Q3 2024 Byline Bancorp Inc Earnings Call
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Good morning, and welcome to Byline Bancorp third quarter 2024 earnings call. My name is Kate and I will be your conference operator today.
All 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. The star followed by the number one on your telephone if you would like to withdraw your question Press Star and two if you were listening to be a 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 call is being recorded.
Speaker Change: At this time I would like to introduce Brooks Ronnie head of Investor Relations for Byline Bancorp to begin the conference call.
Brooks Ronnie: Thank you Kate good morning, everyone and welcome to Byline Bancorp's third quarter 2024 earnings Conference call.
Of course with regulation FD. This call is being recorded and is available via webcast on our Investor Relations website, along with our earnings release and corresponding presentation slides.
Brooks Ronnie: As part of today's call management may make certain statements that constitute projections beliefs or other forward looking statements regarding future events or the future financial performance of the company.
We caution that such statements are subject to certain risks uncertainties and other factors that could cause actual results to differ materially from those discussed the company's risk factors are disclosed and discussed in our SEC filings.
Brooks Ronnie: In addition, our remarks and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures reckon.
Brooks Ronnie: A reconciliation for each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release.
Brooks Ronnie: For additional information about risks and uncertainties. Please see the forward looking statements and non-GAAP financial measures disclosures in the earnings release as.
Speaker Change: As a reminder for investors this quarter, we plan on attending the Hubby financial services Conference and the Piper Sandler East Coast Conference with that I would now like to turn the conference call over to Alberto <unk> President of finally and thankfully.
Alberto: Thank you Brooks good morning, everyone and thanks for joining us today to go over our third quarter results with me. This morning are Roberto <unk>, our chairman and CEO, Tom <unk>, our CFO and Mark <unk>, our Chief Credit Officer.
Alberto: Before we got into a review of our results for the quarter I would like to pass the call onto Roberto for his comments Roberto.
Alberto: Okay.
Roberto: Thank you Alberto and good morning to all.
Roberto: Our performance this quarter was once again solid across the board.
Roberto: With strong profitability metrics.
Roberto: Several of which continue through ranked top quartile among our peer group.
Roberto: We're proud to continue to deliver strong results.
Showcase the consistency and resiliency of the franchise.
Roberto: Our business model.
Roberto: We believe the marketplace in time.
Roberto: We were awarded a franchise with these attributes and prospects with a premium value valuation.
Roberto: We're also excited about the announced merger with first security, we tell Bert Tony will touch on in a minute.
Roberto: This is yet another disciplined merger with a quality group of shareholders and within the merger metrics.
Roberto: We have had in place since we started dialing back in 2013.
Roberto: We continue to feel excited and optimistic about our ability to build out the pre eminent commercial bank in Chicago.
Roberto: The Chicago banking market continues to be our kind of market.
Roberto: Rich with opportunities to gain market share in the spaces that we know well and punch above our weight.
As we've said before we're keenly focused on being home to the best commercial banking talent in town.
Roberto: We recently were recognized with two new workplace awards.
Roberto: Chicago is best workplaces for 2024.
Roberto: Ranking violin is one of the top 25 workplaces.
In this city by the Chicago Sun Times, and best Workplaces in Illinois by Best companies Group, and the Illinois Society for Human Resources management.
Roberto: These awards are in addition to the award from U S News and World report.
Roberto: As one of the best companies to work for in the Midwest that we received earlier this year.
Roberto: And we shared on our last call.
Roberto: We're thrilled and humbled at the same time to receive these awards and recognition in celebration of our people and the culture, we have built at violin.
Roberto: Awards, which hurt significantly driven by employee feedback.
Roberto: Demonstrate that the investments, we're making in employee development inclusion.
Roberto: Incentive compensation and benefits.
Roberto: Are making an impact indeed.
Speaker Change: With that I'm delighted to pass the call back to Alberto.
Alberto: Excellent. Thank you Roberto.
Alberto: In terms of the agenda. This morning, I will start with some comments and highlights for the quarter, Tom will follow and cover the financial results in more detail and I'll come back to wrap up before opening the call up for questions.
Alberto: As a reminder, you can find the deck were using for todays call on our website and as always please refer to the disclaimer at the front.
Alberto: Let me start by saying that we are proud of our overall performance and results for the quarter. Aside from the continued strong financial performance of the company, which I will get to shortly we also announced the transaction with first security Bancorp here in Chicago, the transaction will add approximately $355 million in ASP.
Alberto: <unk> $201 million in loans, and importantly, $323 million and deposits of which we consider 96% to be core.
Alberto: We believe the transaction is financially attractive as reflected by minimal tangible book value dilution, a short earn back period, EPS accretion and return in excess of our cost of capital. Furthermore, the transaction is in line with our track record of executing franchise enhancing M&A.
Are these that are consistent with our strategy of becoming the preeminent commercial bank in Chicago I'd like to take this opportunity to welcome first security employees and shareholders that are on the call. This morning, and we look forward to completing the transaction in the first half of 2025.
Alberto: Moving onto our results starting on page three for the third quarter, we reported net income of $33 million or <unk> 69 per diluted share on revenue of $102 million. Excluding transaction related charges net income was $30 7 million or <unk> 70 per diluted share.
Alberto: Turning to profitability and return metrics. They also came in strong with a narrow way of 129 basis points and our return on tangible common equity.
Up 14 five.
Alberto: 5%.
Alberto: The lower Aro TCE this quarter compared to last quarter was driven not by declining profitability, but rather by growth in our capital base stemming from retained earnings and OCI recapture.
Alberto: Our pre tax preparation income set a new record for the company at 47 5 million, resulting in pre tax preparation ROA of 202 basis points, marking the eighth consecutive quarter of that metric exceeding 200 basis points.
Total revenue increased to $102 million up to $1 $5 million for the quarter. The increase was driven by higher net interest income stemming from higher average, earning assets, which offset a decline in the margin as expected noninterest income increased to $14 4 million driven by a lower fair value Mark on our search.
Missing asset and increases in other fees expenses, excluding transaction related charges came in at $53 9 million and continue to remain well managed for the quarter. The ratio of operating expenses adjusted for transaction charges to average assets declined five basis points.
Alberto: 229% from the prior quarter.
Alberto: As far as the margin is concerned which Tom will cover in more detail. Shortly we saw a 10 basis point decline to 389% for the quarter as expected that said excluding accretion the margin comprised by only six basis points, notwithstanding earning asset growth drove net interest income.
Alberto: Higher for the quarter lastly, our efficiency ratio stood at 52% remaining stable on a quarter on quarter basis.
Tom: Moving onto the balance sheet loans remain relatively flat at $6 9 billion higher payoffs of acquired loans towards the latter part of the quarter impacted end of period balances. We made good progress on reducing noncore loans in the portfolio coming from prior acquisitions, you'll notice that we carry the higher cash balance.
Tom: At quarter end, which bodes well going forward as we deploy that cash into loans.
Tom: <unk> average balances grew modestly modestly for the quarter.
Tom: We anticipate loan growth for the rest of the year to be in the mid single digit range business development activity remained healthy driven by commercial and leasing teams and our government guaranteed lending business also had a good quarter with commitments closed totaling $114 million.
Tom: Shifting on to the liability side total deposits stood at $7 5 billion and grew by $151 million or eight 2% annualized from the second quarter in prior calls we've discussed our desire to bring down the loan to deposit ratio plus or minus a target level of 90% we made.
Tom: Good progress on that front with the ratio declining to 92% from the second quarter, and it's down 319 basis points on a year on year basis.
Tom: Asset quality remained stable from last quarter with Npls, excluding government guaranteed balances increasing three basis points to 86 basis points at the end of the quarter charge offs declined by $1 million from last quarter to $8 5 million or <unk> 49 basis points and include approximately $2 $4 million.
Tom: <unk> PCV loans, excluding that impact charge offs were $6 million or <unk> 30, 35 basis points for the quarter. The allowance remains strong and ended the quarter at 144% of total loans.
Having and maintaining strong capital levels gives us the ability to grow organically invest back into the business and provides us with flexibility to take advantage of opportunities our capital ratio strengthened further this quarter with CET, one and total capital coming in at 11, 35% and 14, 4% respect.
Secondly, with a TCE ratio of 972% as of quarter end, we remain above our targeted operating range of 8% to 9%.
Tom: Lastly, we also continued to steadily grow tangible book value per share.
Tom: Summary, we delivered strong results in the quarter and remain well positioned to continue to grow the business going forward. We're in the middle of our strategic planning process and I can't recall, a time when the opportunity set in front of US has been more attractive with that I'd like to turn over the call to Tom who will provide you with more detail on our results.
Tom: Thank you Alberto and good morning, everyone. Despite.
Tom: Despite the changing interest rate environment, we had strong results for the quarter driven by higher net interest income fee revenue growth and well controlled expenses.
Tom: As a result, we grew capital nicely this quarter.
Tom: Which resulted in higher TCE tangible book value CET, one and all other regulatory capital ratios.
Speaker Change: All in all this was another great quarter for Biolife.
Speaker Change: With that we can start on slide four with the loan and lease portfolio.
Speaker Change: Total loans stood at $6 9 billion at September 30th flat from the prior quarter.
Speaker Change: We originated $212 million in new loans, and payoffs were higher for the quarter coming in at $267 million up $32 million linked quarter.
Speaker Change: Payoff activity increase largely by run off in non core portfolio, which was offset by growth in new business relationships.
Speaker Change: Line utilization grew for the fifth consecutive quarter up 1% to 59%.
Speaker Change: As we look ahead for the remainder of the year pipelines are stronger and we expect loan growth to continue in the mid single digits for 2025.
Speaker Change: Turning to slide five.
Total deposits increased to seven 5 billion up eight 2% annualized from the second quarter.
Speaker Change: The increase in deposits was driven by growth in commercial money market accounts and consumer time deposits.
Speaker Change: Noninterest bearing demand deposits accounted for 23% of total deposits down slightly from Q2, primarily driven by commercial client needs.
Speaker Change: The mix was stable after accounting for seasonal customer activities for the quarter.
Speaker Change: We are pleased with our loan deposit ratio results, which decreased.
Speaker Change: 319 basis points from a year ago.
Speaker Change: Turning to slide six.
Speaker Change: Net interest income was $87 5 million for Q3 up 1% from the prior quarter higher than guidance, primarily due to increases in interest income offset by higher interest expense on deposits.
Speaker Change: The NIM for the quarter was 388% down 10 basis points linked quarter, driven by higher cash balances and lower accretion.
Depending on the fed rate path going forward, we expect net interest income for Q4, and the $85 to $87 million range and we continue to focus on stable to growing net interest income.
Speaker Change: Turning to slide seven.
Speaker Change: Non interest expense income totaled $14 4 million in the third quarter, which was up 12% linked quarter, primarily driven by the.
The change in fair value of equity Securities and increase in both our wealth management and customer swap businesses.
Speaker Change: Volume of government guaranteed loans sold was higher compared to Q2. The average premium was nine 7% for Q3 lower than the second quarter, primarily due to the mix of loans sold.
Speaker Change: We expect gain on sale income in the $5 million to $6 million range for Q4.
Speaker Change: Turning to slide eight.
Speaker Change: Our non interest expense remained well managed and came in at $54 3 million for the third quarter up 2% from the prior quarter. The uptick in expenses was mainly due to higher salaries employee benefits and acquisition costs.
Speaker Change: Disciplined on expense management remains evident as noted by our track record of improving our expenses to average assets to a record low 231% as well as consistently maintain an efficiency ratio in the low fifties.
Speaker Change: As we look ahead, we expect noninterest expense to increase in the fourth quarter, mainly due to onetime costs related to investments in our digital banking platform and seasonality in our advertising spend.
Speaker Change: For Q4, we expect expenses between 55% and $57 million.
Speaker Change: And for 2025, we expect our expenses to range in the 54% to $57 million.
Speaker Change: Area.
Speaker Change: Turning to slide nine.
Speaker Change: Provision expenses for the quarter came at a sub $5 million up from $6 million in Q2.
Primarily attributed to increases related to individually assessed loans in the government guaranteed loan portfolio.
Speaker Change: The ACL at the end of Q3 was $98 4 million down 1% from the end of the prior quarter.
Speaker Change: Net charge offs trended down by 11% this quarter to $8 5 million compared to $9 $5 million in the previous quarter.
Npls to total loans increased by 90 basis points to one 2% in Q3, excluding government guaranteed loans Npls stood at 86 basis points up three basis points from the previous quarter and.
Speaker Change: And NPA to total assets stood at 75 basis points in Q3.
Speaker Change: Due to our consistent track record of <unk>.
Delivering pretax pre provision above 2%, we are well positioned to absorb higher credit costs, while maintaining strong financial results.
Speaker Change: Turning to slide 10.
Speaker Change: During the quarter, our cash position stood at approximately $453 million.
Speaker Change: Which decreased $278 million from the second quarter, primarily due to the repayment of the term facility trade.
Our liquidity remains strong which positions us well to fund future business development.
Speaker Change: Moving on to capital on Slide 11.
Our capital levels continue to grow during the quarter. We are very pleased to see that CET, one now exceeds 11% and stood at 11, 35% as of quarter end, which is ahead of our schedule. After the inland transactions. Our total capital increased by 55 basis points linked quarter to $14 41 per <unk>.
Additionally, TCE to Ta ratio stood at 972% up 90 basis points linked quarter.
Speaker Change: We remain positive about the opportunities ahead, as we execute on our strategy and enhance our franchise value with that Alberto back to you.
Thank you Tom so to wrap up slide 12 does not change very much and gives you a summary of what we think about when running the business.
Speaker Change: Last quarter, we made excellent progress across all of the category categories listed here, we continued to grow our commercial franchise.
Alberto: We further bolstered the strength of our balance sheet, we invested in the business and we announced an attractive acquisition transaction consistent with our strategy and delivered strong financial performance.
Alberto: While we were pleased with our results for the quarter, we remain optimistic about our ability to continue to execute for customers and deliver results for our stockholders I would like to thank all our employees for their hard work and the contributions they make on a daily basis to our organization with that operator, let's open the call up for questions.
Alberto: Absolutely.
Speaker Change: We'll now begin the question and answer period.
Speaker Change: I'd like to ask a question you may do so by pressing the star followed by the number one on your telephone.
To withdraw your question you may do so by pressing star and Jill.
As a reminder, if you are listening via speaker phone. Please lift your handset prior to asking your question again to ask a question you may do so by pressing the star followed by the number one on your telephone keypad.
Speaker Change: The first question will come from the line of Nate race with Piper Sandler.
Your line is now open.
Speaker Change: Hey, guys. Good morning, hope you're doing well.
Speaker Change: Coordinator.
Nate race: Alberto I was wondering if you could just expand on your comments just in terms of your enthusiasm and excitement coming out of the strategic planning process heading into next year curious if you could just touch on some of the aspects of the business that you are most excited about on a organic basis and curious if some of those comments also tied into some optimism on the.
Speaker Change: <unk> as well.
Speaker Change: I think the.
Speaker Change: The answer to the latter point is yes mate.
Speaker Change: Obviously, we announced that transaction this quarter and I think still we see opportunities for.
Speaker Change: Continue continued opportunities to do the types of transactions that are similar to the one that we just announced so the answer to a latter point is yes on the on the first point.
Speaker Change: Look I.
Speaker Change: We look ahead and we look at the position in the market that we have today.
Speaker Change: Obviously today the largest public.
Speaker Change: Publicly traded commercial bank in the market under $10 billion.
Speaker Change: When we ultimately cross $10 billion.
Speaker Change: We will be the largest.
Speaker Change: In the market at our size same characteristics. So commercial bank publicly traded it with excellent capabilities between 10 and $50 billion.
Speaker Change: And that just presents excellent runway for us to continue to execute the same strategy that we've been focused on executing over the last.
Speaker Change: 11 years, so Roberto touched on our ability to attract talent.
Speaker Change: We continue to see good opportunities to attract banking talent to our platform to continue to serve customers well and.
I'm, probably more optimistic today than I was at the time of the recapitalization of the company.
Speaker Change: Back in 2013, so hopefully that gives you color to your answer to your question I'm sorry.
Speaker Change: Yes very helpful.
Speaker Change: And.
Speaker Change: Speaking of $10 million, just curious if you could maybe frame up in terms of kind of where you guys are from a infrastructure compliance headcount perspective et cetera in terms of prepare to cross that threshold is at.
80%, 90% just curious if you can kind of frame that up for us.
Speaker Change: Yes.
Speaker Change: Just also just to touch also on kind of like the timeline Nate. So this is something that is not.
Speaker Change: A new thing for us we've been preparing for this over time frankly, since we were a much smaller company.
Speaker Change: That being said there will be investments primarily in people.
As we get close to crossing and as we prepare to ultimately cross the $10 billion pipeline in terms of percentages.
Speaker Change: Aye.
Speaker Change: It's hard for me to kind of say that I think we want to make sure that.
Speaker Change: Particularly when it comes to areas and risk management and our control different control functions that we have the capabilities and more importantly, we have the staff in place with the expertise to be able to comfortably manage and meet heightened regulatory expectations.
Speaker Change: Patients.
Speaker Change: In terms of the timeline I think in the in the prior prior quarter I think somebody asked the question about when do you expect to cross.
Speaker Change: How has the potential how is M&A factoring into that and we just announced a an M&A transaction. So I think our view is still.
Speaker Change: That look ultimately this is this is something that organically potentially could happen between let's say the second half of 2025 through the first half of 2026, I think we have a lot of flexibility still.
Speaker Change: To manage that.
Speaker Change: Degree without having any negative impact on the business.
Speaker Change: So that could what that could mean as take plus or minus one or two quarters to that timeline. Obviously, if there were to be more M&A transactions take time.
Speaker Change: Still have to do diligence you have to go through an approval process, but I think at this point, it's fair to say that kind of range between.
Speaker Change: Second half of 2025 or kind of extending to the full year of 2026, I think it's probably a fair.
Speaker Change: A fair assessment at this point.
Speaker Change: Okay, that's very helpful.
Maybe one last one for Tom.
Speaker Change: I appreciate the guidance for <unk> does that include any additional fed rate cuts through the end of the year and just.
Speaker Change: Thinking about NII growth on the legacy.
Speaker Change: Buy online.
Speaker Change: Thesis for next year, assuming the fed maybe has more gradual.
Great.
Speaker Change: Cadence sure yes, thanks Nate.
Speaker Change: Obviously, the 50 basis point cut will have a little catch up going on here and I think that with some of the pressure we saw.
Speaker Change: Because of the CD book, so to speak, but we think that the NIM is stable and is growing at least at this point again subject to what the fed does here, but we also think just given our organic growth that we should actually be able to keep NII stable through the period.
Speaker Change: Okay, Great and then.
Speaker Change: Excluding the acquisition rate yes.
Speaker Change: Yes.
Speaker Change: Okay, and sorry, just one last clarifying question was.
Speaker Change: The expense guidance I think you mentioned 54 million to $57 million for next year was that excluding the deal.
Speaker Change: It is excluding the deal.
Speaker Change: Okay, Great I appreciate the color. Thanks, guys congrats on a great quarter.
Speaker Change: You bet. Thanks.
Speaker Change: The next question will come from the line of Damon Delmonte with <unk> W. Damon Your line is now open.
Damon Delmonte: Hey, good morning, guys. So everybody is doing well today.
Damon Delmonte: Just had a question regarding the loan growth outlook.
Damon Delmonte: Seems pretty positive as you go into 2025.
Have you seen.
Much change in behavior from the commercial real estate side of things with the initial rate cuts and maybe additional conversations with the expectation that rates can be coming lower.
Speaker Change: I guess good morning statement first and foremost thanks for thanks for the question.
Speaker Change: I think we need to see we need to see more and also.
Speaker Change: <unk>.
Short term rates coming down a bit certainly will help some.
Speaker Change: Had a backup in longer term rates.
Speaker Change: So that's going to that's going to impact some as well.
Speaker Change: As far as the.
Speaker Change: What we're seeing in our pipeline I can tell you that we are.
Speaker Change: Our pipeline in our commercial real estate pipeline is higher today than it was at any point over the course of the year.
Speaker Change: So far so that's certainly.
Speaker Change: An uptick I don't know that I would say that that is strictly rate driven I think rates would have to come down more so that at the margin you start seeing more call. It rate induced transactions I would keep a close eye on transaction activity, that's usually a good proxy.
Speaker Change: Both for originations and payoffs I think what we're seeing is <unk>.
Speaker Change: Insistent with what Youre seeing in the market, which is well capitalized sponsors have.
Speaker Change: The ability to take advantage of opportunities and they have access to capital.
US and other institutions are certainly in a position to lend.
Speaker Change: Those sponsors that the dollars that they need to execute their strategies and I think it's more driven by that then.
Speaker Change: Then by strictly rates are.
Speaker Change: <unk> cut rates 50 basis points and this is kind of where we are today.
Speaker Change: Got it okay. That's helpful. Thank you.
Speaker Change: And then with regards to two credit and specifically net charge offs. If we kind of look at the last couple of quarters.
Speaker Change: 50 basis points this quarter 56, the quarter before.
Would you kind of expect that trend to continue for a little bit longer or do you think you've kind of go back to the mid 30 level a bit more normalized.
Speaker Change: Yes, I think I would point you to keep paying attention I think we've talked about this in prior quarters keep paying attention to that PCB component because those are essentially acquired loans that we mark that now youre seeing flowing through charge offs, just because of the way the accounting works today.
Speaker Change: So keep paying attention, we're improving and added additional disclosure on the back for that so that you keep track of that if you exclude what was PCB this quarter as an example.
Speaker Change: That charge off rate is roughly in the 35 basis point range, which is consistent with what our rate has been.
Speaker Change: Historically over time.
Speaker Change: Great. That's helpful. Thank you.
Speaker Change: I guess, just lastly on capital management thoughts any updated update here you know TCE. We can do it is up to nine 7%, which is comfortably above your 8% to 9% target.
Speaker Change: The.
The pending transaction had two meaningful of an impact on capital level, So any near term thoughts on.
Speaker Change: The plant that excess capital.
Yes, I think the the.
Speaker Change: Guidance there Damon is consistent with what we've always said is look we're not.
If we don't have if we're generating excess capital as we are operating at a level. That's above what we think we need in the short to medium term then we'll look for ways whether it be.
Speaker Change: <unk>.
Speaker Change: Looking at our dividend over time, whether it's ultimately buybacks or like it was this quarter, we had an opportunity to.
Speaker Change: Act on an opportunity that presented itself in the market. We think it's a really attractive use of capital and we want to have the flexibility to do that and before all of those things.
<unk> ability to continue to support the growth in our business organically.
Speaker Change: But all that being said look if we are generating an operating for a period of time at a level of capital that is in excess of what we think we will need to deploy and can utilize.
Speaker Change: Effectively then we will look for ways to return that capital back to shareholders.
Got it great. Okay. That's all that I had thank you.
Speaker Change: Thank you. The next question will come from the line of Terry Mcevoy with Stephens Terry Your line is now open.
Terry Mcevoy: Thanks, Good morning, everyone and first off Alberto Thanks for expanding on the opportunity set being really attractive today I thought that was very insightful and I appreciate that.
Terry Mcevoy: A couple of questions when I look at the bottom of page four the originations down about a third quarter over quarter or was that being more selective pricing competition or just.
How the quarter shaped up and then as a follow up there Tom the mid single digit loan growth, how do payoffs come into play because they seem to be higher in Q3 for you and the industry overall.
Speaker Change: Yes Terry.
We're not we're still seeing good business development activity in terms of the pipelines.
Speaker Change: If you look at I mean, just looking at that chart. There are some quarters going back to like the third quarter of 2023.
Notice there were like at $311 million, then we dipped down to $2 41, I think theres just quarterly volatility some loans don't happen in one quarter, they bleed into the next quarter.
Speaker Change: So I think we're still seeing good activity there I'm not.
Speaker Change: We have any concerns.
Speaker Change: In that regard I think on the payoff side before I pass it over to Tom.
Speaker Change: When we announced the inland acquisition I think we mentioned at the time that.
Speaker Change: What we wanted to do was allow for some runoff in that portfolio and that would allow us to essentially redeploy those liabilities into our own lending businesses and this quarter. We saw some of that I think we like seeing that I think we want to do more of that so some of what.
Speaker Change: You saw there in terms of.
Pay offs or run off this quarter is driven by that and I would point out you also saw cash balances and Tom will Tom touched on it in his remarks as well cash balances were a little bit elevated at the end of the quarter, which actually bodes really well going forward because ultimately, we'll redeploy that cash over time.
Into our lending businesses so Tom.
Tom: Sure Yes.
Tom: I think as Alberto alluded to some of the inland loan payoffs, we had some syndication loans pay off so call that noncore lending so.
Tom: So we like that because we can redeploy those.
Tom: Funds into customer relationship stuff, but I think there's also been a little bit of a slowdown or at least to tap the brakes, just to see what happens with the elections and the outcome from that but generally the pipelines are very strong as Alberto alluded to you know the fourth quarter I think we've seen elevated pipelines, we will see what the pull through rate is but things look very good into the.
Tom: Future here for loan demand.
Tom: Hopefully that answers your question Terry.
Terry Mcevoy: Yes, Thanks, Tom and then.
Terry Mcevoy: Can you just talk about deposit market pricing your strategy as rates come down.
Interest bearing deposit costs up a bit more than I was modeling in the third quarter.
Terry Mcevoy: And where do you see kind of beta is heading as well.
Speaker Change: Sure. So I mean, our CD book is roughly five months just to put that in perspective. So we're going to have a little lag depending on what the fed does obviously, if they do 25 basis points is more gradual for us and that will be less painful, but when we have a 50 basis point cut.
Speaker Change: It's going to take a while for us to catch up on that on the CD front, but to answer your question about pricing the market definitely has reacted to the expectation and we've seen significantly the significant decline in the pricing of.
Speaker Change: What I would call new acquisition accounts.
Speaker Change: And we've also seen.
Just go back a book for re pricing soften up as well. So we expect things to move pretty swiftly here as it relates to pricing data declines.
Speaker Change: Most banks have some exception pricing and were in that 90% range on repricing on the exceptions.
Speaker Change: Consistent with the other areas other product suite, where we're kind of in line with the normal 30 or 40 basis betas.
Speaker Change: Gary if I could add to that just more more.
Speaker Change: More on a on a kind of.
Speaker Change: Approach to the business.
Speaker Change: <unk> a business standpoint, I think in prior calls we mentioned that we were very willing to.
At the margin.
Speaker Change: Incur higher funding costs, if we saw opportunities to add relationships at basically is that we wanted to do in the marketplace. We think the.
Speaker Change: The short term cost.
Speaker Change: Wing marginally higher funding costs for a period of time has more than offset by the long term benefit of.
Speaker Change: Growing relationships and the business the other thing is.
Speaker Change: Philosophically long run we want to run the business really with customer deposits.
Speaker Change: To fund loan growth with customer deposits, we want to do as much as we can to.
Speaker Change: Achieve that within reason, but in the long run that's our that's our strategy. That's our plan and I think for example, this quarter. We brought down I think we were down $51 $5 million in broker deposits. So that those balances keep coming down we actually replace that with.
Speaker Change: Customer deposits, which.
Speaker Change: Given for example, there is a notice on proposed rulemaking out there on broker deposits.
Those deposits can look more attractive, but if you factor in the effect of higher deposit insurance that could come through that as well as changes that could come stemming from that.
Speaker Change: That notice of proposed rulemaking, we think it's prudent to.
Speaker Change: Look to opportunities to continue to grow.
Speaker Change: Customer deposits in favor of other types of funding.
Speaker Change: Thanks for that and then just one quick one and I apologize. If this was in the release, but the $200 million of the BP SP I think matured in January did you take any actions given where rates are today.
Speaker Change: Will that.
Speaker Change: The off the balance sheet in January.
Speaker Change: It's off now Terry.
Speaker Change: When the fed cut rates the earnings rate is basically on top of the borrowing rate. So it doesn't make sense to hold the investment.
That's what I thought okay. Thanks for answering my questions.
Speaker Change: And that was why the cash decline for the quarter.
Speaker Change: Yeah perfect. Thank you.
Speaker Change: Thank you sure.
Speaker Change: The next question will come from the line of Brendan Nosal with hub group Brendan Your line is now open.
Brendan Nosal: Hey, good morning, guys hope you're doing well thanks for taking the questions.
Speaker Change: Good morning, Brian.
Brendan Nosal: Just as we kind of look ahead to the next year I mean, the profitability at the bank has been really fantastic for quite some time now like you said eight quarters of PPE and our ROA of about 2% do you think you can hold the line on that 2% number as we move across 25 sites.
Speaker Change: I think as Tom alluded to so look I think it's fair to say that most institutions in our and our size and certainly in that range between let's say $10 billion to $100 billion.
Speaker Change: I think what Youre seeing is institutions are trying to reprice liabilities in anticipation of the fact that were seem to be headed to a rate easing cycle of some degree here.
And there is going to be a period of adjustment.
Speaker Change: Brendan so depending on the tenor of your CD book, you're trying to.
Speaker Change: Youre going to write that book is going to lag a little bit, but essentially youre going to youre going to come back to balance at which point the margin your margin should stabilize.
Speaker Change: And then essentially reset a new base and grow from there I think what we've said is.
Speaker Change: And Thomas touched on in terms of kind of the margin guidance.
Speaker Change: But really the focus on net interest income and I think that's driven by the fact that look to a degree like we saw this quarter, where the margin compressed a little bit, but we were able to offset it with earning asset growth and that drives net interest income higher.
Speaker Change: I think we could to answer your question could we see a quarter or two where we're kind of adjusting.
Speaker Change: In other words, allowing the lag and those Cds to reprice.
Speaker Change: Can we see a dip in the margin.
Speaker Change: Call it consistent with what we saw this quarter that could certainly happen hopefully we can drive net interest income higher but at some point, we should be back.
Speaker Change: Or we should be at levels that are consistent with.
The level of profitability that you alluded to in your question.
Speaker Change: That answers that answers the question.
Speaker Change: Yes.
Speaker Change: <unk> helpful timing on the cadence in the areas that are driving that.
Speaker Change: Okay.
Speaker Change: Maybe another one from me.
Speaker Change: At others that have reported recently with SBA portfolios and it looks like a fair bit of stress in some of their books. So it doesn't seem like you saw too.
Speaker Change: Too much in your own portfolio. This quarter saw the the allowance coverage on the guaranteed piece up a bit quarter over quarter.
Speaker Change: Kind of curious.
Speaker Change: What stress youre seeing in.
Speaker Change: In that book is at this moment.
Speaker Change: Well I think we've maybe we've always been cautious, particularly coming out of the pandemic brand then on that portfolio certainly we have a view.
Speaker Change: That portfolio is a higher risk portfolio.
Speaker Change: Also our higher return portfolio I think our view has always been balanced and that risk adjusted returns in that business are attractive. So we like that business very much in that context.
Speaker Change: The other thing I would say as you know we have been surprised we still are somewhat surprise in the sense that we were we would expect or we would have expect that stress in that portfolio too to really have originated shortly after kind of the main effects on the pad.
<unk> just simply on the basis of the resumption of business for a lot of these borrowers and then to the fact that the support the direct support that either the government was provided or some of the programs that that small borrowers could take advantage of we're going to seize we didn't see that.
<unk>.
Speaker Change: But what we are seeing down is more normalization on that portfolio are we seeing stress, yes, but I think our view has been we're well prepared up that we took the position that that we would try to anticipate it to the best that we could and I think we've.
I think thats, what what we've done so.
Speaker Change: Obviously, we brought up our reserves, we have a view of <unk>.
Speaker Change: Also the reserves that that we need to maintain and operate within that business.
Speaker Change: Fantastic. Thank you for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Wonder if you would like to ask a question you may do so by pressing the star followed by the one on your telephone keypad.
Speaker Change: To ask a question. It is star followed by one on your telephone keypad.
Speaker Change: Next question will come from the line of Brian Martin with Janney, Brian. Your line is now open.
Brian Martin: Hey, good morning, guys.
Speaker Change: Good morning, Brian.
Brian Martin: Just one thought Alberto or just one question just given kind of the dynamics in the market and kind of your positioning is.
Brian Martin: Burrito outlined I mean, do you see an opportunity to accelerate the loan growth beyond the mid single digit range as you kind of look here. It sounds like I mean, you've got both the organic and inorganic play here, but just in terms of just focusing on organic I mean, do you see an ability to to move that up from where it's at Kevin.
Brian Martin: The marketplace today.
Speaker Change: I think it's just going to depend on the opportunity set in front of us Brian.
And also.
Speaker Change: Ken.
I would maybe answer it this way.
Speaker Change: We certainly don't want we're not going to change our credit philosophy, we're not going to change our approach to the market in terms of our appetite of risk I don't think is something that.
That changed very much.
Speaker Change: So now that being said, if we see opportunities.
Speaker Change: Two.
Expand what we're doing and what I mean by that as you know in the past we've had a lot of success in attracting bankers to our platform.
Speaker Change: And there's usually a period of time there is non solicits involve we bring our banking team we.
Speaker Change: <unk>.
Speaker Change: Banking team really cannot call on customers for a period of time until those non <unk> are often then that banking team then has an ability to to catch up and things like that could add.
Speaker Change: At the margin certainly push your loan growth up and I think those things are.
Speaker Change: Are all fair game.
Speaker Change: Now and in the future. The other thing that maybe were calibrating a bit to as payoff activity as you know.
Speaker Change: When we provide guidance we're doing our best in terms of what we think is going to run off in the portfolio at least in the short run, but we're far from perfect in that regard.
Speaker Change: So if we see lower payoff activity originations remained consistent that's just going to push loan growth to be higher on a on a net basis. So.
Speaker Change: It's a good question and it's a hard question to answer precisely, but hopefully we gave you there some some of the dynamics that are at play.
Speaker Change: Driving that that estimate.
Speaker Change: Yes, that's super helpful and it seems like there's an opportunity there given kind of your positioning and how youre thinking about the world here today. So as you look given your excitement about the future. So.
Speaker Change: Maybe just a couple of one or two others just on the deal front Alberto It sounds like we should expect.
Maybe smaller deals versus larger deals in the big picture.
Speaker Change: Where the landscape is out or how you guys are looking at things today the opportunities in the market.
Speaker Change: I think Brian we really havent changed our our criteria. So if you think about you know.
First security is in the in the call. It 350 $375 million range I think thats been arkwright, that's been kind of like.
Speaker Change: The the base level that we've been at for some time and then going up all the way up to let's say a couple of billion dollars.
Speaker Change: In that range.
Speaker Change: That cohort of banks in Chicago is that we still think that there's opportunities there.
And we look forward to having the opportunity to participate in additional consolidation as it pertains to those institutions.
Speaker Change: Gotcha Okay.
Speaker Change: And maybe just the last one or two just on the margin maybe for Tom.
Speaker Change: Have you seen with rates down a bit as far as where the loan pricing is that today has it gotten more competitive do you expect that to kind of play out here.
Speaker Change: No change on that front.
Tom: That pricing has been very stable I would say.
Okay, and new origination yields time, or if you gave in the deck, maybe I missed it but where are they kind of at today in terms of pricing.
Tom: Depending on the asset class.
Speaker Change: Sulfur plus 300 it.
Speaker Change: Prime Prime minus.
Speaker Change: 50, maybe.
Speaker Change: Got you Okay, perfect and then last just wanted to hear.
Speaker Change: The bank term lending program, Tom just remind us the impact.
Speaker Change: It sounds like that occurred later in the quarter, but just the impact on the margin percentage is it pretty smaller what's the what's that impact.
Speaker Change: It's about six basis points, maybe seven tops.
So in other words, the margin would expand by six to seven basis points in the coming quarter because.
Speaker Change: That that's tight spread transaction.
Right, Okay, and that was not really impacted in the current quarter correct that we could've done later like one.
Speaker Change: The one one we didnt it was unwound a week ago.
Speaker Change: Yes, Okay perfect just wanted to clarify that and then the last one was just your commentary Tom on NII, and just kind of how youre thinking about overcoming the potential margin some margin headwinds here.
Speaker Change: As far as maintaining or kind of being flat I guess is that the.
Speaker Change: Is that the outlook I guess as you kind of go the next five quarters, assuming we get four to five rate cuts I'm, just not sure how youre thinking about or what's embedded in your thoughts in terms of rate cuts, but if we do get four or five more rate cuts here and there.
Speaker Change: Steady increases like we expect then that that's kind of the guide as far as just kind of growing it sequentially quarter to quarter.
Speaker Change: Yes, I mean, we're trying to have stable NII to growing NII, but I mean as it relates to the margin I mean, you have the sensitivity on page six of the deck.
So I was just talking about seeing NII I understand your comment that <unk> just been talking about I just wanted to make sure I understood kind of your outlook.
Speaker Change: I think when we gave guidance right now.
Speaker Change: Yes.
Speaker Change: Yes, I think we gave guidance to $85 to $87 million range. It's just subject to you know if the fed does more or less.
Got you, Okay, Brian perfect just just to add a little bit just to highlight one trade off based on on which I think is relevant.
Speaker Change: The discussion between kind of margin and net interest income. So as you pointed out the impact of that bank term funding.
Speaker Change: A transaction that we had so let's say that ads five to seven basis points potentially to the margin.
Notwithstanding that we lose net interest income as a result, so that's something we're.
Speaker Change: All else being equal the margin expands, but we actually make less money.
Speaker Change: That's why when Tom talks.
Speaker Change: The emphasis yes of course, we want to manage the margin we pay attention to the margin but.
Speaker Change: Net interest income like one of our older competitors I've sat here is ultimately what pace what pays the bills. So.
Speaker Change: Just keep that just keep that in mind.
Yes, no understood that's what I was asking for but but thank you for taking the questions and congratulations on another great quarter.
Speaker Change: Thank you Brian.
Speaker Change: Thank you for your questions today, I will now turn the call back over to Mr. Alberto Parachini for any closing remarks.
Alberto Parachini: Great. 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 2025, so have a great day. Thank you.
Speaker Change: That concludes today's call. Thank you all for your participation and you may now disconnect your lines.