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spk05: 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 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 speakerphone, please lift your hands out prior to asking your question. If you require operator assistance, please press star, then zero. Please note the conference is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp, to begin the conference call.
spk07: 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 the regulation FD, this call is being recorded and is available via webcasts, our investor relations website, along with our earnings release and the 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 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 its SEC filings. 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 see the forward-looking statement in non-GAAP financial measures disclosures in the earnings release. I would now like to turn the conference call over to Alberto Parachini, president of Byline Bancorp.
spk02: 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 Herencia, our chairman and CEO, Tom Bell, our CFO, and Mark Fusinato, our chief credit officer. Before we get into the results for the quarter, I'd like to pass the call on to Roberto to comment on a few items.
spk04: 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 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 selection there. Carlos Reis Sacristin joined the board in early October. We have known Carlos for many years, and more importantly, he knows us very well. Carlos is the is the identical twin brother of the late Jaime Ruiz-Sagristán, 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. And we believe These make us stronger. In an environment where Mr. Market has elected to punish the banking sector, our performance and execution have been excellent. We saw nothing mixed this quarter, other than Mr. Market being significantly disconnected from our strong 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 moved 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 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 this value creation story to unfold for years to come. And I want to highlight for years to come. I think this is easy and crispy enough for analysts and Mr. Market to grasp. It connects us to the future. You can use quarters as signposts, but understand that this is much more than that. Alberto, I'd like to turn it back to you.
spk02: 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. 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 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. We reported net income of $28 million, or $0.65 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 $0.77 per diluted share. 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 preprovision income hit a record $46.9 million, which translates to a pre-tax preprovision ROA of 216 basis points, or 246 basis points, one 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 declined largely due to a negative fair value mark on our servicing asset, despite increased gain on sale 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. 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. Lastly, our efficiency ratio stood at 53.7% or 47.3% adjusted, which represents a four and seven percentage 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 linked quarter basis. This marked the 10th consecutive quarter of loan 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 closed, totaling $113 million. Deposits as of quarter end stood at $7 billion, up $1 billion, largely due to the transaction. Adjusting for that, deposits increased by $74.4 million, or 5.8% on a linked quarter basis. Mike SanClements, Asset Quality inclusive now of the inland portfolio remain stable for the quarter credit costs came in at $9 million inclusive of net charges of 5.4 million. Mike SanClements, And the reserve build up $2.6 million the allowance for credit losses and that the quarter at 1.6% of total loan. Mike SanClements, liquidity and capital remained ample and strong with a CT CT one 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 eight to 9%. Mike SanClements, Moving forward our capital priorities remain on change and with that i'd like to pass the call over to Tom will provide you with more detail on our results.
spk06: 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 of loans 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. 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 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 unguaranteed loan balances was 8.1% as of quarter end, lower as a result of loan upgrades and payoffs. Turning to slide six, total deposits increased to $7 billion at September 30th. Deposits grew $74.4 million 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-interest bearing deposits. Our deposit cost 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. On a cycle-to-date basis, deposit basis, 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 4.46%, up 14 basis points from the prior quarter, stemming 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, the healthy 50 basis 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. Turning to slide 8, non-interest income stood at $12.4 million in the third quarter, down $1.9 million link 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 $769,000 in 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. 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 9, our non-industry 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-interest expense guidance is 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. 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, PCD, and a 2.7 million dollar provision for acquired non-pcd loans in total for the quarter we recorded a nine million dollar provision for credit losses compared to a six million dollars in q2 net charge offs for 5.4 million dollars in the third quarter compared to 4.3 million dollars 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 MPLs was attributed entirely to loans assumed as part of the merger. NPAs 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 30th, a $27 million increase 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 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 a healthy 39 basis points to 2.48% from Q2. Turning to slide 12, our CET1 came in at 10.1% and our TCE ratio stood at 8.2 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.
spk02: 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 optimistic 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.
spk05: 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. Our first question today comes from Damon Delamonte from KBW. Damon, please go ahead. Your line is open.
spk08: Hey, good morning, everyone. Hope you're all doing well today. Good morning. I want to start off with a. morning just want to start off with a question on the margin so the reported margin i think was like 447 and these guys had noted there's around 50 basis points of uh benefit from the merger accounting there um and you do you did uh provide a a table in the in the slide deck with expected accretable yield going forward um so do 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. Is that fair, Tom? So it's 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.
spk06: I think that's generally accurate. I think, you know, you have to remember that, you know, 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 hedges. And, you know, we have the SBC loans repriced another 25 basis points higher in Q4. So, you know, I would say flat to slightly upward.
spk02: 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. But that's our best estimate at this point in time. Just know that it can vary, you know, plus or minus some percentage on a quarter in, 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 short-term market rates is I think the margin, call it the core margin, so to speak, it's kind of you know kind of reached a trough so to speak so just plus or minus i mean we it's 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 a relatively flat kind of core number um with the accretion number on top hope that helps yeah
spk08: It does, yes. Thank you for that color and clarification. And then with regards to the expenses, Tom, I think you said that the guide for next quarter is in the $53 million to $55 million range. Is that correct?
spk06: Yes.
spk08: So if we were to kind of back out the merger charges in this quarter, and I think there is – Oh.
spk06: Sorry. I didn't mean to interrupt you. Go ahead, Dave. Okay.
spk08: That goes beyond – So if we were to kind of – goes beyond the fourth quarter okay um but if we kind of back out to kind of the non-recurring non-operating stuff here in this quarter we're kind of at the 51 million dollar range is that fair that yes so so kind of i guess what's the the the transition from this quarter's level up to that 53 to 55 are there you know um 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.
spk06: I mean, there's a little of the, you know, we don't expect many acquisition costs, merger related costs in going Q4. We think we're done. Um, and then there's obviously some employees that, you know, work through the, the conversion, so to speak that are no longer here. So there, there'll be some saves there, but you know, we are dealing with inflationary pressures and we think given the, the projects and the things we wanna, you know, continue to invest in the business, you know, you know, we're trying to find some other offsets, but we're trying to manage to the lower end of the range.
spk08: Got it.
spk02: Okay. That's helpful. And I think to, to add. To add to what Tom said, and I think the point that he said in between is, I think that guide goes beyond the quarter. Just think of that also going into 2024. So if you take the, call it the run rate, adjust it 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 uptake, you know, into next year that, I mean, I'm sure 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. Got it.
spk06: Okay, that's helpful.
spk08: And I guess just lastly, kind of broader speaking on credit, any updated thoughts on particular areas of your footprint or the portfolio where you might be seeing some softening or you're keeping a more watchful eye?
spk03: 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 James Pfeiffer- Being vigilant doing our portfolio reviews we're we're focused on solutions when we do have problems and. James Pfeiffer- Our business units have been have been very good about staying in touch with their customers and looking for any science based problems.
spk08: James Pfeiffer- got it Okay, thank you very much appreciate all the color so that I had.
spk06: James Pfeiffer- Thank you.
spk05: The next question comes from Terry McAvoy from Stevens Inc. Terry, your line is open. Please go ahead. Hi. Good morning, everyone.
spk09: Morning, Terry.
spk01: Thanks for the appendix slides. Very, very helpful. I don't have to ask Tom the accretion question, so thanks for that. Maybe just stepping out of the model a little bit, we're hearing larger players in Chicago are shrinking or de-emphasizing certain areas. So are you getting more incoming 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?
spk02: You know, I think probably, Terry, in general terms, it'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 know kind of you know going through um a lot of what we're seeing is initially those seem to be very much on transactional driven you know business um 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 we don't have a significant consumer business we're not in the mortgage space so we're not really James Jensen, kind of seeing you know opportunities to to kind of pick up where where others may be that are more capital constraint are looking to to lighten up on on risk weighted assets were more focused on. James Jensen, Opportunities where it's 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. looking to participate or syndicate transactions and actually be willing to offer more of the relationship to others in order to entice them to participate. And that's a marked change from what we had seen in the past. But again, it's not necessarily something that we do on a day-to-day basis. I would say we just are really, really focused on the entire relationship, building relationships, and focusing 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.
spk01: TAB, Mark McIntyre, And then, as a follow up question I don't think anybody should be surprised on seven page 17 the office portfolio metrics with npl delinquencies criticize you know higher in the quarter. TAB, Mark McIntyre, I guess, my question is, if I go back to slide 16 are there any other areas within CRA retail or senior housing, where you have maybe an upward. TAB, Mark McIntyre, upward migration and some of those credits stats, but just not to the degree that we're seeing an office or those portfolios still performing. I guess the trends are relatively stable.
spk03: Hi, Terry. Mark Cusinato. 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 healthcare. We do come across one from the Inland Transition that we're looking at that's of 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 has been our focus for quite some time in our legacy book and obviously in the book that came over from Inland. So we're working on those. We've been focused on solutions for those and we spent a lot of time confirming our risk ratings since we got the Inland portfolio and 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.
spk01: Thanks for taking my questions, and I hope everybody has a nice weekend.
spk02: Great. Likewise, Terry. Thanks, Terry.
spk05: The next question comes from Nathan Grace from Piper Sandler. Nathan, your line is open. Please go ahead.
spk00: Yep. Hey, guys. Good morning. Happy Friday. Morning, Nate. Morning, Nate. Going back to the margin discussion on a 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 were higher end of period. Bargains were also up in the quarter. It looks like you were able to sell down a portion of the inland securities portfolio. So just curious. you know, 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 the overnight funds.
spk06: Hi, Nate. Yeah, good morning to 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. 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 if rates declined, the impact to us, you know, from an NII 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. But the cash position was just timing at quarter end, for the most part, being elevated.
spk02: Yeah, Nate, and to add to that, I mean, Tom gave guidance as far as kind of what we're anticipating as far as loan growth is concerned. One just caveat with that, we anticipate that we are going to see not necessarily runoff that would cost deleveraging, but it's going to be probably a remixing of the portfolio as we have runoff, you know, primarily stemming from the transaction. You know, we'll look to reinvest that over time. So you may see our cash position at times just go up, you know, because we've got payoffs and those payoffs we're anticipating we'll get those redeployed over the course of time in our different portfolios. There's always a little bit of remixing that will take place, and we anticipate we'll see some of that probably starting next quarter, but certainly more into 2024.
spk00: Got it. But 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 contingent on loan growth?
spk06: No, I mean, 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 increase, you really could assume that the other borrowings would decline as the cash position declined.
spk02: Yeah, it's kind of like given we're were rates, you know, 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, because the financial impact of that is going to be pretty negligible. So, but just to just keep that in mind.
spk00: 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. 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. Curious how you guys are thinking about overall growth in loans and core deposits in 2024. I think I would...
spk02: kind of referred to 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, as you would expect, slower given it's probably the most interest rate sensitive sector of our portfolio, so you have lower activity both on the origination side and on the payoff side. So we're anticipating 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. 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 originations into our core businesses. 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, pipelines remain healthy, particularly on the commercial side. Our government guaranteed lending business is a bit slower compared to years past, but they're seeing a fair number of opportunities. So that remains, I think, okay, given the rate environment. Our leasing business 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 delayed. So we're catching up with that, which is, you know, helping in terms of growth. But all in all, I think the guidance provided, Nate, should give you a good picture in terms of kind of what we're seeing at this point in time.
spk00: Yep, that makes sense. And if I could just ask lastly on credit quality, you know, obviously some continued normalization charge-offs this quarter. I'm curious how much of that was driven by SBC and just generally kind of what you're seeing in SBC credit quality these days. I think that's, you know, just increasingly a topic of concern across investors just given the rate shocks that have impacted.
spk02: Yeah, I mean, so... Two comments, and I'll let Mark jump in, but two comments, generally speaking. I mean, all of the charge-ups that we saw this quarter, just think about it's just basically, you know, taking charges against reserves that we established, you know, in prior periods. So it's just a realization of, you know, the asset got worked out, you know, and essentially we just took the charge accordingly. 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 in prior calls, that portfolio has behaved fairly well above expectations given the environment. Borrowers there have, I think, prepared and anticipated for rate increases and have absorbed those, I think, probably looking back better than we anticipated. Mark?
spk03: Yeah, I agree, Alberto. I would call it really steady. Our SBA teams are very focused on looking at their portfolio. They've actually stepped up their portfolio management monitoring in the last couple of quarters. So it has been really steady. We haven't seen any big jump in any one area for their book either as of where we are today. The rate
spk00: increases concern me because all those small business owners are dealing with that reality but so far it's 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 um you know it sounds like you know you know growth is understandably slowing on the lending side of things um 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 significant macro deterioration within the CECL framework, how you guys are thinking about the trajectory of the reserve going forward?
spk02: A couple of things. I mean, the macro trajectory is certainly important, but other factors that are TAB, Mark McIntyre, 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. TAB, Mark McIntyre, But you know really any other areas where we're 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. One is, you know, you obviously are going to see a higher TAB, You know reserve overall you know with growth in the portfolio so that's one thing and then the other thing. TAB, Obviously, we have loans that that were we took marks on as a result of the inland transaction, we are active and wanting to you know move those loans out. TAB, So. you may see you know uh you know charge-ups related to that come through we will make sure to to basically um you know show those separate so that you guys are aware of of what we're doing there 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 an uptick in charge of 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 provided in the past.
spk00: Okay, great. I appreciate all the color from you guys taking the questions. Thank you.
spk02: Thank you, Nate. Thanks, Nate.
spk05: As a reminder, that's star follow-up 1 on your telephone keypad to ask a question today. The next question comes from Brian Martin from . Brian, please go ahead. Your line is open. Hey, good morning, everyone.
spk06: Morning, Brian.
spk09: Tom Frantz, Say maybe just you know, one quick question on maybe I think it was time to talk about the SBA or Alberto just it sounds like maybe the revenues are down a little bit in the quarter next quarter. Tom Frantz, Is that more function of it's not like the the margins are holding up and is that maybe just a little less sale activity or kind of how are you thinking broadly about you know that decline what's what's driving a little bit lower you know outlook for next quarter.
spk06: For next quarter, I mean, obviously there's, you know, the government shutdown is a risk for one thing as a caveat. I mean, you know, borrowers are, you know, interest rates are high, so borrowers 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. 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. Um, and as a result, we've just kind of given a little bit lower guidance here.
spk09: Okay. So kind of a combination of both volume and, and pricing is in the conservative.
spk06: 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.
spk02: Yeah. Just keep in mind, Brian, and it's hard to do on, on, and we, 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, we just had a different mix in the assets that we sold compared to the second quarter. So that mix of assets, you know, to give you an example, if we have, on any given quarter. If we have more USDA than we had the prior quarter or less 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 give them the incentive to be able to pay more for those assets. And that can impact on any given quarter you know, the mix changes, you know, we sell more 10-year relative to 15-year or 20-year, that also has implications. So 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.
spk06: 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's just a timing delay as alberto mentioned we can't you know specifically hit one quarter for a number it's if it doesn't fund and sell this quarter it'll fund and sell next quarter yeah and i if i 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 and if there was something you guys were
spk09: thinking about more so than another. But I understand the annual look, as you guys are 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, you know, with the quarter closure. I mean, were they, I thought you said the delinquencies were up. Maybe I missed that. But criticized and classified, were they up in the quarter with the transaction?
spk03: They were up. uh i would say slightly in the quarter um our criticized actually came down a little bit because we had a uh a resolution of a large criticized asset during the quarter but yes the uh 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 just to criticize it or is it both It was criticized slightly down because of a resolution of a byline legacy criticized asset. I would say classified was pretty well, just a slight increase, but the NPL increase overall 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 book.
spk09: Yep, okay, understood. Okay, and then maybe just one, as far as what the loans repricing, what level of loans do you guys have on a fixed rate basis that are repricing maybe over the next 12 to 18 months? Do you have some feet, some color on that, and just kind of what new origination yields are? Maybe that's in the data, and I missed it. I can look if I did miss that.
spk06: Let's maybe come back. We can follow up if you don't have it, Todd. No, no, maybe we can follow up with you, but I mean, it's, you know, we're asset sensitive. The loan mix is kind of 50-ish percent fixed floating. You know, I would say that, you know, the average life is three years, so a third, a third, and a third. But, you know, I guess with Inland now it's 42% fixed. And then it just really depends on, as Alberto mentioned, right, if some of the inland portfolio pays off, then that's going to get repriced or if it refinances. But we're still primarily at that floating rate.
spk02: 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%, you know, is effectively repricing over the course of a three and a half year life. 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.
spk09: Okay. Nope, that's helpful. And just the last one was 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 outlook look on the M&A side as far as, you know, I guess activity or just, you know, calls you guys are having today? It seems like the merger mass is obviously a little bit more difficult.
spk02: get some things done today but um yeah i think we we remain open to that i i think you hit the nail i think you you hit the nail on the head though i think the the channel the math for transactions is challenging given the for for some folks that that would be potential sellers uh i you know the the issue is just the amount of capital that remains after you factor in the 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.
spk09: Okay. So, all right. I appreciate you guys taking the questions. Nice quarter.
spk02: Thank you, Brian. Thanks, Brian.
spk05: Thank you for your questions today. I will now turn the call back to Mr. Alberto Parachini for any closing remarks.
spk02: Yes, thank you, operator, and thank you all for joining the call today and for your interest in byline, and we look forward to speaking to you again in early 2024, and happy Halloween to all of you. Thank you.
spk05: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.
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