Q3 2021 Byline Bancorp Inc Earnings Call
Okay.
Good morning, and welcome to the ball on Banco <unk> 2021 third quarter earnings call. My name is Sam and I'll be your conference operator today, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer Perez.
You'd like to ask a question simply press the star followed by the number one on your telephone if you would like to.
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At this time I would like to have like to introduce Brooks Reni head of Investor Relations to begin the conference call.
Thank you Sam good morning, everyone and thank you for joining us today for the byline Bancorp third quarter 2021 earnings call.
In accordance with regulation FD. This call is being recorded and is available via webcast on our Investor Relations website, along with our earnings release and the corresponding presentation slides.
Management would like to remind everyone that certain statements made on today's call involve projections or other forward looking statements regarding future events or the future financial performance of the company.
We caution that such statements are subject to certain risks uncertainties and other factors that could cause actual results to differ materially from those discussed.
The company's risk factors are disclosed and discussed.
SEC filings. In addition, certain slides contain and we remain referred to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
A reconciliation for these numbers can be found within the appendix of the earnings release.
For additional information about risks and uncertainties. Please see the forward looking statement and non-GAAP financial measures disclosed in the earnings release.
I'd now like to turn the conference call over to Alberto <unk> President of Byline Bancorp.
Thank you and good morning to all of you joining the call to review our third quarter results.
Joining me on the call are chairman and CEO, Roberto <unk>, our CFO Lindsay Corby, our chief credit officer, Mark with scenario.
Turning over to slide three on the deck for the financial highlights for the quarter as soon as our practice Lindsay will be providing you with much more detail on our results, but I wanted to start by going over a few areas at a high level.
<unk> had another outstanding quarter, driven by positive trends in a number of key areas first we had very good loan growth second our margin expanded nicely from the second quarter and third we had stable credit quality, which when combined with strong internal capital generation allowed us to continue growing and investing.
And the business as well as return capital to shareholders.
Our net income in the quarter came in at $25 3 million or <unk> 66 per share. This was a bit lower than last quarter, but results include a $2 $7 million fair value Mark on our servicing asset, which cost us about seven cents per diluted share.
Fair value marks are part of the business can go up and down in a given quarter, but are not reflective of our recurring earnings which carried over consistently from the second quarter.
Our profitability and return metrics were excellent across the board digging a bit deeper here pre tax preparation revenue was $34 2 million, which translates into a pretax pre provision ROA of 207 basis points.
<unk> came in at 153 basis points, which was a bit lower on a linked quarter basis, but up 72 basis points from the year ago period.
TCE came in at 16, 2% reflective of strong profitability and capital management as well as materially higher than the year ago level of nine 4%.
Moving onto the balance sheet. The third quarter saw continued growth in both loans and deposits. Our results were driven by momentum across our lending businesses and the value of having a diversified lending platform production was strong across the board in C&I sponsors CRE equipment leasing.
As well as in our government guaranteed lending business loans, excluding PPP increased by $348 million or 35% annualized and stood at $4 4 billion as of quarter end. This is the second consecutive quarter, where we have seen significant loan growth.
Ex PPP, we had $428 million in loan production during the quarter a record level for the company and up from $315 million in the prior quarter. We also benefited from lower than expected payoffs some of which we expect to see in the coming quarter on a year over year basis loans.
Ex PPP grew by $588 million, which gets us very close to our goal of being able to fully replace PPP balances what quality conventional loans.
Note is the contribution we're starting to see from investments we've made in bolstering our banking teams improve profitability and our position in the marketplace. Our credit standards remain consistent and we're happy to trade off growth if the risk reward equation does that make sense.
Demand for credit remains healthy and the market remains competitive price competition in certain categories, namely C&I and CRE with particular emphasis on multifamily and industrial is notable.
That lenders in the market are generally maintaining discipline and credit structures.
Customer activity was another positive this quarter with both new relationship additions and with existing customers increasing their use of their line. We saw commercial line utilization increased to 52, 4% from 56% last quarter, which helped us drive some additional growth in commercial.
<unk> balances our government guaranteed lending business had record production with $195 million in closed loans up 36% from the prior quarter gain on sale income increased 4% to $12 8 million compared to the prior quarter, we worked really hard at quarter.
And to make sure we got our customers the benefit of lower fees and higher guarantees under loans prior to the expiration of certain subsidies at quarter at.
We continue to remain the market leader in this business and as the government's fiscal year ends on September 30th we're the fifth largest <unk> lender in the United States.
Moving over to the liability side with respect to <unk>, we continue to see strong inflows of commercial deposits from the buildup of liquidity among existing commercial clients and from the addition of new relationships and the third quarter deposits grew by $66 million or five 2% annualized and stood at $5.
$2 billion as of quarter end with the Gulf growth coming primarily from money market account or deposit mix remains exceptional with DDA, representing 41% of total balances.
Deposit costs were flat on a quarter over quarter basis, and continue to be at a cycle low.
This quarter was also the first full quarter, we started digitally opening consumer deposit accounts results are modest at this point, but we're encouraged by the traction we're gaining with growing deposits digitally and seeing continued improved conversion rates as well as seeing the early returns on <unk>.
Some of our technology investments moving onto profitability, our margin expanded by 15 basis points ex accretion income and was reflective of higher yields on loans and securities.
It also expanded if you exclude the six basis point drag of PPP, which was very nice to see and positions us well for potentially higher rates at some point next year.
Lastly, our efficiency ratio remained in the 252% range. Despite seeing the effects of higher compensation costs, some of which were variable and tied to production levels and the rest reflective of the current environment from an asset quality standpoint, our results were very good NPL and NPA has declined again.
Then on a quarter over quarter basis in both dollar and percentage terms and are reflective of what has been a benign credit environment combined with ample liquidity in the market.
Charge offs declined quarter over quarter coming in at 13 basis points and our allowance represented 131 basis points up loans or 140 basis points excluding PPP.
Our capital position remains strong with a CET one ratio of 11, 3% and a total capital ratio of 14, 8% as of quarter end.
Given our strong level of profitability and capital we were well positioned to return capital to shareholders. During the quarter, we repurchased approximately 460000 shares of our common stock we believe our balance sheet strength positions us well to support organic growth continue investing in our franchise.
And pursue M&A opportunities, while returning capital to shareholders with that I would like to turn the call over to Lindsay who will provide you more detail on our results.
Thanks, Alberto Good morning, everyone I'll start with some additional information on our loan portfolio on slide four.
Total loans and leases were $4 7 billion at September 30th an increase of $163 million or 14, 4% annualized from the end of the prior quarter.
As Alberto discussed earlier, the new loan production and increased line utilization more than offset the forgiveness, we had on the PPP loan and runoff in the acquired portfolio.
In addition, we saw payoffs moderate for the first quarter down $78 million to $140 million with a well balanced growth across our commercial commercial real estate and equipment leasing, which helped us offset the continued planned runoff of our residential mortgage loan portfolio.
When PPP loans in the residential mortgage loan portfolio are excluded our originated loan portfolio increased 35% over the past year, which reflects the growth in our core commercial client base.
We continue to be encouraged by the demand we're seeing in our equipment finance business, which is up 78% over the past year.
With respect to PPP loans, we have included a page in the appendix on page 14 that provide details on the balances forgiveness and feeds from their respective ramp.
Turning to slide five we'll look at our government guaranteed lending business.
At September 30th to on balance sheet, SBA, seven exposure with $468 million approximately $6 million lower than the end of the prior quarter with $81 million being guaranteed by the SBA.
SBA on balance sheet exposure was $76 million up $8 million from the end of the prior quarter.
$37 million is guaranteed.
As the economy recovers from the pandemic, we continue to see improving trends in this portfolio with most borrowers returning to regular payment status following the exploration of deferral periods and subsidies.
As a result, we slightly decreased our allowance as a percentage of the on guaranteed loan balances to eight 1% from just under 9% at the end of the prior quarter.
However, we remain vigilant as the economy and small business borrowers continue to demonstrate more resiliency.
Moving on to deposits on slide six our total deposits increased $66 million from the end of the prior quarter to $5 2 billion. The growth came in our lower cost deposit categories. As we continue to see inflows of commercial transaction deposits that are replacing higher cost time deposits.
As expected our total cost of deposits remained flat at eight basis points.
Our deposit activity during the quarter continuing to reflect and result in a positive shift in our mix of deposits non interest bearing deposits increased to 41, 1% of total deposits, while commercial deposits represent about half of our total deposits and 77% of noninterest bearing deposit.
Moving on to net interest income and margin on slide seven.
Our net interest income was $59 8 million for the quarter nearly 3% higher from the prior quarter. This was primarily due to higher average balances of loans slightly higher forgiveness on PPP loans as solid as lower funding costs.
On a GAAP basis, our net interest margin was 391% in the third quarter up 17 basis points from the last quarter accretion income on acquired loans contributed 11 basis points to the margin for the third quarter up from nine basis points in the last quarter.
PPP loan interest income and net fee income combined to contribute $5 4 million to net interest income for the third quarter compared to $4 5 million last quarter.
The Q3 margin also benefited from the 16 basis point improvement in average yield on earning assets as the mix of earning assets continued to shift as a result of the robust loan production during the quarter.
Looking forward, our GAAP margin will be impacted by the $7 5 million of remaining net processing fees from PPP loans that the exact timing and the amounts are dependent upon the SBA is timing and process for forgiveness.
We believe our core net interest margin, excluding PPP and accretion may see compression as a result of lower yield as loans continue to reprice.
We anticipate that the margin should stabilize and begin to increase as rates begin to rise.
Our balance sheet remains asset sensitive and we're well positioned to take advantage of higher interest rates in the future with approximately 61% of the loan portfolio invested in variable rate loan.
Turning to noninterest income on slide eight.
In the third quarter, our noninterest income decreased $2 5 million from the prior quarter.
The decrease was primarily attributed to a $2 7 million dollar loan servicing asset revaluation charge, which was a downward valuation adjustment for the third quarter compared to a minor upward valuation adjustment in the prior quarter.
This was due to a change in the fair value of the servicing asset as a result of lower secondary market pricing early payoff and servicing asset write off.
This was partially offset by an increase in net gains on sales of loans due to higher volume of loan sales.
We sold $104 2 million of loans in the second quarter up from $100 6 million in the prior quarter. The net average premium continued to be strong at 12, 9% during the quarter. Although we did begin to see a slight decrease by the end of the quarter.
Looking forward the SBA enhancements for government guaranteed lending ended September 30th and the guaranteed portion has returned back to 75% from 90% in the fee waiver program with discontinued for most new SBA loan origination.
Our pipeline in Investor appetite for government guaranteed loans do in fact remains strong but.
But as we begin to sell more loans without the guarantee fee waiver, we anticipate premiums to decrease in the beginning of 2022 and return to historical averages.
Moving to noninterest expense trends on slide nine.
Noninterest expense was $44 2 million in the third quarter up from $43 million in the prior quarter. The increase was primarily attributed to two factors.
First our salaries and benefits expense increased by $1 4 million, primarily due to new hires during the quarter and increased commission expense and second we saw an increase in other noninterest expense, mainly due to higher marketing spend during the quarter.
On an adjusted basis, our efficiency ratio was up from the prior quarter, but improved from a year ago to $52 three 5%.
We continue to focus on our expense run rate and we will continue to review for efficiencies.
As we continue to invest in our talented team, including the additional bankers and employees that Alberto will touch upon in his closing remarks, we believe the quarterly expense run rate will increase slightly and began trending between 43 and $46 million per quarter.
Turning to slide 10, we'll take a look at asset quality.
We continue to see positive trends during the quarter, our nonperforming assets declined five basis points to 56 basis points of total assets.
Oreo decreased by $1 4 million and excluding government guaranteed loans, our nonperforming loans declined five basis points to 61 basis points of total loans and leases.
Net charge offs also declined to 13 basis points from 17 basis points of average loans and leases in the prior quarter.
Our provision expense was 352000 for the third quarter, an increase of $2 3 million compared to a $2 million release of provision in the prior quarter the.
The provision during the quarter was mainly driven by new loan growth and.
And lease origination offset by a release of $1 7 million as a result of improved qualitative factors, resulting from continued economic improvement.
We continue to have a high level of total loss absorbency as measured by our allowance plus acquisition accounting adjustment, which represents 154 basis points of total loans and leases excluding PPP loans at September 30.
Turning to slide 11.
Our capital position and our focus on returning capital.
Through the first nine months of the year, we have returned approximately 49% of our earnings to stockholders through the common stock dividend and our share repurchase program.
As Alberto mentioned during the quarter, we continued to opportunistically repurchase our shares year to date, we have repurchased one 3 million shares and with the expanded program. We have approximately $1 2 million shares remaining authorized to be repurchased.
We believe these actions to deploy our capital reflect our solid capital position as we continue to generate excess capital, while allowing us the flexibility to grow both organically and strategically.
Alberto back to you.
Thank you Lindsey looking.
Looking ahead to our priorities on slide 12, we remain laser focused on executing our strategy achieving quality organic loan growth across our lending businesses remains a top priority and we will continue to add talent to support. This objective, we have a great market opportunity and company culture and.
Have buildup platform with ample room for growth at the same time, we will continue to manage our expense base with an eye to take cost out of the operation in order to continue investing in our digital capabilities.
Lastly, we want to continue to capitalize on market opportunities that can further add value to the franchise.
As we previously reported to you in the past we've been actively adding talent to the organization over the last several years, both on revenue and non revenue generating areas of the company. This quarter was no exception as we added new leaders for both our wealth management business and for business banking in addition to continuing.
To add a.
Our banks bankers in our commercial banking business.
Business banking is an example of us critically looking at our business figuring out who the customer we're trying to serve really is and then organizing ourselves the best way possible to serve the customer in that particular segment. This approach through a business coupled with a scalable platform with requisite size and capital strength position.
So as well to effectively compete in the marketplace on the M&A front. The marketing continues to be active and we continue to evaluate opportunities that fit our criteria and can add value to our franchise.
To wrap up today with a few comments on the market environment and our outlook for the remainder of 2021, while the third quarter was dominated over concerns of surging Delta variant and supply chain challenges. We do remain optimistic about growth in the latter part of this year and into next year.
Given the level of activity and liquidity looking for yield in the market today, we expect prepayments to pick up from the levels. We saw this quarter notwithstanding our pipelines remained strong which position us well for continued growth in the portfolio and to continue remixing, our earning assets from secure.
<unk> to loans and closing, we're finishing off the year in a strong position heading into 2022, and we're optimistic about our ability to continue growing our franchise and creating additional value for our shareholders. I would also like to say thank you to all of our employees for their continued hard work and the debtor.
Acacia to serving all our stakeholders with that operator, let's open the call up for questions.
Thank you if you'd like to ask a question simply press the star.
<unk> followed by the number one on your telephone.
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Your first question comes from the line of Ben <unk> from Hovde Group.
Your line is now open. Please proceed.
Hey, good morning, guys.
On <unk>.
I was wondering if we can just take a higher level view.
<unk> landscape for <unk>.
The last two quarters or so we've seen a bifurcation of banks. Some are willing to go lower on loan yields in order to increase loan growth, where some are willing to pull back in order to somewhat defend their margin.
It is by line seems to be able to do both.
It seems like you guys.
Strong growth, while also seeing pretty stable to increasing margins in terms of.
Lending capabilities. So I'm wondering going forward do you think that a focus on kind of more niche lending is in the area to kind of keep future growth stable.
And excuse me in the future.
Margin stable or do you think there is a different opportunity set should provide upside going forward.
Good question, Ben I think our view on that is we believe strongly in having a diversified lending business. So this quarter, we benefited from really having.
All of those lending businesses have a very good quarter, it's not going to be the case every single quarter, but it provides two things it provides stability overall to originations and second it provides.
Flexibility and diversification in terms of yield as well some of those businesses are growing some of those businesses generate higher yields.
Other businesses have lower yields depending on obviously the type of business and.
And the type of borrower, we're looking to serve and I think the.
The idea of having diversity that supports stability in the margin as well as diversity and origination sources is something that that has paid off pretty well for us over the years.
The last thing I would say is don't forget that we also had and we were coming off having up relatively large position in our securities portfolio had been elevated.
If we can continue to remix those earning assets from securities into loans it add some tailwind to our margin.
Your next question comes from Nathan race of Potash Sandler Your line is now open.
Yes, hi, everyone. Good morning.
Morning.
Going back to the loan growth discussion, obviously really strong broad based growth in the quarter.
I'm curious to know how we can kind of think about the drivers for that growth. I know you mentioned line utilization was a factor in terms of that increase in the quarter.
Also curious to get some color around how much of this growth is coming from share gains as well.
Maybe a couple of things.
So obviously a strong quarter in terms of loan growth no question about that we had the benefit of a few tailwind so as I mentioned in the comments.
Prepayments came in lower than we expected I suspect we will see some pay downs here in the fourth quarter that didn't happen for extra Y reason in the third quarter. So certainly that helped us a bit I think the other.
Staying with relax.
Speaks to run off as something that Lindsay mentioned and that we've been talking about over the last several quarters and that is we have a residential mortgage portfolio that is coming down and balances obviously that portfolio had.
Added to some headwinds as as particularly the last last year in the first quarter of this year when prepayments were much higher obviously that portfolio is smaller so the effect of that is starting to subside a bit the other thing that I would add in thinking and putting context into <unk>.
Loan growth is as you know we have been adding bankers over the last several years and we're really starting to see the benefits in the form of contributions that those banking teams are making to our platform and our bank and I think thats also reflective there and and growth. This.
<unk> the last thing I would say is.
This is something that we've been building we've been really really focused on making sure that our pipelines are building up.
Talked about that since really the end of last year and it's been a gradual buildup I think what we're seeing is the size of the bank today and given the different origination sources that we have namely for example, our leasing business was not contributing a lot in years past now it's starting to.
Contribute at the margin a lot more so going back to the benefit of diversification. This quarter. We had the good fortune that all of these lines of business has really had a good quarter in aggregate and it is not going to be that way every single quarter, but it speaks to the diversification of our lending platform.
Got it that's great color and so just trying to put all those pieces together in terms of thinking about the outlook.
Our expectations for kind of high single digit growth.
Is it reasonable to assume going forward.
We're still sticking to that number.
Nate.
Okay, Great and then.
Maybe changing gears and thinking about the trajectory of the reserve going forward.
I'd be curious to kind of get your updated thoughts on the outlook for charge offs going forward. Obviously, the SDA unit is continuing to be the main contributor to the charge offs. So just love to hear kind of what your expectations are for charge offs from the unit going forward, particularly as some of the subsidies continue to roll.
And within that context.
Any thoughts on just the absolute reserve level and the need to provide for that and ICL unit growth relative to maybe some still unallocated excess reserves that were built up over the last couple of years.
Yes. So good question, just let me unpack that.
In several ways first to your question is about charge offs I think the question there and speaking to.
So the comments at Lindsay made I think the word vigilant for the reasons that you mentioned is is exactly where we are we still as you know the credit environment has been very benign.
The economy has had the benefit on credit overall has had the benefit of a lot of stimulus in many forms.
So as that stimulus wears off completely we want to make sure that we have a really good understanding of how borrowers are coming off this period, which has been extraordinary so we'll continue to remain.
Cost chosen vigilant and with respect to <unk>.
To that point as far as reserves are concern.
In terms of charge offs. The other thing I would mention is.
The market there is.
An immense amount of liquidity in the marketplace looking for yield and that presents.
Several opportunities in the form of to a degree that you have credits that you're concerned about or situations that where you have an opportunity to exit certain things. It's something that we look at and we will look to take advantage of that so.
I think what I'm, saying there is charges have been very good over the last several quarters.
We have built.
<unk> to a level of adequacy that we think at this point or the right level of reserves.
But we will continue to take to look at closely opportunities that we have to anticipate potential issues and take advantage of the environment.
<unk>.
And lastly need to your point on growth, obviously, if we continue to see good loan growth and.
And I am sure Lindsay will touch on this.
As you get some question.
Seeing a remixing of assets from a risk weight standpoint, as PPP pace down obviously those are zero percent risk weight.
So as we book traditional commercial loans in our portfolio.
Well, we havent growth, we're obviously going to fruition to support that growth.
Our next question comes from the line of Terry Mcevoy of Stephens. Your line is now open.
Hi, good morning.
When comparing Terry.
I guess I hate to ask another loan growth question, but I'll start there.
Did you see much growth at all in call. It your legacy middle market and commercial real estate portfolios. This last quarter or did a majority of the growth come from new teams in the specialized lending verticals that you run in that you've talked about already on the call.
Two things we saw good growth in both Terry both our legacy C&I business, we're seeing customer activity pick up.
I think you've probably heard the commentary on line utilization that was very nice to see particularly where utilization had been.
Certainly at the beginning of the year. So and we're also just to add to that we're also seeing customers resuming activity a lot of expansion equip new equipment purchases.
Which again, it's nice to see from <unk>.
From a call it up our core customer or existing customer base. So yes. The short answer is yes on.
On the real estate side.
I think the color there is more is narrower meaning we're seeing good activity, particularly in industrial.
As well as multifamily everything else.
Rest of the asset classes are Barry.
Acquired so for example, retail we're not seeing a lot there.
I think for for obvious reasons, we're not a big hotel lender, but thats an asset class that certainly is having some challenges.
From from a capital access to capital standpoint.
And we're again, we're not a big office lender, but thats an area were I think the market for four loans to office.
Office settings.
Is in a wait and see mode, given the pandemic effects.
I appreciate that thank you and then.
Lindsay could you, maybe just remind us what to more normal levels of net net premiums our gain on sales spreads within SBA and.
Is there a risk that maybe premiums go a little bit below just given supply demand issues and given how strong they've been over the last four to six quarters.
Sure So Terry the best way to look at historical premiums is honestly just to go back and look at our previous performance prior to Covid because that was a much more normalized state.
And then what we're seeing today. So you did see this quarter it did dip down slightly.
And we think we'll be saying probably somewhere from 100 to 200 basis points decrease going forward.
So really when you think about the gain on sale, it's driven by production and Thats. One of the first variable is done and obviously the second is the premium keep in mind.
And just as a reminder, we share 50 50 with the government anything above 10% so.
Premiums do dipped down just from a from a gain on sale standpoint, we only share above 10%.
Less of an impact there than probably you would think so.
Okay I appreciate that and then I'll squeeze one more in.
What's what's next for <unk> digital banking group.
It was mentioned earlier on the call and new product was rolled out with some success and what are they working on and any comments as it relates to just tech spending and on the expense side as you think about your budget for next year, how much that could grow thank you.
No problem Terry Yeah on the on the digital banking side. It is.
Nice to see we had.
Introduce something that I think it's table stakes today, which is the ability to open accounts. So.
So we did that earlier kind of like in the.
Middle of this summer.
And we were we had been testing it for a while and it's nice to see us getting some traction there thats only on the consumer side. So the next evolution of that project is really to enable that for business accounts. So small business accounts the ability to open those soup to nuts.
In a really short period of time on an end to end fully digital process is what the team is working nexon and we expect that.
That will come online sometime in.
In the first quarter towards the end of the first quarter, maybe at the beginning of the second quarter.
Next year aside from that.
That is a big focus area, Terry and continues to be and will continue to be a focus area and that speaks to the comments I made earlier and in.
In the call about <unk>.
Continuing to find ways to take cost out of the operation. So that we can continue to invest into that digital space. So to your question about percentage of spending or how does that spending impact what we're trying to do is obviously take costs out of the operation on areas that are deemed by our customer.
<unk> not to be as important as they once were and redeploy those by investing in our digital capabilities.
Thank you both and have a nice weekend.
Great. Thank you Perry.
Your next question comes from Tim Switzer of K.
K B W. Your line is now open. Please go ahead.
Hey, good morning, I'm on for Mike Perito.
Good morning, Tim Good morning, Tim.
I wanted to ask a question on your expense outlook, moving a little bit higher to the 43 43, 6% range and.
I guess, that's probably largely driven by the new hires but are you guys baking in any additional hires on top of the ones. You've already made is that assuming you continue adding bankers, adding new business leaders and then also where could expand.
<unk> land.
If say loan volume as hires of loan growth comes in stronger than expected or gain on sale doesn't moderate quite as much as you're expecting.
Sure. So in terms of the expenses and where the guidance was given with the 43 to 40 Sachs Tim that really incorporating everything that Alberto just Scott around those additions and just keep in mind that the reason for that increase is that those people.
For brought on towards the end of the quarter. So that we don't have a full quarter of run rate there.
Just to keep that in mind in terms of the ads and then I'd say going forward as we continue to look to add new teams and new bankers will continue to update our guidance on that front.
So we do see obviously pressures in the market around inflation and so thats one of the other reasons that I've guided slightly higher just due to the outlook in terms of what's happening.
And the economy.
I hope that gives you a little more color around that.
Okay. So it doesn't necessarily include additional hires now.
Okay ones that we do that.
Okay.
But to add to what Lindsay said, just just to add a little bit of color. There, we've always been pretty opportunistic when it comes to.
Adding talent. So if we have the right if the right opportunity and we find the right person that's good for the business in the long term. So we're going to do it we're going to invest so it's hard to predict that but.
From a from we are perfectly fine if our expenses were a little higher on any given quarter as a result of us being able to hire incremental talent to the organization. So.
Yes, just to add some context to that.
Okay, great. Thank you and if I could have one more you guys have talked about kind of in a pretty active M&A market for a couple of quarters now.
And that you guys are.
Reviewing opportunities could you please remind us exactly what.
What you'd be looking for in a potential target and what kind of criteria you guys are looking at for thank you.
Yes so.
Strategically we're looking obviously for good strategic fit whether that'd be.
Just.
Incremental.
Markets, where we don't have a presence where typically we typically look for.
Complementary complementary deposit franchise two hours, we're always going to be very sensitive about deposits. Despite the fact that the current environment really has not been.
Ideal for four and given the amount of liquidity in the system, but that said the <unk> are is always an area of focus to us.
To a degree that a potential target has a lending business that that we like then obviously that that.
Another plus and an acquisition strategically.
As well as some of the more basic tenets of can we take cost out of the operation and drive higher profitability from essentially consolidating the banking franchise. So that's just strategically more tactically I think our targets are institutions and COO.
Our general market area, which I would say would be the greater Chicago Metro area. All the way to for example, Milwaukee.
Size wise somewhere in the $300 million range to two to $1 $5 million to $5 billion range. I think those are that's certainly within the strike zone.
And as far as financial metrics, we're looking and this is dependent on the quality of the franchise, but I think we've been disciplined if you look at the transactions that we've done in the past depending on the quality of that franchise. We're looking for earn back certainly inside of three years.
<unk>.
And thats more or less kind of the quick snapshot of our criteria and what we're looking for.
That's perfect. Thank you.
As a reminder, if you would like to ask a question today. Please press star followed by one on your telephone keypad.
Our next question comes from the line of Brian Martin of Janney Montgomery.
Your line is now open. Please proceed.
Okay. Good morning.
Good morning, Brian.
Just wondering if you could just comment on a couple of things Lindsay maybe just your comment just for clarity on your thoughts on the margin.
Can you, let us know or just.
Your comments about the margin ex accretion and ex PPP, where did that level land.
This quarter. This is kind of the baseline to think about as we go forward here.
Sure. So when you back those out it did compress slightly.
Ryan in terms of.
The margin, but really what the margin with great even even despite that it was very modest and one of the reasons that we're still not as just because of the earning asset mix that we've had on several times here during the call.
The shifting of the.
Loans.
And coming out of Securities has been really a great left and something that we've talked about for a long time.
And that we wanted to do and as they continue to deploy that liquidity that will continue to give us tailwind.
<unk> to help the margin.
I would say that the headwinds and Thats really what drove my my margin comments about the slight compression in the near term. It is really just the loan repricing.
That we're seeing and obviously the unknown of the payoff. So I'd say those are the two factors that are really driving the headwinds there.
Got you, Okay and just.
Correct percentage Lindsay I mean, it was at what level is that when you take out accretion in PPP, what what is that core margin today as you kind of think about going into next quarter and the quarter thereafter.
Ryan we don't give that because we're PPP with technically have to make an assumption on the funding side, though we give you all the pieces.
On page 14, so you can calculate it but.
It depends on what you assume there.
Yes, Okay, alright and the.
How about just in terms of the.
The SBA production that you guys have given some color on those yields coming down just how are you feeling about production as you go into fourth quarter and then into next year with some of the subsidy has gone just how to think about that component of the business.
Pipelines remain strong and healthy as all Alberto's highlighted and we feel good about their production and again their production is what drives that.
The gain on sale in.
Obviously that the other shift or I guess, you could call. It a tailwind from a margin standpoint is that 75% change in going from the 90% Brian to 75% that will also help.
There'll be more earning assets with a 75% being sold in retaining 25 out of 10.
Got you Okay, and then just maybe last one from me just on the deposit growth has been great with the DDA towers is super impressive kind of record levels here I guess as you think about the size of the balance sheet going forward is your expectation that deposit growth slows and kind of just do this remix as you kind of.
Articulating with.
Moving moving into more loans from the security side and the balance sheet is more stable here and that's kind of the the outlook just to be clear on that on the deposit side are you still seeing those deposit flows.
I know it was down a little bit this quarter, but just how to think about that.
I think the deposit flows you saw a slight increase this quarter and we're seeing it coming on the commercial side.
So there's a lot of liquidity out there Brian.
How long it stays in the system is still the big question that everybody has.
But yes, I think your assessment is fair and the goal here is to continue to remix that.
Those earning assets to deploy our liquidity into loan.
Got you Okay, that's what I thought and just last one was just on I know, it's I guess, but is your expectation that the remaining PPP is largely completed this year and there's some tail into next year that seems fair or is it are you seeing.
I don't know how the trends have been since quarter end here.
Then a slowdown or a pickup but just any thoughts on how to think about that would be great.
Yeah, we had a great quarter and the third quarter in terms of TPP forgiveness and we saw.
That amount come through.
Things did quiet down a little bit and we will see.
It's all dependent on how quickly it all gets through the system. So I don't think that it'll all come next year, Brian I think maybe half and then the other half will trickle into 2022.
Got it.
Yes, and yes.
Yes, Theres only $7 5 million.
Net.
Licensing fees remaining so this department right.
Yes totally get it okay, thanks, and great quarter guys.
Thank you Brian I appreciate it.
We now have a follow up question from Nathan race with Piper Sandler. Your line is now open. Please go ahead.
Yes.
We're taking the follow up just a question on just capital management over the next few quarters at least.
Guys have returned about 50% of net income to shareholders.
Each of the last two quarters.
I'm just curious if we can expect that level to continue near term and kind of just with them within the context of the flow of acquisition opportunities that youre seeing recently.
I think Nathan the way I would think about it is.
It affords us great flexibility going forward.
Whether that be to to continue to increase the dividend over time, whether that be to deploy it.
Via buybacks.
Certainly first and foremost to support growth in the business.
And obviously it gives us flexibility for M&A as well so.
I guess, what what im saying is that it.
We obviously, if we continue to see the.
The balance sheet and capital grow if we're generating excess capital, we will and are not have more than enough to support the business and are not looking to deploy it.
More strategically and then we will return capital to shareholders, so whether that be through increases in dividends over time or whether that be through buybacks will will retain that flexibility and determined data accordingly.
Got it I appreciate all the color. Thank you guys and congrats on a great quarter.
Thanks, Thank you.
Okay.
Thank you for your questions today, I will now turn the call back over to Mr. Parachini for any closing remarks, great. Thank you Sam and that concludes our call. This morning on behalf of all of US here. Thank you for your time today your interest in <unk> and we look forward to speaking to you again next quarter and next year.
So thank you very much.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.
Okay.
Okay.