Fulton Financial Corporation (NASDAQ:FULT) Q3 2021 Earnings Conference Call October 20, 2021 10:00 AM ET

Company Participants

Matt Jozwiak - Director, Investor Relations
Phil Wenger - Chairman and Chief Executive Officer
Curt Myers - President and Chief Operating Officer
Mark McCollom - Chief Financial Officer

Conference Call Participants

Frank Schiraldi - Piper Sandler
Daniel Tamayo - Raymond James
Chris McGratty - KBW
Russell Gunther - D.A. Davidson
Matthew Breese - Stephens Inc.
Erik Zwick - Boenning & Scattergood

Operator

Good day, everyone and welcome to the Fulton Financial Third Quarter 2021 Results Conference Call. [Operator Instructions] As a reminder, this conference call maybe recorded. It is now my pleasure to hand the conference over to Mr. Matt Jozwiak, Director of Investor Relations. You may proceed.

Matt Jozwiak

Good morning and thanks for joining us for Fulton Financial’s conference call and webcast to discuss our earnings for the third quarter of 2021. Your host for today’s conference call is Phil Wenger, Chairman and Chief Executive Officer. Joining Phil are Curt Myers, President and Chief Operating Officer and Mark McCollom, 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 and Slides 10 and 11 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.

Phil Wenger

Thanks, Matt. Good morning, everyone. I will begin with some overall thoughts on the quarter and then Curt Myers will discuss our business performance and Mark McCollom will share the details of our financial performance. And after that, we will answer any questions you may have.

Fulton’s performance was again solid in the third quarter of 2021. Our earnings per share of $0.45, was another quarterly record for us, surpassing our previous record of $0.43 per share in the first quarter of 2021. We saw growth in many segments of our business as Curt 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 third quarter. Fulton has taken a look at select opportunities that might be a good fit for us and we remain interested in supporting our future growth through M&A. We are 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 one-third of our $75 million 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 have referenced the challenges brought about by COVID-19. 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 onsite work beginning the week of November 1. And 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 three main priorities of growing the company, achieving operational excellence and sustaining effective risk management and compliance.

Now, I will turn things over to Curt to discuss our business performance.

Curt Myers

Well, thank you, Phil and good morning, everyone. As Phil noted, our third quarter 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 million in total loan growth or about 4.5% annualized when excluding the impact of PPP forgiveness.

Starting with consumer lending, loan balances grew $186 million or 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 our 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, in-market residential mortgage loans and we continue to evaluate our opportunities to do so.

Residential mortgage originations for the quarter were $659 million, 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 2x our pre-pandemic levels. As I noted before, residential construction also had a strong quarter, increasing $21 million or 14% linked quarter. Finally, in consumer banking, a new fin-tech partnership for student loan refinance 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&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 million, the first increase we have 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&I loans were down $7 million. However, excluding floor plan, C&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 million or 1.6% linked quarter, with seasonal municipal deposits representing $290 million of that growth. Also during the quarter, we continued to actively manage our deposit costs lower.

Moving to fee income businesses, we were pleased with the strong quarter as fee income increased $11 million. 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 billion in the third quarter, up from $13.7 billion at the end of the second quarter and $11.8 billion at the end of the year ago period. These trends drove quarterly wealth management income to record levels for the fourth quarter in a row. Mortgage banking delivered another strong quarter on solid loan sales and wider gain on sale margins. Even when excluding 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 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 third 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 continued to decline. Non-performing loans declined $3.5 million linked quarter and remained relatively stable since prior to the beginning of the pandemic. During the quarter, we booked a net recovery of $2.3 million or 5 basis points. This compares to $6.9 million or 15 basis points of annualized net charge-offs in the second 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 continued to decline, ending the quarter at only $65 million. 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.

Mark McCollom

Thank you, Curt and good morning to everyone on the call. Unless I note otherwise, the quarterly comparisons I will discuss are with the second quarter of 2021.

Starting on Slide 3, earnings per diluted share this quarter were $0.45, while net income available to common shareholders was $73 million. 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 high operating expenses, which I’ll cover in more detail later in my comments.

Moving to Slide 4, our net interest income was $171 million, a $9 million increase linked quarter. This was due to a pickup in fees earned on PPP loans forgiven during the third quarter versus the second quarter, moderate loan growth and higher yields on earning assets during the quarter, coupled with a relatively sizable decline in interest expense. First, I will provide some more detail around our PPP program. At the end of the second quarter, we had $1.1 billion of outstanding PPP loans and $36 million of unearned fees. During the third quarter, our PPP loan forgiveness was $526 million and fees earned were $18 million, up from $12 million earned in the second quarter. Since the start of the program, the SBA has forgiven approximately 78% of our PPP loans. And at September 30, we have $590 million of PPP loans still on our books, with approximately $18 million of PPP loan fees yet to be recognized.

Turning to the investment portfolio, balances grew modestly during the period, increasing $80 million to end the quarter at $4 billion. We did see an increase in deposits with other institutions by about $450 million during the quarter, but we would expect this to decline a bit in the fourth quarter if deposit patterns are consistent with prior years.

Turning to deposits, total deposits grew by approximately $350 million on an ending balance basis. And as Curt noted, we lowered our cost of deposits for the quarter from 15 basis points to 12 basis points and we expect this to migrate modestly lower in future periods. The third quarter traditionally represents the peak inflow of our municipal deposit balances and we would expect to see those balances begin to outflow in the fourth quarter and into next year. Non-municipal deposits increased approximately $60 million during the quarter, whereas municipal deposits represented $290 million of our overall quarterly increase.

Our average loan-to-deposit ratio declined from 86.9% in the second quarter to 83.2% in the third quarter from a combination of increased deposits as well as a significant decline in PPP loans. Our net interest margin for the third quarter was 2.82% versus 2.73% in the second 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 third quarter provision for credit losses was a negative $600,000 compared to a negative $3.5 million last quarter and a negative $5.5 million in the first quarter. Year-to-date, due to solid performance, including a net recovery in the third quarter and an improving 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 $2.3 million 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 on non-interest income, I will touch on just a few items that Curt 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 third quarter, consistent with this year, we have chosen a portfolio salable mortgage product and have now put approximately $288 million of salable mortgages on 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 $3.5 million due primarily to the higher interest rate environment. Our MSR asset was $32.9 million on balance sheet at September 30. This balance is net of a $3.1 million mortgage servicing rights valuation allowance, which remains as of quarter end. Lastly, in fee income, other fee income increased by $2.6 million linked quarter. This was primarily due to gains of $2.1 million on equity investments as we have seen an investment in a fin-tech fund generate very strong returns recently.

Moving to Slide 7, non-interest expenses were approximately $145 million in the third quarter, up $4 million linked quarter. This increase was driven by the following factors: the day count in the third quarter accounted for about $1.6 million of the increase, and we saw increased benefits costs of $1.6 million for the quarter that were due to increased healthcare costs. As a reminder, we are self-funded for our healthcare, and we saw employees hitting their deductible limits. We would expect these costs to revert to historic trends in the fourth quarter and then decline in early 2022 as deductibles reset.

We also saw higher variable comp costs due to both higher pretax earnings as well as higher commissions in our wealth management area. And lastly, on expenses, we saw higher data processing costs occur 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 by approximately $1.4 million.

Turning to taxes, our effective tax rate was 16% for the quarter, consistent with the second quarter. Slide 8 gives you more detail on our capital ratios. As of September 30, we maintained strong cushions over the regulatory minimums, and our bank and parent company liquidity remain very strong. During the quarter, we repurchased approximately 1.7 million shares at an average price of $15.43 and have utilized approximately one-third of our $75 million 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 million to $665 million. 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 million to $235 million. And we expect operating expenses, excluding charges related to our balance sheet restructuring, to be in the range of $570 million to $575 million for the year. Included in this number are some planned expenses in the fourth quarter related to COVID vaccine bonuses as well as a contribution to our Fulton Forward Foundation.

Lastly, we are aware that many of you look at 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 million from the second quarter to the third quarter. And also, MSR valuation allowance adjustments resulted in a $5.7 million swing from a $2.2 million increase to the allowance in the second quarter to a $3.5 million decrease in net valuation allowance in the third 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 first quarter balance sheet restructuring, earning asset growth, core margin stabilization and continued cost-containment efforts.

And with that, I’ll now turn the call over to our operator for questions. Brian?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question will come from the line of Frank Schiraldi with Piper Sandler. Your line is now open.

Frank Schiraldi

Good morning.

Phil Wenger

Hi, Frank.

Curt Myers

Hi, Frank.

Frank Schiraldi

Just, Curt, you mentioned the pipeline, commercial pipeline has been pretty stable. And I 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 third quarter. 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?

Curt Myers

Yes. Sure, Frank. Just a little more color on just loan growth overall. Originations were 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 fourth quarter. 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 linked quarter was $24 million. 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 are in and off the line very, very quickly. That business overall for us is about $350 million.

Frank Schiraldi

Okay. Great. Thanks for the color. And then just lastly, on the – you also mentioned the fin-tech 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 would provide in terms of growth and if it’s something you’re looking at across the board on the consumer side that these fin-tech partnerships, that could be a tailwind?

Curt Myers

Yes, Frank. So we are looking at fin-tech partnerships on the origination side. 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 will accept under that program, and it is very modest at this point. It’s ranging $2 million to $4 million of originations per month, but we think we will continue to grow. And we are looking at other partnerships that can accelerate our overall origination activity on the consumer side.

Frank Schiraldi

Okay. Great. Thanks. And if I could just sneak in one more in terms of the, Mark, on the expenses, you 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 million to $2 million higher in terms of expense 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 in the 4Q? And is that still something that you’ll ramp up through 2022 as well?

Mark McCollom

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 with 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 million and that’s up from a little under $425 million over the same period a year ago. That’s about $6.5 million 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 million of year-over-year additional revenue, those incentive accruals and wealth commissions account for $7.6 million, 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.

Frank Schiraldi

Prefect. Okay, great. Thanks for all the color.

Phil Wenger

You bet. Thanks for the questions, Frank.

Operator

Thank you. And our next question will come from the line of Daniel Tamayo with Raymond James. Your line is now open.

Daniel Tamayo

Thanks. Good morning everyone.

Phil Wenger

Good morning, Dan.

Curt Myers

Good morning, Dan.

Daniel Tamayo

So maybe just starting on – I just want to make sure I heard this comment right. You made a comment about an expected decline in deposits. Was that in the fourth quarter? Was that overall deposits? And you talked about the municipals peaking in the third quarter, but did I catch a comment on overall deposit decline in fourth quarter?

Mark McCollom

Yes, Danny. So – this is Mark. If you think about our normal trends in our municipal deposit business, the third quarter is always a high watermark. And if you look back in prior years, we would have between $500 million to $600 million between the peaks and the valleys of that business, with the peak always occurring in the third quarter. I think one of the questions that the whole industry is sort of wondering right now is that, on top of that, then you had the surge deposits during the beginning of COVID. And we’re – the jury is really still out as to how much of that is surge versus how much of that is going to stick around. But typically, for us, from the third quarter to the first quarter, 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 million to $600 million range.

Daniel Tamayo

Okay. Great. That’s helpful. Thanks for that. And then not to beat a dead 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 is a lot of moving parts in the fourth quarter where you provided guidance. But how much of the fourth quarter number is going to be kind of onetime in nature on either side and just to try and get us – help us get a base as we start 2022 modeling?

Mark McCollom

Yes. I think with some of the items that we – that I mentioned there in the script, Dan, I think that could be in the $3 million to $5 million range, depending on what overall pretax 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 pretax profitability.

Daniel Tamayo

Okay. So that’s related to the $3 million to $5 million? Can you just kind of sum up with – I apologize of repeating, but just sum up what those would be, and then I’ll drop off. Thank you.

Mark McCollom

Yes. You were fading a little bit on the call there, Danny, but I think you’re just asking for a little bit more detail on that $3 million to $5 million. And again, it comes down to the two 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 1, 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 will make up the remainder of that number.

Daniel Tamayo

Yes. Okay. That’s exactly what I was looking for. Thanks Mark. Appreciate it. I am all set.

Mark McCollom

Sure.

Operator

Thank you. And our next question will come from the line of Chris McGratty with KBW. Your line is now open.

Chris McGratty

Hi, good morning. 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?

Mark McCollom

Well, again, a lot of that depends on supply chain issues in our country and how fully things open. As Curt 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 were actually up $700,000, which – we are 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 one quarter does not clearly make a trend, but we think that may be a sign that folks are starting to burn through some of this surge money and the stimulus money and that would overall then lead to our loan activity in future periods. Certainly, the goal is – I mean we are sitting today still about $1.8 billion 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 will be speaking to that certainly on our fourth quarter earnings call when we set our guidance for 2022.

Chris McGratty

Great. Thank you for that color. The – just a clarification on the dealer floor plan. I think you said it was around $350 million. What was the peak in that portfolio?

Curt Myers

I don’t have the balances, the historical balances, but it’s off about $100 million. It was like $70 million linked quarter in the first quarter and second quarter, and then it was another $24 million. So, $80 million to $100 million off of what we would expect kind of to be at this point.

Chris McGratty

Okay. And then maybe if I could on the M&A comments, Phil, in your prepared remarks. Can you just refresh us the size? I know it sounds like end market cultural fits. But I think in the past, you said a minimum of $1 billion, but just kind of an update on potential range of what you might consider? Thanks.

Phil Wenger

Yes. I think we are still looking at $1 billion to $8 billion or $9 billion.

Chris McGratty

Great. Thank you.

Operator

Thank you. And our next question will come from the line of Russell Gunther with D.A. Davidson. Your line is now open.

Russell Gunther

Hey. Good morning guys.

Phil Wenger

Good morning.

Russell Gunther

Just a bit of a piggyback to Chris’ question and following up on the loan growth conversation. So, I appreciate the color on the commercial pipeline originations, pockets of growth you haven’t seen in prior quarters, just the detail with some headwinds. So, as we tie all of this together, is that 4%, 4.5% annualized ex-PPP, the right way to think about Fulton near-term, or are there additional tailwinds or optimism that we are not seeing that you guys are expecting over the next couple of quarters?

Curt Myers

Yes. Russell, it’s Curt. We are expecting that range, 4% to 6%. If you look at historically the organic growth, it’s been in that range. We are doing some things like the fin-tech partnership and some other things to accelerate originations. 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 will drive that growth without adding new customers. We look at growing the business by adding new customers. We think there is a significant tailwind 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 are funded. They are moving forward. I think that’s a positive sign as well. I think it really just depends on how quickly that happens.

Russell Gunther

Okay. Very helpful. I appreciate it, Curt. 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?

Mark McCollom

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 in 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 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 commensurately.

Russell Gunther

Okay, great. Thanks Mark and thanks everyone for taking my questions.

Mark McCollom

Thanks Russell.

Operator

[Operator Instructions] Our next question will come from the line of Matthew Breese with Stephens Inc. Your line is now open.

Matthew Breese

Good morning.

Phil Wenger

Good morning.

Matthew Breese

First question for me, just on what is your current outlook for PPP 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 million remaining fees?

Mark McCollom

Yes. So, of that – of the $18 million in fees and the $590 million of balances that remain, our assumption is we are going to be – there is 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 million in fees, while there has been a little bit of fits and starts with the SBA. I think in general Matt, we would expect two-thirds or around $12 million of that to be recognized in the fourth quarter and then one-third or around $6 million, give or take, to be recognized in the first quarter of next year.

Matthew Breese

Got it. Okay. Perfect. Phil, you mentioned due to in-market M&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?

Phil Wenger

Yes. So, I mean we are looking for teams and lenders all the time. I think when there are acquisitions, the opportunity can become greater. But we are looking for those folks everywhere throughout our footprint.

Matthew Breese

Okay. Two more for me, the first one is just I noticed that common shares outstanding were down quarter-over-quarter. I didn’t see you 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 have mentioned there was some remaining authorization, but did you actually buyback stock this quarter?

Mark McCollom

Yes.

Phil Wenger

Yes. Go ahead, Mark.

Mark McCollom

Yes, we did. It was in our prepared remarks. We repurchased 1.7 million shares at a price of $15.43 on average.

Matthew Breese

Perfect. Okay. Thank you. The last one is just on M&A. This is a recurring topic, but I wanted to get your thoughts on – this year, in particular, we have seen a lot of deals in the buyer stocks have not performed great. And as you have 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?

Mark McCollom

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 two together because you could accept maybe a little bit higher earn-back upfront if you have a really strong company that you are buying. So, then that earn-back – the earn-back of that upfront dilution becomes a little bit lower. I would also say, when you look at that in terms of absolute numbers, I always caution a little bit to say, well, we never do a deal of more than 2% or 4% upfront dilution, because a lot of that depends on the relative size of the entity you are 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 first 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 target’s cost of capital. And we focus on the target’s 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, in non-financial terms, I mean what’s – I mean I just talked about all the financial stuff as a CFO, but the most important thing really is that there is a good cultural fit. And a great financial deal with a bad culture fit will ultimately end up being a bad deal for shareholders.

Matthew Breese

Great. That’s all I had. Thank you for taking my questions. I appreciate it.

Phil Wenger

Thank you.

Mark McCollom

Thanks Matt.

Operator

Thank you. And our next question comes from the line of Erik Zwick with Boenning & Scattergood. Your line is now open.

Erik Zwick

Good morning guys.

Phil Wenger

Hi Erik.

Erik Zwick

I appreciate all the color and commentary already on the near-term expense outlook. Maybe thinking a little bit more kind of mid or longer term outlook, there has obviously been a lot of press about inflationary pressures in labor markets. Curious, wondering 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?

Phil Wenger

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 – as with every business, the biggest problem everyone has is getting employees. And it’s a very tough environment to hire people. And I think for all industries, we see wages continuing to climb, and we see permanent inflation.

Erik Zwick

That’s helpful. And when do you typically kind of award annual increases?

Phil Wenger

April.

Erik Zwick

And then maybe just switching gears a little bit, Mark I appreciate the calling out kind of tracking the PPNR, and 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 the opportunities today within the organization to pull levers to gradually increase that outside of considering M&A or a steepened yield curve or improved interest rate environment?

Mark McCollom

Yes, the most obvious area to focus on is that excess liquidity we are sitting on. Right now, we have got $1.8 billion that effectively is earning about 15 basis points. So, that – when you think about – like I know there are – some of the analysts on this call, I know strip out our PPP piece, which we understand and think is appropriate to get down to core PPNR. But when you strip out the impacts of 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-to-deposit ratio between 95% and 100%. And so when you get back to that level, that – redeploying that excess liquidity 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.

Erik Zwick

Thanks for taking my questions today.

Mark McCollom

Thanks Erik.

Operator

Thank you. And I am showing no further questions at this time. So, now it is my pleasure to hand the conference back over to Phil Wenger, Chairman and Chief Executive Officer, for closing comments and remarks.

Phil Wenger

Well, thank you again for joining us today. And we hope you will be able to be with us when we discuss the fourth quarter results in January 2022. Thank you.

Operator

Thank you. Everyone, this concludes our conference call today. Everyone, have a wonderful day.