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. To withdraw, please press star followed by two. For assistance, please press star followed by zero. It's now my pleasure to hand the call over to Shelly Doran, Director 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, Martin 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. Today's prepared comments in 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. We'll also discuss certain non-GAAP financial measures intended to supplement. These measures to GAAP financial measures were provided in 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.
Pleased to deliver strong results, reporting net income of $17.2 million, or $5 per diluted share. Net income was down from the second quarter's $20.2 million, or $1. Organic growth across our businesses, as well as the third consecutive quarter of loan loss reserve release and corresponding provision for loan loss benefit. Pre-tax, pre-provision income for the increase in the second quarter of 2021 and a $1.9 million increase from the third quarter of 2020. 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 decades, 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 tuck-in 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 ones. It's now my pleasure to turn the call over to Jack, so he can provide additional details on 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 $541,000 from the linked quarter due to one basis point of margin expansion. Despite a lower level of average interest earning assets and PPP loans, we grew net interest 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 PPP loans were forgiven in the third and second quarters of 2021, respectively, with a related fee accretion of $1 million in the third quarter as compared to $1.5 million in the second quarter.
Net interest margin was 307 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 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, approximately $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 have included a remixing of investment assets by reducing cash. The average balance was down $92 million quarter over quarter and 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, enabling reinvestment into loans or additional investment securities when rates begin to rise. Lastly, our net interest margin benefited from a lower cost of funds that dropped by one basis point from the second quarter to 24 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. Provision for credit losses on loans was a benefit of $334,000 in the quarter, compared to a benefit of $3.9 million in the 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. Net charge-offs were $587,000 in the quarter as compared to net recoveries of $394,000 in the second quarter. The second quarter benefited from commercial-related net recoveries of $294,000 and indirect net recoveries of $426,000 . Our indirect business continued to experience a lower than historical level of charge-offs in the third quarter at $265,000 . As a result of all of these factors, the allowance for credit losses decreased by $921 thousand 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, to criticized assets and set aside a specific reserve of $4.7 million. The specific reserve increased by $2.4 million in the first quarter and decreased by about $200,000 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.
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 1.24% at quarter end, down four basis points from June 30. Excluding PPP loans, the ratio increases to 1.28%, a decrease of six basis points from the end of the second quarter. Our total non-performing loans to total loans ratio of 18 basis points was unchanged from June 30. The allowance for credit losses for loans to non-performing loans at quarter end was 681%, down slightly from 699% at June 30. Non-interest 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, 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 $717,000 due to the timing of commercial renewals and the impact of our August acquisition of North Woods Capital Benefits. Income from derivative instruments was up $969,000 based on the number of transactions and impact of changes in fair market value. Income from limited partnerships was up $456,000 based on the activity and performance of underlying investments. Non-interest 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 was a result of the impact of a true-up of performance-based annual incentive compensation and higher commissions totaling approximately $690,000 related to strong year-to-date performance, combined with the impact of investments in personnel to support strategic initiatives, including digital banking, De Novo Bank branches, an enhanced CRM platform, customer experience and banking-as-a-service. Occupancy and equipment was $548,000 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 $119,000 higher due to investments in technology, including digital banking initiatives.
Income tax expense was $4.6 million in the quarter, representing an effective tax rate of 21%. Effective tax rates in 2021 have been higher than the previous year due to higher pre-tax earnings. Moving on to the balance sheet. Total loans increased $22 million or 0.6% from June 30. Commercial business decreased 6.2%. Commercial mortgage increased 2.5%. Residential real estate loans were down 1.1%. Consumer indirect was up 4.6%. PPP loans are included in commercial business loans. Excluding PPP loans, the commercial business portfolio increased 1.8% and total loans increased 2.2%.
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 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. 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 on net interest margin. We experienced a decline in our TCE ratio from 7.58% to 7.25%. 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. 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 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 was due to shorter-term PPP loans and excess liquidity. In addition, our asset growth has been concentrated in very low risk-weighted assets. 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 PPP loans. 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 2021 PPP assumptions included approximately $125 million-$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 streamlined for customers, and the SBA has been approving applications and processing payments much faster than the first round. Approximately 18% of 2021 loans have been forgiven to date in October. Therefore, we expect a higher percentage to be forgiven in the fourth quarter than originally anticipated. There was approximately $4.6 million of unamortized fees remaining on the 2021 vintage of PPP loans as of 9/30/2021. Regarding the 2020 vintage of PPP 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 loans.
We expect the remaining 5% of loans to be forgiven or repaid in Q4 and into 2022. There was approximately $190,000 of unamortized fees remaining on the 2020 vintage of PPP loans as of 9/30/2021. We continue to anticipate mid-single-digit growth in nonpublic deposits for the full year, largely driven by non-maturity demand and savings deposits as runoff 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 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 305-310 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 streamlined process for the 2021 vintage of PPP loans. 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 to be 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 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 that is difficult to forecast, such as swap fees and limited partnership income, so we are providing a wider range of guidance. 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 2021 has been for non-interest expense to range from $27 million-$29 million per quarter. 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 enhance future profitability in areas including digital banking, De Novo Bank branches, an 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 56%-57% for the full year. However, given our year-to-date efficiency ratio of 55.4%, 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 our range of 20%-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 are revising full year guidance to a range of 5-20 basis points, a 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, developed a roadmap to respond to and capitalize on industry changes, and invested in people, process, and technology. We've talked extensively about the 2020 conversion to Five Star Bank digital banking and the success we've experienced and how we are accelerating our offerings through this digital banking platform. Another organizational initiative underway is the implementation of Salesforce, a 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 transactions. Implementation is proceeding on target and is 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 BaaS. 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 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 BaaS 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 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. Our partners on this initiative are Q2, our digital banking platform provider and a leading provider of digital transformation solutions for banking and lending, and NYDIG, 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 deliver secure and seamless Bitcoin services. 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 to fast-changing market conditions and opportunities. We are pursuing other transformational opportunities and will 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 embrace innovation, technology, and data driven by smart investments in innovative partnerships.
Our core focus is to continue to operate a strong and stable enterprise through collaboration and partnering among 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 are 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. Our first question today comes from Damon DelMonte from KBW. Please go ahead, Damon. Your line is now open.
Hey, good morning, guys. Hope everybody's doing well today. My first question was.
Hey, Damon.
Hi. My first question is regarding the outlook for loan growth. Could you just give a, you know, an update on your commercial pipelines and kind of how they're looking as far as the, you know, building demand and if there's any headwinds or challenges related to supply chain and things of that nature?
Hey, Damon, this is Jack. Good morning.
Hey, Jack.
Yeah, that's a good question. You know, as we look at our commercial loan pipelines, we feel like they're very strong and healthy, particularly going into the fourth quarter. CRE has been a, you know, very strong platform for us during the pandemic. It really wasn't impacted from our perspective. C&I has posed 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. Then the borrowers, again, as you mentioned, are impacted by the supply chain constraints.
On the residential side, we've seen a little bit of normalization in originations, particularly in our market coming off the 2022 highs. Indirect has proved to be, you know, a significant engine 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 a short duration. All in, you know, we're pretty feeling pretty positive about commercial pipelines and the rest of our consumer pipelines going into the end of the year.
Okay. That's very helpful. Thank you. Then with regards to credit, you know, 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 at the beginning of the pandemic. 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, Damon. Yeah, that's a good question. If we think about the remaining specific reserves on those loans, you know, 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. 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. If that does 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 115 basis points.
Got it. Okay. That's very helpful. That's all that I had. Thank you very much.
Thanks, Damon.
Our next question today comes from Alex Twerdahl from Piper Sandler. Please go ahead, Alex. Your line is now open.
Thanks. Good morning.
Good morning, Alex.
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, like, 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 on some of these loans?
Right. You know, as we talked previously, Alex, we in our process provided COVID bridges to what, you know, was anticipated or estimated to be the potential timeframe to the end of the pandemic. We provided bridges all through, you know, really the end of the year. Our experience and what we're observing is that these companies and borrowers are demonstrating a return to normalcy and stability. Most likely, we'll start to see those numbers come down in the fourth quarter, early in the first quarter.
Yeah.
Yeah, I think that's great, Marty. Thank you.
Okay, that's helpful. 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 is in terms of your ability to kind of partner with some of these Fintechs, 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 out those capabilities so that you can take on some of these partners?
Well, while, you know, we've internally declared this to be a new line of business for us in August of this year, we've really been working on this over the course of 2020. You know, we obviously saw the disruption coming as a result of COVID and other industry factors. We started to modernize our foundation last year relative to Q2 and our digital platform, which we've talked about. Salesforce was a decision we made last year. You know, 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, you know, exposure to a group of like-minded, community banks and fintech participants. It really was about helping us share the costs and risks of innovation that is, you know, preparing us to get to the market faster with digital, you know, enhancements in terms of, across our platform. We feel good about where we are today, and, as far as investment's concerned, you know, we feel well positioned to be able to build that into our capital planning.
Yeah, this is Jack. I'll just add that this is a journey we've been on since 2020, and over the course of that timeframe, we've been making steps and strides in the right direction and continued investments in technology. Now we're the reason we're ready to announce this today is we feel that we are positioned to begin to integrate with our BaaS partners that we've developed and the pipeline that we've established. We really have, today, the infrastructure or operating system that's in a position to be able to execute on those opportunities.
Great. Then I'm just kind of curious, you know, if I remember correctly, sort of 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 some tech companies for the BaaS.
I think that is a fair statement, and we're gonna take advantage of those opportunities that are there. You know, in the interim, it's also been an opportunity to attract talent that's helping us move this initiative forward. Between the talent and local partnerships, I do think that we'll be able to reflect that progress in the future.
Okay. I just also wanted to ask about M&A. We've seen a little bit of pick up of deal activity up in your markets, you know, including from you guys on the fee side. I'm just sort of curious what your outlook is and appetite is for additional fee add-ons. When it comes to whole bank M&A, we've seen one that's kind of right smack dab in the middle of your 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.
Well, on the fee base, you know, I think we've been a really consistent participant, relative to enhancing our wealth and insurance, you know, business lines. 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. We remain open and interested to those opportunities. We're very aware of the acquisition that you talked about. You know, from our perspective, the market continues to be picking up activity and momentum. You know, 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.
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. There's a lot of factors at play in those types of opportunities from our perspective.
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 are kind of relooking at their budgets for next year. You know, you guys are obviously in a healthy position, making a lot of investments. I'm sort of curious, you know, in terms of the timeframe, if you would, you know, if we could see a whole bank acquisition should one fit those criteria in the, you know, at some point in the next, you know, 12-18 months.
Yeah. I wouldn't rule out a possibility. I mean, it would have to be something that wouldn't distract us from our current initiatives and would provide, you know, a sizable level of accretion and long-term value for both companies and their shareholders.
One of the aspects or attributes of that opportunity that you just referenced would be the ability to continue to broaden our geographic, you know, 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.
Perfect. Thanks for taking my questions.
Thank you, Alex.
Our next question today comes from Bryce Rowe from Hovde Group. Please go ahead, Bryce. Your line is now open.
Thanks. Good morning, Jack and Marty. How are you doing?
Good.
Doing well. Thank you.
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 we've you know that you might have seen over the summer, given that being the kind of the height of you know of the tourist season there and just any indications that you're seeing from you know from that level of performance. Thanks.
Our hotel portfolio has you know is performing well. You know, the borrowers and operators that we are dealing with really provide you know flagged properties and generally lower service. Those hotels have been performing well in terms of a return to normalcy and activity that is happening in the markets. We do have a small number of hotels that are more comprehensive in terms of banquet facilities and services and higher end, and they as well have demonstrated you know a return to normalcy.
Yeah, we feel, you know, that the progress is picking up in that space. Even for the ones that we've placed in the COVID deferral bucket, they are on a positive outlook and we expect a portion of those to come off in the next few quarters.
Great. Okay. That's helpful. Wanted to ask a little bit about the, I guess, the margin dynamic here. You know, you've talked about, you know, 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, you know, if you think about where yields now, earning asset yields are now, you know, within the loan bucket, you know, excluding PPP and within the bond portfolio, how do you think about, you know, 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.
This is Jack. You know, 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. From an all-in standpoint, I mean, you can see where the curve is at this point in time. That's, you know, weighed on margin a little bit. From a bond pricing standpoint, you know, bond yields have come down dramatically over the past 24 months and continue to put pressure on margin.
When we look at our forecast for cash flow coming off that portfolio, given that we have made majority of our investments in the mortgage-backed security space, we're modeling, you know, approximately $200 million of cash flow to come off that portfolio, plus the amount of excess liquidity we're carrying in just Federal Reserve balances that we have, so we can de-lever from some brokered deposit maturities that are coming due in early 2022. 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. I appreciate that, Jack. Maybe one more follow-up on the expense side of things. I appreciate the guidance here for the fourth quarter and, you know, some discussion around some of the pressure on the expense side of things, you know, given the operating environment. Just curious how you extrapolate that, you know, as we look into 2022. Is there, you know, 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, you know, the operating environment might put upward pressure on that more normalized rate of increase? Thanks.
Yeah. I mean, I'm going to take a step back here. When we looked at our forecast for and our guidance we provided for 2021, we provided a range of $27 -$29 million per quarter for NIE. You know, for the first half of the year, we were at the low end of that range. Due to some delays in projects and the company performance, you know, we've come in towards the higher end. On average, you know, we expect to be around $28 million per quarter on NIE 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.
You know, I fully expect to be able to provide an update on our run rate during our late January earnings call.
Okay. That's fair. I appreciate it. Thanks for the answers.
Thanks, Bryce.
Our next question today comes from Marla Barker from Fidelity. Please go ahead, Marla. 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 engagement in the M&A space, where you noted that, you know, if it were something that could expand your geographic footprint, you know, you might consider. What about something to enhance your strategy to gain market share in some of the larger markets? Can you talk, you know, speak to that point a little bit?
Well, certainly, you know, 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 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, you know, 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 and as well as an employer of choice.
We're open to those opportunities, but as well if there are others in, you know, other 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.
As far as our existing geographies are concerned, we, you know, continue to have market share to be gained in both Buffalo and Rochester markets. As you've seen how we've demonstrated in the past, we've continued to expand our commercial presence in both footprints as well as the de novo branches that we opened up in Buffalo this summer.
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, you know, what you think you could take out of those new configurations and possibly apply to other branches throughout the network?
I think, you know, the feedback has been very good relative to our engagement in those neighborhoods that we are now serving and, you know, utilizing more efficient, you know, smaller space and taking advantage of our universally trained associates that, you know, the feedback has been good relative to the customer experience and our own experience in terms of how we're operating the branch.
Yeah. Justin, do you have anything you'd like to add from that perspective?
Yeah. Hi, Marla. It's Justin Bigham. How are you? I just actually was on a tour of our footprint, and the feedback for these branches and how they were designed is actually quite strong. I ironically witnessed a customer come in and be pleasantly surprised that they were going to sit down in an office and, you know, conduct a transaction that she was performing. It resulted in a nice conversation and ultimately expanded banking services with us as a result of that conversation she had with the banker. I do think it's working, but it is very early, as you pointed out. We're obviously going to continue to monitor and receive feedback over time, but so far so good.
Okay. One last follow-up is that those two branches that we've talked about in Buffalo, those have been in the works for a while and had obviously been put on hold because of the pandemic. You know, you've done a good job of streamlining the branch network to you know 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 that you know your near-term focus? How are you thinking about that?
Well, exactly the way you just described it. We need to be aware enough to optimize while at the same time, because you know, Buffalo and Rochester represent significant growth opportunities, and they are two markets where we have not operated 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 you know, connect our own network, that provide an opportunity for you know, reinforcing our brand and planting a 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 you know, economic class, as well as middle income to affluent.
Okay. Thanks so much.
We currently have no further questions today, so I'll hand the call back to Martin Birmingham for closing remarks.
Thank you very much for participating on our call. We'll look forward to talking to everyone again in January. Thank you, operator.
This concludes today's call. Please enjoy the rest of your day. You may now disconnect your lines.