to purchase activities, we've made successfully the shift from refi to purchase activity. I'd say 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 swap income that you guys booked this quarter were obviously very strong. Do 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 near $4 million level.
As I mentioned in my comments, I view 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 debt with floating rate characteristics. So, there's plenty of opportunity to continue that. The swap doesn't fit every situation. You need a certain amount of size and customer sophistication, and wherewithal to bring it all together. However, our opportunities in that arena do not appear to be diminishing in the near future and I would expect that we continue at a similar pace out into the foreseeable future.
Yes, Damon, I would just add to Ray's comments; it's definitely going to be lumpy on a quarter-to-quarter basis just the nature of the program that's out there. About half of the income that we recorded 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 generally in our program what we do is instead of having the customers pay their prepayment penalty in cash, and we record that as interest income, we instead embed that into the swap metrics. And then, when we get the fee paid by the correspondent bank that we swap out with, we get, how you say it, an oversized fee if you will, wherever you want to call it. So there's two things that are going on with swap income, one happens to be fee activity. The 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 on and we are going to correct those, how those play out.
Yes Damon, this is Bob, I guess I'll wrap up on this topic by saying that the swap is not a good fit necessarily for every customer, but our lending team has done a really good job of identifying those clients situation for this is a good fit, and the sophistication is there. And the attributes that Ray alluded to are present to be able to benefit the customer and allow them to get what they're after in a -- array for a term loan, and helps us accomplish our balance sheet objectives from a banking standpoint.
Got you. That’s good color, thank you. And then just kind of one followup question on overall noninterest income, the other noninterest line was like, a little bit over $1 million this quarter, which was higher than normal. Chuck, was there anything kind of one time in there?
Yes, it's about $600,000 in one time. We finally went through finalizing 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 systems and all the appeals and we finally got our payment, so about 600 grand of that is one time.
Okay, great. And then just kind of quickly here and the size of the securities portfolio, obviously, a decent increase quarter-over-quarter, do you expect to keep that level of securities on the books, is that just going to be dictated by the pace of loan growth or how do we think about that?
Yes, I think, the growth that we did in the third quarter is pretty similar to the growth that we've had over the last four quarters. Probably about this time last year we really started adding to the portfolio, when it became pretty obvious to us that the assets and liquidity was going to stay on the balance sheet for quite some time. And that we know the excess liquidity would actually go sometime, even with those securities purchases and loan drop. So I would expect that certainly here in the fourth quarter, the growth will continue as it has been over the last four quarters or so. At some point that will slow down, especially when we see commercial loan growth continuing and a lot of that's going to also depend on the behavior of the deposits, which is really the driver of the excess liquidity overall.
We continue to put most of that money is going into government agency bonds, generally with three to seven, eight year, three to eight year time bucket. So what we've been doing is basically just staying with a ladder of maturity, and just growing those ladders. And we certainly want as time goes on, we certainly would like to have that build up with the securities portfolio that we've done, we would love nothing else than to take those investments as they mature, and put those into the loan portfolio.
So we'll definitely have that opportunity from a cash flow standpoint. It was not needed for loan growth; I would think rates are probably going to be up over the next few years and then we'll be able to refinance those monies at higher rates. So we think it's a good use of that actual liquidity, not 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 bought before. So we're seeing discipline there, and think we've got a good program in the future.
Got it. Okay, great. And then just one final question, to circle back on the provision, flash reserve outlook, we saw larger than expected provision this quarter, more so than what we've seen in the last few quarters and that was in response to loan growth. Given the optimism and continued loan growth, so would you expect the provision level similar to kind of what we saw this quarter?
Yes, I think, like we said, a vast majority of that $1.9 was the loan growth. And we did not touch any of the environmentals this quarter, something that's important. We had loan growth in the second quarter that we had to provide for. We ended up with a negative provision for the quarter because the change in the economic environmental was more than offset the growth that, the growth we had the commercial loan portfolio, and therefore the provision expense associated with that. But all things being equal, I think that commensurately, the loan growth will provide for a similar level of provisioning going forward without messing with any of the environmentals.
Got it. Okay, that's all I had. Thanks a lot. I appreciate it.
Our next question comes from Bryce Rowe of Hovde Group. You may go ahead.
Thanks a lot. Maybe one followup here on the swap income side of things. I wanted to get a feel for the level of prepayment income that's affected that line this year, not just this quarter, but this year? And then if you could speak to maybe the potential for more prepaid type income within that line as we move forward, just trying to get a feel for how much fixed rate, activity do still have within the portfolio?
Yes, Bryce like I 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 said, from the third quarters, but specifically about half the income was related to prepayment fees. That's definitely a higher percentage than what was $6.1 million represents. 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 enter the swap.
And the question I've been through that means. And I think Ray mentioned this about half of our portfolio, of commercial loan portfolios fixed rate. And while we don't look, flip all of those into a floating rate with a swap attached, there's definitely some opportunities there. This management team is and I know the word concerned, or how much I hate that your rates are very, very low. And we definitely see a lot of inflationary pressures.
And obviously, we're in an unprecedented environment that is causing some of those inflationary pressures. But we are very cognizant of what could happen to our income statement, if interest, medium and longer term interest rates were to rise appreciably. And we're definitely, through this program and other things, finally, make sure that we position our balance sheet that would be -- is able to perform well in that environment. Yes, clearly, there's a little bit of pain on the front end, especially on the refinance activities when we take the higher rate, fixed rates and put them in a floating rate. But we think that insurance policy, if you will, is definitely the right thing to do. As both Bob and Ray mentioned already, the swap program isn't for everybody. So we're not -- we don't really even have the opportunity to take, solve fixed rate commercial loans and put them into floating rates, we don't really want to do that.
But we definitely look at larger bank balance loans, those with more sophisticated management teams. Clearly, we want to make sure that our borrowers understand the workings around a swap, how it works, and then some of the handcuffs that put that, that could potentially put on them as they continue to run their businesses. So there's plenty of opportunity there. That's we're talking so far about existing loans. Certainly now we're looking at new loans to the bank, new borrowings from existing customers. They -- many of them, are getting really, meeting those size and sophistication and goalposts and that they want a fix rate product, we're definitely talking with them about the swap program.
So there's lots of opportunity out there both in the existing portfolio, as well as the growth, but you're trying to determine how much that's going to 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 forecast early and the way we look at the swaps, it's another tool in toolbox that we have in trying to assess what's best for the customer and what are their needs, structured a credit package that makes sense for them and makes sense for us as well. So it's a great program and hats off to the team for putting this program into place because it meets the need, this environment and something that provides us with some nice benefit on the income side. And as importantly, it puts the customer in a situation that meets their needs as far as their credit request.
Great. Couple more questions here from me. Just curious what you're seeing, obviously, PPP introduces quite a bit of noise and volatility around kind of loan yields and NIM. Could you give some commentary around what you're seeing from an originated yield perspective in this quarter versus recent quarters?
Yes, I've got these in my head here. I got the PPP program this year, has been pretty consistent, for the impact on the income statement and on an overall net interest margin, it's about a 15 basis point positive impact, the fee accretion. 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, paid off here in the fourth quarter. That's something we have very little control over because it's all about our borrowers making the applications and the SBA funding things, but the trends seem pretty steady. So I think we'll have a little bit of a tail, I think going into next year, but for the most part, we'll be done with the progress at the end of the year.
Okay. And then maybe last one for you, Chuck. In terms of CECL, is it still kind of go forward January 2022 with that adoption?
Yes, once they give me another extension of it, but I don't think I'm going to get that one. So yes, January 1 of 2022 is the day we will convert to CECL.
Okay, thanks, guys.
[Operator Instructions] Our next question comes from Brendan Nosal of Piper Sandler. You may go ahead.
Hey, just one followup from me. Just on the COVID factor still in the reserve, and then the kind of day one CECL reduction in reserves, I just want to make sure that those that there is some overlap presumably between those two numbers right to meet meaning upon CECL adoption, you'll be releasing some of that remaining COVID reserve for adoption, you'll be releasing some of that remaining COVID reserve factor, is that the right way to think about it?
Well, I look at those as two totally separate. We do have the COVID factor is part of our CECL model. And as we go from incurred, the CECL is a separate decision as to what we really want to do with that COVID environment. So if we keep the COVID, environmental study, and we would have adopted October 1. We got a little over $7 million excess there that we would, run through capital and make that adoption to CECL. That's where it plays out right now. But the adoption of CECL and what we do with the COVID factor are really two separate decisions or two separate impacts.
Yeah. Okay. That's very helpful clarification. Thanks, Chuck.
This concludes our question-and-answer session. I would like to turn the conference back over to Bob Kaminsky for any closing remarks.
Yes thanks, Anthony and thank you all very much for your interest in our company. We hope you and your families stay healthy and safe. We look forward to speaking with you again at the conclusion of the fourth quarter at our conference call in January. The call has now ended.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.