Good day, everyone, and welcome to the Fulton Financial Third Quarter 2020 Results Conference Call. At this time, all participants are in a listen only mode. Following management's prepared remarks, we will host a question and answer session and our instructions will be given at that time. As a reminder, this conference call may be recorded. It is now my pleasure to hand the conference over to Mr.
Matt Jozwiak, Director of Investor Relations. You may proceed.
Good morning and thanks for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the Q3 of 2021. Your host for today's conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are Curt Meyers, President and Chief Operating Officer and Mark McCollum, Chief Financial Officer. Our comments today will refer to the financial information and related slide presentation included with our earnings announcements, which we released yesterday afternoon. These documents can be found on our website at fult.com by clicking on Investor Relations and then on News.
The slides can also be found in the Presentations page under our Investor Relations website. On this call, representatives of Fulton may make forward looking statements with respect to Fulton's financial condition, results of operations and business. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors and actual results could differ materially. Please refer to the Safe Harbor statement on forward looking statements in our earnings release and on Slide 2 of today's presentation for additional information regarding these risks, uncertainties and other factors. Fulton undertakes no obligation other than as required by law to update or revise any forward looking statements.
In discussing Fulton's performance, representatives of Fulton may refer to certain non GAAP financial measures. Please refer to the supplemental financial information included with Fulton's earnings announcement released yesterday in Slides 1011 of today's presentation for a reconciliation of those non GAAP financial measures to the most comparable GAAP measures. Now, I'd like to turn the call over to your host, Phil Wenger.
Thanks, Matt. Good morning, everyone. I'll begin with some overall thoughts on the quarter and then Curt Myers will discuss our business performance and Mark McCollum will share the details of our financial performance. And after that, we'll answer any questions you may have. Fulton's performance was again solid in the Q3 of 2021.
Our earnings per share of $0.45 was another quarterly record surpassing our previous record of $0.43 per share in the Q1 of 2021. We saw growth in many segments of our business as Kurt and Mark will discuss and asset quality remains stable. The economy and the markets we serve continue to show improvement. Unemployment is in decline and the communities we serve continue to move forward. And as vaccination levels increase, we remain optimistic about our company's future and the future of the markets we serve.
As I noted last quarter, we have seen several mergers and acquisitions in and around our footprint, and that trend has continued in the Q3. Fulton has taken a look at select opportunities that we're particularly interested in those companies, which would be a good fit for Fulton's strategy and our community oriented style of banking. As always, we remain focused on our shareholders and will remain disciplined on pricing if the right opportunity presents itself. During the quarter, we were able to take advantage of a dip in our stock price and have utilized approximately 1 third of our 75,000,000 share repurchase authorization. We will continue to repurchase stock under that authorization if it makes financial sense to do so.
Throughout the past year, I've referenced the challenges brought about by COVID-nineteen. And now as vaccination rates continue to rise throughout the markets we serve, Fulton is moving forward with our previously announced plans to begin bringing more of our team members back to on-site work beginning the week of November 1st. We are really proud of how our team members have adapted to constantly changing circumstances, And we are pleased to have provided an essential service that our customers could depend on throughout the pandemic. As we reunite our team, we remain focused on achieving our 3 main priorities of growing the company, achieving operational excellence and sustaining effective risk management and compliance. Now I'll turn things over to Kirk to discuss our business performance.
Well, thank you, Bill, and good morning, everyone. As Phil noted, our Q3 performance produced solid results, and I'd like to share some detail on several key areas. Strong loan growth from residential mortgage lending, moderate loan growth from consumer loans and growth in certain commercial lending areas led to approximately $205,000,000 in total loan growth or about 4.5% annualized when excluding the impact of PPP forgiveness. Starting with consumer lending, loan balances grew 186,000,000 were 3.5% linked quarter and 14% on an annualized basis. This growth was driven primarily by strong residential mortgage and residential construction lending with other consumer loan categories also contributing to the growth this quarter.
Overall, mortgage banking business remains strong as we continue to experience origination activity above pre pandemic levels and see opportunities to either sell or conforming mortgages in the secondary market at healthy spreads or increase our balance sheet at beneficial yields. As noted in prior quarters, our asset sensitive balance sheet provides room to continue to grow this segment of high quality market residential mortgage loans and we continue to evaluate our opportunities to do so. Residential mortgage originations for the quarter were 6 $9,000,000 a decrease of 25% from the prior quarter, but purchase activity accounted for approximately 70% of the total residential mortgage originations during the quarter, up from 60% in the second quarter. At September 30, the mortgage pipeline remains at approximately 2 times our pre pandemic levels. As I noted before, residential construction also had a strong quarter increasing $21,000,000 or 14% linked quarter.
Finally, in Consumer Banking, a new FinTech partnership for student loan finance business contributed to consumer loan growth this quarter. The overall consumer loan growth was partly offset by continued headwinds in home equity lending line utilization. Turning to commercial loans, we saw pockets of growth driven by increased line utilization, strong commercial construction lending and growth in our core C and I business. However, we saw continued pressure in our floor plan business as dealers continue to struggle to get inventory. This kept total commercial loans flat for the quarter.
During the quarter, commercial line utilization increased $46,000,000 the first increase we've seen since the beginning of 2020. This is an encouraging sign of business growth and activity. Commercial construction loans grew as well, up 2.1% linked quarter or 8.4% annualized. C and I loans were down $7,000,000 However, excluding floor plans, C and I loans were up 0.5% linked quarter and 2% annualized. Commercial mortgages were flat for the quarter.
The commercial pipeline has been relatively consistent over the past few quarters and ended the quarter flat on a linked quarter, year to date and year over year basis. Turning to deposits, growth for the quarter continued as we saw expected seasonal inflow of municipal balances. Total deposit balances increased $350,000,000 or 1.6% linked quarter with seasonal municipal deposits representing $290,000,000 of that growth. Also during the quarter, we continue to actively manage our deposit costs lower. Moving to fee income businesses, we were pleased with a strong quarter as fee income increased $11,000,000 strong results in Wealth Management and Mortgage Banking and solid performance in consumer fee businesses drove this increase.
Our Wealth Management business continues to perform very well, driven by strong equity markets, solid sales efforts and good client retention. Assets under management and administration grew to $14,000,000,000 in the 3rd quarter, up from $13,700,000,000 at the end of the second quarter and $11,800,000,000 at the end of the year ago period. These trends drove quarterly wealth management income to record levels for the 4th quarter in a row. Mortgage Banking delivered another strong quarter on solid loan sales and wider gain on sale margins. Even when Including a positive change in the mortgage servicing rights valuation, which Mark will discuss, fee income was up on a linked quarter basis.
Continuing with consumer banking, consumer transactional fees were up 8.7% linked quarter as customer activity continues to grow. This increase was across the board in the majority of the consumer products. Overall, commercial banking fees were down modestly for the quarter. We saw a sizable increase in capital markets and recorded modest growth in merchant banking and card fee income. Offsetting these categories was a slight decline in cash management and a sizable linked quarter decline in SBA gain on sale fees.
Capital markets activity, which is primarily commercial loan interest rate swaps increased in the 3rd quarter. We expect capital markets revenue to return to more historic trends over time. However, this will continue to depend on customer preferences, commercial loan demand and interest rate expectations. SBA gain on sale fees declined linked quarter coming off a very strong second quarter. In summary, we remain encouraged by the increased activity within our commercial business during the period.
Moving to credit, asset quality remains stable, delinquency remains low and deferrals and forbearance continue to decline. Non performing loans declined $3,500,000 linked quarter and remain relatively stable since prior to the beginning of the pandemic. During the quarter, we booked a net recovery of $2,300,000 or 5 basis points. This compares to $6,900,000 or 15 basis points of annualized net charge offs in the 2nd quarter. Historically, we have included a detailed slide on COVID loan deferrals.
However, you will notice we have removed that from the presentation as COVID deferrals and forbearance continue to decline ending the quarter at only $65,000,000 Overall, our credit outlook remains cautiously optimistic for the remainder of 2020. And as a result, we have further reduced our 2021 provision for credit loss outlook. Now I'll turn the call over to Mark to discuss our financial results in a little more detail.
Thank you, Kurt, and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the Q2 of 2021. Starting on Slide 3, earnings per diluted share this quarter were $0.45 on net income available to common shareholders of 73,000,000 this represents an increase of $0.07 per share versus the prior quarter. Our strong third quarter performance included increases in net interest income and non interest income as well as a negative provision for the quarter, offset by higher operating expenses, which I'll cover in more detail later in my comments. Moving to Slide 4, our net interest income was 171,000,000 a $9,000,000 increase linked quarter.
This was due to a pickup in fees earned on PPP loans forgiven during the Q3 versus the Q2, moderate loan growth and higher yields on earning assets during the quarter, coupled with a relatively sizable decline in interest expense. 1st, I'll provide some more detail around our PPP program. At the end of the second quarter, we had $1,100,000,000 of outstanding PPP loans and $36,000,000,000 of unearned fees. During the Q3, our PPP loan forgiveness was $526,000,000 and fees earned were $18,000,000 up from $12,000,000 earned in the 2nd quarter. Since the start of the program, the SBA has forgiven approximately 78% of our PPP loans.
And at September 30, we have $590,000,000 of PPP loans still on our books with approximately $18,000,000 of PPP loan fees yet to be recognized. Turning to the investment portfolio, balances grew modestly during the period, increasing $80,000,000 to end the quarter at $4,000,000,000 We did see an increase in deposits with other institutions by about $450,000,000 during the quarter, we would expect this to decline a bit in the Q4 if deposit patterns are consistent with prior years. Turning to deposits, total deposits grew by approximately $350,000,000 on an ending balance basis. And as Kurt noted, we lowered our cost of deposits for the quarter from 15 basis points to 12 basis points and would expect this to migrate modestly lower in future periods. The 3rd quarter traditionally represents the peak inflow of our municipal deposit balances and we would expect to see those balances begin to outflow in the Q4 and into next year.
Non municipal deposits increased approximately $60,000,000 during the quarter, whereas municipal deposits represented 290,000,000 of our overall quarterly increase. Our average loan to deposit ratio declined from 86.9% in the 2nd quarter to 83.2% in the 3rd quarter from a combination of increased deposits as well as a significant decline in PPP loans. Our net interest margin for the 3rd quarter was 2.82% versus 2.73% in the 2nd quarter. The 9 basis points of linked quarter expansion resulted from higher PPP loan fee recognition as well as higher earning asset yields and a continued decline in deposit costs. Turning to credit on Slide 5, our Q3 provision for credit losses was a negative $600,000 compared to a negative $3,500,000 last quarter and a negative $5,500,000 in the Q1.
Year to date, due to solid performance, including a net recovery in the 3rd quarter and an proving view on asset quality, it has been appropriate to release reserves throughout 2021. Slide 5 shows our quarterly credit quality metrics. We recorded a net recovery of previously charged off loans of $2,300,000 for the quarter and non performing loans to total loans declined, whether including or excluding PPP loans. The allowance for credit losses, excluding PPP loans, remained flat on a linked quarter basis, down 15 basis points since the end of last year and currently stands at 1.45%. As always, our allowance for credit loss trends could change in future periods based on new loan origination volumes, loan mix, net charge off activity and longer term economic projections.
Moving to Slide 6, non interest income, I will touch on just a few items that Kurt did not cover in a little bit more detail. Mortgage banking revenues were driven by strong mortgage loan sales and widening gain on sale spreads, which were 194 basis points this quarter versus 185 basis points last quarter. During the Q3, consistent with this year, we have chose to portfolio saleable mortgage product and have now put approximately $288,000,000 of saleable mortgages onto our balance sheet thus far this year. Keeping more mortgage production on our balance sheet has impacted mortgage banking revenues modestly for 2021, but may provide a significant long term benefit to net interest income versus the purchase of lower yielding investment securities. Lastly, during the quarter, we recorded a valuation to the valuation allowance of our mortgage servicing rights asset of $3,500,000 due primarily to the higher interest rate environment.
Our MSR asset was $32,900,000 on balance sheet at September 30. This balance is net of a $3,100,000 mortgage servicing rights valuation allowance, which remains as of quarter end. Lastly, in fee income, other fee income increased by $2,600,000 linked quarter. This was primarily due to gains of $2,100,000 on equity investments as we have seen an investment in a FinTech fund generate very strong returns recently. Moving to Slide 7, non interest expenses we're approximately $145,000,000 in the 3rd quarter, up $4,000,000 linked quarter.
This increase was driven by the following factors. The day count in the Q3 accounted for about $1,600,000 of the increase and we saw increased benefits costs of $1,600,000 for the quarter that were due to increased health care costs. As a reminder, we are self funded for our health care and we saw employees hitting their deductible limits. We would expect these costs to revert to historic trends in the 4th quarter and then decline in early 2022 as deductibles reset. We also saw higher variable comp costs due to both higher pre tax earnings as well as higher commissions in our wealth management area.
And lastly on expenses, we saw higher data processing costs occurred during the quarter due to various technology initiatives across the company. These increases, some of which are not expected to recur, were offset in part by sales of real estate related to our branch closings earlier in the year and also one sale leaseback transaction, which when combined reduced Other expenses, approximately $1,400,000 Turning to taxes, our effective tax rate was 16% for the quarter, consistent with the Q2. Slide 8 gives you more detail on our capital ratios. As of September 30, we maintain strong cushions over the regulatory minimums and our bank and parent company liquidity remain very strong. During the quarter, we repurchased approximately 1,700,000 shares at an average price of $15.43 and have utilized approximately 1 third of our $75,000,000 share repurchase authorization.
On Slide 9, we provide our updated guidance for 2021, we expect our net interest income to be in the range of $655,000,000 to $665,000,000 we now expect our provision for credit losses to be negative for the year. We expect our non interest income excluding securities gains to be in the range of $230,000,000 to $235,000,000 And we expect operating expenses excluding charges related to our balance sheet restructuring to be in the range of $570,000,000 to $575,000,000 for the year. Included in this number are some planned expenses in the Q4 related to COVID vaccine bonuses as well as a contribution to our Fulton Forward Foundation. Lastly, we are aware that many of you look Pre provision net revenue or PPNR as a key metric to assess the profitability of key operations. We also know that many of you calculate this metric differently.
We have included our version of this metric in the financial tables of our press release. We would also like to point out a couple of additional items to consider as you assess our PPNR results. First, PPP fees earned have increased $6,000,000 from the Q2 to the 3rd quarter. And also MSR valuation allowance adjustments resulted in a $5,700,000 swing from a $2,200,000 increase to the allowance in the 2nd quarter to a $3,500,000 decrease in that valuation allowance in the 3rd quarter. When you remove the impact of these items, we believe our PPNR has shown continued improvement each quarter in 2021.
As a result of our Q1 balance sheet restructuring, earning asset growth, core margin stabilization and continued cost containment efforts. And with that, we'll now turn the call over to our operator for questions. Brian?
Thank Our first question will come from the line of Frank Schiraldi with Piper Sandler. Your line is now open.
Good morning. Hey, Frank. Hey, Frank. Just,
Kurt, you mentioned the pipeline, commercial pipeline has been pretty stable. And, wondered if you could Follow-up a little bit on your comments about the dealer floor plan utilization. The mechanics there in terms of it sounds like it was Slower again or reduced again in the Q3. I'm just wondering your thoughts about 4Q and going forward and just if you could quantify The size of that and where utilization rates are right
now? Yes, sure, Frank. Just a little more color on just loan growth overall. Originations We're pretty consistent quarter to quarter. Pipeline remains steady as well.
So I think we feel that originations will remain steady in as we look forward into the Q4. We do see increased business activity overall. I think the overall commercial line utilization Growth was a really encouraging factor. So as we look forward there, we expect originations to continue to accelerate and the stable pipeline we think is positive at this point. Specifically on dealer, that headwind for the length quarter was $24,000,000 and essentially We're maintaining that business and even growing that business, but car dealers just can't get cars.
Almost all of our dealers, all their new cars are pre sold. So they're in and off the line Very, very quickly. That business overall for us is about $350,000,000
Okay, great. Thank you for all the color. And then, just lastly on the you also mentioned the FinTech partnership On the consumer side, I think you said student loans. And so I would think that, that refi business is actually pretty slow right now. And Just wondering your thoughts on growth or really what this partnership Could provide in terms of growth and is this something you're looking at across the board on the consumer side that These FinTech partnerships that could be a tailwind.
Yes, Frank. So we are looking at FinTech partnerships on the origination We had not been in the student loan business and it was a good way to get into that business, we have specific originations that we'll accept under that program and it is very modest at this point. It's ranging $2,000,000 to $4,000,000 of originations per month, But we think we'll continue to grow and we are looking at other partnerships that can Accelerate our overall origination activity on the consumer side.
Okay, great. Thanks. And if I could just sneak in one more in terms of the Mark, on the expenses, you've talked about the investment in digital, as being sort of a partial offset to cost saves you've gotten elsewhere. You talked about that running maybe, data and software running maybe $1,000,000 to $2,000,000 higher in terms of year over year. It seems like that is holding true and already in run rate.
I'm just wondering, is that still a pretty good bogey to think about 4Q and is that still something that you ramp up through 2022 as well?
Yes. I think what you've seen on the data processing line is consistent with the guidance that we gave at the beginning of the year. I would expect to see that probably continue to creep higher. I mean, just when you think about the continued digitization of our industry, As well as the way the accounting changed on that Frank, where previously you could buy a piece of software and amortize it over 7 years, but So much more going to the cloud and things being subscription based, I think that's also going to see that line to go up A little bit higher discretely. I guess, while we're talking on expenses, the one comment, I guess, I'll also make on just our overall expense Base, if you look at our expenses year to date, and if you take out the debt extinguishment costs, that takes our expenses year to date To $431,000,000 and that's up from a little under $425,000,000 over the same period a year ago.
That's about $6,500,000 or about a 1.5% increase year over year. But when you then look at the reasons for that, The principal reason really just comes down to the fact that we're making more money this year. If you take between Management related incentive bonuses as well as specific commissions within our wealth area, which is produced through 9 months $10,000,000 of year over year additional revenue. Those incentive accruals and wealth commissions account for 7 $600,000 so more than 100% of our year over year increase. So when you strip that out And the fact that we're making a little bit more pretax, we think we have delivered on the cost savings program that we put in place last year.
Okay, great.
Thanks for all the color.
You bet. Thanks for the questions, Frank.
Thank you. And our next question will come from the line of Daniel Tamayo with Raymond James. Your line is now open.
Thanks. Good morning, everyone. So maybe just starting on, I just want to make sure I heard this comment right. Made a comment about an expected decline in deposits. Was that in the Q4, was that overall deposits?
And you talked about the municipals peaking in the 3rd quarter, but Did I catch a comment on overall deposit decline in the Q4?
Yes, Danny. So this is Mark. If you think about our normal Trends in our municipal deposit business, the 3rd quarter is always the high watermark. And if you look back in prior years, we would have between $500,000,000 to $600,000,000 between the peaks and the valleys of that business with the peak always occurring in the 3rd quarter. I think one of the questions that the whole industry is sort of wondering right now is it on top of that then you had to be surge deposits during The beginning of COVID.
And we're the jury is really still out as to how much of that is served versus how much of that is going to stick around. But Typically for us from the Q3 to the Q1, so over that 6 Month period of time is when you would see that moving from the peak to trough, which again has historically been in the $500,000,000 to $600,000,000 range.
Okay, great. That's helpful. Thanks for that. And then not to be that horse here, but on the expense guidance, Maybe we could talk just about a little bit about what's going to be the it sounds like there's a lot of moving parts in the 4th Quarter where you provided guidance, but how much of the 4th quarter number is going to be Kind of one time in nature on either side and just to try and get us help us get a base as we start 2022 modeling.
Yes. I think with some of the items that we that I mentioned there in the script, Danny, I think that could be In the $3,000,000 to $5,000,000 range depending on what Overall pre tax earnings end up being. And but I think those then would not recur into next year Unless we would have another year similar to this one in terms of a pre tax profitability.
Okay. So that's related to the 3 to 5. Can you just kind of sum up with I apologize for repeating, but Just follow-up on what those would be and then I'll drop off. Thank you.
Yes. You were fading a little bit on the call there, Danny, but I think you're just asking for a little bit Detail on that 3 to 5. And again, it comes down to the 2 items I mentioned, which is specifically we are Encouraging our employees to receive a vaccine and we're offering for those employees who are fully vaccinated by November 1st that they would receive a $500 bonus. So that would be part of that one time number. And then the remainder would be a contribution to our Fulton Forward Foundation, which would make up the remainder of that number.
Yes. Okay. That's exactly what I was looking for. Thanks, Mark. Appreciate it.
I'm all set.
Sure.
Thank you. And our next question will come from the line of Chris McGrady with KBW. Your line is now open.
Hey, good morning. Hey, good morning. Hey, Mark, a question on the just the composition of the balance sheet. How should we think about earning asset Growth or remixing from here. Is it more likely I know it's dependent on deposit growth, but is it more likely to Shift into more profitable assets or outright grow in the next few quarters?
Well, again, a lot of that depends Supply chain issues in our country and how fully things open. As Kurt referenced in his script, We did see some signs of optimism with an increase in commercial line utilization. I would also say that when you look at within our fee income, you may have noticed that our overdrafts We're actually up $700,000 which we're still not back to pre pandemic levels of overdraft fees, but we do think When you got into the details of that, we saw a 17% increase in the incidence of overdrafts linked quarter, Which may be a sign and 1 quarter does not clearly make a trend, but we think that may be a sign the folks are starting to burn through some of this surge money and the stimulus money and that would overall That lead to more loan activity in future periods. Certainly, the goal is, I mean, we're sitting Today, it's still about $1,800,000,000 higher in excess cash than what we did pre pandemic. So There is certainly a lot of room for us to make that shift from overnight cash into more profitable asset classes and that's certainly our expectation.
Exactly what percent Of that and what percent of loan growth, we'll be speaking to that certainly on our Q4 earnings call when we set our guidance for 2022.
That's great. Thank you for that color. Just a clarification on the dealer floor plan, I think you said it was around 350. What was the peak in that portfolio?
I don't have the balances, the historical balances, but it's off about 100,000,000 It was like $70,000,000 linked quarter in the 1st and second quarter and then it was another 24,000,000 So it's $80,000,000 to $100,000,000 off of what we would expect utilization to be at this point.
Okay. And then maybe if I could on the M and A comments, Phil, in your prepared remarks. Could you just refresh the size? I know it sounds like end market Cultural fits, but I think in the past you said minimum of $1,000,000,000 but just kind of an update on potential range of what you might consider? Thanks.
Thank you. And our next question will come from the line of Russell Gunther with D. A. Davidson. Your line is now open.
Hey, good morning guys. Good morning, Lauren.
Just a bit of a piggyback to Chris' question and following up on the loan growth conversation. I appreciate the color on the commercial pipeline originations, pockets of growth you haven't seen in prior quarters, just to detail some headwinds. So As we tie all of this together, is that 4%, 4.5% annualized XPPP the right way to think about Fulton Near term or are there additional tailwinds or optimism that we're not seeing that you guys are expecting over the next couple of quarters.
Yes, Russell, it's Kurt. We are Expecting that range 4% to 6%. If you look at historically, the organic growth has been in that range. We are doing some things like the FinTech partnership and some other things to accelerate Origination, so we want to be kind of at the top end of that range, all things being equal where they are right now. Certainly a pickup in business activity, and we'll drive that growth without adding new customers.
We look at Growing the business by adding new customers, we think there's a significant tailwind at At some point, when we just get back to normal business activity in our commercial book. The commercial Construction utilization, we referenced as well. That just shows that those Construction mortgages are being done, they're funded, they're moving forward. I think that's a positive sign as well. I think it really just depends on how quickly that happens.
Okay. Very helpful. I appreciate it, Kurt. And then just on the securities portfolio. So you mentioned the growth this quarter as well as some of the deposit inflow dynamics this quarter and over the next couple.
But how should we think about that near term in terms of overall growth and investment appetite?
Yes. We think of our investment portfolio primarily for liquidity. And while it's grown a little bit this year, that's really been largely commensurate with just overall Balance sheet growth, there was some opportunity here obviously late in the quarter when rates went up a little bit To maybe put a little bit more into the investment portfolio, but for a good chunk of the quarter, the longer end was down. And It just didn't seem as attractive to us. I mean ideally for us, we as I said earlier, we would like to see a lot of that excess liquidity I'll be put into higher yielding asset classes and classes that are supporting our customers.
And So I would not expect on a percentage basis for you to see our investment portfolio increase more than what it has historically. But to the extent that the overall balance sheet grows, then you could expect to see the investment portfolio to grow commensurate.
Okay, great. Thanks, Mark, and thanks everyone for taking my questions.
Thank you. Thanks, Russell.
Thank you. Our next question will come from the line of Matthew Breese with Stephens Inc. Your line is now open.
Good morning. Good morning. Good morning, Matt.
First question for me, just on what is your current outlook for PPP Keep balances and forgiveness from here. When do you think it's totally off the balance sheet? And along those same lines, how do you expect the cadence of recognizing the $18,000,000 remaining fees?
Yes. So of that of the $18,000,000 in fees and the $590,000,000 of balances that remain, Our assumption is we're going to be there's going to be somewhere around 10% to 15% of that might remain on the books And actually go out to become a term loan, but the majority of it we expect to be forgiven. And we expect that majority to be forgiven by the end of the first Quarter of next year. So of that $18,000,000 in fees, while There's been a little bit of fits and starts with the SBA. I think in generally, Matt, we would expect 2 thirds or around $12,000,000 of that to be recognized in the Q4 and then 1 third or around $6,000,000 give or take to be recognized in the Q1 of next
Got it. Okay. Perfect. Phil, you mentioned due to in market M and A disruption that there were opportunities on the hiring front. Could you just give us some more color on the extent of those opportunities?
Are you talking Lenders in terms of individuals or teams and just wanted to get a sense for what kind of needle moving opportunity that could be?
Yes. So, I mean, We're looking for teams and lenders all the time. I think when there are acquisitions, the opportunity Can become greater, but we're looking for those folks everywhere Throughout our footprint. Okay.
Two more from me. The first one is just, I noticed that common shares outstanding were down quarter over quarter. I didn't see a mention that you repurchased stock in the release. I just wanted to get a sense for whether or not you actually did repurchase stock this quarter, what price? I know you've mentioned there was some remaining authorization, but did you actually buy back stock this quarter?
Yes. Yes. Go ahead, Mark.
Yes, we did. It was in our Prepared remarks, we repurchased about 1,700,000 shares at a price of $15.43 on average.
Perfect. Okay. Thank you. The last one is just on M and A. This is a recurring topic, But I wanted to get your thoughts on this year in particular, we've seen a lot of deals in the buyer stocks have not performed great.
And as you've looked at other deals in your markets where buyer stocks have not performed well, could you just share with us some of the items you think Are critical to a deal being successful and well received by shareholders versus
not? Yes. I think Matt, this is Mark. First, right now, certainly tangible book value dilution and earn back has a heightened focus. I always think it's important to look at those 2 together because you can accept maybe A little bit higher earn back upfront if you have a really strong company that you're buying.
So then that earn back The Yermak of that upfront dilution becomes a little bit lower. I'd also say when you look at that in terms of absolute numbers, I always caution a little bit To say, well, we'd never do a deal more than 2% or 4% upfront dilution because a lot of that depends on the relative size of the entity you're acquiring as well. But in general, I would say that from an earn back perspective, we want to be 3 years or less on that earn back. And then EPS accretion for us, it's always important in the 1st year of combined operations that you show EPS accretion. Again, how much accretion you show is also going to be a function of the relative size of the entities.
And then we also focus on internal rate of return And make sure that the IRR on the deal is higher than the targets cost of capital. And we focus on the target cost of capital because with a smaller entity there could be more risk embedded there than with a larger Entity, with a more diversified revenue stream, so we always want to have an IRR in excess of the target's cost of capital as well. And then on top of that, I would tell you that on non financial terms, I mean, what's the I mean, I just talked about all the financial stuff as a CFO, but The most important thing really is that there's a good cultural fit. And a great financial deal with a bad culture fit will we'll ultimately end up being a bad deal for shareholders.
Great. That's all I had. Thank you for taking my questions. Appreciate it.
Thank you. Thanks, Matt.
Thank you. And our next question comes from the line of Eric Zwick with Boenning Scattergood. Your line is now open.
Good morning, guys.
Good morning, Eric.
I appreciate all the color commentary already on the near term expense outlook. Maybe thinking a little bit more kind of mid or longer term outlook, there's obviously been a lot of press about Inflationary pressures and labor markets. Curious, wonder if you guys are seeing any pressure either as you look to recruit new lenders or other associates From external sources or anything internal from employees asking for increases? And then maybe second part of the question, can you just remind me when you typically award merit increases and how inflation is maybe considered in those decisions?
Sure. This is Phil. There is intense pressure on wages at every level of our company. And as we talk to our businesses, I think it's With every business, the biggest problem everyone has is getting employees And it's a very tough environment And I think for all industries, we see Wages continuing to climb and we see permanent inflation.
That's helpful. And when do you typically kind of award annual increases in April, April. And then maybe just switching gears a little bit. Mark, I appreciate the calling out Kind of tracking the PPNR and then that's been growing year over year. If we think about that from a profitability standpoint relative to average assets or even looking at ROA and ROE.
Where are there opportunities today within the organization to pull levers to gradually increase that outside of considering M and A or a steepened yield curve or improved interest rate environment?
Yes. The most obvious area to focus on is that excess We're sitting on, right now we've got $1,800,000,000 that effectively is earning about 15 basis points. Remarks. So that when you think about like I know there are some of the analysts on Paul, I know strip out our PPPs, which we understand and think is appropriate to get down to core PPNR. But when you strip out the impacts PPP on our margin and our loan yields, we think you also need to then strip out the impact of that excess liquidity, Because as you get back to a more normalized environment and a more normalized environment for our company is a long term loan Has a ratio between 95% 100%.
So when you get back to that level, that redeploying that excess Clearly, kind of gives you back about the same amount as what the PPP fees are actually pulling away. So we think that's by far the biggest lever and opportunity for our company.
Thank you. And I'm showing no further questions at this time. So now it is my pleasure to hand the conference back over to Phil Wagner, Chairman and Chief Executive Officer for closing comments and remarks.
Thank you again for joining us today, and we hope you will be able to be with us when we discuss the 4th quarter results in January
2022. Thank you.