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spk01: Good morning and welcome to the Byline Bancorp 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 speaker's remarks, there'll be a question and answer period. If you would like to ask a question, simply press the star followed by the number one on your telephone. If you would like to withdraw your question, press star and two. If you are listening via speakerphone, please lift your handset prior to asking your question. If you require operator assistance, please press star and then zero. Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations, to begin the conference call.
spk04: 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 for those discussed. The company's risk factors are disclosed and discussed in its SEC filings. In addition, certain slides contain and we refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. 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 would now like to turn the conference call over to Alberto Paracini, President of Byline Bancorp.
spk03: Brooks, 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 Herencia, our CFO Lindsey Corby, and our Chief Credit Officer Mark Lucinato. Turning over to slide three on the deck for the financial highlights for the quarter. As is our practice, Lindsey will be providing you with much more detail on our results, but I want to start by going over a few areas at a high level. Byline 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 in the business as well as return capital to shareholders. Our net income in the quarter came in at $25.3 million, or $0.66 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 7 cents per diluted share. Fair value marks are part of the business, can go up and down on 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 pre-tax preparation ROA of 207 basis points. ROA came in at 153 basis points, which was a bit lower on a link quarter basis, but up 72 basis points from the year-ago period. ROTCE came in at 16.2%. reflective of strong profitability and capital management, as well as materially higher than the year-ago level of 9.4%. Moving on to 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 CNI, 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. XPPP, 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-to-year basis, loans XPPP grew by $588 million, which gets us very close to our goal of being able to fully replace PPP balances with quality conventional loans. Of note is the contribution we're starting to see from investments we've made in bolstering our banking teams, improved 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 not make sense. Demand for credit remains healthy, and the market remains competitive. Price competition in certain categories, namely T&I and CRE, with particular emphasis on multifamily and industrial, is notable. That said, lenders in the market are generally maintaining discipline in credit structures. Customer activity was another positive this quarter, with both new relationship additions and with existing customers increasing the use of their lines. We saw commercial line utilization increase to 52.4% from 50.6% last quarter, which helped us drive some additional growth in commercial 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 end to make sure we got our customers the benefit of lower fees and higher guarantees on their loans prior to the expiration of certain subsidies at quarter end. We continue to remain the market leader in this business, and as of the government's fiscal year end on September 30th, we're the fifth largest 7 lender in the United States. Moving over to the liability side. With respect to deposits, 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 in the third quarter. Deposits grew by $66 million, or 5.2% annualized, and stood at $5.2 billion as of quarter end, with the growth coming primarily from money market accounts. Our deposit mix remains exceptional, with DDAs 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 some of our technology investments. Moving on to profitability, our margin expanded by 15 basis points at 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 as well for potentially higher rates at some point next year. Lastly, our efficiency ratio remained in the 52 percent 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. NPLs and NPAs declined again 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 of loans or 140 basis points, excluding PPP. Our capital position remained strong with a CET1 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 460,000 shares of our common stock. We believe our balance sheet strength positions as 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.
spk00: 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 loans and runoff in the acquired portfolio. In addition, we saw payoffs moderate for the first quarter down $78 million to $140 million. We saw 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 and 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 provides details on the balances, forgiveness, and fees from the respective rounds. Turning to slide five, we'll look at our government guaranteed lending business. At September 30th, the on-balance sheet SBA 7 exposure was $468 million, approximately $6 million lower than the end of the prior quarter, with $81 million being guaranteed by the SBA. The USDA on-balance sheet exposure was $76 million, up $8 million from the end of the prior quarter, of which $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 expiration of deferral periods and subsidies. As a result, we've slightly decreased our allowance as a percentage of the unguaranteed loan balances to 8.1%, 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 over 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 of 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 continued 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 non-interest bearing deposits. 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 well as lower funding costs. On a GAAP basis, our net interest margin was 3.91% 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 the 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, though the exact timing and the amounts are dependent upon the SBA's timing and process for forgiveness. We believe our core net interest margin, excluding PPP and accretion, may see compression as a result of lower yields 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 loans. Turning to non-interest income on slide eight. In the third quarter, our non-interest income decreased 2.5 million from the prior quarter. The decrease was primarily attributed to a $2.7 million 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 payoffs, 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%, and the fee waiver program was discontinued for most new SBA loan originations. Our pipeline and investor appetite for government guaranteed loans do, in fact, remain strong. But as we begin to sell more loans without the guaranteed fee waiver, we anticipate premiums to decrease in the beginning of 2022 and return to historical averages. Moving to non-interest expense trends on slide nine. Our non-interest 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 non-interest 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 52.35%. 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 begin 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 non-performing assets declined five basis points to 56 basis points of total assets. Oreo decreased by 1.4 million and excluding government guaranteed loans, our non-performing 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 $352,000 for the third quarter, an increase of $2.3 million compared to a $2 million release of provision in the prior quarter. The provision during the quarter was mainly driven by new loan growth 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 adjustments, which represents 154 basis points of total loans and leases, excluding PPP loans at September 30th. Turning to slide 11, outlining 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 continue to opportunistically repurchase our shares. Year-to-date, we have repurchased 1.3 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.
spk03: Thank you, Lindsay. 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'll continue to add talent to support this objective. We have a great market opportunity and company culture and have built a platform with ample room for growth. At the same time, we'll continue to manage our expense base with an eye to take costs 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 in 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 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 to a business coupled with a scalable platform with requisite size and capital strength positions as well to effectively compete in the marketplace. On the M&A front, the market continues to be active and we continue to evaluate opportunities that fit our criteria and can add value to our franchise. I'd like 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 remain strong, which position us well for continued growth in the portfolio and to continue remixing our earning assets from securities to loans. In closing, we're finishing off the year in a strong position heading into 2022, and we're optimistic of our ability to continue growing our franchise and creating additional value for our shareholders. I'd also like to say thank you to all of our employees for their continued hard work and the dedication to serving all our stakeholders. With that, operator, let's open the call up for questions.
spk01: Thank you. If you'd like to ask a question, simply press the star followed by the number one on your telephone. If you'd like to withdraw your question, press star and two. If you are listening via speakerphone, please lift your handset prior to asking your question. Your first question comes from the line of Ben Gerlinger from Hofder Group. Your line is now open. Please proceed.
spk02: Hey, good morning, guys. Morning, Ben. Morning, Ben. I was wondering if we could just take a higher-level view, the banking landscape for 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, whereas some are willing to pull back in order to somewhat defend their margin, whereas Byline seems to be able to do both. It seems like you guys have strong growth while also seeing pretty stable, encouraging margins in terms of lending capabilities. So I was wondering, going forward, do you think that a focus on kind of more niche lending is an area to kind of keep future growth stable and, excuse me, to keep the future margin stable? Or do you think there's a different opportunity set that should provide upside going forward?
spk03: 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 the type of borrower we're looking to serve. And I think the idea of having diversity that supports stability in the margin as well as diversity in origination sources is something 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, a relatively large position. Our securities portfolio had been elevated. Obviously, if we can continue to remix those earning assets from securities into loans, it adds some tailwinds to our margins.
spk01: Your next question comes from Nathan Race of Piper Sandler. Your line is now open.
spk08: Yep. Hi, everyone. Good morning. Good morning, Nate. Going back to the loan growth discussion, obviously really strong, you know, broad-based growth in the quarter. So curious, you know, how we can kind of think about the drivers for that growth. I know you mentioned, Alberto, that line utilization was a factor in terms of that increase in the quarter. But what's also curious to get some color around How much of this growth is coming from share gains as well?
spk03: Nate, 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 tailwinds, as I mentioned in the comments. Prepayments came in lower than we expected. I suspect we'll see some paydowns here in the fourth quarter that didn't happen for X or Y reason in the third quarter, so certainly that helped us a bit. I think the other thing which speaks to runoff is something that Lindsey mentioned and that we've been talking about over the last several quarters, and that is, you know, we have a residential mortgage portfolio that is coming down in balances. Obviously, that portfolio had, you know, added to some headwinds as particularly the last last year and 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 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 that's also reflective there in growth this quarter. 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. You know, we've talked about that since really the end of last year, and it's been a gradual buildup. I think what we're seeing is, you know, the size of the bank today and, you know, given the different origination sources that we have, you know, 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 businesses really had a good quarter in aggregate. And it's not going to be that way every single quarter, but it speaks to the diversification of our lending platform.
spk08: Got it. That's great, Tyler. And so just trying to put all those pieces together in terms of thinking about the outlook. Are expectations for kind of high small-digit growth kind of reasonable to assume going forward?
spk03: We're still sticking to that number, Nate.
spk08: Okay, great. And then just 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 SBA unit is continuing to be the main contributor to charge-offs, so just would love to hear kind of what your expectations are for charge-offs from the SBA unit going forward. particularly as some of the subsidies continue to roll off? And within that context, you know, just any thoughts on just the absolute reserve level and the need to provide for that kind of high-skillage growth relative to maybe some still unallocated excess reserves that were built up over the last couple years?
spk03: Yeah, so good question, and just let me unpack that in several ways. First, your question is about charge-offs. I think the question there and speaking to to the comments that Lindsay made. I think the word vigilant for the reasons that you mentioned is exactly where we are. We still, as you know, the credit environment has been very benign. The economy has had the benefit and 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 cautious and vigilant with respect to that point as far as reserves are concerned. You know, in terms of charge-offs, the other thing I would mention is the market, there's an immense amount of liquidity in the marketplace looking for yield. And that presents several opportunities in the form of, you know, to the degree that you have credits that you are 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 reserves to a level of adequacy that we think at this point are the right level of reserves. But we'll continue to look at closely opportunities that we have to anticipate potential issues and take advantage of the environment. And lastly, Nate, to your point on growth, obviously if we continue to see good loan growth, and I'm sure Lindsay will touch on this as she gets the question, we're seeing a remixing of assets from a risk-weight standpoint. As PPP pays down, obviously those are 0% risk-weight. So as we book traditional commercial loans in our portfolio, and we have growth, we're obviously going to provision to support that growth.
spk01: Our next question comes from the line of Terry McEvoy of Stevens. Your line is now open. Hi, good morning.
spk07: Good morning, 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 and the specialized companies lending verticals that you run and that you've talked about already on the call?
spk03: Two things. We saw good growth in both, Terry. Both our legacy CNI business, we're seeing customer activity pick up. I think you probably heard the commentary online utilization. That was very nice to see, particularly where utilization had been, certainly at the beginning of the year. And we're also, just to add to that, we're also seeing customers resuming activity, a lot of expansion, new equipment purchases, which again, it's nice to see from a, call it our core existing customer base. So yes, the short answer is yes. On the real estate side, I think the color there is narrower, meaning we're seeing good activity, particularly in industrial. as well as multifamily. Everything else, the rest of the asset classes are very quiet. So for example, retail, we're not seeing a lot there. I think for obvious reasons, we're not a big hotel lender, but that's an asset class that certainly is having some challenges from a capital access to capital standpoint. And again, we're not a big office lender, but that's an area where I think the market for loans in office settings is in a wait-and-see mode given the pandemic effects.
spk07: Appreciate that. Thank you. And then, Lindsay, can you maybe just remind us what more normal levels of net premiums or gain-on-sale spreads within SBA and You know, 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?
spk00: 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 than what we're seeing today. So you did see this quarter, it did dip down slightly, and we think we'll be seeing 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 that's one of the first variables, and then obviously the second is the premiums. Keep in mind, and just as a reminder, we share 50-50 with the government, anything above 10%. So if the premiums do dip down, just from a gain-on-sale standpoint, we only share above 10%. So less of an impact there than probably you would think.
spk07: Okay. Appreciate that. And then I'll squeeze one more in. What's next for Byline's digital banking group? It was mentioned earlier on the call, a 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.
spk03: No problem, Terry. Yeah, on the... On the digital banking side, it's nice to see we had introduced something that I think is table stakes today, which is the ability to open accounts. So we did that earlier, kind of like in the middle of the summer, and we had been testing it for a while, and it's nice to see us getting some traction there. That's 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 next on and we expect that will that will come online sometime you know in the first quarter towards the end of the first quarter maybe 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 in the call about continuing to find ways to take costs 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 base not to be as important as they once were and redeploy those by investing in our digital capabilities.
spk07: Thank you both and have a nice weekend.
spk00: Thank you.
spk01: Your next question comes from Tim Switzer of KBW. Your line is now open. Please go ahead.
spk06: Hey, good morning. I'm on for Mike Perito.
spk00: Good morning, Tim. Morning, Tim.
spk06: 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 expenses land if volume is higher, so loan growth comes in stronger than expected, or gain on sale doesn't moderate quite as much as you're expecting?
spk00: Sure. So in terms of the expenses and where the guidance was given with the 43 to 46, Tim, that's really incorporating everything that Alberto discussed around those additions. And just keep in mind that the reason for that increase is that those people were brought on towards the end of the quarter. So 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, we'll continue to update our guidance on that front. So we do see, obviously, pressures in the market around inflation, and so that's one of the other reasons that I've guided slightly higher just due to the outlook in terms of what's happening in the economy. So I hope that gives you a little more color around that.
spk06: Okay, so it doesn't necessarily include additional hires?
spk00: No.
spk06: Okay.
spk00: The ones that we talked about today. Okay, great.
spk03: If I could add to that, to what Lindsey said, 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 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 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 just to add some context to that.
spk06: OK. Yeah, great. Thank you. And if I could have one more. You guys have talked about kind of 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 you'd be looking for in a potential target and what kind of criteria you guys are looking out for? Thank you.
spk03: Yeah. So just strategically, we're looking obviously for good strategic fit, whether that be just incremental markets where we don't have a presence. We typically look for a complementary deposit franchise to ours. We're always going to be very sensitive about deposits, despite the fact that the current environment really has not been ideal for and given the amount of liquidity in the system. That said, deposits is always an area of focus to us. To the degree that a potential target has a lending business that we like, then obviously that's another plus in an acquisition strategically, as well as some of the more basic tenets of can we take costs 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 in call it 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 $2, $2.5 billion range. I think 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, you know, 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, you know, we're looking for earned back certainly inside of three years. And that's more or less kind of a quick snapshot of our criteria and what we're looking for.
spk06: That's perfect. Thank you.
spk01: As a reminder, if you would like to ask a question today, please press star followed by 1 on your telephone keypad. Our next question comes from the line of Brian Martin of Janie Montgomery. Your line is now open. Please proceed.
spk05: Okay, good morning. Morning, Brian. See, I just wondered if you could just comment on a couple things. Lindsay, maybe just your comment just for clarity on your thoughts on the margin, just Can you let us know just your comments about the margin X accretion and X PPP? Where did that level land just this quarter? This is kind of the baseline to think about as we go forward here.
spk00: Sure. So when you back those out, it did compress slightly, Brian, in terms of the margin. But really, the margin was great, even despite that. It was very modest. And one of the reasons it was so modest was because of the earning asset mix that we've hit on several times here during the call. The shifting of the loans and coming out of securities has been really a great lift and something that we've talked about for a long time that we wanted to do. And as we continue to deploy that liquidity, that'll continue to give us tailwinds to help the margin. But, you know, I'd say that the headwinds and that's really what drove my margin comments about the slight compression in the near term 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.
spk05: Gotcha. Okay. And just the correct percentage, Lindsay, I mean, was it, what level was that? When you take out accretion and PPP, what is that core margin today? as you kind of think about going into next quarter and the quarter thereafter.
spk00: So, Brian, we don't give that because with PPP, you technically have to make an assumption on the funding side. So, we give you all the pieces on page 14 so you can calculate it. But it depends on what you assume there.
spk05: Yeah. Okay. All right. How about just in terms of the SBA production? 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 subsidies gone? Just how to think about that component of the business.
spk00: Pipelines remain strong and healthy, as Alberto's highlighted. And we feel good about the production. And again, the production is what drives The gain on sale and obviously the other shift, or I guess you could call it a tailwind from a margin standpoint, is the 75% change and going from the 90%, Brian, to 75%. That'll also help as there'll be more earning assets with the 75% being sold and retaining 25% instead of the 10%.
spk05: Gotcha. Okay. And then just maybe the last one or two for me, just on the deposit growth has been great where the DDAs are is super impressive, kind of record levels here, I guess. As you think about the size of the balance sheet going forward, just is your expectation that deposit growth slows and you kind of just do this remix as you're kind of articulating with 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.
spk00: Yeah, 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, and how long it stays in the system is still the big question that everybody has. But yeah, I think your assessment is fair, and the goal here is to continue to remix those earning assets and deploy our liquidity into loans.
spk05: Gotcha. Okay, that's what I thought. And this last one was just on, and I know it's a guess, but is your expectation that the remaining PPP is largely completed this year, and there's some tail in the next year? That seems fair, or is it, I don't know how the trends have been since quarter end here. There's been a slowdown or pickup, but just any thoughts on how to think about that would be great.
spk00: Yeah, we had a great quarter in the third quarter in terms of PPP forgiveness, and we saw a good amount come through. Things did quiet down a little bit, and we'll see. It's all dependent on how quick it all gets through the system. So I don't think that it'll all come this year, Brian. I think maybe half, and then the other half will trickle into 2022.
spk05: There's not that much left.
spk00: Yeah, and good point. There's only 7.5 million of net processing fees remaining, so just a part of perspective.
spk05: Yep, totally get it. Okay, thanks, and great quarter, you guys.
spk00: Thank you, Brian. Appreciate it.
spk01: We next have a follow-up question from Nathan Race of Piper Sandler. Your line is now open. Please go ahead.
spk08: Thanks for taking the follow up. Just a question on just capital management over the next few quarters at least. You know, you guys have returned about 50% of net income to shareholders in each of the last two quarters. I'm just curious if we can expect that level to continue near term and kind of just within the context of the flow of acquisition opportunities that you're seeing recently.
spk03: I think, Nate, the way I would think about it is it affords us great flexibility going forward, whether that be 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 I'm saying is that we obviously, if we continue to see, you know, the balance sheet and capital grow, if we're generating excess capital, we will, and are not, you know, have more than enough to support the business and are not looking to deploy it more strategically. And then we'll return capital to shareholders. So whether that be through increases in dividends over time or whether that be through buybacks, we'll retain that flexibility and determine that accordingly. Got it.
spk08: I appreciate all the color. Thank you, guys, and congrats on the great quarter. Thanks, Nate. Yeah, thank you.
spk01: Thank you for your question today. I'll now turn the call back over to Mr. Parachini for any closing remarks.
spk03: 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 byline. And we look forward to speaking to you again next quarter and next year. So thank you very much.
spk01: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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