Q3 2023 Byline Bancorp Inc Earnings Call
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Good morning, and welcome to the pylon Bancorp's third quarter 2023 earnings call. My name is that Tim and I will be your conference operator today.
Your lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. If you would like to ask a question simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question. Please press star and two.
If you are listening via speaker phone. Please lift your handset prior to asking your question. If you require operator assistance. Please press Star then zero.
Please note the conference is being recorded.
This time I would like to introduce <unk> head of Investor Relations for Korlym Pan Coke to begin the conference call.
Thank you Adam good morning, everyone and thank you for joining us today for the byline Bancorp third quarter 2023 earnings call.
In accordance with regulation FD. This call is being recorded and is available via webcast, our investor Relations website, along with our earnings release and a corresponding presentation slides.
During the course of the call today management may make certain statements that constitute projections or other forward looking statements regarding the future events or the future financial performance of the company. We cautioned that such statements are subject to certain risks uncertainties and other factors that could cause actual results to differ materially from those discussed.
Yes.
The company's risk factors are disclosed and discussed this SEC filings in.
In addition, our remarks may reference non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Reconciliation for these numbers can be found within the appendix of the earnings release for additional information about risks and uncertainties. Please.
Please see the forward looking statement and non-GAAP financial measures disclosures in the earnings release I would now like to turn the conference call over to Alberto <unk> President of Byline Bancorp.
Thank you Brooks good morning, everyone and thank you for joining the call. This morning to go over our third quarter results with me on the call are Roberto her NCR, Chairman and CEO, Tom Bell, our CFO and Mark <unk>, Our Chief Credit Officer before we get into the results for the quarter I'd like to pass the call onto Roberto or.
To comment on a few items.
Yeah.
Thank you Alberto and good morning to all we had another strong quarter and are delighted to have welcomed our inland colleagues and shareholders.
After a successful core system conversion and integration in the third quarter.
Speaking about welcoming it is important to call out.
The addition of two very accomplished individuals to our board.
You have seen there are buyers so I won't go into those details.
Stuart joined US as part of the close of the inland merger in early July.
We did not know Pam other than through our <unk>.
<unk> shown an evaluation process at the board level, but.
But we can tell you that.
And just a few months that we've been working with her.
Delighted with her contributions and we know we've made a great great selection there.
Carlos <unk> joined the board in early October.
Adam: My name is Adam and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question, simply press the star for the number one on your telephone keypad. If you would like to withdraw your question, please press star and two. If you're a listening voice speaker phone, please lift your hands out prior to asking your question. If you require operator assistance, please press star than zero. Please note the conference is being recorded.
We have known Carlos for for many years.
And more importantly, he knows us very well Carlos is the.
Is the identical twin brother of delayed timing cycle.
<unk>, who was one of our founding shareholders and served.
On our board.
The addition of these two individuals keeps in line with our commitment to building diverse high performing teams at all levels that reflect our core values of diversity and inclusion.
Brooks Rennie: At this time, I would like to introduce Brooks Rennie, head of investor relations for Byline Bank Group to begin the conference call. Thank you, Adam. Good morning, everyone. And thank you for joining us today for the Byline Bank third quarter 2023 earnings call. In accordance with the regulation FD, this call is being recorded and is available via webcasts or investor relations website, along with our earnings release and the corresponding presentation slides.
And we we believe.
These make us stronger.
In an environment, where Mr market has elected to punish the banking sector.
Our performance and execution.
Has been excellent.
Brooks Rennie: During the course of the call today, management may make certain statements that constitute projections or other board looking statements regarding the future events or the future financial performance of the company. We cautioned that sub statements are subject to certain risks on certain fees and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed as SEC filings. In addition, our remarks may reference non-GAQ measures which are intended to supplement but not substitute for the most directly comparable gap measures. Reconciliation for these numbers can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement in non-GAQ financial measures and closures in the earnings release.
We saw nothing mixed this quarter.
Then Mr market being significantly significantly disconnected from our strong fundamentals the fundamentals as Alberto and the team will cover.
We have been posting top quartile numbers in several important metrics in this quarter.
Some of those metrics move even higher or into the top quartile.
But these are just numbers and what really matters to us people strategy and long term shareholder value.
We feel uniquely positioned especially.
Because of the uncertainty in the economy.
We have created a place where the best lenders, who want to work and grow.
In a market.
Alberto Paracchini: I would now like to turn the conference call over to a part of the President of Byline Bank Group. Thank you, Brooks. Good morning, everyone, and thank you for joining the call this morning to go over our third quarter results. With me on the call, our Roberto Harencia, our Chairman and CEO, Tom Bell, our CFO, and Mark Fusonato, our Chief Credit Officer.
Us disruption opportunities.
In addition, we have strategic pathways.
Inorganic value creation.
Such as the inland merger that you just saw.
On top of that.
We have a very special group.
Of long only long term shareholders, which provide us the runway.
Roberto Herencia: Before we get into the results for the quarter, I'd like to pass the call on to Roberto or to comment on a few items. Thank you, Alberto, and good morning to all. We had another strong quarter and are delighted to have welcomed our inland colleagues and shareholders after a successful core system conversion and integration in the third quarter. Speaking about welcoming, it is important to call out the addition of two very accomplished individuals to our board.
For these value creation story to unfold for years to come.
And I want to highlight for years to come.
I think.
This is <unk>.
E C increased enough for analysts and Mr market.
The grass.
It connects us to the future.
You can use quarters, a signpost, but understand that this is much more.
Pat.
Alberto I would like to turn it back to you.
Great. Thank you Roberto in terms and moving onto the agenda I'll start with some comments and highlights for the quarter, Tom will follow and cover the financial results in detail and then I'll come back and wrap up at the end before we open the call up for questions as a reminder.
Roberto Herencia: You have seen their bios, so I won't go into those details. Pamela Stewart joined us as part of, at the close of the inland merger in early July, we did not know Pam other than through our selection and evaluation process at the board level. But we can tell you that in just a few months that we've been working with her, we're just delighted with her contributions and we know we've made a great, a great selection there.
That we're using for today's call is on our website. So please refer to the disclaimer at the front.
Starting on slide three of the deck the third quarter was not only a strong quarter financially for the company, but also a very productive one during the quarter. We closed the inland merger on July one successfully completed the systems conversion in mid August and wrapped up the integration project by quarter at.
Roberto Herencia: Carlos Reese Sacristen joined the board in early October. We have known Carlos for many years, and more importantly, he knows us very well. Carlos is the identical twin brother of the late Jaime Luis Sacristen who was one of our founding shareholders and served on our board. The addition of these two individuals keeps in line with our commitment to building diverse, high performing teams at all levels that reflect our core values of diversity and inclusion.
The merger added roughly $1 billion in deposits $800 million in loans and 10 branches located primarily in attractive west and not northwest suburbs of Chicago.
I'd like to welcome all former inland customers employees and stockholders to byline lastly, I'd like to thank all of our colleagues who played a critical role in making the conversion and integration projects a success.
Roberto Herencia: And we believe these make us stronger. In an environment where Mr. Market has selected to punish the banking sector, our performance and execution has been excellent. We saw nothing mixed this quarter, other than Mr. Market being significantly disconnected from our strong fundamental, as Alberto and the team will cover. We have been posting top quartile numbers in several important metrics. In this quarter, some of those metrics moved even higher or into the top quartile.
We reported net income of $28 million or <unk> 65 per share on revenue of 105 million. These results include the impact of merger related charges taken in connection with the inland transaction. Excluding the impact of these net income was 33 million or <unk> 77 per diluted share.
Roberto Herencia: But these are just numbers in what really matters to us, people, strategy, and long-term shareholder value. We feel uniquely positioned, especially because of the uncertainty in the economy. We have created a place where the best lenders want to work and grow. In a market, handing us disruption opportunities. In addition, we have strategic pathways for inorganic value creation, such as the inland merger that you just saw. On top of that, we have a very special group of long-only long-term shareholders, which provide us the runway for these value creation started to unfold for years to come.
These figures represent new benchmarks for the company since our IPO with increases of 5% and 40% on a quarter on quarter and year on year basis, respectively.
<unk> ability and return metrics were also strong with an ROA of 130 basis points and an ROE TCE of 16, 5%.
Adjusting for merger related charges ROA was 153 basis points in our OTC just under 19%.
Our pretax pre provision income hit a record $46 9 million, which translates to a pre tax preparation ROA of 216 basis points or 246 basis points when excluding merger related charges.
Total revenue was $105 million up $14 million for the quarter and 30% year on year growth in the quarter was driven by a $16 million or 21% increase in net interest income stemming from higher loan balances non interest income decline large.
Fleet due to a negative fair value Mark on our servicing asset despite increased gain on sale revenue.
Roberto Herencia: And I want to highlight four years to come. I think this is easy and precipit enough for analysts and Mr. Market to grasp. It connects us to the future. You can use quarters of signposts, but understand that this is much more than that.
Expenses inclusive of all merger related charges were $58 million for the quarter up 17% excluding charges operating expenses remain well managed at 51 million, marking a six eight increase from the prior quarter.
Operating expenses relative to assets came in at 235 basis points, excluding charges, representing a 25 basis point improvement from the prior quarter and a 21 basis point improvement year on year.
Alberto Paracchini: Alberto, I like to turn it back to you. Great. Thank you, Roberto. In terms of moving on to the agenda, I'll start with some comments and highlights for the quarter. Tom will follow and cover the financial results in detail and then I'll come back and wrap up at the end before we open the call-up for questions. As a reminder, the deck we're using for today's call is on our website, so please refer to the disclaimer at the front.
The margin remained strong at 446 basis points, which includes approximately 50 basis points of loan accretion income.
Coming from the transaction excluding acquisition accounting the margin came in as expected at just over 400 basis points as an aside I would like to point you to additional disclosures. We added in the appendix related to loan accretion income on slide 18, and updated slides on pages 15 and <unk>.
Alberto Paracchini: Starting on slide three of the deck, the third quarter was not only a strong quarter financially for the company, but also a very productive one. During the quarter, we closed the inland merger on July 1st, successfully completed the systems conversion in mid-August and wrapped up the integration project by quarter-end. The merger added roughly $1 billion in the deposit, $800 million in loans, and 10 branches located primarily in attractive west and not northwest suburbs of Chicago.
<unk> so in our office exposure inclusive of inland.
Lastly, our efficiency ratio stood at 53, 7% or 47 three.
3%, adjusted which represents a four and seven percentage point improvement over the prior quarter and year respectively.
Moving onto the balance sheet loans to increase by approximately $1 billion and stood at $6 6 billion as of quarter end. The increase was primarily due to the inland transaction notwithstanding excluding the impact we still saw growth in the portfolio of approximately $216 million or 4% on a.
Alberto Paracchini: I'd like to welcome all former inland customers, employees, and stockholders to buy line. Lastly, I'd like to thank all of our colleagues who played a critical role in making the conversion and integration projects a success. We reported net income of $28 million or $65 cents per share on revenue of $105 million. These results include the impact of merger-related charges taken in connection with the in-line transaction, excluding the impact of these net income with $33 million or $77 cents per diluted share.
Linked quarter basis. This marked the 10th consecutive quarter of loan growth for the company.
Business development activity remains healthy driven by our commercial and leasing businesses. Our government guaranteed lending business also had a good quarter with commitments closed totaling $113 million.
Deposits as of quarter end stood at $7 billion up a $1 billion largely due to the transaction adjusting for that deposits increased by $74 4 million or five 8% on a linked quarter basis.
Alberto Paracchini: These figures represent new benchmarks for the company since our IPO, with increases of 5% and 40% on a quarter-on-quarter and year-on-year basis, respectively. Profitability and return metrics were also strong, with an ROA of 130 basis points and an ROTCE of 16.15%. Adjusting for merger-related charges, ROA was 153 basis points and ROTCE just under 19%. Our pre-tax pre-pervision income hit a record 46.9 million, which translates to a pre-tax pre-pervision ROA of 216 basis points or 246 basis points, one excluding merger-related charges.
Asset quality inclusive now of the inland portfolio remained stable for the quarter credit cost came in at $9 million inclusive of net charge offs of $5 4 million and the reserve build up $2 6 million the allowance for credit losses ended the quarter at one 6% of total loans.
Liquidity and capital remains ample and strong with a CET one ratio of 10, 1% and total capital of 13, 2%.
<unk> ended the quarter at 818%, which is within our targeted operating range of 8% to 9%.
Alberto Paracchini: Total revenue was $105 million, up 14 million for the quarter and 30% year-on-year. Growth in the quarter was driven by a $16 million or 21% increase in net interest income, stemming from higher loan balances. Non-interest income declined largely due to a negative fair value mark on our servicing asset, despite increased gain-on-cell revenue. Expenses inclusive of all merger-related charges were $58 million for the quarter, up 17%. Excluding charges, operating expenses remain well-managed at 51 million, marking a 6.8 increase from the prior quarter.
Moving forward, our capital priorities remain unchanged and with that I'd like to pass the call over to Tom who will provide you with more detail on our results.
Thank you Alberto and good morning, everyone.
Starting with our loan and lease portfolio on slide four total loans and leases were $6 6 billion at September 30th and.
An increase of $1 billion from the prior quarter.
<unk> contributed approximately $800 million in total loans, notwithstanding we saw increases across all of our major lending areas with the strongest growth coming from commercial and leasing teams.
Net of loan sold we originated $311 million during the quarter and payoffs were lower than we expected at $185 million compared to $256 million in the second quarter.
Alberto Paracchini: Operating expenses relative to assets came in at 235 basis points, excluding charges, representing a 25 basis point improvement from the prior quarter and a 21 basis point improvement year-on-year. The margin remains strong at 446 basis points, which includes approximately 50 basis points of loan accretion income, coming from the transaction. Excluding acquisition accounting, the margin came in as expected at just over 400 basis points. As an aside, I'd like to point you to additional disclosures we added in the appendix related to loan accretion income on slide 18 and updated slides on pages 15 and 16 on our office exposure inclusive of inland.
Looking ahead, we expect loan and lease growth to be in the low to mid single digits for the remainder of the year.
Turning to slide five.
Our government guaranteed lending business finished the quarter with $113 million in closed loan commitments, which was lower than the second quarter at September 30, the on balance sheet SBA, 7% exposure was relatively unchanged and we saw an uptick in the USDA business.
Our allowance for credit losses, as a percentage of the UN guaranteed loan balances was eight 1% as of quarter end.
Lower as a result of loan upgrades and payoffs.
Turning to slide six.
Alberto Paracchini: Lastly, our efficiency ratio stood at 53.7% or 47.3% adjusted, which represents a 4% and 7% point improvement over the prior quarter and year respectively. Moving on to the balance sheet, loans increased by approximately $1 billion and stood at 6.6 billion as of quarter end. The increase was primarily due to the inland transaction, notwithstanding excluding the impact we still saw growth in the portfolio of approximately $216 million or 4% on a link quarter base.
Total deposits increased to $7 billion at September 30th.
<unk> grew $74 4 million or five 8% annualized from the end of the prior quarter.
DDA as a percentage of total deposits was 28% compared to 30% from the prior quarter.
The change in mix was primarily driven by lower DDA percentage on the assumed deposit portfolio.
Commercial deposits represent 48% of total deposits and accounts for 77% of noninterest bearing deposits.
Our deposit costs for the quarter came in at 213 basis points, an increase of 43 basis points from the prior quarter, which was primarily driven by higher rates on money market accounts and time deposits.
Alberto Paracchini: This marked the 10th consecutive quarter of long growth for the company. Business development activity remained healthy driven by our commercial and leasing businesses. Our government guaranteed lending business also had a good quarter with commitments close totaling $113 million. The deposits as a quarter end stood at $7 billion off of billion largely due to the transaction, adjusting for that deposits increased by $74.4 million or 5.8% on a link quarter basis. As a quality inclusive now of the inland portfolio remains stable for the quarter.
On our cycle to date basis deposit betas, both for total deposits and interest bearing deposits stood at 39% and 55% respectively.
Turning to slide seven.
Net interest income was $92 5 million for Q3 up 21% from the prior quarter, primarily due to the merger organic loan and lease growth and higher yields offset by increased interest expense.
Our net interest margin was 446% up 14 basis points from the prior quarter.
Alberto Paracchini: Credit costs came in at $9 million inclusive of net charge of 5.4 million and the reserve filled of $2.6 million. The allowance for credit losses ended the quarter at 1.6% of total loans. The quality in capital remained ample and strong with a CTE-T1 ratio of 10.1% and total capital of 13.2% TCE ended the quarter at 8.18%, which is within our targeted operating range of 8 to 9%. Moving forward, our capital priorities remain unchanged.
<unk> primarily from the merger.
Accretion income on acquired loans contributed 50 basis points to the margin in the third quarter.
Up from three basis points in the last quarter.
Earning asset yields increased a healthy 50 basis points driven by higher loan yields.
Going forward.
The higher than expected accretion in Q3, we estimate net interest income of $85 to $87 million for Q4.
Turning to slide eight.
Noninterest income stood at $12 4 million in the third quarter down $1 9 million linked quarter, primarily driven by a $3 $6 million negative fair value Mark on our loan servicing asset due to higher discount rates and increased prepayments, which was partially offset by an increase of $769000.
Tom Bell: And with that, I'd like to pass the call over to Tom who will provide you with more detail on our results. Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on slide four, total loans and leases were $6.6 billion at September 30th, an increase of $1 billion from the prior quarter. Inland contributed approximately 800 million in total loans, notwithstanding we saw increases across all of our major lending areas with the strongest growth coming from commercial and leasing teams.
Net gain on sale of loans due to higher volumes.
Sales of government guaranteed loans increased $16 million in the third quarter compared to Q2.
Tom Bell: Net up loan sold, we originated $311 million during the quarter, and payoffs were lower than we expected at $185 million, compared to $256 million in the second quarter. Looking ahead, we expect loan and lease growth to be in the low to mid-single digits for the remainder of the year.
The net average premium was 8% for Q3 lower than the prior quarter, primarily due to changes in the mix of loans sold and tight market conditions.
Assuming we avoid a government shutdown in November we are forecasting gain on sale income in the $5 $5 million range for Q4.
Turning to slide nine our non interest expense came in at $58 million for the third quarter up $8 6 million from the prior quarter.
Tom Bell: Turning to slide five. Our government guaranteed lending business finished the quarter with $113 million in close loan commitments, which was lower than the second quarter. At September 30th, the on balance sheet SBA 7A exposure was relatively unchanged, and we saw an uptick in the USDA business. Our allowance for credit losses as a percentage of the on guaranteed loan balances was 8.1% as a quarter and lower as a result of loan upgrades and payoffs.
Similarly, due to the impact of the inland acquisition.
On an adjusted basis, our net interest expense stood at $51 2 million $2 million below our Q3 guidance of $53 million to $55 million.
We continue to remain disciplined on our expense management and we are on track to meet projected cost savings.
With one time merger costs behind us or.
Our non interest expense guidance is unchanged at $53 million to $55 million per quarter.
Tom Bell: Turning to slide six. Total deposits increased to $7 billion at September 30th. Deposit grew 74.4 million dollars or 5.8% annualized from the end of the prior quarter. DDAs as a percentage of total deposits was 28% compared to 30% from the prior quarter. The change in mix was primarily driven by a lower DDA percentage on the assumed deposit portfolio. Commercial deposits represent 48% of total deposits and accounts for 77% of non-intersparing deposits.
<unk> are well managed and we believe we have the right balance of investing versus spending to achieve our strategic goals.
Turning to slide 10.
The allowance for credit losses at the end of Q3 was $105 $7 million up 14% from the end of the prior quarter.
The increase includes an adjustment of $10 6 million for purchase credit deteriorated loans, PCT and a $2 $7 million provision for acquired non PCI loans in total for the quarter, we recorded $9 million provision for credit losses compared to a $6 million in Q2.
Tom Bell: Our deposit cost for the quarter came in at 213 base points and increased the 43 base points from the prior quarter, which was primarily driven by higher rates on money market accounts and time deposits. On a cycle-to-date basis, the positive basis, both for total deposits and interest-sparing deposits, stood at 39% and 55% respectively.
Net charge offs were $5 $4 million in the third quarter compared to $4 3 million in the previous quarter.
Npls to total loans and leases increased 79 basis points in Q3 from 69 basis points in Q2.
The increase in Npls was attributed entirely to loans assumed as part of the merger.
Tom Bell: Turning to slide 7. Net interest income was $92.5 million for Q3, up 21% from the prior quarter, primarily due to the merger, organic loan and lease growth, and higher yield offset by increased interest expense. Our net interest margin was 4.46% up 14 base points from the prior quarter, standing primarily from the merger. Accretion income on acquired loan was contributed 50 base points to the margin in the third quarter, up from three base points in the last quarter. Ernie NASA yields increased, the healthy 50 base points driven by higher loan yields. Going forward, giving the higher than expected accretion in Q3, we estimate net interest income of $85 to $87 million for Q4.
NPA to total assets increased to 60 basis points in Q3 from 54 basis points in Q2.
And total delinquencies were $36 9 million on September 30, a $27 million increased linked quarter. The increase was primarily due to the merger which contributed approximately half of the delinquency increase.
Turning to slide 11.
We ended the quarter with approximately $429 million in cash and $1 $2 billion of securities, which represents roughly 19% of total assets.
Our available borrowing capacity stood at $1 7 billion.
And our uninsured deposit ratio stood at 26, 1%, which remains well below all peer bank averages.
Tom Bell: Turning to slide 8. Non-interesting income stood at $12.4 million in the third quarter, down 1.9 million link quarter, primarily driven by $3.6 million negative fair value mark on our loan servicing asset due to higher discount rates and increased prepayments, which was partially offset by an increase of $769,000 in net gain on sales loans due to higher volumes. Sales of government guaranteed loans increased $60 million in the third quarter compared to Q2.
Total security yields increased a healthy 39 basis points to four 8% from.
From Q2.
Turning to slide 12.
Our CET one came in at 10, 1% and our TCE ratio stood at $8 two and remains within our targeted TCE range.
Going forward, we are focused on executing our strategy and we expect our capital levels to grow given our earnings outlook with that Alberto back to you.
Thank you Tom so to wrap up on slide 13, you have a summary of our strategy, which has remained consistent and continues to work very well for US. We were pleased with another quarter of strong results and notwithstanding the significant sources of uncertainty present in the environment remain.
Tom Bell: The net average premium was 8% per Q3, lower than the prior quarter, primarily due to changes in the mix of loan sold and tight market conditions. Assuming we avoid a government shutdown in November, we are forecasting gain on sale income in the $5.5 million range for Q4.
Think about our ability to continue to differentiate ourselves in the marketplace and deliver results for both our customers and stockholders with that operator, let's open the call up for questions.
Tom Bell: Turning to slide 9, our non-interesting expense came in at $58 million for the third quarter, up 8.6 million from the prior quarter, primarily due to the impact of the inland acquisition. On an adjusted basis, our net interest expense stood at $51.2 million, $2 million below our Q3 guidance of $53 to $55 million. We continue to remain disciplined on our expense management and we are on track to meet projected cost savings. With one time merger costs behind us, our non-interesting expense guidance has unchanged at $53 to $55 million per quarter. Expenses are well managed and we believe we have the right balance of investing versus spending to achieve our strategic goals.
As a reminder, if you'd like to ask a question today. Please press star followed by one telephone keypad to enter the queue. If you wish to withdraw your question that'd be staff followed by two.
Our first question today comes from Damon Delmonte from <unk>. Steven. Please go ahead. Your line is open.
Hey, good morning, everyone hope, you're all doing well today.
Good morning wanted to start off with a.
Good morning, just want to start off with a question on the margin. So the reported margin I think it was like 447, you guys had noted there is around 50 basis points of benefit from the merger accounting there.
You did provide a table.
Tom Bell: Turning to slide 10, the allowance for credit losses at the end of Q3 was $105.7 million, up 14% from the end of the prior quarter. The increase includes an adjustment of $10.6 million for purchase credit to curated loans, PCD, and a $2.7 million per vision for acquired non-PCD loans. In total, for the quarter, we recorded $9 million per vision for credit losses compared to a $6 million in Q2. Net charge loss for $5.4 million in the third quarter compared to $4.3 million in the previous quarter.
In the slide deck with expected accretable yield going forward.
So we basically just take out the $10 $3 million this quarter to get to a core number of like $3 97, and then if we kind of layer on the expected accretable yield we can kind of back into the core margin for next quarter to get to the guided NII.
Is that fair Tom.
Kind of basically I guess, what I'm trying to get at it sounds like the core margins trending lower.
From third quarter to fourth quarter.
I think thats generally accurate I think you have to remember that.
Tom Bell: NPLs to total loans and leases increase $79 points in Q3 from $69 points in Q3. 2. The increase in MPL was attributed entirely to loans assumed as part of the merger. NPA's total assets increased to 60 basis points in Q3 from 54 basis points in Q2. And total delinquencies were $36.9 million on September 30th, a $27 million increased link quarter. The increase is primarily due to the merger, which contributed approximately half of the delinquency increase.
Theres, a number of repricing things going on and I think that you would see the margins stable to maybe slightly up just given we have balance sheet hedges in.
We have the SBC loans repriced, another 25 basis points higher than Q4, so I would say flat to slightly up.
I think the construct to add to what Tom was saying Damon and I think the construct is correct I think youre thinking about it the same way just one word of caution with accretion that's our best guess.
Obviously as it's going to fluctuate in some cases, we may see that accretion to par <unk>.
Tom Bell: Turning to slide 11, we ended the quarter with approximately $420.9 million in cash and $1.2 billion in securities, which represents roughly 19% of total assets. Our available borrowing capacity stood at $1.7 billion, and our uninsured deposit ratio stood at 26.1%, which remains well below all pure bank averages. Total security yields increased to healthy 39 basis points to 2.48% from Q2.
<unk> faster I think that you saw some of that this quarter, but that's our best estimate at this point in time, just know that that it can vary.
Plus or minus some percentage on a on a quarter end quarter out basis. The second point to just add to what Tom said is I think what youre seeing absent.
The other increase in rates.
Or or call. It a significant change in in short term market rates I think.
The margin the call it the core margin so to speak is kind of kind of reached a T.
Tom Bell: Turning to slide 12, our CET1 came in at 10.1% and our TC ratio stood at 8.2 and remained within our targeted TC range. Going forward, we are focused on executing our strategy, and we expect our capital levels to grow, giving our earnings outlook.
Trough, so to speak so just plus or minus I mean.
Alberto Paracchini: With that, Elberto, back to you. Thank you, Tom.
It's impossible to predict this things with within a basis point or two but just plus or minus just know that it could bounce around a little bit but generally speaking what we're seeing is probably up.
Alberto Paracchini: So, to wrap up on slide 13, you have a summary of our strategy, which has remained consistent and continues to work very well for us. We were pleased with another quarter of strong results and notwithstanding the significant sources of uncertainty present in the environment, remain optimistic about our ability to continue to differentiate ourselves in the marketplace and deliver results for both our customers and stockholders.
Ill.
Relatively flat kind of a core number with the accretion number on top.
Hope that helps.
Yes. It does yes, thank you for that that color and clarification.
Then with regards to the expenses Tom I think you said the guide for next quarters in the $53 million to $55 million range is that correct.
Yes.
So if we were to kind of back out the merger charges and an order and I think all of us.
Adam: With that, operator, let's open the call up for questions. As a reminder, if you'd like to ask a question today, please press star followed by one on your telephone keypad to enter the queue. If you wish to withdraw your question, that would be star followed by two.
Oh, sorry, I didn't mean interrupt you go ahead Dave.
Okay. It goes beyond kind of border.
It goes beyond the fourth quarter Okay.
Damon Delmonte: Our first question today comes from Damon Del Monte, from KBW. Damon, please go ahead. Your line is open. Good morning, everyone. Hope you're all doing well today. Good morning.
But if we can kind of back out the kind of the.
<unk> non operating stuff here in this quarter, we're kind of at the $51 million range.
Out there.
Damon Delmonte: We start off with a question on the margin. So, the reported margin, I think it was like 447, and you guys had noted there's around 50 basis points of benefit from the merger accounting there. And you did provide a table in the slide deck with expected accretable yield going forward. So, we basically just take out the 10.3 million this quarter to get to a core number of like 397. And then if we kind of layer on the expected accretable yield, we can kind of back into the core margin for next quarter to get to the guided NII.
Yes.
So it kind of I guess, what's the.
The transition from this quarter's level up to that 53 to 55 are there.
Yes.
Inflationary expenses that are causing that to kind of go higher or are there maybe some onetime savings this quarter that don't recur in the coming quarters.
I mean, there is there is a little of the.
We don't expect many acquisition costs merger related costs in Q4, we think we're done.
And then there is obviously some employees that worked through the conversion so to speak that are no longer here. So there'll be some savings there, but we are dealing with inflationary pressures and we think given the the.
Damon Delmonte: Is that fair, Tom? So, it kind of basically, I guess what I'm trying to get at is it sounds like the core margin is trending lower from third quarter to fourth quarter. I think that's generally accurate. I think you have to remember that there's a number of repricing things going on. And I think that you would see the margin stable to maybe slightly up just given. We have balance sheet edges and we have the SBC loans repriced another 25 basis points higher in Q4.
The projects and the things we want to continue to invest in the business.
We're trying to find some other offsets, but we're trying to manage to lower end of the range.
Got it okay.
Yes.
To add to what Tom said.
The point that he said kind of like.
Between us.
I think that guide us goes beyond the quarter, just think of that also kind of going into into 2024. So if you.
Damon Delmonte: So, you know, I would say flat to slightly up. I think the construct to add to what Tom was saying, Damon, I think the construct is correct. I think you're thinking about it the same way. Just one word of caution with accretion. That's our best guess. Obviously as it's going to fluctuate. In some cases, you know, we may see that accretion to par, you know, be faster. You know, I think you saw some of that this quarter.
If you kind of take the.
Call it the run rate adjusted for charges.
And you take that run rate on the guide what that range I think what youre seeing there is probably just an update.
Into next year that I mean Im sure you can you can kind of do a back of the envelope there, but that's just.
Damon Delmonte: But that's our best estimate at this point in time. Just know that that it can vary. We, you know, plus or minus some percentage on a quarter and quarter out basis. The second point to just add to what Tom said is, I think what you're seeing absent, you know, another increase in rates or call it a significant change in in short term market rates. I think they're the margin that call it the core margin, so to speak, is kind of, you know, kind of reached a trough, so to speak.
Inflation.
And probably just also incorporate some of the growth that we're seeing into next year.
Got it okay. That's helpful.
I guess, just lastly, kind of broader speaking on credit.
Thoughts on <unk>.
Particular areas of your footprint or the portfolio, where you might be seeing some softening or youre, keeping a more watchful eye.
Other than.
The office space obviously.
Damon Delmonte: So just plus or minus. I mean, we, it's impossible to predict these things with within a basis point or two, but just plus or minus, just know that it could bounce around a little bit. But generally speaking, what we're seeing is probably a relatively flat kind of core number with the accretion. We should number on top. Hope, hope that helps. Yeah, it does. Yes. Thank you for that, that color and clarification.
We haven't seen any trends in the other asset classes that we currently have in the portfolio.
We're spending a lot of time.
Being vigilant in doing our portfolio reviews.
Focused on solutions, when we do have problems.
Our business units have been.
They've been very good about staying in touch with their customers looking for any signs of any problems.
Damon Delmonte: And then with regards to the expenses, Tom, I think you said that the guide for next quarters in the 53 to 55 million dollar. Is that correct? Yes. So if we were to kind of back out the merger charge and order, and I think I was, oh, sorry, I didn't mean interrupt you go ahead, dude. Okay, it goes beyond the fourth quarter. Okay, but if we kind of back out the kind of the non-recurring non operating stuff here in this quarter, we're kind of at the 51 million dollar range.
Got it okay. Thank you very much appreciate all the color so all that I had.
Thank you Steven.
The next question comes from Terry Mcevoy from Stephens, Inc. Terry Your line is open. Please go ahead.
Hi, good morning, everyone.
Good morning, Terry.
Thanks.
And thanks for that.
The appendix slides very very helpful. I don't ask Tom the accretion question. So thanks for that.
Maybe just stepping out of the model a little bit you've got we're hearing larger players and Chicago are.
Shrinking or deemphasizing certain areas.
Damon Delmonte: Is that there? Yes. So, so kind of, I guess what's the transition from this quarter's level up to that 53 to 55 are there, you know, the inflationary expenses that are causing that to kind of go higher, or there may be some one time savings this quarter that don't recur in the coming quarters. I mean, there's, there's a little of the, you know, we don't expect many acquisition costs, emergency related costs in Q4, we think we're done.
So are you getting more incoming calls from lenders and how are you thinking about kind of playing more offense given some.
Some of the changes in the competitive landscape that I'm hearing about.
I think.
Probably Terry in general terms.
What we're seeing is a lot of the <unk>.
So called the risk weighted asset diets that some of the larger players are.
Kind of going through.
A lot of what we're seeing is initially those seem to be very much on transactional driven business.
Damon Delmonte: And then there's obviously some employees that, you know, work through the conversion, so to speak, that are no longer here. So there will be some saves there, but, you know, we are dealing with inflationary pressures, and we think given the projects and the things we want to, you know, continue to invest in the business, you know, we're trying to find some other offices, but we're trying to manage to lower end of the range.
So.
Not necessarily we're not necessarily we're not in a lot of those businesses. We as you well know we don't have.
We don't have a significant consumer business, we're not in the mortgage space. So we're not really kind of seeing.
Opportunities to kind of pick up where others, maybe that are more capital constrained or looking to lighten up on risk weighted assets were more focused on.
Damon Delmonte: Got it. And in between it's like, you know, I think that guide is goes beyond the quarter, just think of that, you know, also kind of going into into 2024. So if you, if you kind of take the, the call it the run rate, you know, adjusted for charges. And you take that run rate on the guide, you know, with that range, I think what you're seeing there is probably just an update, you know, into next year that, I mean, I'm sure you can, you can kind of do the back of the envelope there, but that's just, you know, just, you know, inflation, you know, and probably just also incorporate some of the growth that we're seeing into next year, here. Got it. Okay, that's helpful.
Opportunities, where it's relationship driven.
What we are seeing though in the market as more and more particularly some of the larger players.
Looking to looking to participate or syndicated transactions and actually be willing to offer more of the relationship.
Two others in order to entice them to participate in that is a marked change from what we had seen in the past.
But again, it's not necessarily something that.
We are.
Not necessarily something that we do on a day to day basis I would say, we just are really really focus on the entire relationship building relationships and focusing on.
Damon Delmonte: I guess just lastly, kind of broader speaking on credit, you know, any updated thoughts on, on particular areas of your footprint or the portfolio where you might be seeing some softening or you're keeping a more watchful eye. Other than the office space, obviously, we haven't seen any trends in the other asset classes that we currently have in the portfolio. We're spending a lot of time being vigilant, doing our portfolio reviews, we're focused on solutions when we do have problems and our business units have been very good about staying in touch with their customers and looking for any new science-based problems. Got it. Okay, thank you very much. Appreciate all the color. So I'll let it head. Thank you, Damon.
On customer dislocation as a result of.
Mergers and transactions that have happened here in the past so to answer your question directly yes, we're seeing some of it not necessarily in areas, where we really would be looking to capitalize on.
Perfect.
And then as a follow up question I don't think anybody should be surprise on seven page 17, the office portfolio metrics with Npls delinquencies criticized higher in the quarter.
So I guess my question is if I go back to slide 16 are there any other areas within CRE.
Retail or senior housing, where you have maybe an upward.
Upward migration in some of those credit stats, but just not to the degree that we're seeing in office or are those portfolios are still performing against the trends are relatively stable.
Terry McAvoy: The next question comes from Terry McAvoy from Steven Zing.
Terry McAvoy: Terry Yolana, please go ahead. Good morning, everyone. Good morning, Terry. Thanks. And thanks for the appendix slides. Very, very helpful. I don't have to ask Tom the accretion question. So thanks for that.
Terri Mark Schneider.
Sure.
We haven't seen that in terms of any trends in the other asset classes. We don't have a lot of senior housing or a health care.
Good.
We do come across one from England transition.
Roberto Herencia: Maybe just stepping out of the model a little bit, you've got, we're hearing larger players in Chicago or shrinking or de-emphasizing certain areas. So are you getting more income and calls from lenders and how are you thinking about kind of playing more offense given some of the changes in the competitive landscape that I'm hearing about? You know, I think probably Terry in general terms that's, you know, what we're seeing is a lot of the so-called risk-weighted asset diets that some of the larger players are kind of going through.
We're looking at both size.
But other than that we just haven't seen any real kind of trend of any increases in the other asset classes the office.
Our focus.
For quite some time.
Our legacy book and obviously in the book that came over from England. So.
We're working on those we have been focused on solutions for those.
We spent a lot of time confirming our risk ratings since we got the inland portfolio.
We're going to continue to approach it that way, but I have not seen.
<unk>.
Other breaks in the asset classes for commercial real estate.
Roberto Herencia: A lot of what we're seeing is initially those seem to be very much on transactional driven, you know, business. You know, so not necessarily, we're not necessarily, we're not in a lot of those businesses. We, as you well know, we don't have a significant consumer business. We're not in the mortgage space. So we're not really kind of seeing, you know, opportunities to kind of pick up where others may be that are more capital constrained, are looking to lighten up on on risk-weighted assets.
Thanks for taking my questions and I hope everybody has a nice weekend.
Likewise, Derek Thanks Terry.
Okay.
The next question comes from Nathan race Piper Sandler Nathan Your line is open. Please go ahead.
Hey, guys good morning Happy Friday.
Good morning Nate.
Going back to the margin discussion on a core basis Im curious kind of what that contemplates in terms of the size of the earning asset base and then in the fourth quarter, obviously cash balances were higher in the period borrowings were also up in the corner.
Looks like you were able to sell down a portion of the inland securities portfolio. So I'm just curious.
Roberto Herencia: We're more focused on opportunities where its relationship driven. What we are seeing though in the market is, you know, more and more, particularly some of the larger players, you know, looking to participate or syndicate transactions and actually be willing to offer more of the relationship, you know, to others in order to entice them to participate. And that's a mark change from what we had seen, you know, in the past. But again, it's not necessarily something that we are, you know, it's not necessarily something that we do on a day-to-day basis.
How you guys are thinking about those dynamics in terms of maybe deleveraging the balance sheet in the fourth quarter, just given some of those dynamics.
Between securities and overnight funds.
Hi, good morning, its Tom Thanks.
Thanks for the question yes.
Yes, I mean, our cash position was slightly elevated at the end of the quarter I mean, that's not something we would normally maintain.
As we mentioned in prior meetings, we Werent investing securities cash flows and so we're back on board with doing that now just given where rates are and our asset sensitivity. I think we are still mindful of if rates decline the impact to us.
Roberto Herencia: I would say we just are really, really focused on, you know, the entire relationship, building relationships and focusing on, you know, customer dislocation as a result of, you know, mergers and transactions that have happened, you know, here in the past.
From an NII perspective, so you'll you'll see some of that cash move into securities.
Throughout the next quarter here and then we'll plan on continuing to reinvest cash flows as we move forward, but the cash position was just timing at quarter end for the most part being elevated.
Mark Fucinato: So to answer your question directly, yes, we're seeing some of it, not necessarily in areas where we really, you know, would be looking to capitalize, on. Perfect.
Yes, Nate and to add to that I mean, Tom gave guidance is as far as kind of what we're what we're anticipating as far as loan growth is concern.
Mark Fucinato: And then as a follow-up question, I don't think anybody should be surprised on page 17, the office portfolio metrics with NPLs, the link when he's criticized higher in the quarter. I guess my question, if I go back to slide 16, are there any other areas within CRE, retail or senior housing where you have maybe an upward migration in some of those credit stats, but just not to the degree that we're seeing in office, or are those portfolios still performing against the trends are relatively stable?
One just caveat with that we anticipate that we are going to see.
Not necessarily run off that would cost deleveraging, but it's going to be probably a remixing of the portfolio as we have run off primarily stemming from the transaction. We will look to reinvest that over time. So you might see our cash position at times just go up.
Because we've got pay offs and those payoffs were anticipating we will get those redeployed over the course of time in our and our different portfolio. So there is always a little bit of Remixing that will take place and what we anticipate we will see some of that.
Mark Fucinato: I tell you, Mark Fucinato, we haven't seen that in terms of any trends in the other asset classes. We don't have a lot of senior housing or health care. We do come across one from the inland transition that we're looking at as up size. But other than that, we haven't seen any real trend of any increases in the other asset classes. The office has been our focus for quite some time in our legacy book and obviously in the book that came over from inland.
Are we starting.
Next quarter, but certainly more more into 2024.
Got it.
In terms of kind of the overnight borrowings that were added in the quarter do you expect those balances to come down.
Over the next couple of quarters or is it just continues.
Contingent on loan growth the success no we wouldn't.
Mark Fucinato: So we're working on those. We've been focused on solutions for those, and we spend a lot of time confirming our risk ratings since we got the inland portfolio and that we're going to continue to approach it that way. But I have not seen any other breaks in the asset classes for commercial real estate.
Sure.
We normally would not hold that high of a balance and again, if we went to the home loan bank to borrow the money. It sat at the fed. So it was kind of a neutral P&L trade for us. So if you see the.
Other borrowings increased you really assume that the other borrowings with decline in the cash position declined.
Terry McAvoy: Thanks for taking my questions, and I hope everybody has a nice weekend. Great. Likewise, Derek. Thanks, Derek.
Yes, it is kind of like.
Given where we are.
Where rates given the rates that you get paid on reserves at the fed I mean, I think what Tom said you might just want to just net those two numbers out and look at a net number.
Nathan Briggs: The next question comes from Nathan Briggs, partner Sandler. Nathan, your line is open. Please go ahead. Hey guys, good morning. Happy Friday. Good morning, Nate. Going back to the margin discussion on the core basis, you know, curious kind of what that contemplates in terms of the size of the earning asset base in the fourth quarter. You know, obviously cash balances are higher, and if your barons are also open the quarter, it looks like you were able to sell down a portion of the inland security portfolio.
Because the financial impact of that it's going to be pretty negligible.
So, but just to just keep that in mind.
Got it.
Very helpful.
And just kind of thinking about the balance sheet growth trajectory into next year, I think Tom alluded to kind of low to mid single digit loan growth for the fourth quarter.
Nathan Briggs: So just curious, you know, how you guys are thinking about those dynamics in terms of maybe the leveraging the balance in the fourth quarter, just given some of those dynamics between securities and the overnight funds. Hi, Nate. Yeah, good morning, Tom. Thanks for the question. Yeah, I mean, our cash position was slightly elevated at the end of the quarter. I mean, that's not something we would normally maintain. You know, as we mentioned in prior meetings, you know, we weren't investing, you know, securities cash flows.
I'm curious in terms of how the pipeline looks and kind of the prospects going into next year.
Relative to Terry's question around some of the competitive dynamics in Chicago I'm curious how you guys are thinking about overall growth in loans and core deposits in 2024.
I think I would I would kind of referred to what what the guidance that Tom gave.
At this point I mean pipelines are healthy activity is.
I mean generally speaking solid I mean, there are some areas, notably real estate I mean real estate is no surprise notable as you would expect.
Nathan Briggs: And so we're back on board with doing that now, just given, you know, where rates are. And, you know, our asset sensitivity, I think we were still mindful of rates decline, the impact to us, you know, from an NIH perspective. So you'll see some of that cash move into securities, you know, throughout the next, you know, quarter here. And then we'll plan on continuing to reinvest cash flows as we move forward.
Slower given it's probably the most interest rate sensitive sector.
Our portfolio. So you have lower activity both on the origination side and on the payoff side. So we're anticipating and no change there we're anticipating that will continue into 2024.
Nathan Briggs: But the cash position was just timing that quarter end for the most part being elevated. Yeah, Nate, and to add to that, I mean, Tom gave guidance as far as kind of what we're anticipating as far as long growth is concerned. One, just caveat with that, we anticipate that we are going to see. Not necessarily runoff that would cost the leveraging, but it's going to be probably a remixing of the portfolio as we have runoff, primarily stemming from the transaction, we'll look to reinvest that over time.
We're also anticipating the point that we just made.
Before in terms of some remixing within the portfolio I mean, we will pay attention to what what kind of like our core origination rates are.
Nathan Briggs: So you may see our cash position at times just go up because we've got payoffs and those payoffs were anticipating we'll get those redeployed over the course of time in our different portfolios. So there's always a little bit of remixing that will take place, and we'll anticipate we'll see some of that probably starting next quarter but certainly more into 2024. Yeah, but in terms of kind of the overnight borrowings that were added in the quarter, to expect those balances to come down to the next quarter, is it just contingent on long growth success?
But just know that in some cases, we will get payoffs, we won't renew loans, we'll get the cash and then we will redeploy that.
Within the portfolio. So you don't necessarily we'll see net loan growth so to speak.
But it's just being replay just assets being replaced by by originations into our core businesses, but to answer your question.
We had.
I think the number the GDP number.
Yesterday kind of explains endpoints.
The fact that the economy has remained pretty healthy we tend to be more cautious our view is more cautious there is a lot of uncertainty out there.
And.
We're tending to want to have a more cautious view of that.
So far our pipelines remain healthy, particularly on the on the commercial side.
Our government guaranteed lending business is.
Bit slower compared to years past, but theyre seeing a fair number of opportunities. So that remains I think okay, given the rate environment.
Nathan Briggs: No, I mean, we would normally would not hold that high of a balance and again, if we went to the home loan bank to borrow the money, it's sad at the Fed so it was kind of a neutral P&L trade for us. So if you see other borrowings increased, you really could assume that the other borrowings would decline as the cash position declined. Yeah, it's kind of like a given where rates, given the rates that you get paid on reserves at the Fed.
Our leasing business.
Has shown really really good growth over the past year. Some of that is a catch up from supply chain issues that were happening earlier as people had put orders for equipment, but just couldn't get the equipment and therefore that kind of delay. So we're catching up with that which is helping in terms.
Of growth, but all in all I think the the.
Nathan Briggs: I mean, I think what Tom said, you might just want to just net those two numbers out and look at a net number because the financial impact of that is going to be pretty negligible. So just to just keep that in mind. Got it. Now, very helpful. And just kind of thinking about the balance sheet growth trajectory in the next year, I think Tom alluded to kind of load a mid-signal digit loan growth for the fourth quarter.
The guidance provided made should give you a good picture in terms of kind of what we're seeing at this point in time.
Yep.
Makes sense and if I could just ask lastly on credit quality.
Obviously, some continued normalization of charge offs this quarter I'm curious how much of that was driven by <unk>.
And just generally kind of what youre seeing in SBC credit quality. These days I think thats just increasingly topic of concern across investors just given the.
Nathan Briggs: You know, curious in terms of how the pipeline looks and kind of prospects going to next year relative to Terry's question around some of the competitive dynamics in Chicago. I'm curious, you know, how you guys are thinking about overall growth in loans and court deposits in 2024? I think I would kind of refer to what the guidance that Tom gave at this point. I mean, pipelines are healthy. Activity is, I mean, generally speaking, solid.
Great shocks that are impacted.
Yes, so two comments and I'll, let mark jump in but two comments generally speaking I mean, all of the charge offs that we saw this quarter just think about it is just basically taking.
Taking charges against the reserves that we established.
Prior period. So it is just a realization of the asset got worked out and essentially we just took the charge accordingly, and that's just normal course of business I don't think SBC was any different.
Nathan Briggs: I mean, there are some areas, notably real estate. I mean, real estate is no surprise. Notable, as you would expect, slower given it's probably the most interest rate sense of this sector of our portfolio. So you have lower activity both on the origination side and on the pay off side. So we're anticipating in no change there. We're anticipating that will continue into 2024. We're also anticipating the point that we just made right before in terms of some remixing within the portfolio.
This past quarter as far as charge offs.
That portfolio is as we've stated.
In prior calls that portfolio has.
Behaved fairly.
Fairly well.
Above expectations, given the environment borrowers there is half I think prepared an anticipated four rate increases have absorbed dose.
I think probably looking back better than we anticipated.
Nathan Briggs: I mean, we'll pay attention to what kind of like our core origination rates are. But just know that, you know, in some cases we will get payoffs, we won't renew loans, we'll get the cash, and then we'll redeploy that, you know, within the portfolio. So you don't necessarily will see net loan growth, so to speak. But it's just, you know, being replaced, you know, it's just assets being replaced by, by originations into our core businesses.
Mark.
Yes, I agree Alberto I would call it really steady.
Our SBA teams are very focused on looking at their portfolio, we've actually stepped up.
Their portfolio management monitoring west a couple of quarters well. It has been really steady we haven't seen any big jump any one area for their book either.
Where we are today the rate increases concern me because.
Nathan Briggs: But to answer your question, I mean, obviously we had, I think the number, the GDP number yesterday kind of explains and points, you know, to the fact that the economy has remained pretty healthy. We tend to be more cautious, our view is more cautious. You know, there's a lot of uncertainty out there, and, you know, we're tending to want to have a more cautious view of that. But so far, you know, pipelines remain healthy, you know, particularly on the commercial side.
All those small business owners are dealing with that reality, but so far it is.
Been pretty consistent.
Okay, great if I could just squeeze one last one in on just kind of how you guys are thinking about the reserve trajectory from here.
It sounds like growth is understandably slowing on the lending side of things.
You guys are obviously still operating from a position of strength relative to peers in terms of where your reserve stacks up I guess absent significant macro deterioration within the seasonal framework. How do you guys are kind of thinking about the trajectory of the reserve going forward.
Nathan Briggs: You know, our government guaranteed lending business, you know, is, you know, a bit slower compared to years past, but they're seeing, you know, a fair number of opportunities. So that remains I think, okay, given the rate environment, our leasing business, you know, has shown really, really good growth over the past year. Some of that is a catch up from, you know, supply chain issues that, you know, were happening earlier as people, you know, had put orders for equipment, but just couldn't get the equipment and therefore that, you know, kind of delay.
A couple of things I mean, the macro trajectory is certainly important.
But other factors that.
That are.
We see in the environment.
As I said earlier, there's a fair amount of uncertainty in the environment to give you. An example, certainly everybody knows and everybody is paying attention to office.
But really any other areas, where we're maybe it's not necessarily something that we are seeing but its something thats happening in the environment and not yet reflected in your historical or in your forecast. We can obviously use factors to adjust for that so just keep that in mind.
Nathan Briggs: So we're catching up with that, which is, you know, helping in terms of growth. But all in all, I think the, the guidance provided, and they should give you a good picture in terms of kind of what we're seeing at this point in time. Yep, that makes sense. And if I could just ask lastly on credit quality, you know, obviously some continued normalization in charge of this quarter. Curious how much of that was driven by SBC and just generally kind of what you're seeing at SBC credit quality these days.
Second I think.
Just.
I think you nailed in terms of kind of how we think about provisioning in the reserve.
Just keep two things in mind one is.
Nathan Briggs: I think that's, you know, just increasingly a topic of concern across investors just given the rate shocks that have impacted. Yeah, I mean, so two comments and I'll let Mark jump in, but two comments generally speak. I mean, all of the charge of that we saw this quarter, just think about it's just basically, you know, taking charges against reserves that we establish, you know, in prior period. So it's just the realization of, you know, the asset got worked out, you know, and essentially we just took the charge accordingly.
You, obviously are going to see a higher reserve overall.
With growth in the portfolio. So that's one thing and then the other thing.
Obviously, we have loans that that where we took marks on as a result of the inland transaction. We are active in wanting to move those loans out.
So you may see.
Charge offs related to that come through we will make sure to two basically.
Nathan Briggs: And that's just normal course of business. I don't think SBC was any different this past quarter as far as charge offs. That portfolio, as we've stated, you know, in prior calls, that portfolio has, you know, behaved fairly well above, you know, expectations given the environment borrowers there have, you know, I think prepared and anticipated for rate increases and have absorbed those, you know, I think probably looking back better than we anticipated.
Show those separate so that you guys are aware of of what we're doing there but.
In the course of the year, we will look to work out out of situations that have been identified so you might see an uptick in charge offs on any given quarter related to that but outside of that.
I think it's consistent with.
What the guidance that we provided in the past.
Okay, Great I appreciate all the color can you guys.
Any questions.
Thank you. Thank you.
As a reminder, that star followed by one telephone keypad to ask a question today.
Nathan Briggs: Mark? Yeah, I agree, Alberto. I would call it really steady. The RSBA teams are very focused on looking at their portfolio. They've actually stepped up their portfolio management monitoring in the last couple of quarters, but it has been really steady. We haven't seen in a big jump, any one area for their book either as of where we are today. The rate increases concern me because all those small business owners are dealing with that reality, but so far it's been pretty consistent.
The next question comes from Brian Martin from Janney. Brian. Please go ahead. Your line is open.
Hey, good morning, everyone.
Good morning, Brian morning, Brian.
Okay, maybe just one quick question on.
Maybe I think it was time that talked about the SBA Alberto just it sounds like maybe the revenues are down a little bit in the quarter next quarter.
More a function of it sounds like the <unk>.
Margins are holding up and is that maybe just a little less sale activity around kind of how you're thinking broadly about that decline, what's what's driving a little bit lower outlook for next quarter.
Yeah.
Nathan Briggs: Okay, great. If I could just squeeze one last one in on just kind of how you guys are thinking about the reserves trajectory from here. You know, it sounds like, you know, growth is understandably slowing on the lending side of things. You guys are obviously still operating from a position of strength relative to peers in terms of where your reserve stacks up, but I guess just absent, you know, significant macro deterioration within the Cecil framework.
For next quarter I mean, obviously there is the government shutdown as a risk for one thing as a caveat I mean.
Borrowers are interest rates are high so ours that borrow.
Hours that will qualify right they have to be a little bit stronger just given the rate environment in the loan yields that theyre going to have and then just given the.
Nathan Briggs: How you guys are kind of thinking about the trajectory of the reserve going forward. I, I, a couple of things to mean that the macro trajectory is, is certainly important. But other, you know, factors that, you know, we, that are kind of we see in the environment. I mean, as I said earlier, there's a fair amount of uncertainty in the environment to give you an example, you know, certainly everybody knows and everybody's paying attention to office.
The mix and the appetite out there right now we just think the market is not giving us the same premiums that we were getting before.
And as a result, we've just kind of given a little bit lower guidance here.
Okay, So kind of a combination of both volume and pricing is in the <unk>.
Yes, I mean, theres always again things can pick up I mean pipeline looks pretty decent right now, but it's a little bit slower.
As we speak.
Yes.
Keep in mind, Brian and it's hard to do on on and we actually don't manage the business that way, it's hard to do this on a quarter by quarter basis. So just try to look at it more.
Nathan Briggs: But, you know, really any other areas were, were, you know, maybe it's not necessarily something that you're seeing, but it's something that's happening in the environment and not yet reflected in your historical or in your forecast, you know, we can obviously use factors to adjust for that. So just keep that in mind. Second, I think, just, you know, I think you nailed in terms of, you know, kind of how we think about provisioning and the reserve, just keep two things in mind.
Kind of like over a 12 month period just because.
For example, this quarter the third quarter.
We just had a different mix and the assets that we sold compared to the second quarter. So that mix of assets to give you. An example, if we have.
On any given quarter we have.
More USDA then we had the prior quarter or last USDA that may impact those loans command, a significantly higher premium relative to SBA because they have certain characteristics in them that you don't have certain protections for investors that.
Nathan Briggs: One is, you know, any, you obviously are going to see a higher, you know, reserve overall, you know, with growth in the portfolio. So that's one thing. And then the other thing. Obviously, we have loans that, that where we took marks on as a result of the inland transaction, we are active and wanting to, you know, move those loans out. So you may see, you know, you know, charge ups related to that come through, we will make sure to to basically, you know, show those separate so that you guys are aware of of what we're doing there.
Give them the incentive to.
Be able to pay more for those assets and that can impact on any given quarter.
Mix changes, we sell more 10 year relative to 15 year 20 year that also has implications. So just just keep that in mind the mix on any given quarter is going to can potentially impact margins and dollars as well.
Nathan Briggs: But, you know, in the in the course of the year, we will look to, you know, work out out of situations that have been identified. So you might see enough thick and charge ups on any given quarter related to that. But outside of that, you know, it's, I think it's consistent with, you know, what the guidance that we provide in the past. Okay. Great. I appreciate all the color. Can you guys taking the questions? Thank you. Thank you, Nate. Thank you.
I think the last thing I would say too is fully funded loans. It matters right. So some loans are in the pipeline, but haven't fully funded so that means we can't really go out and sell them in the marketplace. So there is just a timing delay as Alberto mentioned, we can't.
Specifically hit in one quarter for a number if it doesn't fund and sell this quarter it'll fund and sell next quarter.
Yes.
I apologize if I've, leading going lower I, just didnt understand im just trying to understand rate or volume and it was something you guys were thinking about more so than another but I understand the the annual look.
Brian Martin: As a reminder, that staff of both one on your telephone keypad to ask a question today. The next question comes from Brian Martin from Johnny. Brian, please go ahead. Your line is open. Hey, good morning, everyone. Morning, Brian.
Guys I, suggesting so I appreciate that.
As far as the maybe one for Mark just on the maybe you mentioned this if I missed it but just where the criticized and classified levels are.
Brian Martin: Say, maybe just, you know, one quick question on maybe I think it was time to talk about the SBA or Alberto. It just, it sounds like maybe the revenues are down a little bit in the quarter, next quarter. Is that more a function of, it sounds like the margins were holding up. I mean, is that maybe just a little less sale activity or kind of how are you thinking broadly about, you know, that decline?
With the quarter closed here I mean with a I thought you said the delinquencies were up maybe I misheard, but criticized and classifieds were they up in the quarter with with the transaction.
They were up I would say slightly in the quarter.
Our criticized actually came down a little bit because we had a.
Brian Martin: What's driving a little bit lower, you know, I'll look for next quarter. I mean, obviously, there's, you know, the government shut down as a risk for one thing as a caveat. I mean, you know, we're borrowers are, you know, interest rates are high. So hours of hours that will qualify, right, they have to be a little bit stronger just given the rate environment and the loan yields that they're going to have.
The resolution of a large criticized asset during the quarter.
Yes.
The transition of some of the inland credits, which again, we knew which credits were coming in that we're going to be criticized or classified.
Does it increase yes.
Okay. So an increase in just to just to criticize.
Is it both.
It was criticized was slightly down because of the resolution of a byline legacy criticized asset.
Brian Martin: And then, you know, just given the mix and the appetite out there right now, we just think, you know, the market's not giving us the same premiums that we were getting before. And as a result, we've just kind of given a little bit lower guidance. Yeah, I mean, there's always, you know, again, things can pick up. I mean, pipeline looks pretty decent right now, but it's a little bit slower, you know, just as we speak.
I would say classified was pretty was pretty well.
Slight increase but the NPL increase overall was wasn't that much different from where we were the previous quarter. In other words, we do have some resolutions of our criticized and classified assets in Npls from the <unk> book, but obviously, we had increases come back in from the inland book.
Brian Martin: Yeah, just keep in mind, Brian, and it's hard to do on, and we actually don't manage the business that way. It's hard to do this on a quarter by quarter basis. So just try to look at it more, you know, kind of like over a 12 month period, just because, you know, like, for example, this quarter, the third quarter, we just had a different mix in the assets that we sold compared to the second quarter.
Yes, okay understood.
Okay, and then maybe just one.
As far as what the loans repricing.
What level of loans, you guys have a fixed rate basis that are repricing maybe over the next.
Brian Martin: So that mix of assets, you know, to give you an example, if we have on any given quarter, if we have, you know, more USDA, then we had the prior quarter or less USDA, that may impact those loans, command a significant higher premium relative to SBA because they have certain characteristics in them that you don't have certain protections for investors that, you know, give them the incentive to be able to pay more for those assets. And that can impact on any given quarter.
12 months to 18 months.
Some color on that and just kind of what new.
New origination yields are maybe thats in the deck and I missed it or they can look at that.
So.
Let's.
Maybe come back and we can follow up if you don't have a target yet.
Maybe we can follow up with you, but I mean, it's yes, no we're asset sensitive the loan mix is kind of 50 ish percent fixed to floating.
I would say that.
The average life is three years, so a third a third a third.
But.
Yes.
Yes, hi.
I guess with inland now its 42% fixed and then it just really depends on as Alberto mentioned right. Some of the inland portfolio pays off and thats going to get repriced or if it refinances.
Brian Martin: You know, the mix changes, you know, we sell more 10 year route up to 15 year or 20 year, that also has implications. So just just keep that in mind. The mix on any given quarter is going to, you know, can potentially impact, you know, margins and dollars as well. I think the last thing I would say to fully funded loans, it matters, right? So some loans are in the pipeline, but haven't fully funded.
But we're still primarily asset floating rate.
But just as a rule of thumb Bryan to kind of <unk>.
As you think through this.
If you take what Tom just said.
42%, it's fix I mean these are not <unk>.
Brian Martin: So that means we can't really go out and sell them in the marketplace. So there's just a timing delay. As Alberto mentioned, we can't, you know, specifically hit one quarter for a number. If it doesn't fund and sell this quarter, it'll fund and sell next quarter. Yeah, and if I apologize if I was leading to it was going lower, I just didn't understand it. Just was trying to understand rate or volume. There was something you guys were thinking about more so than another, but I understand the annual look as you guys are suggesting, so I appreciate that.
30 year 15 year residential mortgages. These are essentially kind of like three and a half year assets. So just assume.
That that 42% is the fact that we re pricing over the course of a three and a half year life and that kind of just gives you a sense of kind of how much of that fixed rate portfolio.
We're going to get to see being repriced on a on a yearly basis I mean, it doesn't deviate too far from that.
Mark Fucinato: As far as the maybe one from Mark, just on the, maybe you mentioned this if I missed it, but just where the criticized and classified levels are, you know, with, with the quarter close. I mean, were they, I thought you said that the linkities were up, maybe I missed that or criticize and classified, were they up in the quarter with the transaction. They were up, I would say slightly in the quarter are criticized actually came down a little bit because we had a resolution of a large criticized asset during the quarter.
Okay. That's helpful and just the last last one was on the on M&A given with this one being that I know, it's quick to turn the page, but just as far as what opportunities you're seeing today I know you've talked about the inorganic opportunities that are out there but.
How does the.
Outlook look on the M&A side as far as.
Activity or just cause you guys are having today.
It seems like the merger math is obviously, a little bit more difficult to get some things done today, but.
Yes, I think we remain open to that I think you hit the nail I think you hit the nail on the head, though I think that.
Mark Fucinato: But yes, the transition of some of the inland credits, which again, we knew which credits were coming in that were going to be criticized or classified resulted in an increase. Yes. Okay, so an increase in just a, just a criticize or is it bold? It was criticized slightly down because of a resolution of a byline legacy, a criticized asset. I would say classified was pretty, was pretty well just a slight increase, but the NPL increase overall was wasn't that much different from where we were the previous quarter. In other words, we did have some resolutions of our criticized and classified assets and NPLs from the byline book. But obviously we had increases come back in from the inland. Yeah, okay, understood.
The channel the math for transactions is challenging given the.
For some folks that that would be potential sellers.
The issue is just the amount of capital that remains after you factor in the <unk>.
The interest rate marks.
Both on the loan portfolio and on the investment portfolio.
I mean to be completely transparent that's the biggest impediment.
Today.
Okay. So alright.
I appreciate you guys taking the questions.
Nice quarter.
Thank you Brian Thanks, Brian.
Brian Martin: Okay, and then maybe just one, as far as the loans repricing, what level of loans do you guys have, you know, a fixed rate basis that are repricing, maybe over the next, you know, 12 to 18 months, do you have some, some color on that and just kind of what new, what, what new origination yields are, maybe that's in the data and then I miss it up, but I can look if I'm trying to dismiss that. So, um, what, maybe come back, we can follow up, I mean, we can follow up with you, but I mean, it's, you know, we're asses sensitive, the loan mix is kind of 50% fixed, floating, you know, I would say that, you know, it's, the average life is three years, so a third, a third and a third.
Yes.
Thank you for your questions today, I will now turn the call back to Mr. Alberto <unk> for any closing remarks.
Yes. Thank you operator, and thank you all for joining the call today and for your interest in <unk> and we look forward to speaking to you again in early 2024.
And happy Halloween to all of you. Thank you.
This concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
[music].
Yeah.
Brian Martin: But, um, you know, it's, you know, I guess with the inland now it's 42% fixed, and then it just really depends on, as Albert will mention, right, if he and some of the inland portfolio pays off, and that's going to get repriced or if it refinances, but we're still primarily at floating rate. But just as a rule of thumb, Brian, to kind of, you know, so that you can, as you think through this, if you take what Tom just said, if you, you know, 42% is fixed, I mean, these are not, you know, 30 year or 15 year residential mortgages, these are essentially kind of like three and a half year assets, so just assume, you know, that that 42% is effectively repricing over the course of a three and a half year life.
Brian Martin: And that kind of just gives you a sense of, you know, kind of how much of that fixed rate portfolio, you know, we're going to get to see being repriced on a yearly basis. I mean, it doesn't deviate too far from that. Okay, no, that's helpful.
Roberto Herencia: And just the last last one was on the, on M&A given with this one being done. I know it's quick to turn the page, but just as far as what opportunities you're seeing today, I know you talked about the, you know, inorganic opportunities that are out there, but, you know, how does the, you know, the outlook that look on the M&A side as far as, you know, I guess activity or just, you know, calls you guys are having today.
Roberto Herencia: And simply submerge your mass is obviously a little bit more difficult to get something done today, but. Yeah, I think we, we remain open to that. I think you hit the nail. I think you hit the nail in the head, though. I think the, the channel, the math for transactions is challenging given the, for some folks that that would be potential sellers. I, you know, the issue is just the amount of capital that remains after you factor in the interest rate marks, you know, both on the loan portfolio and on the investment portfolio. That's, I mean, to be completely transparent, that's the biggest impediment today.
Brian Martin: Okay, so all right, I appreciate you guys taking the questions. Nice quarter. Thank you, Brian. Thanks, Brian. Thank you for your questions today.
Alberto Paracchini: Oh, now it's on the cool back to Mr. Alberto Paracchini for any closing remarks. Yes, thank you, operator, and thank you all for joining the call today and for your interest in Byline. And we look for who are to speaking to you again in early 2020 for and happy Halloween to all of you. Thank you.
Adam: This concludes today's call. Thank you very much for your attendance.
Unknown Executive: You may now disconnect your lines.