Q4 2020 Byline Bancorp Inc Earnings Call
Good morning, and welcome to the Byline Bancorp fourth quarter 2020 earnings Conference call.
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I'd now like to turn the conference over to Tony Rossi of financial profiles. Please go ahead.
Thank you Ali good morning, everyone and thank you for joining us today for the byline Bancorp fourth quarter 2020 earnings call will.
We will be using a slide presentation as part of our discussion. This morning. Please visit the events and presentations page of bite lines 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 of byline Bancorp that involve risks and uncertainties, including the impact of the COVID-19 pandemic very.
Various factors could cause actual results to be materially different from any future results expressed or implied by such forward looking statements.
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 the reconciliation of the GAAP to non-GAAP measures and with that I'd like to turn the call over to Alberto Parachini Alberto.
Great. Thank you Tony and good morning, everyone and welcome to our fourth 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.
Can follow our discussion with presentation materials, you can find on the Investor Relations section of our website.
Joining me this morning are Lindsay Corby, our CFO, Mark <unk>, our chief credit Officer, and Roberto her NCR, our chairman as a reminder, you can follow our discussion with presentation materials that R&D Investor Relations section of our website, we're happy to be presenting to you the results for the quarter and the year 2000.
On 'twenty, which we will no doubt remember for the rest of our careers. At this time last year, we have started to pay attention to a virus outbreak and the not so well known province of one and had no force sight of what's to come.
Banks have to come to grips with an economic crisis collapsing interest rates on the effects of a once in a century pandemic. We adapted quickly to a work from home environment supported customers through multiple rounds of PPP strengthened our capital position built reserves resume growth reduced expenses.
And continued to invest in the business all in all we accomplished a lot in a challenging operating environment.
Before we get into the presentation I want to comment on on the appointment by our board of Roberto her NCR, who has served as nonexecutive chairman of the board since 2013, as executive Chairman and CEO of Byline Bancorp seldom does one have the privilege of working with someone of her burritos caliber on.
Extended period of time.
<unk> been fortunate enough to work with Roberto directly for 27 years and look forward to continuing to work closely with Roberto in the years ahead.
Moving on to our results for the quarter net income came in at $12 3 million or <unk> 31 per diluted share. This was a decline when compared to the previous quarter. But these results include charges related to both the previously announced consolidation of 11 branches, which was completed at the end of December.
<unk> and impairments taken to accelerate the disposition of assets held per sale.
<unk> this reduced our net income by approximately <unk> 15 per diluted share our adjusted pre tax preparation on revenue was solid at $30 7 million for the quarter and our adjusted pre tax preparation on ROA came in at a healthy 191 basis points.
Revenue for the quarter was $73 7 million and was driven by an increase in net interest income, which was up four 7% from the third quarter and strong non interest income, albeit lower than the record levels from last quarter, our margin expanded across the board and also bench.
<unk> from our ability to continue to lower deposit cost moving on to the balance sheet low.
Loans, excluding PPP increased by $74 million or six 4% from the linked quarter as previously discussed our pipeline strengthen gradually over the second half of the year and we saw the benefit of that during this quarter with originations increasing to $230 million up from 200.
$4 million in the previous quarter.
Overall production was broad based across our commercial commercial real estate sponsor and specialty lending areas, including yet another productive quarter from our equipment leasing group, which saw originations rising to $49 million.
Our government guaranteed lending business also had a strong quarter of production with guaranteed loans sold topping $108 million.
$9 $4 million of gain on sale income, which was below the record level set in the third quarter, but up on a year over year basis.
Total deposits decreased by $58 million largely due to seasonal fluctuations in public fund balances. Despite the continued strong inflows of commercial non interest bearing deposits. Our mix was outstanding and we ended the year with DDA balance these balances representing 30.
Seven 1% of total deposits.
Moving on to asset quality.
Asset quality improved with both NPA npls charge offs and probation on expense declining from the prior quarter, we continue to add to reserves and ended the year with the allowance representing 153 basis points of total loans or 174 basis points excluding.
PPP balances loans on deferral increased by $72 6 million to $106 million, representing two 6% of loans, excluding PPP day.
Increase in deferrals was driven by <unk>.
<unk> granted to SBA borrowers coming off cares act subsidy payments during the fourth quarter.
We anticipate that approximately 95% of these borrowers will be eligible for the next round of subsidy payments starting in February notwithstanding the improvement in the credit the outlook for credit we remain vigilant in identifying weaknesses in our portfolio and continue to perform targeted portfolio.
<unk> across our different business lines.
On the business side, we completed the closing of 11 branches identified for consolidation at the end of December to date, we have not seen any meaningful deposit runoff as a result of these consolidations the efficiency of our network continues to improve with deposits per branch topping 100.
$103 million.
Excuse me $103 3 million at the end of the year up from $84 4 million at the end of September our capital position remains strong with a fee.
<unk> ratio of 12, 2% and total capital of six 2% at the end of the quarter given the strong financial performance capital position and improving outlook. Our board authorized the doubling of our quarterly dividend from <unk> to <unk> <unk> per share and the reinstatement of our stock buyback program. This.
Provides us with the ability to manage our capital position.
And deliver returns to shareholders, while retaining flexibility to continue organic and strategic growth.
Slide five provides additional information on our COVID-19 response efforts and the detail on the PPP program during the fourth quarter, our focus shifted to helping clients navigate through the forgiveness process at the end of the quarter, we had $286 million of loans in some stage.
Forgiveness with approved applications totaling $110 million in January.
We began accepting applications for the current round of the PPP program through January 26, we have received over 1900 applications totaling just over $290 million and have already funded approximately $166 million.
Turning to slide six we provided an update on our loan deferrals within our conventional loan portfolio of total modifications remained relatively unchanged from the prior quarter and continue to be less than 1% of total loans as I mentioned earlier, we granted modifications to SBA loans coming on.
<unk> cares act subsidy payments.
Each modification requests was reviewed and analyzed with updated financial information to determine need and confirm the integrity of our race ratings. These modifications provide these borrowers with a bridge to the next round of subsidy payments starting on or after February.
Slide seven provides an update on our exposure to industry is seeing the most impact from COVID-19.
Exposures that remain manageable with these industries collectively representing less than 10% of our portfolio. Excluding PPP. Please refer to the appendix for additional detail on these exposures now I'd like to turn the call over to Lindsay who will provide you with more details on our results Lindsey. Thanks, Robert Good morning, everyone.
I'll start with some additional information on our loan portfolio on slide eight.
Our total loans and leases were $4 3 billion at December 31 down from the end of the prior quarter due to the runoff of the Pvp line.
Alluding the PPP loans, our total loans and leases increased by approximately $70 million our originated loan portfolio increased by $32 million or $136 million on PPP loans are excluded we thought broad growth across our commercial commercial real estate and equipment leasing, which helped offset anticipated run off in our residential portfolio.
Turning to slide nine we will look at our government guaranteed lending business, we had another very strong quarter production with $117 million of lung commitment.
Although this was down from the record level, we saw last quarter. During 2020, the business originated approximately $450 million. Despite the disruption for the business in the first half of the year at December 31, the on balance sheet SBA seven day exposure was $436 million, including $53 million I'd like to just guarantee.
By the SBA USDA on balance sheet exposure was $89 million up $54 million as guaranteed as.
As we continue to work through the pandemic, we have proactively provided for that uncertainty around this portfolio.
December 31, our allowance as a percentage of the on guaranteed loan balance represents approximately 8% we.
We continue to actively support our small business customers through both the second round of PPP and through other government program.
The new release Bill made some enhancements to the traditional SBA program. For example, the SBA guarantee on seven day loans increased from 75% to 90% fee waivers on loans as well as additional subsidies as Albert on discussed we believe these SBA program enhancements will help our customers during this time moving.
Moving over to deposits, our total deposits decreased $58 2 million from the end of the prior quarter.
During the third quarter, we have seasonal inflows of public.
Due to tax receipts and in the fourth quarter, we saw seasonal outflows at those customer to utilize those tax payments for their budgetary needs.
These outflows from public funds were partially offset by continued inflows of commercial deposits that increased our noninterest bearing deposits by $44 million.
Our deposit activity during the quarter continued to result in a positive shift in our mix of deposits.
Non interest bearing deposits increased to 37, 1% of total deposits from 35, 7% at the end of the prior quarter demonstrating the core strength of our franchise.
The positive mix shift helped to drive a seven basis point decline on our cost of deposits, which included a 12 basis point decline in our cost of interest bearing deposits.
Moving on to net interest income and margin.
Our net interest income was $56 million for the quarter nearly 5% higher than the prior quarter. This was primarily due to the net fee income we recognized related to the $110 million on PPP loan forgiveness during the quarter as well as lower funding cost. Our net interest margin was $3 77 for the quarter up 17 basis points from last quarter.
Accretion income on acquired loans contributed 16 basis points to the margin for the fourth quarter down from $6 26 basis points on the lab partner exclude.
Excluding accretion income our net interest margin was 361, an increase of 27 basis points.
The increase was due to PPP fee income recognition the decline in our average deposits and a more favorable mix of new loan production that positively impacted our earning asset yield ex.
Excluding PPP loans, the average yield on loans in the fourth quarter was 508 versus 506 in the previous quarter.
With our average cost of deposits declining to just 14 basis points in December our ability to continue reducing our deposit costs is limited and we will not see the same level of benefit from the time deposits repricing this year as.
As a result, we expect to see some modest compression in our net interest margin, excluding PPP stemming from higher securities balances before we redeploy into loan.
Speaking to the impact of the PPP loans on the margin the remaining effect of the first round is approximately $9 million of net processing fees. We believe this income will be more concentrated in the first half of the year <unk>.
The impact on the second round of PPP in 2021 is still in process and as Alberto mentioned we are at.
50% of what we originated in round one we.
We hope to be able to provide additional guidance on the second round of PPP by the end of the first quarter.
Turning to noninterest income on slide 12.
In the fourth quarter, our noninterest income decreased by $4 5 million from the prior quarter. The decrease was primarily attributed to a couple of factors, we added $3 $2 million decline in net gain on sales of government guaranteed loans J.
Due to a decrease in the volume of loans sold we.
We had a $2 $3 million loan servicing asset revaluation charge, which resulted in a swing of $3 4 million in this line item. Following the positive adjustment we had in the prior quarter.
These factors were partially offset by $3 1 million and net gains on security sales in the fourth quarter.
Although the contribution from our government guaranteed loan group was lower than the record levels. We saw on the third quarter. We still had a very strong end to the year from a historical perspective.
During the fourth quarter, we sold $108 $1 million from guaranteed loans, which was up six 5% from the comparable quarter in 2019.
Net average premiums continued to be very strong at 11, 9% as a result of lower inventory in the market and investors searching for yield as we move through 2021, we would expect premiums to return to a more normalized level.
Moving to noninterest expense, our noninterest expense was $47 million in the fourth quarter up from $41 $7 million from.
From the prior quarter as Alberto previously mentioned, our fourth quarter expenses included charges related to branch consolidations and impairment charges on assets held for sale. We took these charges to accelerate the disposition of our non operating real estate portfolio.
We will continue to look for opportunities to further reduce overall square footage given the impact of this pandemic.
Excluding the branch consolidation and impairment charges, our non interest expense declined $2 4 million from the prior quarter, primarily due to a decrease in legal expense and lower loan and lease related expenses due to the lower volume of government guaranteed loan production this quarter.
Loan origination workout costs were well controlled throughout the year, despite the pandemic and on them.
Adjusted basis, our efficiency ratio was up from the prior quarter, primarily due to the lower net gain on sale of <unk>.
However year over year, our efficiency improved share.
58, 4% in the fourth quarter from 61, 1% a year ago.
We would expect our expense run rate to be in the 41% to $42 million range to start 2021.
Remember the first quarter tends to be more elevated as a result of payroll taxes and other business line seasonality expenses.
We continue to prudently manage our expenses and find opportunities to lower costs throughout the organization.
Next we'll take a look at asset quality, we saw good trends in the conventional portfolio during the quarter, our nonperforming assets declined five basis points to 74 basis points of total assets Oreo decreased by $1 8 million and our nonperforming loans declined four basis points to 95 basis points of total loans and leases are net charge offs also declined in the.
Quarter to 47 basis points of average loans from 53 basis points last quarter.
As of December 31, our nonperforming assets included $3 $7 million on government guaranteed loans, which was comparable to the end of the prior quarter.
Our provision expense was $10 2 million, which was primarily driven by the growth in our originated portfolio and a further increase on the reserve held against our on guaranteed portion of the government guaranteed volume.
With that I would like to pass the call back to Alberto. Thank you Lindsay turning over to slide 15, I'd like to wrap up today with a few comments about our outlook and priorities for 2021 as far as the environment is concerned we remain cautiously optimistic and expect growth to pick up particularly in the second half of the year that of course is continuing on.
On the vaccine and the current course of the pandemic our priorities remain the same for 2021, we want to continue profitably growing our business drive returns higher maintain a high level of engagement with our employees continuing to invest in the business and capitalize on both organic.
And strategic growth opportunities in the market with that operator, let's open the call up for questions.
We will now begin the question and answer question asked a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
Our first question today comes from Ebrahim <unk> with Bank of America.
Good morning, guys.
Hey, good morning <unk>.
Just a first if you could force touch base on the CEO change and obviously there is no question about.
Robert towards expedient, but just talk to us in terms of why the change and what you expect to do differently going forward.
Following the change and just give us some color on on that because it's fairly unusual to see something like this so help us.
Sure Roberto you wanted to take it.
Happy happy to Alberto Hi, Amy Good morning, happy new year or two to all of you.
TB.
First I think the.
This is in part.
<unk> four.
The role Ryan and the actions that I have been playing in the organization since inception since 2013 so.
So in part the board is aligning.
You know what my role has been.
With.
With the right title right.
The other the other part is.
Clearly.
How the.
How the industry on the World has changed right we have.
An acceleration of trends.
Our planning cycles.
Our GAAP and compressed and.
So there is a premium on execution here.
Alberto and I have the.
I have been fortunate enough to have worked very closely together for almost 30 years.
<unk>.
I think that we all feel that we can benefit from formalizing that relationship and taking this to a different level.
There is.
Really no no mystery behind it.
It's an opportunity that we feel.
Exist and we can benefit from what we think is going to be a major disruption.
In the marketplace over the next few years.
Got it and just sorry to go back to this virtual but.
So I get the bad can change, but is there anything strategically as a shareholder you should expect the bank to do differently versus what we were doing previously in terms of how youre pursuing organic growth and then we will look strategy I'm. Just wondering is anything changing strategically that becomes a lot more possible because of the split in roads, which was not possible.
No Alberto make sure that our strategic priorities have not changed we think we have a terrific strategic plan in place.
You know our aspirations here, it's to be the best commercial bank Middle market Bank in the Chicago area of those opportunities are there today.
More than ever.
So there is no change to our strategy on our approach.
We are going through.
Through this change.
Tried to accelerate on some some.
Some of the execution opportunities that are in front of us.
And accelerate them, but no no change to our direction.
Got it.
And I guess just one.
Quick one moving to credit quality Lindsay just talk to us in terms of.
The outlook on just your comfort level in terms of having.
Absorb these portfolios over the last few quarters, the new PPP.
How do you think about future provisioning loan losses as you think about the next year.
Yes, I'll take that so good question.
Jen very rallo and question. So obviously are the.
Look at this at this point last year, we were starting to become aware of the pandemic and then.
In about a month or so we were we were facing an environment that I don't think any of us had seen.
And anticipating the year to be to be a very challenging year from a credit standpoint, I think it's fair to say that that would be environment turned out largely as a result of all of the stimulus that was done to different programs. The.
The different facilities that were put in place the environment from a credit standpoint was.
Bit more benign than any of us had expect debt that said.
As we look to the future I think as I said in the comments our outlook is we're cautiously optimistic we think that.
Hopefully we get this pandemic in the rearview mirror, we think economic growth will pick up.
Obviously contingent on on the vaccine, but we see economic growth picking up particularly in the second half of the year and assuming thats. The case, we do anticipate credit.
So essentially moderate I've spoken in the previous quarters about seeing provision expense be at elevated levels. Obviously, we saw that moderate in the fourth quarter and we anticipate further that to further moderate obviously and the big caveat is.
Absent this setback as it pertains to the pandemic here.
In 2021.
So as far as what we have seen.
Look I think we are we on when we look card portfolios we are since.
Early on last year, we began to really do enhance further enhance the type of monitoring that we do.
In terms of constantly doing portfolio reviews constantly being on top of clients.
Trying to understand what the impact of the environment is to their business, we continue to do that and.
On the.
The conventional side the portfolio has held up.
Very very well.
So we are very constructive there on the SBA side I think we saw and we spoke about this at the last call.
We mentioned that we would be monitoring.
Borrowers coming off.
The subsidy payments here on the fourth quarter. We saw that you saw that we did about $75 million roughly of modifications, there which are essentially deferrals.
No surprises there those portfolios are largely.
Restaurants.
Hospitality amusement so the industries that you would expect would be impacted by restrictions lockdowns et cetera.
Good news is I.
I think with the flexibility that we're providing to those borrowers as a result of the the modifications plus the fact that.
A large large portion of those are bad portfolio is going to be eligible to receive another round of subsidy payments. While we anticipate is obviously a lot of those businesses are going to have.
A very good opportunity to be able to get through to the other side of the pandemic. So.
Those portfolios, we took the opportunity now when we had to touch them to go through modifications.
One by one process with each borrower getting updated financials, we confirmed.
Our risk ratings and rated them accordingly, so no.
If we saw that something was criticized assets we classified it as criticize if we saw that it was a classified assets we rated it as classified based on updated information. So Furthermore, youre going to see an uptick in the in the in our criticized and classified levels that uptick is.
Essentially 100% driven by what we did in that portfolio. So we pretty much box then.
That exposure pretty well and obviously, we will continue monitoring accordingly hope that answered your question EBIT.
Yes on let's say.
For taking my questions.
Our next question comes from Terry Mcevoy with Stephens, Inc.
Hey, good morning, everyone.
Hey, Gerry Gerry.
Nice to see the commercial loan growth in the fourth quarter and it sounds like Youre expecting maybe growth to accelerate in the second half of 2021 under that scenario is that the opportunity Lindsay to reduce securities kind of build and build up the loan portfolio and as debt.
Kind of take to provide some core core NIM stability.
But on Terry.
Okay, and then going back to Roberto.
Maybe as you think about the strategic plan there is growth, which was mentioned in the press release, and then theres actually increasing shareholder value I am just curious your philosophy as someone who has been in the industry for a long time.
Then with byline since day one.
Are the opportunities to increase shareholder value for by line is it M&A or is it having more of an impact in call. It presence in middle market commercial banking in Chicago or maybe it's a little of both thank you.
Thanks Terry.
Alberto on Lindsay please.
I mean, because we talk about this all the time, Terry and I think one of the.
The attributes of the franchise that we've built this exactly.
Optionality right. So so it's it's.
It's both right.
We see.
Strong opportunities in the organic area.
And as we've shared with you all along.
And we see some other some really interesting opportunities as well on the on the M&A side, which we would only execute.
Per the guidelines that we've shared with you on the past right. We've done acquisitions that have been I think smart.
While price within the metrics that we've shared with you.
So it's both but we like very much where we're sitting we're a commercial bank right.
Should be pretty clear to everyone.
We have terrific teams.
On the C&I side on the CRE side, we have some niche businesses that are.
Very powerful that offer us some some really nice opportunities.
So it's the Optionality built in our.
And in our franchise.
Nobody nobody has mentioned the increase in dividends, but.
We had a very low dividend.
We raised it to a point, where it's still very low we've talked about the share buyback.
So those are options for us our focus is still relatively as you know.
Low dividends. So we continue to believe in our growth strategy.
And as we've said we're sticking to that.
I appreciate that thanks, everyone.
Sure.
Thanks.
Our next question comes from Michael Perito with K B W.
Yes.
Hey, good morning, happy new year.
New year Mike.
I wanted to spend a minute on the.
Excuse me sorry on the SBA outlook, you guys alluded to kind of the changes there and I think for at least a temporary period of time here.
Fees for the borrowers which are pretty significant are being waived I think theres also fees are smaller btu, guys as well right that debt that will be waived.
And then I can.
Can't help but notice the strength in the back half of the year. The PPP program wondering may be if larger banks are pulling back in this space a little bit I was just curious if maybe you could provide us an update I mean, it feels like Theres forces at work that could keep this SBA origination platform elevated near term I'm. Just wondering if you kind of agree with that and is there anything else that we should be thinking about as we kind of look over the next couple of <unk>.
Orders and try to forecast what the SBA revenue line could look like.
Yes sure Mike.
A couple of things I think I think the answer to that is yes.
The only short term caution I would give you is the fact that.
On.
The.
The PPP.
Yeah.
The SBA has done a lot of things.
In a very very short period of time.
Very quickly and you have a new round of PPP. There were a lot of changes I think for the most part despite some so.
So on the issues that are that are always going to be there anytime you have a program of this size.
They've done a good job on trying to modernize and facilitate.
Their ability to process, a large number of loans in a relatively short period of time, but it has caused some delays I mean, I think you probably read some.
There are a little bit delayed on certain things that they wanted to do as it pertained to forgiveness on that updating form's getting us certain things to allow for that so.
There'll be some short term disruption on that as far as the new.
Some of the new enhancements to existing programs that Lindsay talked about low.
Look we want to take advantage of that clearly there are aside from the inquiries on the guarantee which is certainly.
Very much a positive.
You have the fees that you mentioned on and so we wanted to the extent that we can we want to make sure that our borrowers benefit from that so if I give you. An example, if we have a borrower that is going to close a loan today and we can wait.
A week or so or until the SBA.
Allows for those reduction in fees to take hold we're going to do the right thing for the borrower. We're now just going to rush to have the borrower incur higher fees when a week later, they're going to substantially save some money. So.
So.
The caveat that I will give you there is a little bit of a disruption until the agency can get.
All of these things off the ground and running and put in place. So that we can kind of resume business accordingly, but that being said I mean, we think that there is I mean.
Think our outlook for for the year factors in the fact that there is some pent up demand that we see there that hopefully.
We will be able to capitalize on as the vaccine we continue to see progress with.
With respect to the vaccine and hopefully COVID-19.
We can look at it.
The rearview mirror, so hopefully that gives you some some constructive that.
Understood that's really helpful.
And then Lindsey on the expense side.
I think the core number has been kind of between $42 43 million.
<unk> hundred 20 outside of that second quarter, which was abnormally low and just curious I know you guys have some some cost savings coming in from the branch closures or some of that is being reinvested.
It sounds like growth is picking up so I mean is it is it fair to maybe kind of stay in that $40 million to $43 million type range near term here or do you think theres enough coming out that that that there should be a little a little wiggle room down from from that as we look to the first half of next of this year I guess.
So Mike we always look for we'll go remnant continue moving down.
We want to make sure we're running the.
Our organization in an efficient manner. So we will continue to try to push it down I think the range that I gave you I still feel it is a solid one here.
Over the course of the year, there are ebbs and flows.
Into two we are looking at the square footage of our real estate throughout the organization on trying to determine what that looks like post pandemic.
Again, we're going to look to find levers and opportunities wherever available.
Helpful. And then just lastly from me.
You commented about how.
The environment is kind of rapidly changing I imagine a big piece of that is technology, and digital and mobile adoption and whatnot and just curious how.
Those responsibilities.
Oversight and leadership decision, making will be split kind of going forward and is that kind of incorporated in in terms of the general comment you made about <unk>.
Theres just a lot to do I guess right and more hands on deck will certainly help.
Yes, Mike.
Yeah, and I, obviously, you want to be sensitive Alberto and I have talked about many of these things, but we just we.
We haven't we're always wanted to talk to our troops first.
On our people first.
And.
So clearly, we just announced a chain shelter too and I are have talked about the things that we need to.
To push.
In digital.
Digital banking is one of them. So so clearly we have and Alberto is.
It's really in my opinion on one of those few bright minds that is on top of that game.
So.
We want to use.
Going forward, our powered talent in a way that can maximize.
Execution, So you bet that we're going to be.
<unk> around.
How we spend our time.
<unk>.
Working closely together, but thats really.
Work too in progress.
Yes, Mike.
To add a little bit to what Roberto just let us do bad.
You bet that there is a lot and as you as you well know.
The financial services landscape, particularly with with banks and I don't mean just.
Just the notion of what is your mobile App look like or what does your online banking application look like.
There is there is an entirely different environment out there today in terms of the way financial services are provided where the user experience.
It seems to be separated from the fruition of the actual banking services.
That's in our opinion, that's very interesting fertile ground.
That we definitely want to explore and.
In a more.
Deliberate way so in terms of things to do and kind of exciting opportunities that we think are are there for a bank like us I mean, those are things that that we want to have the capacity to be able to to look at and explore.
<unk>.
To see what opportunities are therefore for the company.
Yeah, No I totally great makes a lot of sense and thank you guys for taking my questions I appreciate it.
Thanks, Mike.
Our next question comes from Nathan race with Piper Sandler.
Yes, hi, everyone. Good morning.
Hey, Nate.
Question on just the <unk>.
D R.
Government guaranteed kind of charge off outlook I appreciate that that was kind of the main driver in charge offs during the fourth quarter and I guess with the low.
Round of stimulus how.
How should we think about maybe charge offs within the SBA unit.
Trending in the second quarter as those.
Payments roll off.
Being supported.
Oh.
At the.
Government level.
Into the second quarter again into the.
Of.
Okay.
2021 as well.
Naved I am sorry, but you were you were kind of breaking up a bit coming in we didn't quite get.
The probably the full the full question there but.
But we will take a stab on just please feel free to to add on after we try to answer but I think your question was more around kind of what's the outlook more so in terms of timing of charge offs related to.
On the SBA business in light of <unk>.
Subsidy payments.
Deferrals et cetera, and.
I think the short answer is look I think that timing certainly could have could be impacted because borrowers are going to gain additional flexibility.
Two hopefully try to navigate and be on the other side of the pandemic and have.
The best opportunity possible for their business to to be able to make it through so one thing of note remember the subsidy payments apply to businesses that are not in liquidation. So if we have loans that we are in the process of liquidating those loans essentially are not going to be eligible for.
For for the subsidy payment and we will continue to to work out.
Loans, accordingly, and take the charges when when when appropriate so.
I think it's.
Our sense is more.
Inflows are probably going to be delayed a bit because you have loans that obviously are receiving payments on the borrowers are certainly benefiting from from that so hopefully that answered your question, but feel free to to ask anything else that we didn't cover.
No.
That's helpful. I guess I'm, just trying to get a sense.
Eight 5% reserve roughly on the on.
Guaranteed portion I guess, how conservative or.
Do you guys feel that is at this point.
Well I think we feel it's the appropriate level of reserves for that exposure and you know us we're conservative so.
We think we think that thats whats appropriate relative to the risk that we have in those portfolios.
Yeah. So just generally speaking it sounds like charge offs, just given the decline in deferrals ex the.
Government guarantee portion on the portfolio are likely to remain pretty low over the next few quarters at the very least.
Way to think about the contribution of charge offs over the course of the.
2021.
Yeah, just just just remember made there that just that again to the degree that we have work out some progress will continue.
And handle those accordingly I think.
I would think like there would be some some deferral or kind of pushing out.
Losses over time, a little bit, but obviously the ones that we have that we're actively working on that or not.
Benefiting from from any sort of additional forbearance or additional form of subsidy payment and saying we will continue to try to move those out as quickly as we can.
Understood.
Hello, Chris.
So you guys taking the questions. Thank you.
But do you have any further questions. Please press star and then one to join our Q.
Our next question comes from Brian Martin with Janney Montgomery.
Hey, good morning.
Good morning, Brian Hey, Brian.
Hey, I just wanted to touch a couple of things just the capital deployment and just if you can talk a little bit about obviously heard the comments about the dividend and saw that Justine just as far as the buyback how are you thinking about that today and then just kind of the the.
The M&A activity or just discussions in kind of the competitive landscape in Chicago.
I guess, Wisconsin, how you guys are I guess just thoughts on that at this point.
So I think Brian one word first and foremost is flexibility. Obviously I think you saw the action that our board took with the dividend and I think hopefully that's well received by by shareholders. We started as Roberto just mentioned a little bit ago. When we instituted the dividend. It was a very modest dividend obviously doubling it is.
Is certainly something that we view as as a way to get back and return capital to shareholders. So that's one thing there and hopefully that's something that over time, we can continue to evaluate that periodically as the company continues to grow as.
As far as the buyback obviously you saw that we authorized.
Our buyback program that authorization is for one on a quarter million shares that authorization is there for two years and we are.
Our board is.
Authorizing us to look to go out in the market and repurchase shares as market conditions warrant. So our view there is that something that that we will certainly be looking looking to do again subject to market conditions I know that some of you are probably going to ask us what.
What our targets are obviously, we're not going to share that with you for obvious.
The reasons, but.
We will we will look to.
Put capital work and return capital back to shareholders using that tool accordingly, which obviously provides us with flexibility to continue to support the organic growth of the banks on the bank and the opportunity that we have there.
And look.
Continue to look strategically.
At acquisition opportunities.
Okay, and just the discussions or just the commentary on on.
M&A activity Alberto I guess have discussions been pretty similar have they been it seemed like they have been lower for a while any pickup in activity in the Chicago area that you're I guess, you're sensing at this point I mean definitely a pick up I think you saw one transaction here being announced not that long ago.
So I think I don't think that would have happened at this point I don't think that would have happened last year.
And I think it's fair to say I think conversations have picked up the one thing I will tell you, which is always the case, particularly when youre dealing with smaller.
Privately held companies as the GAAP the bid ask between what folks think their institution is worth relative to really what the market value of those institutions, but thats part and parcel for that process.
And.
Think again I would say that.
If we compare the pace of where these conversations were.
Let's say over the course of last year, there are certainly more activity at this point.
At this point is what I the way I would answer the question Brian.
Okay. That's helpful and maybe just one for Lindsay here on the on the margin Lindsay just can you talk about or quantify what was the impact this quarter of the PPP to the margin.
So we gave you the breakout there was about $5 5 million of impact on the margin.
Net debt came through so we've given you all of that in the materials, Brian, but I think as I provided in line materials, we still have about $9 million last from round one.
And that will be coming through on bad debt.
We believe it will be concentrated more on the first half of the year, Okay, Gotcha, Alright, and then I.
I missed that I thought I saw the increase I didn't see the total so apologize for that.
No problem.
Just the loan pipeline it sounds as though you guys are expecting more on the second half. So maybe the first half is a little bit slower is that how the pipeline looks today is that I guess kind of on I'm understanding.
Just just remember Brian. So PPP is is the second draws are taking place right. Now. So borrowers are certainly the people that can take advantage of it and can qualify and can get them thats kind of where their focus is.
Also don't discount the fact that.
Liquidity for clients is pretty good right now we see it a little bit in terms of the usage of <unk>.
Lines of credit.
So.
Their need to borrow money immediately I mean, as being kind of buffered by the fact that theyre carrying they tend to be carrying a little bit more liquidity as a result of of the PPP. So that that's factoring in.
All that being said when we look at pipelines pipelines.
Pipelines are healthy are we back yet to where we were kind of pre COVID-19 no, but we continue again I would standby by the comments, we gave last quarter.
We see continued progress in building back up to those levels and therefore, that's kind of what what drives our commentary there.
Yes.
Brian Real quick I wanted to add on.
You have some level of seasonality in our business line. So just make sure.
On a look at our historical run rates and trends and things like that because I think that will give you. Some good insight and particular in the SBA business. The first quarter does tend to be lighter.
Just on a historical basis.
Yeah, Okay I appreciate.
Lindsey Thank you guys for taking the questions.
You bet.
At this time I show no further questions. So I'd like to turn the call back to management for any closing remarks.
Great and thank you operator, so that concludes our call for today I would like to thank each and every one of you for participating on the call. This morning, and thank you for your interest in byline.
With that we look forward to talking to you again next quarter. Thank you operator.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.