Q2 2022 Byline Bancorp Inc Earnings Call
To our chairman Roberto of our NCI.
Thank you Alberto and good morning to all.
I'm delighted to announce the appointment of Tom Bell, who is currently our treasurer to the CFO position.
And also Sheryl lineup, who is currently our corporate controller.
Two the Chief Accounting officer position effective August 15 of this year.
As you know Lindsay Corby, who is currently our CFO will be leaving.
To pursue.
Tractive opportunity outside of the banking industry with <unk>.
Privately own trading firm here in Chicago.
We are no doubt sad to see Lindsay leave.
But we are comforted by the fact that she's just going across the street.
She believes filing and as such a fan of hours and she leaves the finance area in great shape.
And in excellent hands.
Tom Bell has been.
Treasurer of <unk> since its recapitalization, we have known Tom and worked with Tom Alberto and myself since before violin.
So we know.
He is not only.
The logical choice, but the best choice. He has over 30 years in banking experience. They started with the Federal Reserve Bank of Chicago.
It has.
Assumed important roles with other banking organizations.
The important sharla liner.
Who is currently the corporate controller.
Been with US since 2014, and she has over 20 years of banking and accounting experience at financial institutions.
We spent a considerable amount of time here at <unk> and people initiatives.
From training through leadership development.
To wellness.
And succession planning.
And.
In the last three years in the last several years. This is a third change that we've announced with respect to our executive officers.
In all of those cases.
We have promoted from within which speaks to the depth of our team.
On our succession planning process.
A hallmark of ours.
Pass back to Alberto.
Thank you Roberto and now moving on through the review of our results as is our practice I'll start by walking you through the highlights for the quarter before I pass the call over to Lindsay who will provide you with more detail on our numbers.
Turning over to the highlights on slide three of the deck. In summary, we were very pleased with the results for the quarter and the first half of the year, while the outlook for 2022 has changed materially since the start of the year, our businesses have performed well and we've capitalized on opportunities to continue to grow the business.
Our clients remain in good financial shape continue to operate with ample levels of liquidity and we continue to see good demand for credit to support investment and expansion.
That economic activity is expected to continue to slow inflation remains problematic and higher interest rates create additional challenges for both consumers and businesses.
Notwithstanding the strength of our strategy diversified business model disciplined expense management came through in our second quarter results, which portrayed another solid quarter of earnings and growth.
For the quarter <unk> had net income of $20 3 million or <unk> 54 per diluted share. This was a bit lower than last quarter, but results include a $4 6 million dollar mark on our servicing asset, which cost us about <unk> <unk> per diluted share.
We discussed back in October during our third quarter earnings call Fair value marks are part of the business can go up and down in a given quarter, but are not reflective of our operating earnings which carried over consistently from the first quarter, our profitability and return metrics were solid across the board pre tax preparation Rev.
<unk> was $32 million, which translated into a pre tax preparation an ROA of 184 basis points return on assets came in at 117 basis points, while our OTC was a healthy 14, 1%.
Moving on to the balance sheet assets grew by over $300 million and total assets now exceed 7 billion for the first time.
Performance continues to be positively impacted by strong loan growth, which carried over nicely from last quarter loans ex PPP grew by $405 million or 34%.
Linked quarter annualized and we crossed over the $5 billion Mark on the portfolio.
This was the fifth consecutive quarter of solid net loan growth and that as of quarter end reflect debt portfolio growth of 29% on a year over year basis.
Our results were driven by strong growth across our C&I leasing and sponsor businesses, coupled with lower pay off across the board net of loan sales, we originated $443 million in loans a record level for the company and up from $325 million last quarter.
Line utilization saw another uptick and now stands at 56, 2%, which provided a tailwind to additional growth in commercial balances our government guaranteed lending business also had another solid quarter of strong loan production with $125 million in closed loans, which as expected was lower.
<unk> than the first quarter.
We remain a market leader in this business and as of June 30, we are the fifth largest <unk> lender in the U S. Moving over to the liability side total deposits stood at $5 4 billion as of quarter end down two 6% on a linked quarter basis, but up five 8% year over year the mix remains strong with didi.
Representing 45% of total balances deposit cost increased eight basis points to 16 basis points for the quarter as we came off the cycle lows and start seeing the impact of higher rates.
Revenue for the quarter came in at $75 8 million and was driven by robust net interest income up 5% from the prior quarter and 6% year over year as.
As we indicated during last quarter's call, we expected to see our margin lagged initial rate increases because of floors and the quarterly reset of our SBA portfolio. We saw that this quarter with our margin contracting by five basis points to 376%. The decline was also driven by lower P. P. P.
Fees are margin remains strong in our position remains favorable from rising rates on page eight of the deck. We added additional information for you that shows 99% are floating rate loans are no longer impacted by floor restrictions non.
Noninterest income came in at $14 2 million down from the prior quarter driven largely by the Mark we took on our servicing asset our efficiency ratio remained in the 55% range and lastly, our.
Our deposits per branch increased to $142 million as of quarter end and reflect the branch consolidations announced in Q4 of last year and completed during the quarter.
Asset quality remained relatively stable for the quarter and we remain vigilant and proactive with respect to credit given the uncertainty in the environment Npl's ex government guaranteed loans increased by 13 basis points driven largely by a single borrower that we moved to nonperforming status during the quarter.
The relationship entails the commercial borrower with multiple pieces of performing and nonperforming collateral that we're in the process of working out given our secured position. We don't anticipate the loss content to be material. If any NPA showed an uptick as we took in one property into Oreo is part of a loan.
Got it.
Charge offs increased from the very low levels experienced last quarter to 24 basis points this quarter and our allowance increased to $62 4 million largely driven by portfolio growth.
Capital levels remained strong with a CET one ratio of 10, 3% and total capital ratio of 13, 1% as of quarter end, our performance and strong capital position allowed us to continue to return capital to stockholders with the repurchase of 232000 shares of our common stock. This being an addition.
To our quarterly common dividend of <unk> <unk> per share, we believe our balance sheet strength positions us well to continue supporting organic growth and investing in the franchise, while returning capital to stockholders with that I'd like to turn the call over to Lindsay.
Thanks, Albert and good morning, everyone.
I'll start with some additional information on our loan and lease portfolio on slide four.
Our total loans and leases were $5 2 billion at June 30, an increase of 357 million or 38% annualized from the end of the prior quarter past, a relatively flat quarter over quarter coming in at $128 million.
We believe past will increase in the coming quarter.
I'll note that this will be the last quarter, we referenced PPP loan balances and related financial impact are reaching levels that are relatively insignificant to our results on a quarter over quarter basis.
Furthermore, based on our year to date results, we are updating our loan and lease growth guidance for the full year to low to mid teens up from high single digits previously provided.
Ill equal our outlook does imply a slower rate of loan growth in the second half of the year compared with the pace of the first half our current pipelines are healthy and we are optimistic about the future of <unk>.
Turning to slide five we'll look at our government guaranteed lending business.
At June 30th on balance sheet, SBA, seven X measure was $479 million flat from the prior quarter with $102 million being guaranteed by the SBA.
USDA on balance sheet exposure was 64 million nearly flat from the end of the prior quarter of which $26 million is guaranteed we continue to see stable trends in this portfolio and as a result, we have decreased our allowance as a percent of the on guaranteed loan balance to six 6% from seven 4% at the end of the prior quarter.
Turning to slide six total deposits decreased by two 6% compared with the first quarter. This was primarily due to lower commercial deposits and business accounts as a result of seasonal fluctuations that typically occur at the end of the second quarter due to business needs.
Total average deposits increased by one 6% compared with the first quarter driven by high growth in both average interest bearing deposits and average noninterest bearing demand deposit.
Total average deposits increased by seven 7% compared with the year ago period.
Deposit composition and ability to generate core deposits continues to be a strength of our franchise commercial deposits represent about half of our total deposits and 76% of noninterest bearing deposits during last quarters call. We mentioned that with rising rates, we would anticipate deposit pricing pressure at some point during the year and.
Second quarter deposit costs were 16 basis points, increasing eight basis points from the cycle low in the prior quarter.
Moving on to net interest income and margin on slide seven.
Our net interest income was $61 6 million for the quarter, an increase of four 9% from the prior quarter. This was primarily due to higher average balances of loans and leases, which more than offset the impact of higher interest expense on deposits, reflecting the rising rate environment.
Net interest income on a year over year basis increased five 9% driven by our ability to replace PPP loans with organic loan growth.
On a GAAP basis, our net interest margin was $3 76 down five basis points from last quarter, but up from the year ago period.
Accretion income on acquired loans contributed eight basis points to the margin slightly down from 10 basis points in the last quarter.
PPP interest and net fee income combined contributed approximately $746000 to net interest income compared to $2 7 million last quarter.
Yield on loans and leases, excluding PPP was $4 74 up nine basis points from the first quarter.
All of that said our margin remained strong both in absolute terms and relative to peers remaining in the top quartile for banks of our size.
The NIM performed as we expected in Q2 and as a result of the rising rate environment, our asset sensitive profile and organic growth. We believe net interest margin, excluding accretion and PPP will begin to expand during the second half of 2022.
Moving on to slide eight we believe our asset sensitive balance sheet positions us well for rising rates.
The asset sensitivity is principally driven by our loan portfolio of which 56% of loans. Excluding PPP are variable rate and nearly all of those with Florida are currently priced at or above the floor.
We estimate that instead of 100 basis point increase in interest rates will result in additional seven 8% increase in net interest income, which to reiterate guidance provided last quarter. Every 25 basis point increase would result in approximately $4 million to $5 million of additional net interest income on an annualized basis.
We believe with SBA loans are pricing in July and rate hikes. During this quarter, coupled with floating rate portfolio being reprice going forward positions us well for future margin expansion.
Our loan to deposit ratio increased at quarter end to 96% as a result of deposit fluctuations. We believe the ratio will trend back down to the lower nineties as balance will return from commercial relationships during the quarter.
Turning to noninterest income on slide nine.
Noninterest income decreased from the prior quarter, primarily due to a negative $4 6 million dollar loan servicing asset revaluation expense due to higher discount driven by lower premiums on government guaranteed loan sale.
We sold $118 million of government guaranteed loans in the second quarter, an increase of 16% linked quarter.
The net average premium continues to be strong at 10% during the quarter, which was as expected lower than the first quarter our pipeline for government guaranteed loans remains strong and we continue to anticipate premium pressures next quarter due to negative market conditions, resulting from higher interest rates and higher government guaranteed inventory levels in the secondary market.
<unk>.
Moving on to noninterest expense trends on slide 10.
<unk> expense was $43 8 million in the second quarter, a decrease of 2% from $44 6 million in the prior quarter the.
The decrease was primarily attributed to three factors.
First we saw a decrease of $1 3 million in salaries and employee benefits related to lower payroll taxes, and higher deferred salary costs related to loan and lease origination.
Second due to higher reimbursement of legal fees and third we saw a decrease in occupancy and equipment expense due to the net effect of our branch consolidation and real estate strategy.
We remain focused on expenses and continue to look for opportunities to offset the expense pressures as a result of inflation.
We are reaffirming our quarterly noninterest expense guidance to trend between 45 and $47 million.
Turning to slide 11 asset quality continues to remain stable, reflecting our diverse portfolio and disciplined risk culture.
Our nonperforming assets increased 21 basis points to 54 basis points of total assets in the prior quarter and net charge offs were $2 9 million in the second quarter total.
Total delinquencies were $15 8 million on June 30 of $13 million or <unk>, 46% declined linked quarter, reflecting lower commercial loan delinquencies.
Our second quarter allowance increased to $62 4 million from $59 5 million at the end of March and represents a 121 basis points of total loans.
<unk> build was driven by an increased provision primarily due to growth in the loan portfolio and higher qualitative factors surrounding the macroeconomic environment and rising interest rates.
And while we do not see any broad based signs of deterioration in our portfolio today, we believe that the uncertainty in the economy warrants the current level of allowance coverage.
Turning to slide 12, we display our strong capital ratios and return of capital.
Through the first six months of the year, we returned approximately 47% of our earnings to stockholders through the common stock dividend and our share repurchase program.
We believe our capital ratios position us well to pursue both organic and strategic opportunities, while managing our capital through dividends and Opportunistically executing on share repurchases. As previously stated we want to run our total common equity to tangible asset ratio between 8% to 9% our TCE ratio at $8 65.
Thus the ability to grow our balance sheet, while utilizing share repurchases and dividends to return capital as needed.
That for the last time, the overall back to you. Thank you Lindsey.
Moving on to Slide 13, we were very pleased with our results for the quarter in particular, our ability to adapt to the changing rate and economic environment loan growth exceeded expectations. Net interest income growth was strong and expenses were balanced for both near term efficiency and long term investment.
Looking ahead, there is uncertainty in the environment, given higher inflation and higher rates and geopolitical disruptions, regardless, we believe our balance sheet diversified business model disciplined expense management and focused execution of our strategy will continue to provide the foundation for our success.
In closing pipelines remain healthy and we are in a strong position heading into the back half of 2022, we're optimistic about our ability to continue to grow our franchise, while creating additional value for our stockholders I would like to thank our employees for their hard work and unwavering dedication to our clients and business with that.
Operator, let's open the call up for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
If you would like to withdraw your question Press Star and two if you are listening by telephone you speak fund. Please lift your handset prior to asking your questions.
Yes.
Our first question comes from the line of Terry Mcevoy from Stephens. Your line is now open. Please go ahead.
Alright. Thanks, Good morning, everyone first off Lindsay enjoyed working with you since the IPO and you will be missed and Tom Congrats and look forward to working with you more.
Thanks, Terry I appreciate an answer.
Maybe just start with the question Lindsay just when you think about your margin outlook could you help us understand how you kind of internally or looking at the composition of your deposits in terms of any sort of mix shift from from noninterest bearing to interest bearing.
You provided some comments on loan growth what do you think deposit balances due from here over the remainder of the year.
Sure Yes, great question on the margin Yeah, I would say that when we look at the margin given the higher interest rates, we do think that you'll start to see some shift into higher yielding.
Deposit products in particular money market and time deposit so when we look at when we look at our betas and what we're seeing going forward. We're currently modeling about 40% for interest bearing deposit betas during the second half of the year. Terry So that's kind of to give you a little bit of color. There and then in terms of your second part of that.
Around the deposit growth, yes, we continue to remain focused on deposits.
Really manage the balance sheet looking at the average deposit balances Terry So we did see a slight increase quarter over quarter in terms of average balances and we'll continue to watch that here as we go forward.
We've seen great pace of loan growth and we obviously are very active in the market, making sure when we get a lending relationship that we get the deposit relationship with it as well so trying to offset as much as we can with core funding and we have plenty of liquidity and availability to pull other levers as needed.
Thanks for that and then as a follow up.
Sure.
On the branch closure side, which has helped the expenses I'm just wondering if you've noticed any.
Any impact on those customers, where the branches were closed in the deposit balances and relationships there.
Sure.
The branch closures, we do monitor that pretty closely Terry.
Tend to see a little bit of run off in terms of the higher yielding deposits are particularly in time deposits, but nothing outside of the ordinary of what we've seen in the past and has met our expectations in terms of what's happened there. So.
Good performance, our retail team does a great job in terms of reaching out to customers and making sure that their needs are taken care of and help with the transition given.
Given the closures.
Nothing out of the ordinary and has been in line with what we've seen in the past.
Okay.
Just some clarity on the page eight when you said was it the loan to deposit ratio was 96 and Lindsay I wasn't quite following you on.
You expect that to go lower I couldnt quite understand the reason why that right going to drift lower.
Sure. So there are fluctuations right at that very ended the quarter with some of our commercial customers and we do anticipate that we'll be going back lower into the nineties lower nineties here as time goes on and those deposits come back into the bank. So there's just some seasonal fluctuations that occurred at the very end of the quarter Terry and lead.
Do you anticipate that it will it will trend back down.
Okay. Thanks for clearing that up and thanks for all the help with your question. Thanks.
Absolutely Thanks Terry.
Our next question comes from the line of Ben Garlinger of Hovde Group. Your line is now open. Please go ahead.
Alright, Thanks, guys solid loan growth this quarter I was curious how you guys are man.
Approaching.
Growth from the water off the year with.
Anything pulled forward and with that.
Is the goal of really meant.
NII growth or is it going to hold the margin I guess, because youre going to get a lift from rates just kind of how you balance.
Yeah.
Yeah, Ben Good question I would say it just starts with the opportunities that we see in the market. So if we have the ability to.
Though our business add new relationships.
To support our customers I mean first and foremost before we're targeting net interest income or the margin or anything like that it's really focus on that.
That is kind of the first.
The more important thing that we pay attention to.
It pertains to the growth and I think.
You guys have been giving us a hard time like the last couple of calls in terms of our loan growth guidance and.
You have proven to us to be a little bit off I mean, we still think that.
Two lenses comments.
Clearly it looks like loan growth. This year is going to exceed that guidance. So I think what we're trying to convey is we still think at least from this point on we're going to see kind of that.
Mid single digit to kind of high single digit range for the remainder of the year. We do think there will be payoff activity over the course of the year that that will be realized that we haven't seen yet.
But obviously, we're reflecting the fact that the last several quarters, we've grown certainly up rates that exceed that so I think that's that's what we were trying to convey.
Got it Okay and then.
Just from a 10000 foot view in terms of declines but your banking.
Rather they are seemingly any pressure points that are building the surface here it seems as though the headline of our restructuring.
Selling newspapers, but from a boots on the ground perspective.
There's a lot of.
The pressure point that we're already known whether it be wage inflation or commodity pricing or things like that is there anything in that.
That we're missing that would be driving stronger loan growth, but could eventually turn into theoretical credit issues down the road.
And we still I think it's.
<unk>.
I think we separate probably what we see based on the performance of our of our clients and the performance of the loan book as we review loans as we review relationships as we renew loans on a on an ongoing basis.
I think in general what we're seeing ban is.
As of the end of the quarter clients, we're doing pretty well financially.
Levels of liquidity, certainly compared to pre pandemic levels higher levels of liquidity.
That being said I think it's really a function of the outlook clearly we're operating in an environment of much higher inflation.
We have seen a lot of our customers be able to pass through increases in input costs.
To win customers in order to maintain margins. There was a question as to what degree can they continue to do that.
But we really don't know the answer to those questions. We just kind of have to wait and see how the how clients do relative to an environment. That's certainly we all expect.
The economy's slowing down as as the fed continues to raise rates too.
Got it he saw up on the inflation pressures that we're seeing.
Gotcha, Alright, thats helpful color.
Echo Terry's points.
Great working with you.
Anthony.
Congrats everyone.
The new seats, we look forward to working with everybody going forward.
Thanks, Brad I appreciate it.
Our next question comes from the line of Nathan race of Sandler. Your line is now open. Please go ahead.
Yeah, Hi, everyone. Good morning.
Good morning, going back going back to Terry's last question in terms of the.
Dynamics with deposit flows.
You'll have some.
Deposit growth in the third quarter and I'm just curious if the step up in funding costs that we saw here in Q2.
Kind of a good proxy to use going forward with.
Deposit costs accelerating upwards.
Maybe that's all set budgets less wholesale funding on the balance sheet.
With the.
Deposit replacement.
After the increase in wholesale that we saw in the second quarter.
Sure. So great question and in terms of the costs, yes. They did go up on a quarter over quarter and we did guide you to that last last quarter or so.
I do believe we will continue to see the deposit costs go up and again, it's a function of our loan to deposit ratio and competitive pressures in the market. So.
We continue to watch and our competitors seem to be lagging there early on but I think with the recent rate increase I think youre going to see competitors begin to increase prices on their deposits and increase the cost and that's kind of.
It's going to come through here I think in the third quarter, a little bit faster than it did in the in the second quarter. So.
The fluctuation that you saw in terms of the borrowings at the end of the part of it is just again a function of what happened at the very end of the quarter with our commercial.
So that was a little bit elevated but you will obviously see an increase on the borrowing side as rates continue to rise here. So I think all of those factors that play going into Q3 and beyond.
Yes.
The other thing I would add is I think it's important to keep in context kind of the starting points for this because when.
Looking at some of our peers and other institutions reporting numbers in.
We hear about comparisons while this bank saw this bank saw that and certainly that that's part and parcel to what you guys do but I think it's important to keep in context.
What the starting point and ending points are likely to be.
Because you could have.
Relatively lower sensitivity, but your starting point is much higher and therefore youre going to end up on an absolute basis still with higher cost and when we think about our business, we were coming off cycle lows of deposit costs of around eight basis points. So.
We're not really that concerned about seeing an uptick.
Eight basis points or something like that rates are higher the fed has moved obviously very aggressively.
225 basis points, so far year to date, when we were expecting maybe at the beginning of the year at this point, we'd be seeing 50 basis points, So we're pretty pretty happy with it.
Basis points sensitivity relative to 225 basis points movement in rates.
Just some context.
Got it that's very helpful. Thank you.
Changing gears and just kind of thinking about the.
D a.
Premiums going forward the magnitude of the step down that we saw here in <unk>, but reasonable to expect in <unk> with the fed raising rates by a similar degree at.
At least thus far here in the third quarter.
The pace of <unk>.
Decline slope from here to some degree.
Sure Great question, and I wish I had a crystal ball to give you a perfect answer her name but.
We do see pressures we.
We do think we're reaching a bottom here at some point, but we're not sure at the end of the day, but I do think youll see a little bit more pressure here, we do have the ability to hold loans on balance sheet. If needed. So if premiums go to a level where the earn back on that it makes more sense to hold the loan.
We do have the ability and the balance sheet to do that.
So we do think that Youll see pressures and I think youll see some improvement in the end of the year here in terms of premiums as the inventory gets pushed through and end market conditions stabilize.
Got it makes sense and just kind of one broader question on just the loan growth and kind of overall organic.
Balance sheet growth prospects from here, obviously, there was a larger.
Hey.
Integration that occurred recently in Chicago. So just curious kind of how you guys are thinking about share gain opportunities at this point.
I see an opportunity to.
Or do you feel like the opportunity to.
Grow market share.
Feasible with kind of the existing team in place.
Nate as you as you know, we're always looking for opportunities to add talented bankers to byline. We think we have a great platform.
Serving local businesses here in Chicago.
And we think our platform for bankers looking to have access to not only products services capabilities sophistication on the credit side, but also really being in a position to serve clients well we are.
Above anybody else when it comes to offering that so we're constantly looking for that and we're constantly looking to continue to grow relationships in the market. So I think the short answer to your question is yes to both of the bulk of the questions.
Okay, Great Lindsay it's been great working with you over the years.
Look at your next endeavor and look forward to hopefully staying in touch.
Sounds good thanks, Nate I appreciate everything.
Yes.
Our next question comes from the line of Damon Delmonte from K BW Damian. Your line is now open. Please proceed with your question.
Hi, Thanks, and good morning, everyone Lindsay short experience I only picked up coverage not too long ago, but I know our roots go way back so congrats and best of luck and Tom I look forward to getting to know you and working with you as well.
So with that being said I just wanted to add.
Ask a couple a couple of quick questions here a lot of a lot of good things have been asked and answered already but on the expense side.
Right.
Amendment to that to that $45 million to $47 million range.
Kind of attribute that to some of these onetime items. This quarter that go away and you kind of go back to a normalized run rate is that kind of how you think about that.
That's spot on.
Okay.
Alright, great.
And then.
As far as the a little.
A little bit of uptick in nonperforming loans this quarter can.
Can you give a little bit more detail on what drove that and kind of where they stand in the resolution process.
Yes. This is this is.
Damon this is kind of the regular course of business, we have relationships that we monitor.
Continually.
This particular situation was just simply an NPA.
Entrepreneurialism owning.
Various properties of different types.
This is a relationship that we have been monitoring for some time in the traditional sense going from watch through special mention and one of the properties in the collateral pool.
Ryan is really having struggles with.
We are well secured.
<unk> multiple you know, it's a pool of multiple pieces of collateral.
And we're frankly, just simply being proactive we decided that the issues with this particular property.
Warranted quad.
Classifying the entire relationship as a number forming loan.
And we will be.
In the process of working out the loan and the.
Regular course of business.
This is real estate secured we feel we're very well secured here with the amount of collateral that we have so as we said in the comments.
We don't expect the lost content here it could be material if any.
Got it that's great color. Thank you and then I guess lastly, just the technical question on the on the tax rate what would be a good effective tax rate to model for the back half of the year.
Sure.
No tax rate increase I'd say, the same guidance of 25% to 27%.
Okay, perfect, great and congrats again Lindsay.
Thanks, Dave I appreciate it.
As a reminder, if you'd like to ask a question today. Please press star followed by one on your telephone keypad now.
Our next question comes from the line of Brian Martin from Janney.
Brian Your line is now open. Please go ahead.
Hey, good morning, everyone.
Good morning.
And just maybe just on the on the reserve side, you guys kind of took up the reserves a little bit this quarter just a lot of talk about the recession, just kind of thinking about how we think about that going forward and then maybe just within the portfolio itself, just maybe where you guys are doing.
Doing a little bit more monitoring a little bit more concerned are there any areas. You guys are more focused on as far as where the bigger risk is today on the portfolio as you look forward given all the macroeconomic concerns.
Yes, so the first part of the question, Brian . So I think we think the reserve we are well reserve and the reserve is adequate.
So the end of the period.
As a reminder, as you know we are still.
Accounting for.
Our reserve under the incurred loss model. So we're not a seasonal adopter yet we will be a seasonal adopter on the last day of the year. This year. So you will see that in the fourth quarter.
So I think from that standpoint, the reserve really just simply reflects obviously good growth that we've had in the portfolio.
As well as you alluded to.
Certain qualitative adjustments to the reserve to account.
Account for the uncertainty in the economic environment.
Okay.
Any areas that you guys are more concerned with today when you look at the portfolio of kind of where the greater risk in the portfolio is today.
Can you give any any kind of color on that or just how youre thinking about.
Yes, I think.
I don't know that I would say that we have anything specific but we've been.
We've been really really focused probably since before the beginning of the year.
We had concerns around how our folks.
Our business is going to come out of all of the stimulus that we saw during the pandemic.
So monitoring the portfolio monitoring customers doing internal portfolio reviews continually has been.
A practice that we've been following for some time now and.
Can't really give you anything we're not seeing anything as of yet, but we're certainly looking for it in anticipation that at some point.
We're going to start seeing some degree of.
Credit weakness given the fact that.
The economy is likely to continue to slow, but we can't point to it yet.
Brian , but you know.
Sure.
Really really vigilant to try to isolate and try to.
Fine any sign of weakness in the portfolio as quickly as we can.
Got you no that's helpful. Alberto Thank you.
Maybe just there's a lot of.
Talk about the premiums on the SBA side.
The other side of it just the volume.
Can you talk about other opportunities to increase the volume there and then maybe just even change the mix a bit as you look forward given kind of whats the roadmap appears to be on the premiums just maybe any context on that would be helpful.
Sure so.
The gain on sale is a function of volumes and premiums right. So I did state in my prepared remarks that the pipelines are healthy.
<unk>.
And Brian the biggest the biggest piece there is.
If the premiums get to a level that.
That we prefer to hold the loans, we have that ability. So our team has shown a great track record of being able to produce and the volumes have com.
Again, we're coming off of an all time high year last year. So just keep in mind that 2021 and its in particular September 30th.
2021 was a peak and that was the end of the subsidy. So that was really an outsized quarter for us and frankly, an outsized year. So the team continues to work hard and staying the course in terms of production.
Pipelines remain full right now so we'll keep an eye on it and keep you posted here as we go forward.
Okay, and just how low I guess when you talk about the range of where it could go to before you might want to think about putting more on the balance sheet. I mean can you give any parameters on how low that would be I guess, if you go back over time was there a point in time, where you guys, putting we're putting more on the balance sheet at certain levels.
Sure. So I mean at the end of the day, it's a loan by loan basis, Brian , but I'd say when you look at the the premium and you go back a while I'd say when you looked at when the government shut down and we had to stop you saw our gain on sale go to a lower level and then also.
In the first quarter when Covid hit you saw premiums go down.
Those are kind of a good Florida kind of look at in terms of premiums I'm going back.
But I'd say, that's really the <unk>.
<unk> thought when it when it hovered down into those ranges I'd say, that's really where we think about okay does it make more sense and we will run the math on each loan and see what the earn back is and figure out are we better off to sell it or hold it.
So we do think that things will improve we think this is temporary but we do think that there will be improvement and we can hold them a little longer and sell them later if need be.
Brian it's.
The math is pretty straightforward it's not.
You don't have a black box when you simply look at the carry that we can earn on the alone.
Over roughly speaking of three and a half or four year period, which is typically the life of the.
These assets.
And we take the present value of that and compare it to the premiums that we can get in selling loans in the market and that's essentially the math.
From a big picture standpoint.
Yeah, No. That's helpful. I appreciate that I appreciate all the color and it's been great working with you Lindsey I wish you the best of luck and hopefully we can stay in touch and congrats down right.
Thanks, Brian .
We have a follow up question from Nathan race from Piper Sandler Nathan Your line is now open. Please go ahead.
Yes.
Thank you for taking the follow up.
Question was kind of answered it in.
And the last line of questioning, but just curious kind of what you guys are seeing in terms of SBA credit quality I know SBA loans constitute a bulk of the charge offs here in the second quarter and so I think investors are increasingly focused on that asset class.
Suddenly borrowers get rates shocked with what the fed has done recently so just curious if you guys are maybe tighten your underwriting box to some degree going forward.
Maybe kind of impact volumes as well in the future.
Mark.
Well obviously the.
The rate increase for those customers is something we're going to watch very carefully.
And.
But credit quality in that book right now is actually pretty stable.
We're seeing some activity in upgrades, we're seeing some activity downgrades and a few charge offs, but.
I think they are in fairly good shape right now and we were again, we were pretty vigilant in looking at the effects of the rates that we're going to see here in the third quarter pretty.
Pretty much a weekly or biweekly basis with them. So.
I don't anticipate a lot of degradation here in the third quarter for that portfolio.
Okay, great and that was over most early enough to congratulate Tom and Maria as well.
<unk>.
Yeah.
Thank you Nate.
Thank you guys.
Thanks, Dan Thank you.
Thank you for your question today, I will now turn the call back over to Mr. <unk> for any closing remarks.
Great. Thank you Sam in closing and before we close for the day here I want to acknowledge and thank my colleague and good friend Lindsay Corby for being a great partner during the 20 earnings calls that we've hosted over the last five years.
It's been an honor and a privilege to have worked closely with her for the last nine years on behalf of the company and all of US at by line, we want to thank her for commitment our leadership hard work and the country using that she has made over that time, we'll certainly miss her but we want to wish or nothing but the very best.
She embarked on a new journey and look forward to having her as a commercial customer soon I would also like to welcome Tom who are full and we look forward to working with him going forward in his new role that concludes the call for today. Thank you for your time this morning, and your interest in byline and we look forward to talking to you again.
Next quarter.
Thank you.
This concludes today's call. Thank you for joining you may now disconnect your lines.
Okay.