Q3 2020 Byline Bancorp Inc Earnings Call
Good morning, and walk through the third quarter Twentytwenty, One bank Corp. earnings conference call all parts.
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I would now like to turn the conference over to Tony Rossi of financial profiles. Please go ahead.
Thank you Andrew Good morning, everyone and thank you for joining us today for the byline Bancorp third quarter 2020 earnings call.
We'll be using a slide presentation as part of our discussion. This morning. Please visit the events and presentations page Biotimes Investor Relations website for access to the presentation.
Before we begin I'd like to remind you that this conference call contains forward looking statements with respect to the future performance and financial condition, a byline bancorp that involve risks and uncertainties, including the impact of the COVID-19 pandemic.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements. These.
These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call.
Management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures.
I like to turn the call over to Albert repair Chaney, President and CEO Alberto.
Great. Thank you Tony Good morning, everyone and welcome to our third quarter earnings call. Thank you for participating on the call. This morning, and I Hope you on your families are doing well and staying healthy joining me today are let's see Corby, our CFO and Mark Sainato, Our Chief Credit Officer, I'll start the call with a summary of our results and provide.
I do want to highlight some important developments for the quarter before I pass the call over to Wednesday, who'll provide you with more detail on our financial after that I'll come back with some closing comments before opening the call up for questions.
As a reminder, all ways you can follow our discussion what presentation materials you can find in the Investor Relations section of our website.
Obviously, we continue to operate in an uncertain environment as a result of the pandemic notwithstanding I'm proud of the way. Our team has responded to this challenge we continue to support our customers on a daily basis maintain efficient and highly productive operations and produce strong results relative to the environment I would like to.
Personally thank all of our team members for their extraordinary efforts during this unprecedented.
Moving onto performance net income for the quarter came in at 13.1 million or 34 cents per diluted share up from 9.1 million or 24 cents per diluted share last quarter. Our pretax pre provision income was strong at 34.1 million up from 28.4 million on a quarter over quarter basis.
Pre tax preparation an hour away. It came in at 212 basis points up from 185 basis points last quarter.
The operating improvement was primarily driven by higher fee income from the sale of SB eight loans, while maintaining disciplined expense management, which in turn drove operating leverage higher net interest income increased by just under a million dollars. Despite the NIM declining by 11 basis points that's sad.
The decline in the name was largely impacted by lower yielding PPP loans and the higher level of liquidity. We are currently carry offsetting days and reflective of the quality of our deposit franchise was up 14 basis point decline in deposit costs that drove our cost of deposits to just 22 basis points at quarter.
And.
I mentioned earlier, our government guaranteed business saw strong production levels this quarter, which resulted in a record level of gain on sale income as high demand in the secondary market for government guaranteed loans drove an increase in the premiums received four sold loans.
Our team has a lot of experience in this space has gone through cycles before and operate it through periods, where SP a loans can become very attractive for potential borrowers.
Higher origination levels. This quarter were partly driven by borrowers looking to take advantage of the six month principal and interest subsidy on SB eight loans close prior to the end of the quarter notwithstanding the expiration of that benefit as well as tighter standards. We continue to see good demand for loans through the end up.
Quarter Lastly, we were once again recognized as the top SB seven a lender and both the states of Illinois, and Wisconsin, We actually number.
You Wonder in Indiana as well.
Right up to the number two position nationally Turner.
Turning over to the balance sheet total assets grew by about a 100 million over the prior quarter to six and a half billion, primarily driven by an increase in our securities portfolio loans declined by 16 million from prior quarter with the decline driven by borrowers curtailing their line usage from earlier in the year.
Commercial pipelines continued to increase during the quarter, which should lead to higher production levels going forward.
Deposits remained relatively stable, except for seasonal fluctuations and core balances primarily related to tax payments and planned run off of higher cost time deposits.
The mix remained strong with non interest bearing representing 35% of total deposit which contributed to the aforementioned 14 basis points reduction in deposit costs again, underscoring the quality of our franchise.
Operating expenses were stable after adjusting for one time items impacting the prior quarter and declined by 5.8% from the prior year. The combination of higher revenue with disciplined expense management led to a decline in our efficiency to 52.5%.
During the quarter, we also announced the consolidation of 11 branch locations, which should contribute to further efficiency improvement and allow for continued investments in our digital capabilities and franchise.
Moving onto credit quality, we saw generally positive trends in asset quality during the third quarter loans and apparel declined throughout the quarter and stood at 78 basis points at the end of September and be Allison Npis were stable, while net charge offs declined.
Criticized and classified levels held steady and we continue to actively monitor the portfolio communicate with borrowers and performed targeted at reviews.
Notwithstanding and against the uncertain backdrop of the pandemic and the potential for additional stimulus. We continue to build that reserve levels, our allowance for loan loss increased to 140 basis points.
Loans from 123 basis points at the end of the second quarter.
Capital and liquidity remained very strong and we opted to add an incremental 25 million and subordinated debt to further increase tier two capital RCT, one increased to 12.55% and total capital to 16.7% at the end of the quarter.
Slide four provides some additional information on the continuation of the actions we've taken to optimize the size of our retail branch network. We've identified 11 branches for consolidation this year, which will mark the third time, we've done day since our recapitalization seven years ago, all combined we have consolidated.
The weighted over 56 branch locations, representing approximately 55% of our network inclusive of acquired branches. This resulted in material reductions in operating expenses, what manageable attrition, which has helped us improved efficiencies and increased aggregate branch productivity.
As evidenced by the boxes per branch, increasing from $25 million at the time of the recap to $45 million at the time of the IPO to over 100 million. After we complete these consolidations in the fourth quarter.
Also allowed us to reinvest dollars back into our digital capabilities and make other upgrades to our business right.
Slide five provides additional information on our COVID-19 response efforts and detail on the PPP program. We originated a small amount of additional PPP loans during the third quarter and now our primary focus is on helping clients navigate through the forgiveness process, we have about a $160 million of loans.
In various stages of forgiveness with approximately 29 million that has already been submitted to the SB eight for approval. The PPP program had a significant impact on various line items on metrics. This quarter and included in the appendix, we provide a summary of the area. So you can better understand our performance both.
With and without the impact of PPP.
Turning to slide six we provide an update on our loan deferral, it's about 96% of the loans that received a modification have now returned to regular payments status.
Timber 30, S., we had 79 loans last on active deferral, representing just 78 basis points of total loans and leases roughly.
Roughly two thirds of the act of deferrals are loans that have been granted a second deferral with most of those commercial exposure is common in the manufacturing entertainment and food services sectors.
Slide seven provides an update on exposures to industries that I've seen the most impact from call. It 19. The exposure is there remain manageable with these industries collecting collectively representing less than 10% of our portfolio. Excluding PPP. The largest exposure continues to be restaurants at a 133 million.
In dollars or 3.6% of the portfolio, excluding PPP bites eight and nine provide more detail on the individual portfolios, making up this whole like COVID-19 industries and with that I'd like to pass the call over to lend C will provide you with more detail on our results. Thanks, Robert I'll start with some additional.
Formation on our loan portfolio on slide.
Our total loans and leases are 4.4 billion at September Thirtyth, essentially unchanged from the end of the prior quarter. Our originated loan portfolio increased by $41 million, primarily due to growth in leasing commercial and construction loans, which off that we are seeing in our residential real estate portfolio.
We originated a small amount of PPP loans during the quarter and our balances grew by $11 million from the end of the prior quarter.
The growth in the originated portfolio was offset by a decrease of $58 million in our acquired loan portfolio, including $18.9 million or 8%.
The acquired impaired portfolio.
Our total loan originations of $204 million in the third quarter were well in excess of $107 million in pay offs, we had.
Our total loans in the quarter were negatively impacted by a $167 million increase in that line utilization.
Overall utilization rate dropped from 57.2% from.
58.5% last quarter and is now below pre corporate level.
Turning to slide 11, well look at our bank guaranteed lending business as Robert discussed our team delivered a record quarter loan production they had $176 million of loan commitments in the quarter, which was more than double the level of EBITDA. During the year. We did this by pivoting quickly from our PPC effort and we focused on the rough lending really.
Having said that were less likely to be impacted by that.
The top three industries, including finance and insurance administrative and support services and specialty freight contractor.
During the third quarter, our managed government guarantee portfolio increased to just under $2.1 billion in service.
At September Thirtyth, the on balance sheet.
An exposure was 434 million, including 72 million of which is guaranteed by the FDIC.
Yes on balance sheet exposure was 88.7 million of which 62%.
Yeah.
We have been actively monitoring this portfolio and communicating with bars as they make the transition back to their scheduled payment impact of the pandemic on these loans remains uncertain as we continue to monitor the duration and severity of COVID-19, as well as any further federal stimulus actions.
Moving over to deposit as we have discussed in prior quarters, we are diligently managing our costs.
Can you reduce higher cost deposits, we continue to see a positive shift in our deposit mix.
Time deposits declined to 16.8% of total deposits from 18.7% at the end of last quarter.
In addition, average noninterest bearing deposits increased $50 million versus last quarter. The positive mix shift helped to drive a 14 basis point decline and our cost deposit.
Hey, driven by a 20 basis point decline in our cost of interest bearing deposit.
Moving on to net interest income and margin.
Non interest income was $53.5 million for the quarter approximately a million dollars higher than the prior quarter. This was primarily due to higher average balances of loans and leases, which offset the decline of repricing.
Our net interest margin was 360 in the third quarter down 11 basis points from last quarter accretion income on acquired loans contributed 26 basis points to the margin for the third quarter up from 22 basis points in the last quarter.
But in accretion income our net interest margin was 334, a decline of 15 basis point decline.
The decline was due to lower earning asset yields as we continue to see repricing and our loan and securities portfolios and the quarter impact of the lower yielding TPP loan as well as excess liquidity.
We also had an increase in our borrowing cost, resulting from the issuance of our subordinated debt.
These were offset by the continued decline in our cost of deposits as outlined in the drivers of NIM change.
Excluding TPP loan the average yield on within the third quarter with five opex versus Fourninety four in Q2.
While the impact of repricing and our portfolio was moderate a bit going forward. We will not have the same level of high cost deposit as an off that.
Our cost of deposits now at 22 basis points, our ability to further reduce deposit cost is limited as it were.
Result, we expect to see slight compression in our reported net interest margin in the fourth quarter. However, not to the same degree as we experienced in the third quarter turning.
Turning to noninterest income on slide 14.
In the third quarter, our noninterest income increased by nine and a half million from the prior quarter. The increase was primarily due to net gains on sales of government guaranteed.
Positive fair value adjustment on our servicing out, but a general increase in customer activity that resulted in higher fees.
On a $425000 net impact from Securities also contributed to the increase this quarter.
During the third quarter, we sold $121.2 million of government guaranteed loans up from $78.7 million of loans sold in the prior quarter.
For the third quarter sales the net average premium was 11.7%, which was a historically high level for this business. We don't anticipate premiums remain at this level for an extended period of time premiums have been driven by demand from investors searching for yield and the liquidity in the market.
Turning to slide 15, our non interest expense was 41.7 million in the third quarter up from 37 million from the prior quarter, which benefited from the higher amount of salary and benefit cost as we deferred as a result of loan origination.
Excluding the variance from PTP, our expenses were well controlled this quarter, although we did see higher loan related expenses, which was driven by the strong quarter of government guaranteed loan production we all.
We also had approximately $700000 in charges recognized during the quarter related to our planned branch consolidation.
Compared to the third quarter of last year when merger related and other non recurring expenses are excluded our adjusted non interest expense declined by nearly 6%, which reflects the success we've had in managing our expense levels and improving our operating leverage.
With our revenue growth exceeding our expense growth our efficiency ratio improved to 52.5% in the third quarter, 53.7% in the prior quarter.
Looking ahead to Q4, we anticipate expense levels to be elevated including just over $5 million.
This is associated with the branch consolidation.
Next we'll take a look at asset quality, we saw good.
Stability in the loan portfolio during the quarter, our nonperforming assets were consistent at 79 basis points of total assets. We had an increase in nonperforming loans, but this was offset by a decline in our Joe and lower net charge off than the prior quarter.
As of September Thirtyth, our nonperforming assets include a $3.7 million of government guaranteed.
Parallel to the end of the prior quarter.
Our provision expense was 15.7 million, which included $6.4 million in specific impairment, but the remainder largely related to an increase in qualitative factor the quarter included $8.4 million to address the continued economic uncertainty caused by the COVID-19, and then we can.
We continue to leverage qualitative factors and our incurred loss allowance methodology related to the uncertainty of the pandemic on our portfolio, including the uncertainty around the unguaranteed portion of the FDIC M&A loans coming off the subsidy payments later in the year.
Turning to my last slide on our solid liquidity and capital position as of Sept.
As of September Thirtyth, we continue to have strong liquidity at 2.6 billion, while cash and securities represent 25% of our balance sheet.
We increased our regulatory capital issued 50 million of subordinated debt in June an additional 25 million in August for a total of $75 million. This additional capital affords us the flexibility at the holding company and bank level. We viewed this as an opportunistic time to raise capital and solidify our balance sheet during an uncertain environment.
Our capital ratios continue to increase during the quarter total capital increased by 81 basis points to 16.67% and our tier one ratio increased by 22 basis points to 12 55.
With that I would like to pass the call back to Albert.
Thank you Lindsey I'd like to wrap up today with a few comments about our outlook and areas of focus going forward.
While the economy has and hopefully continues to recover the path of that recovery remains uncertain. The pandemic its impact on businesses and consumers as well as the impact of any additional fiscal stimulus gives us reason for caution. We also expect the current rate environment to continue for an extended period of time.
That said, we've adapted well and remain focused on those areas that we can control, namely supporting existing clients managing credit quality capitalizing on pockets of demand and controlling expenses are high levels of capital liquidity balance sheet strength and the hard work of our talented team positions.
As well to manage through this period execute our strategy and continue enhancing the value of our franchise with that operator, we can open the call up for questions.
We will now begin the question and answer session to ask the question you May Press Star then one on your telephone keypad. If you are using a speaker phone. Please pick up your handset before pressing the keys. If at any time. Your question has been addressed and you would like to withdraw your question. Please press star.
More than two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Michael Perito of KBW. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Good morning, Mike.
I wanted I had a few things I wanted to hit I wanted to start on the.
A clarification question on your comp margin comment Lindsay I think you said, if I heard correctly that the reported margin will be down again in the fourth quarter, but less so than the third quarter.
What is that excluding any.
Any potential PPP forgiveness.
Yeah. So so the margins a difficult thing to predict as as you all know on the call just given the environment like but yes, we're not when I'm talking about the margin in my prepared remark that surround the reported margin.
So again that TPP timing remains uncertain, but as you've been hearing from us and from others. Its a slow go here in terms of getting the approvals and getting processing. It through so you will see.
You will see some in Q4, but I don't think its going to be as material as it will be into 2021 per share. So that's the guidance there as more around report it.
All right. So so is it fair to say that.
The.
There could be a smidgen of upside to that just relative to the forgiveness rate, which is basically anyone's guess at this point of how much will actually quote get through by the end of the year.
Thats fair.
And then what do you expect side I was wondering you. Obviously you guys have taken a lot of great actions here to try and protect.
Oh earnings a bit in this rate environment I was just wondering if you could oil.
Oil is down a little bit for us here at and as you look at the I guess two part question. The third quarter expense run rate is it fairly clean to to kind of layer in some savings onto it and do you have any feel for where kind of the early 2021 cost quarter.
Quarterly expense run rate will settle I know theres I think theres, some items that might take longer to complete into the so the savings.
Before that puts your style that would be helpful kind of starting point here for us.
Sure. So in terms of expense as Mike I think the previous guidance that I had given last quarter was $42 million to $43 million range.
So obviously.
We did a great job this quarter really controlling the expenses. So there was some noise in there that I outlined for you looking.
Looking at Q4 again, there's a lot of uncertainty out there and so I hate to give perfect guidance, just given all of the changing dynamics here in the market and.
I think we've done a good job here, Mike in terms of controlling expenses, so far and then looking into 2021.
I think in 90 days I'll have better better color for you we're still going through the process. We'll obviously have adjustments continued investment and then obviously I've given you some guidance around the branch consolidation about $4 million in 2021, and about 25% of that will be reinvested back into.
Into the franchise, so I think I've given you a decent guidance there, but again, it's still just too uncertain and we'll have more color and 90 day.
Okay, but it's not it's fair to think that that the quarterly expenses could could see a step up in the fourth quarter. Even if it's just modest before a lot of the savings hit in the early part of next year is it would you disagree with that or.
I would agree with that.
And you have the $5 million from the branch consolidations hitting in Q4 as well.
Right Okay.
And then my last question is for you Alberto just looking back and it was quick <unk> I can't remember the last time your pre tax pre provision ROI was north of 200 basis points with less than 30 basis points of accretable yield flowing through the margin.
Yeah, obviously, a really strong print here and I'm just curious.
Confident are you that that I know, there's going to be some moving parts and things, but as we get into next year. How confident are you that that the outlook can support you know something more in this range relative to kind of where it's been over the last year or so any color there would be great.
Yes, Mike I think obviously it.
That's a very good question and I can you know as as I said and some of the comments and during their prepared remarks, we're focusing on the things that we can control and lend to you alluded to expenses as you well know has been an area that focus managing the margin and the things that we can control with respect to the March.
And as has obviously something that we've been focused on going back to 2019.
In the end by in the environment that we're in kind of looking at pre tax preparation and trying to do the things that we can to make sure that we're creating room and what is a tough revenue environment because of where rates are is obviously a priority for us.
Hi, Thank you.
You know to to my comments earlier I think the the quarter that we had both from a production standpoint and.
In terms of the gain on sale margin pre.
Premiums were very very attractive I think we've we've talked about historically going back and looking at premium levels and this quarter they were.
As high as we have seen I think as I as I have seen in my career and I think thats driven largely by the.
The items that Lindsey mentioned as well as the fact that we have these bad facilities.
Providing support to the market and that obviously has has helped so I.
I'm constructive on that Mike. It's an area of focus however, you know if thats going to fluctuate around a bit and it's going to be driven really by by what happens on the revenue front you know what's the what happens from here on out you know the economy has recovered continues to.
Recover but the pandemic is not over or are we going to get more stimulus or not so revenues are going to be the pad and then on that if we can continue to get good momentum in terms of.
Loan growth and if we can continue to kind of inch up revenues, then I think we'll continue to perform well.
Steadily but.
You are asking me for a specific you know kind of range and a number of that can fluctuate by things that we can control and also by things that we can control and right. Now we're just focused on the things that that we can control there yes, no. That's fair enough when I started looking for specific number but do you think it's reasonable.
We think it's reasonable for us to sit here today and look at some of the things you guys, Don and any of it seemed like you guys are maybe a little bit of an inflection or turning point here where.
There is a a framework in place to drive some steadier and higher returns you Steve would you agree with that.
We're focused on that Mike I think Thats fair Okay.
Okay.
Great excellent. Thank you guys for taking my questions and say well. Thank you.
Thank you. Thank you bye.
The next question comes from Nathan race of Piper Sandler. Please go ahead.
Yes.
Hi, everyone. Good morning.
Good morning, Nate Good morning, Nate question on the.
Unit.
Looking back I think is probably the strongest score that we've seen in terms of closed.
Commitments.
And I guess I'm just curious you know good looking to fortune 2021, how much of the strong volumes that we saw this quarter just a function of some of the.
Disruption, that's maybe exists in the market I think you guys allude to the fact that there has been strong demand for this of new products I'm, just trying to parse through how much of that is just nuanced demand versus just kind of how.
The sales team and the pipeline is just increased organically Blake.
Yes, I'll comment generally and so obviously the.
The there was definitely some impact this quarter bye.
That was driven by the fact that the product became very attractive for borrowers because of the fact that on any new origination close before the end of the quarter September 27 to be exact borrowers obviously benefit from six months' worth of principal and interest so that.
That was certainly a very attractive feature.
And certainly drove borrowers to try to capitalize on that that's sad.
We continue to see pretty good demand I would say if you strip out some of that extraordinary effect demand was was good and we continue to see good demand. Even after we started telling borrowers that look if you're coming to us here at the end of August sort of beginning of September thinking.
That we're going to be able to close your loan before September 27th we're not going to be able to do that and we saw that.
The pipeline continued to build.
Throughout that period and that to me just shows that there's there's still no decent demand out there and weve seen demand continue through so.
So Nate I think yes, no question. It was an impact do we expect that impact to be there every single quarter of course, not but be underlying demand I think I would put it as being pretty good right now.
Okay, Great that's helpful color.
That's away from the unit.
It's kind of get your thoughts.
Loan balances ex TPP came down a bit in the quarter. You guys are obviously working through some of the more torbet since the industry exposures that are within the loan portfolio. So just curious if you guys are kind of seeing a trough in kind of loan balances.
Third quarter here and if you can expect to see some growth in fourq and into 2021 as well.
I think we saw you know its Lindsay said in her comments I think we saw a pretty decent originations aside from.
Somebody asked me a.
From the government guaranteed business.
I think the one offset that we had was we saw kind of line usage revert back to levels to kind of more normalized levels pre pandemic.
So that was obviously a negative in the sense that people pay down their their balances to the degree that they had drawn there there are lines and just sat on that liquidity going up and up.
In a precautionary manner, we saw some of that.
Revert back to two very much levels that we're at.
Earlier in the year, so and that had some impact on balance as Mike. So pipeline. So we're all in the commercial side. So both.
Hi, commercial real estate.
Built you know we were we build pipelines throughout the quarter are they.
Are they at pre covert levels, not yet, but I think we're pretty we're pretty comfortable and pretty happy with what the way.
We're seeing transactions, we're seeing deal flow.
You know, it's not yet what it was but it was certainly has been a nice recovery. This quarter. So we feel pretty optimistic about.
Being able to see some growth obviously with with that comes Paydown CNO, we anticipate that we're going to see probably some higher pay down activity, if nothing but for the fact that pay downs. This year have been pretty muted for obvious reasons. So we may see some pay downs here in the fourth quarter, but overall I think.
Loan demand I mean, we're certainly open for business selectively looking at.
Clients and trying to to prudently grow our business and I think we're getting our fair shot at that.
Okay. That's helpful and just one more on capital you guys I'm Susan.
Very high capital levels.
Currently stocks still trading below tangible book value. So just curious what you need to see from an environmental perspective, or perhaps internally from a credit perspective or otherwise to resume the.
Buybacks that we saw earlier this year in the first quarter.
So I think first and foremost Nate I think it's just hopefully some some.
First and foremost is depend amex and you know I think getting that pandemic under control and.
As you well know you're in Illinois, we're seeing cases rising again, so were monitoring that and more importantly, the impact that has in terms of businesses potentially having to shut down again or slow down again.
So any type of disruption there obviously in the short run well.
Well impact businesses and will impact activity, so getting the pandemic under control I think is important.
Having a little bit more certainty in terms of any additional fiscal stimulus coming from the federal government is also important and.
Credit trends have been reasonably stable so far.
But.
There's still a lot of uncertainty in the environment that said longer term.
As as we stated before is we want to have flexibility first and foremost for safety and soundness second to support organic growth and then third to try to take advantage of opportunities that we see in the market and that really remains the case at this point.
Understandable.
I appreciate you guys, taking the questions and all the color. Thank you.
Thanks.
The next question comes from Terry Mcevoy of Stephens. Please go ahead.
Thanks, Good morning, everyone.
Barry.
I guess my one question is what type of assumptions did you make within the quarterly run reserve analysis as it relates to those SP, a seven day loans that are coming off the the SBA principal and interest guarantee.
I don't have to tell you 327 is a pretty big number and.
It looks like reserves were up in the third quarter was that in connection with this and then.
And then just on the same topic will we see deferrals.
Within the within these lending areas kind of pick up in the fourth quarter as they come off the guarantee.
Yes, very good question, Yes, I think definitely we're factoring that was a factor in our in our reserving this quarter.
Can we see the deferral as I think we May we obviously went through a period, where these borrowers were getting and remember these are borrowers who were current pre pandemic and were eligible to receive.
These payments as a result so.
You know were looking and now we're seeing okay as as here in the month of October a lot of these most of these borrowers are resuming their regular payments.
We're obviously monitoring that and seeing.
That transition back of these borrowers to making their payments, but look we suspect that absent any additional action from.
From the federal government here.
I think like like any part of our portfolio, we're going to see some borrowers that were going to look at you know they will.
We'll see where their business is to a degree that they require a deferral, we're working with those borrowers.
If it makes sense.
And if it doesn't then we will proceed to.
To work out those loans in the normal course of business, but to answer going back to your first point of course, yes that was certainly I mean, an element of uncertainty there as these borrowers are coming are coming off the Saab subsidy payments.
And then just as my follow ups slide seven the COVID-19 industries that slides been consistent since it was first published after first quarter earnings and my question is as you think about the next few quarters what comes off that slide and then maybe more importantly, or is there anything else maybe office.
CRT or something that has the potential to kind of find its way onto that slide.
I think we will know as as more time passes dairy right now that's our that's kind of like our view on that.
Knock on wood, we don't you mentioned office, we don't we're not we don't have a lot of exposure to office. So.
So at this point, we feel okay with with what we have but.
Our sense right now as those are probably the the indas.
The industries that still remain to be the most impactful ones.
Great. Thanks have a good weekend.
Thank you Terry Terry Thank you.
Again, if you have a question. Please press Star then one on your Touchtone phone.
Your next question comes from Brian Martin of Gen. Thomas Please go ahead.
Hey, good morning, guys.
Good morning, Brian Hey, just wondering can you guys comment just on the on the trends in the in the classified and credit criticize or just kind of that migration trends in the quarter just relative to kind of the other views of the loan portfolio now you've had a chance to kind of take a look at just wondering it didn't sound like there's anything significant that occurred in the migration this quarter.
Is that.
That correct or.
Elaborate a little bit on the migration, you're seeing if at all.
Mark you want to take that.
Sure good morning.
Good morning.
So.
I wouldn't say migrations the word.
We've had.
Loans grew into the.
The portfolio classification that we've had some exit.
It's still a good environment for resolution of problem loans.
There's so much capital out there, there's so much desire to acquire assets of all types.
And people are taking advantage of I believe so.
We had some going to get some go out so I think thats could be a continued theme for us going forward.
Our loan portfolio, but.
I don't anticipate a big changes going forward.
We've all become certainty.
Surprise sure, but we think we have a good handle on what's in our CMC list right now.
And we'll continue to look at our our load inventories are as you know on a frequent basis here going forward.
Okay, perfect Thats, what I thought stable I guess migration was wrong word I I am.
Thank you there so okay and then how about just on the going back to the DSP question I guess I mean, just rope Alberto do these loans are just so I understand the process when those loans come off the debt relief from the SP a it sounds as though they do qualify or they would qualify for deferrals or I guess is this how does that process.
Work and I guess, I guess your expectations, what you'd have more.
Clarity I guess, the timing of when Youre loans come off that debt relief as much of it already occurring or is it expected to occur in the next month or so just kind of timing issues would be helpful.
Yes, I think if I, maybe the framework to think about that Brian.
Brian as to as to kind of look back at AAD.
Where are those loans were at the time that the government that Congress passed the cares act so to qualify for that you're you essentially have to be performing borrowers. So those loans were performing at the time of the cares Act and remember this was more of a.
More of a broad based program, where there wasn't any distinction in terms of.
Okay. This industry or this type of loan or the following characteristics are you need the following criteria in order to qualify for these payments. If you had if you.
If you add on SP, a loan if youre outperforming borrower essentially you were going to get six months worth of principal and interest and as these loans come off that.
Basically returning to kind of their pre cares act space and then they resume there.
Monthly payments and as we proceed through this so just like we would with.
These loans or any loan in our portfolio, we will monitor the portfolio, we will monitor the transition to the for these borrowers to resume making their payments to the degree that a borrower's late you know we will follow up with that borrower in the normal course to a degree that a borrower comes to us.
And basically says listen Im struggling because my business is not yet opened or whatever the circumstances are we'll work through with that borrower to determine what makes the most sense. If a deferral makes sense, we will consider that.
Actually if Congress were to act, which is.
Had there's there's there's been bills going back and forth as you know before.
Between the sand at the White house and and the house. So if that were to happen, then well well monitor and see what the impact of that is but if not we will make a determination as to what is in the best interest of the borrowers and ourselves in terms of granting of deferral.
Or if not then proceeding to working out the asset.
An exiting the relationship so I would say its we will handle that as we would normally award.
Any part of our portfolio the caveat being here is that.
Our call at the nice thing about this particular.
Subsidy is that if you think about our traditional deferral portfolio. There was no principal forgiveness. There was no interest forgiven I mean, it was just simply a deferral of that when you think about this cares act payments and this subsidy.
Maybe think about it in the context of these borrowers essentially received an equity injection in the form of six months of principal and interest it's not like payments accumulate and now the borrower has more that they have to pay now, they're just simply going to resume making payments as they normally would.
On on their obligations. So we'll we'll see it's obviously something that we're monitoring closely as we come through here in the month of October in the month of November So we'll know more as as as.
As time passes here in the next couple of months.
Got you okay. Thanks for all the color and just maybe last one or two for me was just the the reserve build this quarter you kind of talked about it but I guess at this point with where the criticizing class. It classifies the stability. There I guess is your expectation if we don't see any significant underlying change in trends that much of the reserve builds from from Covance.
Pointed done.
Yes, I think I think that's a fair comment Brian I think.
I would caution and I know, we said there's a few times here today, but there's still a fair amount of uncertainty in the environment you know and obviously, we're we're I think it's prudent to be cautious given that but.
I think we want to see how the outlook develops from here.
And you know how the portfolio continues to perform.
But but I think your question on your comment is fair.
Okay and then just one last one was that the pipelines you said Albert I know, they're coming back on the loan side, but is there any.
Yes can you talk about what's driving the growth in the pipeline today I mean, what areas are are you seeing activity and you talked about some of the business activity kind of picking up a little bit of the discussions.
Yes so.
We're seeing CNO, we continue to see.
Pretty good activity there.
I think one thing to remember as you know we had made a number of hires.
Last year.
That had customers as you know those those.
Those individuals are typically have non solace had been plays for a period of time before they can start.
You know actively calling on their customer bases, so that those time periods that largely expired. So we're seeing.
The efforts of those individuals starting to translate into into potential customer activity. There on the CNS side were also seeing a resumption in activity in borrower.
Existing borrowers wanting to do things wanting to have you on projects that maybe they had put on pause earlier in the year because of the pandemic. So some of those things they're coming back to us due to request additional capital for equipment and for things that we got suffered.
On the real estate side, we're seeing good trends transaction activity is good youre seeing.
Our fair share of deals.
We're obviously being very targeted and very focused on what we consider there, but I think we're seeing.
Pretty good transaction flow and that pipeline is building back up nicely on the sponsor side.
You know again.
To the degree that you add sponsors that had a lot of dry powder.
They are in a position to look at acquisitions and try to take advantage of of the environment.
And we've seen some sponsors essentially do that so we're seeing again good transaction flow there.
You know as well so we're getting let's put it this way were getting a fair share of looks and as long as we continue to be you know two.
To sit in the batters box and be selective about the things that we swing at I think we'll continue to build our pipelines accordingly.
Got you okay. Thanks for all the color and taking the questions.
Thanks, Brian.
I show no further questions I would like to turn the call back to management for any closing remarks.
Great. Thank you operator, so that concludes our call. This morning. Thank you for participating today and your interest in byline, We hope you stay safe and healthy.
And look forward to speaking to you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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