This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.:.
00:05 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. 00:31 It’s now my pleasure to hand the call over to Shelly Doran, Director of Investor Relations to begin.
Please go ahead..
00:42 Thank you for joining us for today's call. Providing prepared comments will be President and CEO, Marty Birmingham; and CFO, Jack Plants; Chief Community Banking Officer, Justin Bigham; and Director of Financial Planning and Analysis, Mike Grover, will join us for Q&A.
00:57 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.
We refer you to yesterday's earnings release and historical SEC filings available on our Investor Relations website for a safe harbor description and a detailed discussion of the risk factors relating to forward-looking statements.
01:19 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 acted as of today's date, October 29, twenty twenty one. 01:41 I'll now turn the call over to President and CEO, Marty Birmingham..
01:45 Thank you, Shelley. Good morning, and welcome to our third quarter twenty twenty one earnings call. Once again, our team was pleased to deliver strong results, reporting net income of seventeen point two million dollars or one point five dollars per diluted share.
Net income was down to the second quarters twenty point two million dollars or one point two five dollars per share and significantly higher than third quarter twenty twenty net income of twelve point three million dollars or zero point seven four dollars per share.
02:14 Our earnings reflect incremental organic growth across our businesses, as well as the third consecutive quarter of reserve for loan loss release and corresponding provision for loan loss benefit.
Pre-tax pre-provision income for the quarter was twenty one point two million dollars, a two hundred and nine thousand increase in the second quarter of twenty twenty one and a one point nine million increase from the third quarter of twenty twenty.
02:39 In early August, we completed the relocation of our Five Star Bank branch in the city of Elmira to an area included in the New York State Downtown Revitalization Initiative.
Exciting redevelopment is underway in the city of Elmira for the first time in 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.
03:19 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’s 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 one. 03:49 It’s now my pleasure to turn the call over to Jack so he can provide additional details on results and guidance..
03:56 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 twenty twenty one.
Net interest income for the quarter was thirty eight point three million dollars, an increase of five hundred and forty one thousand dollars from the linked quarter due to one basis point of margin expansion.
04:17 Despite a lower level of average interest earning assets and PPP loans, we grew net interest income by remixing our investment assets as we deploy interest earning cash into investment securities and reduced our overall cost of funds and interest expense.
Approximately fifty six million dollars and ninety five million dollars of PPP loans were forgiven in the third and second quarters of twenty twenty one respectively, with a related fee accretion of one million dollars in the third quarter, compared to one point five million dollars in the second quarter.
04:49 Net interest margin was three hundred and seven basis points, one basis point higher than the linked quarter. We continue to manage through the excess liquidity on our balance sheet.
However, the PPP fee forgiveness process provided incremental liquidity again this quarter, approximately ninety million dollars when comparing average balances for the quarters. Conversely, we experienced some relief from a decrease in public deposits, approximately ninety five million dollars when comparing average balances for the linked quarters.
05:21 Public deposits seasonally have a lower average balance in the third quarter as compared to the second quarter. Our efforts to limit margin compression have included a remixing of investment assets by reducing cash. The average balance was down ninety two million dollars quarter-over-quarter and increasing investment securities.
The average balance was up one hundred and twenty million dollars quarter-over-quarter. 05:45 Our investment securities purchases have been focused on mortgage-backed securities with low to moderate duration to provide ongoing cash flow, enabling reinvestment into loans or additional investment securities when rates begin to rise.
05:58 Lastly, our net interest margin benefited from a lower cost of funds, a drop by one basis point from the second quarter to twenty four basis points. Recognizing that opportunities for further reductions in cost of funds are somewhat limited, we continue to manage our funding costs in this low interest rate environment.
06:18 Provision for credit losses on loans with a benefit of three hundred and thirty four thousand dollars in the quarter, compared to a benefit of three point nine million dollars in linked quarter.
Continued improvement in the national unemployment forecast, positive trends and qualitative factors and a relatively low level of net charge-offs resulted in the third consecutive quarterly release of credit loss reserves.
06:41 Net charge-offs were five hundred and eighty seven thousand dollars in the quarter, as compared to net recoveries of three hundred and ninety four thousand dollars in the second quarter.
The second quarter benefited from commercial-related net recoveries of two hundred and ninety four thousand and indirect net recoveries of four hundred and twenty six thousand. 07:00 Our indirect business continued to experience a lower than historical level of charge offs in the third quarter at two hundred and sixty five thousand.
As a result of all of these factors, the allowance for credit losses decreased by nine hundred and twenty one thousand dollars in the quarter to forty five point four million dollars. 07:19 In the fourth quarter of twenty twenty, we identified the specific customers and industries we believe to be most at risk because of the pandemic.
We moved these loans, about twenty loans, totaling one hundred and twenty seven million dollars to criticized assets and set aside a specific reserve of four point seven million dollars.
The specific reserve increased by two point four million dollars in the first quarter, we decreased by about two hundred thousand in each of the second and third quarters, resulting in a specific reserve of six point seven million dollars at September thirty, approximately one hundred and eight million dollars of the original loans remained in the criticized or classified asset classes at quarter end.
08:04 We continue to see improvement in the performance indicators of several of these credits and remain optimistic they will normalize post-pandemic. We do not plan to release specific reserves until the credits return to normal paying status.
The allowance for credit losses on loans to total loans was one point two four percent at quarter end, down four basis points from June thirty. Excluding PPP loans, the ratio increases to one point two eight percent, a decrease of six basis points from end of the second quarter.
08:37 Our total non-performing loan to total loans ratio of eighteen basis points was unchanged from June thirty. The allowance for credit losses for loans and non-performing loans at quarter end was six hundred and eighty one percent down slightly from six hundred and ninety nine percent in June thirty.
Non-interest interest income of twelve point one million dollars was one point nine million dollars higher than the second quarter of twenty twenty one.
09:02 Key drivers of the third quarter increase for our insurance business, swap 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 seven hundred and seventeen thousand dollars due to the timing of commercial renewals, the impact of our August acquisition of North Woods Capital Benefits. 09:29 Income from derivative instruments was up nine hundred and sixty nine thousand dollars based on a number of transactions and impact of changes in fair market value.
Income from limited partnerships was up four hundred and fifty six thousand dollars based on the activity and performance of underlying investments. Non-interest expense was twenty nine point two million dollars, an increase of two point two million dollars from the linked quarter.
09:56 A one point three million dollars increase in salaries and employee benefits with a result of the impact of a true up of performance based annual incentive compensation and a higher commissions totaling approximately six hundred and ninety thousand related to strong year-to-date performance.
Combined with the impact of investments in personnel, to support strategic initiatives, including digital banking, the Novo Bank branches, and enhanced CRM platform, customer experience and banking as a service. 10:28 Occupancy and equipment was five hundred and forty eight thousand dollars 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.
10:45 Computer and data processing was one hundred and nineteen thousand dollars higher due to investments and technology, including digital banking initiatives. Income tax expense was four point six million dollars in the quarter, representing an effective tax rate of twenty one percent.
Effective tax rates in twenty twenty one have been higher than the previous year, due to higher pre-tax earnings. 11:11 Moving on to the balance sheet, total loan increased twenty two million dollars or zero point six percent from June, thirty. Commercial business decreased six point two percent. Commercial mortgage increased two point five percent.
Residential real estate loans were down one point one percent and consumer indirect was up four point six percent. 11:34 PPP loans are included in commercial business loans. Excluding PPP loans, the commercial business portfolio increased one point eight percent and total loans increased two point two percent.
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 the year end.
12:03 Total deposits at quarter end were three hundred and sixteen million dollars higher than at June 30th due to the seasonality of public deposits returning at quarter end, combined with growth in the reciprocal and broker deposit portfolios.
Our excess liquidity position continues to put pressure on net interest margin through both our excess federal reserve balance and additions to the securities portfolio.
12:27 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 remained 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 on net interest margin. 12:54 We experienced a decline in our TCE ratio from seven point five eight percent to seven point two five percent.
The ratio was negatively impacted by growth in total assets, up three hundred and twenty eight million dollars due to the seasonal inflow of public deposits at the end of the third quarter. The ratio was also negatively impacted to a much less extent by a decrease in AOCI related to unrealized losses in the available for sale security portfolio.
These negative impacts more than offset positive impact of earnings. 13:29 We remain very comfortable with our capital position. Given that much of the asset growth we've experienced in the past year was due to shorter term PPP loans and excess liquidity. In addition, our asset growth has been concentrated at a very low risk weighted assets.
Therefore, our regulatory capital ratios remain comfortably above the well capitalized minimums. 13:52 I'll now provide an update on our twenty twenty one outlook. We continue to expect mid-single digit growth in our total loan portfolio, excluding the impact of PPP loan.
As evidenced by the first three quarters of the year, the largest contributors to the increase are the commercial real estate and indirect portfolios.
Our original twenty twenty one PPP assumption, included approximately one hundred and twenty five million dollars to one hundred and seventy five million dollars of originations, which came in below the low end of the range at one hundred and seven million dollars.
14:25 We opened our twenty twenty one forgiveness portal in October and early results has been very positive. The process is much more streamlined for customers and the SBA has been approving applications and processing payments much faster than the first round.
Approximately eighteen percent of twenty twenty one loans have been forgiven to date in October. Therefore, we expect a higher percentage to be forgiven in the fourth quarter and originally anticipated.
14:54 There was approximately four point six million dollars of unamortized fees remaining on the twenty twenty one vintage of PPP loan as of nine thirty twenty one.
Regarding the twenty twenty vintage of PPP loans, we experienced forgiveness and payoffs of approximately seventeen million dollars in Q4 twenty twenty, one hundred and eighty two million dollars in the first and second quarters of twenty twenty one combined and fifty six million dollars in Q3 twenty twenty one, totaling approximately ninety five percent of the loans.
We expect the remaining five percent of loans to be forgiven or repaid in Q4 and into twenty twenty two. There was approximately one hundred and ninety thousand of unamortized fees remaining on the twenty twenty vintage of PPP loans, as of nine thirty twenty one.
15:38 We continue to anticipate mid-single digit growth in non-public deposits for the full year, largely driven by non-maturity demand in saving deposits, as run off in time deposits has occurred in the low interest rate environment. Guidance includes the two new Five Star Bank branches opened in Buffalo in June twenty twenty.
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.
16:14 We are leaving full year NIM guidance at a range of three zero five to three ten basis points, excluding the impacts of PPP. The impact on NIM relative to PPP forgiveness will likely be significant in the fourth quarter, given the streamline process for the twenty twenty one vintage to PPP loans.
This level of guidance reflects our expectation of continued compression from excess liquidity and higher balances and interest bearing cash and investment securities. 16:42 It also reflects lower yields on interest earning assets as loans and security to reprice will be partially offset by lower deposit funding costs.
As a reminder, our NIM fluctuates from quarter-to-quarter with the seasonality of public deposits and its impact on both our earning asset and finding 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. 17:16 Our NIM guidance remained highly dependent on the overall rate environment.
Full year non-interest 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, such as swap fees, and limited partnership income. So we are providing a wider range of guidance.
17:40 We continue to anticipate an increase in non-interest expense in the low to mid-single digit range for the full year. Our guidance throughout twenty twenty one has been for non-interest expense to range from twenty seven million dollars to twenty nine million dollars per quarter and we reiterate this guidance for Q4.
As expected, we experienced higher expense in the third quarter due to the investments we are making in people and technology to improve relationships with our customers and enhanced future profitability in areas including digital banking, the Novo Bank branches and enhanced CFRM platform, customer experience and banking as a service.
18:23 The third quarter also included a higher expense for truing up annual incentive compensation given our strong year-to-date performance. Our twenty twenty one efficiency ratio guidance remains in a range of fifty six percent to fifty seven percent for the full year.
However, given our year-to-date efficiency ratio of fifty five point four percent, we expect to be at the low end of the range. 18:47 We continue to expect that the effective tax rate for twenty twenty one will be within our range of twenty percent to twenty one percent 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 are revising full year guidance to a range of five to twenty basis points, a further reduction to both the low and high end of the range provided last quarter. 19:25 As we have stated in the past, our focus remains on improved profitability and operating leverage.
We are in the process of developing our twenty twenty two budget, and expect to provide guidance with fourth quarter results in late January, after we've obtained for approval consistent with past practice. 19:44 That concludes my prepared remarks. I'll now turn the call back to Marty..
19:49 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 road map to respond to, and capitalize on industry changes and investment in people process and technology. 20:13 We've talked extensively about the twenty twenty conversion to Five Star Bank Digital Banking and the success we've experienced.
Now we are accelerating our offerings through this digital banking platform. Another organizational initiative underway is the implementation of sales force, the customer relationship management solution that brings companies and customers together.
This integrated CRM platform will give all lines of business, including 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 by connecting the bank around customer needs, resulting in journeys and not just transaction. 21:06 Implementation is proceeding on target and is more than seventy percent complete.
This unified approach to customer engagement will help us deliver 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 BaaS.
21:31 Since the launch of this line of business in August twenty twenty one, we have established a pipeline of several potential Fintech partnerships that are in various stages of development, with anticipated launches in the short and intermediate term.
Through legacy and ongoing investments in infrastructure, talent, technology and partnerships, we have created an operating system that enables us to deliver vast capabilities to Fintech partners, and wealth management firms looking to offer banking products and services to their customers.
22:06 There are near term investments necessary to deliver services as consistent with regulatory expectations with revenues expected to follow. We are enthusiastic about the value proposition that our BaaS initiative 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.
22:36 Our partners on this initiative, our Q2, our digital banking platform provider and a leading provider of digital transformation solutions for banking and lending united in 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 bank to deliver secure and seamless Bitcoin services. 23:04 Customers can buy, sell and hold Bitcoin in 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 announce them as they come to fruition. 23:26 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 embrace innovation, technology and data driven by smart investments in innovative partnership.
Our core focus is to continue to operate a strong and stable enterprise to collaboration to partnering among bank, insurance and investment lines of business.
24:03 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.
24:24 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 are exciting times, and I am incredibly proud of our accomplishments and the associates that makes them possible. 24:51 Operator, this concludes my prepared comments and we are ready to open the call for questions..
24:58 Thank you. Our first question today comes from Damon DelMonte from KBW. Please go ahead, Damon. Your line is now open..
25:19 Hey. Good morning guys. Hope everybody is doing well today. My question was – hi, my first question is regarding the outlook for loan growth.
Could you just give an update on your commercial pipelines and kind of how they're looking as far as building demand and if there's any headwinds or challenges related to supply chain and things of that nature?.
25:45 Hey, David. This is Jack. Good morning. Yes. That's a good question. As we look at our look at our commercial loan pipelines, we feel very strong and healthy, particularly going into the fourth quarter. has been a very strong platform for us during the pandemic, it really wasn't impacted from our perspective. C&I has opposed a little bit challenging.
The pipeline has been strong, but we've been containing with a little bit of M&A activity, which has created a little bit higher run off 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.
26:27 And then on the residential side, we've seen a little bit of normalization in originations, particularly in our market coming off the twenty twenty two highs, and indirect has proved to be a significant engine for us to be able to deploy some excess liquidity into a loan category that we feel has a strong risk because the return on capital for the company in a short duration.
So all-in, we're pretty -- feeling pretty positive about commercial pipelines and the rest of our consumer pipeline going to -- end of the year..
27:03 Okay. That's very helpful. Thank you. And then with regards to credit, you had three quarters in a row of reserve release and you noted that you still have a decent amount of specific reserve for those loans that you had put into a criticized bucket beginning of the pandemic.
So how do we kind of think about the quarterly provision in the fourth quarter? And as you go through twenty twenty, do you think that it's realistic that you could have another release here in the fourth quarter?.
27:32 Thanks, David. Yeah. That's a good question. If we think about the remaining specific reserves on those loans, as we mentioned before, we don't really expect to release those reserves until the customers return to a normal paying status and develop some consistency there.
But if we continue on the current path of normalizing and 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 fact does it happen, we would expect our ACL ratio to migrate towards kind of our day one CECL estimate under a normalized specific level, which would be around one hundred and fifteen basis points..
28:22 Got it. Okay. That's very helpful. That’s all that I had. Thank you very much..
28:26 Thanks, Damon..
28:30 Our next question today comes from Alex Twerdahl from Piper Sandler. Please go ahead, Alex. Your line is now open..
28:40 Thanks. Good morning..
28:42 Good morning, Alex..
28:46 Just on the last question on the ACL and some of these criticized loans you talked about earlier.
Is there a date that, I mean, when would we expect that sort of normal paying status to resume? Is there a date in the fourth quarter that we should start seeing P&I in some of these loans?.
29:07 Right. So, as we talked previously, Alex, we in our process provide COVID bridges to, well, was anticipate and rest of and to be the potential timeframe with the end pandemic. So we provided bridges out through really the end of the year.
So our experience, what we're observing is that these companies and borrowers are demonstrating a return to normal same stability. So most likely, we'll start to see those numbers come down in the fourth quarter, early in the first quarter..
29:40 Yeah. Thanks, Marty. Thank you..
29:44 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 are talking about and in your prepared remarks, Marty. I guess a couple questions there.
One is, 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 build out that you guys have to do internally? Kind of where are you in the process of actually building up those capabilities so that you can take on some of these partners..
30:14 Well, we've internally declared this to be a new line of business for us in August of this year. We've really have been working on this, a little bit, of course of twenty twenty.
And we obviously saw the disruption coming it’s result of COVID and other industries factors and we started to modernize our foundation last year relative to Q2 and our digital platform which we've talked about sales forces a decision we made last year and it also has enabled us to start to deliver digital solutions out of our PPP portal that we stood off, et cetera., to our customers and we're in the process of building that out.
30:59 Last year, we also joined the Alloy Labs of consortium, which really was exposure to a group of life minded community banks and Fintech participants and it really was about helping us share the cost 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 concerned, we feel well positioned to be able to build that into our capital planning..
31:40 Yeah. This is Jack. I'll just add to this. This is a journey we've been on since twenty twenty and over the course of that time frame we've been making steps and strides in the right direction and continuing investments in technology.
And now -- the reason we're ready to announce this today, we feel that we are positioned to -- begin to integrate with our vast partners that we've developed in the pipeline we've established and we really have today, the infrastructure or operating system that's in a position to be able to execute on those opportunities..
32:14 Great.
And then I'm just kind of curious, if I remember correctly, sort of the Buffalo market is a bit of a tech hub, and I'm wondering if you're 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 within tech companies for the BaaS?.
32:36 I think that as a fair statement and 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 that's helping us move this initiative forward. And so, between the talent in local partnerships, I do think that will be able to reflect that progress in the future..
33:05 Okay. And then I just also wanted to ask about M&A. We've seen a little bit of pickup in deal activity up in your markets, including from you guys on the fees 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, seeing one that's kind of right smack dab in the million market recently at a pretty fair price.
I was hoping, maybe you can kind of run us through sort of the criteria of what you guys are interested in for a potential partner and sort of pricing metrics, geographic appetite things like that?.
33:40 Well, on the fee-base, I think we've been really consistent participant relative to enhancing our wealth and insurance business lines. And the North Woods 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 a strategic capability in our insurance line of business.
So, you we remain open and interested to that, those opportunities. We're very aware of the acquisition that you talked about.
And from our perspective, the market continues to be 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..
34:32 Yeah. 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 there's still lot of factors that play into the those kinds of opportunities from our perspective..
34:50 And would you be actively looking at opportunities now? I mean, it seems like there's a lot of small banks out there from what we're hearing that, that are kind of relooking at their budgets for next year and you guys are obviously in a healthy position making a lot of investment.
I'm sort of curious in terms of the timeframe if you'd -- if we could see a whole bank acquisition should fit those criteria in the -- at some point in the next twelve to eighteen months?.
35:19 Yes, I wouldn't rule out a possibility I mean we have to be something that wouldn't distract us from our current initiatives and would provide a sizable level of accretion and then long-term value for both companies and their shareholders..
35:36 One of the aspects or attribute to 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 have such a strong legacy of doing..
36:01 Perfect. Thanks for taking my questions..
36:04 Thank you, Alex..
36:08 Our next question today comes from Bryce Rowe from Hovde Group. Please go ahead, Bryce. Your line is now open..
36:16 Thanks. Good morning, Jack and Marty.
How are you doing?.
36:21 Good..
36:22 Doing well. Thank you..
36:23 Great. Excellent.
I wanted to maybe ask a little bit more about the hotel portfolio and not to beat a dead horse, but maybe you could speak to kind of the performance indicators that you might have seen over the summer or given that being kind of the height of the tourist season there and just any indications that you're seeing from that level of performance? Thanks..
36:55 Well, our hotel portfolio is performing well. And the borrowers and operators that we are dealing with really provide flagged properties and generally lower service and those hotels have been performing well in terms of return to normalcy, activity that was 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 have demonstrated a return to normalcy..
37:41 Yes there's a – we feel that the progress is picking up in that space even for the ones that we place in the COVID deferral bucket they are on a positive outlook and we expect portion of those to come off the next few quarters..
37:58 Great. Okay. That's helpful. I wanted to ask a little bit about I guess the margin dynamic here, you've talked about deploying some of the excess liquidity into the bond portfolio, you've talked a little bit about kind of the loan pipeline.
I was curious, if you think about where yields now -- earning asset yields are now within the loan bucket excluding PPP and within the bond portfolio, how do you think about kind of going forward yields where are loans kind of pricing today relative to current core loan yields and same question on the bond portfolio?.
38:42 This is Jack. So from a pricing standpoint, as we have 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 from an all-in standpoint, I mean, you can see where the curve is at this point in time, that's we -- on margin a little bit from a bond pricing standpoint, buying yields sort of come down dramatically over the past twenty four months and continue to put pressure on margin, but when we look at our forecast for our cash flow coming off that portfolio, given that we have the majority of our investments in the mortgage backed security space.
We're modeling approximately two hundred million dollars of cash flow come off that portfolio, plus the amount of access liquidity we're carrying just Federal Reserve balances that we have. So we can delever from some broker maturity deposit maturities that are coming due in early twenty twenty two.
And then holding all of equal as we see a normalization and deposit inflows, we can take some of that cash flow off the investment portfolio and redeploy it into loans..
39:50 Okay. I appreciate that Jack. And then maybe one more follow-up on the expense side of things. Appreciate the guidance here for the fourth quarter and some discussion around some of the pressure on the expense side of things given the operating environment, just curious how you extrapolate that as we look into twenty two.
Is there a -- just a normal level of expense growth that we should expect on an annual basis as we look into next year and do you think that the operating environment might put upward pressure on that more normalized rate of increase? Thanks..
40:37 Yeah.
I'm going to take a step back here, when we looked at our forecast for – in our guidance we provided for twenty twenty one, we provided a range of twenty seven million dollars to twenty nine million dollars per quarter for NII and for the first half of year, we were at the low end of that range and due to some delays in projects and the company performance that was becoming towards the higher end on average.
We expect to be around twenty eight million dollars per quarter on NII this year. We are currently in the process of working through our twenty twenty two budget and our goal to drive positive operating leverage.
However, before I can provide guidance we need to finalize that process and I fully expect to be able to provide an update on our run rate during our late January earnings call..
41:27 Okay. That's fair. Appreciate it. Thanks for the answers..
41:32 Thanks, Bryce..
41:35 Our next question today comes from Marla Backer from Sidoti. Please go ahead, Marla. Your line is now open..
41:44 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 engagement in M&A space. Where you noted that if or something that could expand your geographic footprint, you might consider.
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?.
42:19 Well, certainly, notwithstanding the acquisition that was referenced earlier in the call that happened in our marketplace, there hasn't been a lot of M&A in our historic geographic footprint.
We certainly would be interested and we think would be a great partner for those banks that were described by Alex that maybe be looking at their budgets and the outlook for twenty twenty two and to consider partnering with us. We've got a great platform.
We've got a great track record of serving the markets that where we're operating in as well as an employer of choice. 43:00 But so as I said, we're open to those opportunities, but as well if there are others geographies that are contiguous to our existing footprint or otherwise we're open to those possibilities.
As Jack said, we need to ensure that they are compelling from an accretion perspective and manageable from a dilution perspective..
43:20 As far as our existing geographies are concerned, we continue to add market share to begin and both buffalo and Rochester markets. And as you've seen probably demonstrated in the past, we continue to expand our commercial teams at multiple footprints as well as the Novo branches that we opened up in Buffalo the summer..
43:39 So, it's obviously early in terms of those new Buffalo branches, but do you have any sense right now in terms of takeaways that you're getting from your customer feedback in terms of what you think you could take out of those new configurations and possibly applied to other branches throughout the network..
44:01 So I think the feedback has been very good relative to our engagement and those neighborhoods that we are now serving and utilizing more efficient smaller space and taking advantage of our universally trained associates that the feedback has been good relative to the customer experience and our own experience in terms of how we're operating the branch..
44:33 Yeah, Justin, do you have -- maybe from that?.
44:39 Yeah. Hi Marla. It's Justin Bigham.
How are you? I just actually was on -- I was just actually on a tour of our footprint and the feedback for these branches and how they were designed is actually quite strong and ironically witnessed the customer come in and be pleasantly surprised that they were going to sit down in an office and 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 have with the bankers.
So, I do think it's working, but it is very early as you pointed out and we're obviously going to continue to monitor and receive feedback over time, but so far so good..
45:28 Okay. So, one last follow-up, is that those two branches that we've talked about in Buffalos those have been in the works for a while and had obviously been put on hold because of the pandemic. And you've done a good job of streamlining the branch network to optimize the structure and optimize costs.
What about potential other denovo branches? Would you focus on those two key markets? Would you focus specifically on Buffalo that you’re near term focus, how are you thinking about that?.
46:11 Well, exactly the way you just describe it.
We need to be aware enough to optimize well at the same time because Buffalo and Rochester represent a significant growth opportunities and there are two markets where we have not operated historically for hundreds of years that we also need to be willing to think about consider additional branches very carefully and very thoughtfully that connect our own network that provide an opportunity for reinforcing our brand and planning flag and as well importance of a service outlet in terms of taking care of the financial needs of those markets in every aspect of those markets, emerging economic as well as little income to it..
47:09 Okay. Thanks so much..
47:15 We currently have no further questions today. So I'll hand the call back to Marty Birmingham for closing remarks..
47:23 Thank you very much for participating on our call. We'll look forward to talking to everyone again in January. Thank you, operator..
47:33 This concludes today’s call. Please enjoy the rest of your day. You may now disconnect your lines..