Good morning, and welcome to the Mercantile Bancorporation 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, then open up the call to questions. 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 Q3 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 has allowed us to build long term relationships with our clients. For the Q3, we earned net income of $15,100,000 $4.95 per share, a nearly 41% increase from the Q3 of 2020.
Through the 1st 9 months of the year, net income of $47,400,000 is up more than 57% from the prior year period. Driving those strong bottom line results are 2 key components: robust organic double digit loan growth leading to healthy net interest income expansion and Very strong non interest 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 on that strategy in our markets each and every day.
We believe Mercantile will again be distinguished by our commercial loan production in the 3rd 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 achieved 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 Sometimes when their incumbent banks did not, any of these companies were able to experience the Mercantile Way firsthand. Our responsive local decision making and high-tech 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 Q3, our solid and sustained pipeline show that our approach is an effective one. I'd like to note that even as we've grown loans and navigated the ongoing pandemic, our asset quality remains strong. We continue to report low levels of past due loans and non performing 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 local lenders also That leads me to a second key element of our success I would like to highlight, Our mortgage banking income totaled a solid $6,600,000 for the 3rd quarter $23,000,000 year to date, up 17% for the 1st 9 months of last year. These results are driven by our ability to generate purchase originations, which In turn, results in our success from our success in hiring mortgage bankers who are well connected in their communities. We believe we are well positioned to capture more market share in upcoming periods based upon our team's proven efforts And the positive application and pipeline volume trends we continue to see. Another strategic decision that has proven beneficial was the interest 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 $3,900,000 in fees for the 3 months ended September 30, 2021, making up a quarter of our non interest income this period. Total non interest income was up more than 17% from the prior year Q3. We remain committed to the strategic focus on diversifying and growing our fee income sources. For the last 12 months, Non interest income has made up more than 31% of operating revenue compared to 22% at the median $5,000,000 to $10,000,000 bank range the most recent quarter. As I mentioned earlier, our people are behind these results and we've long supported them through investment in technology.
Digital adoption accelerated since 2020 and some banks find themselves playing catch up. Within our operations, we adapt industry best practices While leveraging available data to capture efficiency, customize unique client interactions and refine our internal systems, We have long made investment 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. Importantly, This supports our ongoing focus on creating shareholder value in a truly sustainable organization. Today, we announced a 4th quarter cash dividend up $0.30 per share.
Regarding our stock buyback program, we're able to repurchase an additional 288,900 Shares of Mercantile stock bring 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, Community and shareholders, we have a strong foundation, momentum headed into the Q4 and 2022 and are prepared to capitalize on the ongoing M and A related disruption in our markets, both 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 3 topics In evidence in the Q3 results, strong core commercial loan growth, strategic growth and sustainable non interest income and increasing efficiency in operations. 1st, core commercial loan growth. For the Q3, we are reporting core commercial loan growth of 100 $2,000,000 representing a 25% annualized growth rate, 62% of which is C and I credit. Year to date core commercial loan growth is $298,000,000 representing a 16% annualized growth rate, 60% of which is C and I credit.
I'd like to stress that the growth consists primarily of C and I credit in line with our strategic objectives. This growth has been possible due to the efforts of our commercial team and their focus on relationship building in the business community bank value proposition. The pandemic and the PPP program gave us the opportunity to prove in action what we have marketed in concept, Namely that Mercantile represents the capacity and technology they need coupled with timely local decision making and exceptional service. We delivered when many 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 level of growth requires robust capital support. Our backlog remains consistent with prior periods as we fund this impressive level of core growth. Secondly, strategic growth in sustainable non interest income.
During the
1st 9 months of 2021, we reported year to date non interest income of $42,500,000 Net of gain on a branch sale compared to $30,800,000 last year, an increase of 38% and $11,700,000 How do we make the case that this is sustainable performance? Swaps represented $6,100,000 of the growth and represent meeting customer demand for Fixed rates without taking on the balance sheet risk of a conventional fixed rate, which is very important to margin sustainability in the present environment. Our 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 $3,300,000 of the growth in non interest income year to date as our team has grown production from $645,000,000 last year to $742,000,000 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 to 70% of refinance activity, While the present year mix is a fifty-fifty split between purchase and refinance activity and of course purchase activity is far more sustainable than refi Lesser but important contributors to the non interest income picture are the role of service charges on accounts And credit and debit card income, which increased by 17% 19%, respectively, during the 3rd quarter, Reflecting the growth in the number of relationships served as well as increased activity within the accounts as the economy recovers from the pandemic.
In sum, non interest income made up 32% of revenue for the 1st 9 months of 2021, up from 25% in the prior period. The final topic of my comments is increasing efficiency and operations. Year to date, we are reporting an efficiency ratio of 50 7.4% compared to 59.9% for 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 Income growth, our FTE increased by only 11 from the prior year period to a total of 629 And that year to date revenue growth of 11.4% outpaces non interest expense growth of 6.8%. That concludes my comments.
I will now turn the call over to Chuck.
Thanks, Ryan. Good morning to everybody. As noted on Slide 22, This morning, we announced net income of $15,100,000 or $0.95 per diluted share for the Q3 of 2021, up over 40% from the $10,700,000 or $0.66 per diluted share for the respective prior year period. Net income during the 1st 9 months of 2021 totaled $47,400,000 or $2.95 per diluted share, Up over 57 percent from $30,100,000 or $1.85 per diluted share during the 1st 9 months of 2020. Turning to Slide 23, interest income on loans during the 3 9 month 2021 periods was relatively consistent With the prior year period, as growth in core commercial loans and residential mortgage loans has largely mitigated the negative effects of the FOMC The rate cuts totaling 150 basis points during March of 2020 and ongoing low interest rate environment since that time.
Interest income on securities in the Q3 of 2021 is 9% higher compared to the same period in 2020, In large part reflecting growth in the securities portfolio over the past 12 months, securities interest income in the 1st 9 months of 2021 is relatively unchanged from the respective time period in 2020 if accelerated discount accretion on, call, US government agency bond in 2020 is excluded. In total, interest income for the most recent quarter increased $300,000 for the Q3 of 2020. However, it was down $4,200,000 for the 1st 9 months of 2021 as compared to the respective prior year period, in large part reflecting a lower interest rate environment that cannot be fully offset with growth in earning assets. Interest expense declined or remained relatively unchanged in all categories during the 2021 period compared to the prior year period, with the reductions reflecting the low interest rate environment. In total, interest expense declined $1,300,000 during the Q3 of 2021 Compared to the Q3 of 2020, it was down $5,400,000 between the comparable year to date periods.
Net interest income increased $1,600,000 during the Q3 of 2021 compared to the Q3 of 2020 It was up $1,100,000 during the 1st 9 months of 2021 compared to the respective prior year period. Overall, growth in earning assets was able to essentially offset a lower net interest margin. We recorded provision expense of $1,900,000 for the Q3 of 2021 compared to provision expense of $3,200,000 for the prior year. For the 1st 9 months of 2021, we recorded a negative provision expense of $900,000 compared to provision expense of $11,600,000 during the respective prior year period. The provision expense recorded for the Q3 of 20 21 mainly reflected growth in core commercial loans, while the prior year provision expense was primarily comprised of increased allocations Associated with the downgrading of certain non impaired commercial loan relationships to reflect stressed economic conditions stemming from the COVID-nineteen environment.
The negative provision expense recorded during the 1st 9 months of 2021 primarily reflects increased reserves needed for 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 Q2, reflecting improvement in both current and forecasted economic conditions. The relatively large provision expense during the 2020 year to date period primarily reflected an increased reserve allocation associated with the economic and business conditions Environmental factor, the introduction of the COVID-nineteen pandemic environmental factor and the aforementioned Q3 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 We'll be about $7,200,000 lower than our reserve balance as of September 30, 2021 as determined using the incurred loss methodology.
This is an increase from the $6,600,000 difference at June 30 and the $2,600,000 difference at year end 2020. The primary difference between the two reserve models over the 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 view of economic and business conditions We will continue to assess all of the qualitative factors at the end of each quarter and we'll adjust the loan loss reserve balance via the provision expense line item on the income statement. Continuing on to Slide 25, overhead costs during the Q3 of 2021 relatively unchanged when compared to the year ago quarter, While increasing $4,900,000 during the 1st 9 months of 2021 compared to the 1st 9 months of last year.
During the Q3 of 2020, we recorded a large bonus accrual due to a change in estimates associated with the bonus plan metrics As no bonus accruals were recorded during the 1st and second quarters due to COVID-nineteen and the associated weakened economic environment. The bonus accrual in the Q3 of 2020 was $1,100,000 higher than what was recorded during the Q3 of this year. The lower bonus accrual in the Q3 of 2021 mitigated the impact of higher salary expense, Stepping 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 resides 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 valuation rate balance.
Currently, we expect Q4 2021 overhead costs to approximate So 3rd quarter expense. As far as 2022 overhead costs, we are in the 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 market 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 Q3 of 2021, down 5 basis points from the 2nd quarter and 1st quarters of 2021 and down 15 basis points when compared to the Q3 of 2020. Compared to the year ago Q3, the yield on earning assets decreased 32 basis points, while the cost of funds declined 17 basis points for the most recent quarter.
Our U. L. Loans have been relatively consistent over the past 5 quarters, except during the Q4 of Net PPP income accretion of $2,800,000 during the Q3 has been very consistent since the origination of the program, except for the aforementioned Q4 of 2020. As of quarter end, unrecognized PPP net fee income totaled $3,400,000 A vast majority of which is related to PPP Round 2 fundings. Assuming PPP forgiveness trends remain unchanged, We expect a large majority of the remaining unrecognized PPP FB income to be recorded as Income during the Q4 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 federal government stimulus programs as well as lower business and consumer investing and spending. Total local deposits and suite balances increased $538,000,000 or 15% during the 1st 9 months of 2021 And are up $1,400,000,000 or 51 percent since year end 2019. Approximately one half of the growth in local deposits Since year end 2019, it's comprised of increased non interest bearing checking account balances. Overnight deposits averaged $734,000,000 during the Q3 and $649,000,000 during the 1st 9 months of margin during the Q3 and 1st 9 months of 2021 by about 40 basis points to 45 basis points.
We expect the level of overnight deposits to stay elevated well into the foreseeable future. The cost of funds has been on an improving trend, primarily reflecting the falling interest rate environment, and we expect that trend to continue throughout the remainder of 2021 And into 2022, as time deposits and FHLB advances originated in higher interest rate environment in prior periods, but churn. 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 1 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 as 0% risk weighting.
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 $94,000,000 above the minimum threshold We repurchased about 289,000 shares for $8,900,000 at a weighted average cost of $30.97 per share during the Q3 of 2021, Bringing our year to date total up to 636,000 shares or $19,800,000 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 Q2 of 2021, our Board of Directors approved a new $20,000,000 stock repurchase plan as we were close to exhausting our then outstanding plan. As of September 30, we had $8,400,000 available in our repurchase plan.
In closing, we are pleased with our operating results in the 1st 9 months of 2021 and financial condition as of quarter end and believe we are well positioned to continue to navigate through the unprecedented environment created by the coronavirus pandemic and other events. Those are my prepared remarks. I'll now turn the call back over to Bob.
Thank you, John. That concludes management's prepared remarks, And we will now open the call up to the Q and A.
We will now begin the question and answer Our first question comes from Brendan Nosal from Piper Sandler. You may go ahead.
Hey, good morning folks. How are you?
Good morning, Brandon. Good morning. Good.
Thanks. Maybe starting off on the loan growth 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 It'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'd be happy to address that. The case for where it goes from here is pretty strong. Right now, We've obviously funded pretty heavily over the last quarter, but the backlog that we have To fund going into this quarter is very strong as well.
So the activity continues, I'd say unabated from what we've recorded in the historical 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.
It's really a strong tribute to our team and despite the challenging work conditions for them, Whether we're working remotely, we've got a hybrid approach or in the office, they understand the importance of providing timely responses Customers and continuing to bring those new relationships to the finish line, they've worked very hard to do that. And again, it's a distinguishing factor that the customers are seeing as they compare Mercantile to other banks in our markets.
All right, great. That's super helpful color. 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 The balance sheet changed over the past year and a half. So with the Fed and the market seeming to anticipate rate hikes maybe at some point late next year, Can you just remind us what each rate hike means for either NIM or net interest income?
Yes. This is Chuck. I don't have those specific numbers in front of us, but definitely our balance sheet would be structured to provide for increased net income and margin under an increase in interest rate environment. And I think those numbers I know those numbers are available in our our Form 10 Qs, did you want to get them quicker or I can get them to you offline here? Yes.
No, that's fine. Just
Our next question comes from Daniel DiMaggio of Raymond James. You may go ahead. Daniel, your line may be muted.
Sorry about that. Can you hear me now?
Hear you now, Neil.
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 factors 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 we're obviously 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 safe to say we could essentially if we pulled 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 not something that frankly we're comfortable with, but that's what the world of CECL It's dictated to us. That's one of the reasons why we did pull the range back as long as we could on adopting that one, Because it's a duration based model and of course our 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 above 2 years, and that does result in a relatively It results in a lower level of reserves against our commercial loan portfolio than what the incurred model does. And you couple that with Very pristine asset quality.
It makes it a challenge to keep your reserves up As much as what you think that they 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 hiring related 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 have I know I have some more specific comments for you in January once I can get through the budget season and put some longer Term forecast 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 in overhead costs Starting pretty much next year when the pay raises go through and the hiring continues. Certainly, long term, We expect the 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 We've been able to demonstrate that our revenue is growing faster than what our overhead costs are. So it 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 That our overhead costs are.
And I think one thing I would add is on the technology side, Bob had a couple of comments echoing this In his opening remarks is we've stayed across state of the art since day 1 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 to continue the 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 for me.
Thank you.
Our next question comes from Damon DelMonte of KBW. You may go ahead.
Hi, so 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 4th quarter?
Sure. Early in the Q4, the pipeline is stronger than you'd Back from a seasonal pattern standpoint, typically at this time of the 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 And the market remains strong in the communities that we serve as it relates to purchase activity. We've made successfully the shift from refi to purchase activity. I'd submit maybe a little bit faster than our peers.
And so, feel pretty good about what the quarter will bring.
Okay, great. And then as far as The swap income that you guys booked this quarter, obviously very strong. Do you see that pulling back a little bit and coming down to little lower level or do you think that the growth in this business is going to be sustainable at this near $4,000,000 level?
Yes. As I mentioned in my comments, I view that as sustainable for a couple of reasons. One is Over a very long period of time, half of our term funding has been in the form of fixed rates, which is what the swap accomplishes for the customer, While providing our balance sheet with 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. I guess 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 Q3, excuse me, Related to prepayment fees, we had a couple of larger customers refinance existing fixed rate debt into floating rate debt with a swap. Generally in our program, what we do instead of having the customer pay that 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, I can say, an oversized fee, if you will, whatever you want to call it.
So there's 2 things that are going on with swap income, one off is 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 collect those, how those play out?
David, 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, Our lending team has done a really good job of identifying those clients' situation where this is a good fit 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 And a rate 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 follow-up question on overall non interest income. The other non interest line was like A little bit over $1,000,000 this quarter, which was higher than normal.
Chuck, was there anything kind of one time in there?
Yes, it's about $600,000 And one time, we finally went through, finalized 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 of that is $110.
Okay, great. And then just kind of quickly here on 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? Or 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 3rd quarter is pretty similar to the growth that we've had over the last 4 quarters. Probably about this time last year, we really started adding to the portfolio. When it became pretty obvious to us that the excess liquidity was going to stay on the balance sheet for quite some time, And those that we know the excess liquidity has actually built since then even with the securities purchases and loan growth. So I would expect that certainly here in the Q4, the growth We'll continue as it has been over the last 4 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 bonds generally with 3 to 7, 8 year 3 to 8 year time bucket. So what we've been doing is basically just staying with the laddered maturity and just growing those ladders. And We certainly want as time goes on, we certainly would like to have that buildup of the securities portfolio that we've 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 excess 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 built Talking forward, so we're staying disciplined there and think we've got a good program in the future.
Got it. Okay, great. And then just one final question, just to circle back on the provisionreserve outlook. We saw a 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 bone growth, should we expect the provision level similar to kind of what we saw this quarter?
Yes. Yes. I think like we said, the vast majority of that $1,900,000 was for loan growth and we did not touch any of the environmentals this quarter. So I think that's important. We had loan growth in the 2nd quarter that we had to provide for.
We ended up with a negative provision for the quarter because the change in the economic environmental It was more than offset the growth that the growth we had in the commercial loan portfolio and therefore the provision expense associated with that. But often being equal, I think that commensurately the loan growth will provide for a similar level of provision expense Going forward.
Got it.
Without messing with any of the environmental.
Got it. Okay. That's all that I had. Thanks a lot. Appreciate it.
Thanks, Damon.
Our next question comes from Bryce Rowe of Hovde Group. You may go ahead.
Thanks a lot. Maybe one follow-up here on the swap income side of things. 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 prepay type income within that line as we move forward. Just trying to get a feel for how much fixed rate Activity do you still have within the portfolio?
Yes. Bryce, like I mentioned before, that one's going to be a tough one to budget Especially on a quarter to quarter basis, just given the nature of what we're dealing with. I would say, like I said, for the Q3, Specifically, about half the income was related to prepayment fees. That's definitely a higher percentage than what the $6,100,000 Represent, so I'd probably say maybe a third of the $6,100,000 so far this year is associated with the collection or the embedding of prepayment fees End of the swap and the question of it through that means, and I think Ray mentioned this, about half of our portfolio, just commercial loan portfolio is fixed rate. And while we don't look to flip all of those into a floating rate with a swap attached, there's definitely some opportunities there.
This management team is I don't know if they were concerned or how much I height that rates are very, very low and we definitely see a lot of inflationary pressures and obviously we're in And obviously, we're in an unprecedented environment that is causing some of those inflationary pressures. But we are very cognizant 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 trying to make sure that we position our balance sheet that would be that would perform well in that environment. 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 the floating rates, but we think that 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 We'll solve the fixed rate commercial loans and put them in the floating range, and we don't really want to do that. But we definitely look at the larger balance loans, Those with more sophisticated management teams, clearly, we want to make sure that our borrowers understand the workings around the swap, how it works And then some of the handcuffs 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, when we're looking at new loans to the bank, new borrowings from existing customers, Many of them, again, meeting those size and sophistication goalposts, If they want the fixed 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 trying to determine how much that's going to equal on a quarterly or even an annual basis, that's just It's a hard one to project just given the nature
of the product. It's difficult, as Chuck said, to forecast certainly. And the way we look at the swaps, it's another tool in toolbox And we have been trying to assess what's best for the customer and what are their needs and structured a credit package that makes sense for them and makes sense for us as well. So it's a great program. My hats off to the team for putting this program into place because it meets the need in 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 for me. Just curious what you're seeing. Obviously, PPP introduced quite a bit of noise and 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 at least in my head here, I got that the PPP program this year Has been pretty consistent for us the impact on the income statement and on our overall net interest margin is about a 15 basis point positive impact, The fee accretion.
Right. Okay.
I would expect, as I mentioned, I think I mentioned in my prepared remarks, based on the trends that we see, We would expect the vast majority of the remaining dollars to be forgiven paid off here in the 4th quarter. That's something we have a little bit of 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 here 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. Unless they give me another extension, I'll put it ready, but I don't think I'm going to get that one. So yes, January 1,
Our next question comes from Brendan Nosal of Piper Sandler. You may go ahead.
Hey, just one follow-up for me. Just on the COVID factor still in the Reserve and then the kind of day 1 CECL reduction in reserve. I just want to make sure that those that there is some overlap presumably between those two numbers, right? Meaning upon seasonal 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 2 totally separate. We do have the COVID factor is part of our CECL model. And As we go from incurred to CECL, it's a separate decision as to what we really want to do with that COVID environment. So if we keep the COVID environment and all the environmentals steady, and we would have adopted October We got a little over $7,000,000 excess there that we would run through capital and make that adoption to CECL. That's the way it plays out right now.
But the adoption of CECL and what we do with the COVID factor are really 2 separate decisions or 2 separate impacts.
Yes. Okay. That's a very helpful clarification. Thanks, Joe. You're welcome.
This concludes our question and answer session. I would like to turn the conference back over to Bob Kaminski for any closing remarks.
Thanks, Anthony, and thank you all very much for your interest in our company. We hope you and your families stay healthy and safe, and we look forward to speaking with you again