Byline Bancorp - Q3 2023
October 27, 2023
Transcript
Operator (participant)
Good morning, and welcome to the Byline Bancorp Third Quarter 2023 Earnings call. 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 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 handset 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.
Brooks Rennie (Head of Investor Relations)
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 on 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 re-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 Paracchini, President of Byline Bancorp.
Alberto Paracchini (President, CEO, and Director)
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 Fucinato, our Chief Credit Officer. Before we get into the results for the quarter, I'd like to pass the call on to Roberto for to comment on a few items.
Roberto Herencia (Executive Chairman)
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 the 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 Ruiz Sacristán 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 Ruiz Sacristán, 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. 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 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 crisp 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.
Alberto Paracchini (President, CEO, and Director)
... Great. Thank you, Roberto. In terms and 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 first, 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-provision income hit a record $46.9 million, which translates to a pre-provision 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 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 4 and 7 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. Asset quality, inclusive now of the Inland portfolio, remains stable for the quarter. Credit costs came in at $9 million, inclusive of net charge-offs of $5.4 million and the reserve build of $2.6 million. The allowance for credit losses ended the quarter at 1.6% of total loans. Liquidity and capital remained ample and strong, with a CET1 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%-9%. Moving forward, our capital priorities remain unchanged.
With that, I'd like to pass the call over to Tom, who'll provide you with more detail on our results.
Tom Bell (CFO and Treasurer)
Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on slide slide, total loans and leases were $6.6 billion at September 30, 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 slide.
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(a) 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 30. 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 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 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 to a 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-$87 million for Q4. Turning to slide eight. Non-interest 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 $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 nine. Our non-interest 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 million-$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 million-$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 purchased credit deteriorated loans, PCD, and a $2.7 million provision for acquired non-PCD loans. In total, for the quarter, we recorded a $9 million provision for credit losses, compared to $6 million in Q2. 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. 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 thirtieth, 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 $429.9 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 peer bank averages.
Total security yields increased a healthy 39 basis points to 2.48% for Q3 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.
Alberto Paracchini (President, CEO, and Director)
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.
Operator (participant)
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 Del Monte, from KBW. Damon, please go ahead. Your line is open.
Damon Del Monte (Equity Research Analyst)
Hey, good morning, everyone. Hope you're all doing well today.
Alberto Paracchini (President, CEO, and Director)
Good morning, Damon.
Damon Del Monte (Equity Research Analyst)
Good morning. Just want to start off with a question on the margin. So the reported margin, I think, was like 4.47, and you guys had noted there was around 50 basis points of benefit from the merger accounting there. And you did provide a table in the slide deck with expected accretable yields going forward. So do 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?
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.
Tom Bell (CFO and Treasurer)
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 SBA loans repriced another 25 basis points higher in Q4. So, you know, I would say flat to slightly up.
Alberto Paracchini (President, CEO, and Director)
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, 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, is kind of, you know, kind of reached a trough, so to speak. So just plus or minus, I mean, it's impossible to predict these things 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 number on top. Hope that helps.
Damon Del Monte (Equity Research Analyst)
Yeah. Yeah, it does. Yes, thank you for that, 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-$55 million range. Is that correct?
Tom Bell (CFO and Treasurer)
Yes.
Damon Del Monte (Equity Research Analyst)
If we were to kind of back out the merger charges-
Tom Bell (CFO and Treasurer)
And, and-
Damon Del Monte (Equity Research Analyst)
in this quarter, and I think there was
Tom Bell (CFO and Treasurer)
Sorry.
Damon Del Monte (Equity Research Analyst)
Oh.
Tom Bell (CFO and Treasurer)
Sorry, I didn't mean to interrupt you. Go ahead, dude.
Damon Del Monte (Equity Research Analyst)
Okay.
Tom Bell (CFO and Treasurer)
That goes beyond-
Damon Del Monte (Equity Research Analyst)
If we were to kind of-
Tom Bell (CFO and Treasurer)
the fourth quarter.
Damon Del Monte (Equity Research Analyst)
It goes beyond the fourth quarter. Okay.
Tom Bell (CFO and Treasurer)
Yeah.
Damon Del Monte (Equity Research Analyst)
But if we kind of back out the, kind of the non-recurring, non-operating stuff here in this quarter, we're kind of in the $51 million range. Is that fair?
Tom Bell (CFO and Treasurer)
That's-- yes.
Damon Del Monte (Equity Research Analyst)
So, kind of, I guess, what's the transition from this quarter's level up to that 53-55? Are there, you know, just 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?
Tom Bell (CFO and Treasurer)
I mean, there's a little of the. You know, we don't expect many acquisition costs, merger-related costs in, you know, Q4. We think we're done. And then there's obviously some employees that, you know, work through the conversion, so to speak, that are no longer here. So there'll 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, you know, we're trying to find some other offsets, but we're trying to manage to the lower end of the range.
Damon Del Monte (Equity Research Analyst)
... Got it. Okay, that's helpful.
Alberto Paracchini (President, CEO, and Director)
And I think-
Damon Del Monte (Equity Research Analyst)
And then-
Alberto Paracchini (President, CEO, and Director)
To add to what Tom said, and, you know, I think the point that he said kind of like in between is like, you know, I think that guide goes beyond the quarter. Just think of that, you know, also kind of going into 2024. So if you kind of take 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 uptake, 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.
Damon Del Monte (Equity Research Analyst)
Got it. Okay, that's helpful. I guess, and I guess just lastly, kind of broader, speaking on credit, you know, 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?
Mark Fucinato (Chief Credit Officer)
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 signs of any problems.
Damon Del Monte (Equity Research Analyst)
Got it. Okay. Thank you very much. Appreciate all the color. That's all that I had.
Alberto Paracchini (President, CEO, and Director)
Thank you.
Mark Fucinato (Chief Credit Officer)
Thanks, Damon.
Operator (participant)
The next question comes from Terry McEvoy from Stephens Inc. Terry, your line is open. Please go ahead.
Terry McEvoy (Equity Research Analyst)
Hi. Good morning, everyone.
Alberto Paracchini (President, CEO, and Director)
Morning, Terry.
Mark Fucinato (Chief Credit Officer)
Morning.
Terry McEvoy (Equity Research Analyst)
Hi, and 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, or 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?
Alberto Paracchini (President, CEO, and Director)
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 you know kind of going through. 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 maybe that are more capital-constrained are looking to lighten up on risk-weighted assets. We're more focused on 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, or syndicate transactions and actually be willing to offer more of the relationship, you know, to others in order to, to entice them to, to participate. And that's a marked change from what we had seen, you know, in the past. But again, it's not necessarily something that, that we are, you know, it's not necessarily something that we do on a day-to-day basis. I, I would say we just are really, really focused on, you know, the entire relationship, building relationships, and, and focusing on, on, you know, customer dislocation as a result of, you know, mergers and, and transactions that have happened, you know, here in the past.
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.
Terry McEvoy (Equity Research Analyst)
Perfect. Then as a follow-up question, I don't think anybody should be surprised on page 17, the office portfolio metrics with NPL delinquencies criticized, you know, 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 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, I guess, the trends are relatively stable?
Mark Fucinato (Chief Credit Officer)
Terry, Mark Fucinato. We haven't seen that in terms of any trends in the other asset classes. You know, 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.
... in 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.
Terry McEvoy (Equity Research Analyst)
Thanks for taking my questions, and I hope everybody has a nice weekend.
Alberto Paracchini (President, CEO, and Director)
Great. Likewise, Terry.
Tom Bell (CFO and Treasurer)
Thanks, Terry.
Operator (participant)
The next question comes from Nathan Race, Piper Sandler. Nathan, your line is open. Please go ahead.
Nathan Race (Equity Research Analyst)
Yep. Hey, guys. Good morning. Happy Friday.
Alberto Paracchini (President, CEO, and Director)
Morning, Nate.
Tom Bell (CFO and Treasurer)
Morning, Nate.
Nathan Race (Equity Research Analyst)
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 heading in the fourth quarter. You know, obviously, cash balances were higher. End-of-period borrowings 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 the securities and the overnight funds.
Tom Bell (CFO and Treasurer)
Hi, Nate. Yeah, good morning. It's 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 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 decline, 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 quarter here, and then we'll plan on continuing to reinvest cash flows as we move forward.
The cash position was just timing at quarter end, for the most part, being elevated.
Alberto Paracchini (President, CEO, and Director)
Yeah, Nate, and to add to that, I mean, Tom gave guidance as far as kinda 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 cause 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.
So there's always a little bit of remixing that will take place, and we anticipate we'll see some of that, you know, probably starting next quarter, but certainly more into 2024.
Nathan Race (Equity Research Analyst)
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-
Tom Bell (CFO and Treasurer)
Yeah
Nathan Race (Equity Research Analyst)
... contingent on loan growth success and-
Tom Bell (CFO and Treasurer)
No, I mean, we would-
Nathan Race (Equity Research Analyst)
Yeah.
Tom Bell (CFO and Treasurer)
We normally would not hold that high of a balance. And again, if you know, 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, you know, the other borrowings increase, you really could assume that the other borrowings would decline as the cash position declined.
Alberto Paracchini (President, CEO, and Director)
Yeah, it's kind of like a, 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 net those two numbers out and look at a net number, so but just keep that in mind.
Nathan Race (Equity Research Analyst)
Got it. Well, very helpful. And just kind of thinking about, you know, the balance sheet growth trajectory in the next year, I think Tom alluded to kind of low to mid-single-digit loan growth for the fourth quarter. You know, curious, you know, 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, you know, how you guys are thinking about, you know, overall growth in loans and core deposits in 2024.
Alberto Paracchini (President, CEO, and Director)
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. 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-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, by originations into our, our core businesses. But to answer your question, I mean, obviously, we had, I think the, the number, the, 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, to wanna have a more cautious view of that.
But so far, you know, pipelines remain healthy, you know, particularly on the commercial side. 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 delayed. So we're catching up with that, which is, you know, helping in terms of growth.
All in all, I think the guidance provided, Nate, should give you a good picture in terms of kinda what we're seeing at this point in time.
Nathan Race (Equity Research Analyst)
Yep, that makes sense. If I could just ask lastly, on credit quality, you know, obviously, some continued normalization in charge-offs this quarter. 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-
Alberto Paracchini (President, CEO, and Director)
Yeah, I mean-
Nathan Race (Equity Research Analyst)
these clients
Alberto Paracchini (President, CEO, and Director)
... 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'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, 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, as we've stated, you know, in, in prior calls, that portfolio has, you know, behaved fairly, fairly well, you know, 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. Mark?
Mark Fucinato (Chief Credit Officer)
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, the last couple of quarters, so it has been really steady. We haven't seen any 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.
Nathan Race (Equity Research Analyst)
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. You know, it sounds like, you know, 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 CECL framework, how you guys are kinda thinking about the trajectory of the reserve going forward?
Alberto Paracchini (President, CEO, and Director)
A couple of things. I mean, the macro trajectory is certainly important. But other, you know, factors that, you know, 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. But, you know, really any other areas where, you know, maybe it's not necessarily something that we are 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 gonna 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 where we took marks on as a result of the Inland transaction. We are active in wanting to, you know, move those loans out. So you may see, you know, you know, charge-offs related to that come through. We will make sure to basically, you know, show those separate so that you guys are aware of what we're doing there.
But, you know, in the course of the year, we will look to, you know, work out of situations that have been identified. So you may see an uptick in charge-offs 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've provided in the past.
Nathan Race (Equity Research Analyst)
Okay, great. I appreciate all the color from you guys, taking the questions. Thank you.
Alberto Paracchini (President, CEO, and Director)
Thank you, Nate.
Mark Fucinato (Chief Credit Officer)
Thanks, Nate.
Operator (participant)
As a reminder, that's star followed by one on your telephone keypad to ask a question today. The next question comes from Brian Martin, from Janney. Brian, please go ahead. Your line is open.
Brian Martin (Equity Research Analyst)
Hey, good morning, everyone.
Mark Fucinato (Chief Credit Officer)
Morning, Brian.
Alberto Paracchini (President, CEO, and Director)
Morning, Brian.
Brian Martin (Equity Research Analyst)
... So maybe just, you know, one quick question on, maybe I think it was Tom that talked about the SBA or Alberto. Just, it sounds like maybe the revenues are down a little bit in the quarter, next quarter. Is that more a function of- it sounded 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? What's driving a little bit lower, you know, outlook for next quarter?
Tom Bell (CFO and Treasurer)
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. And as a result, we've just kind of given a little bit lower guidance here.
Brian Martin (Equity Research Analyst)
Okay. So kind of a combination, both volume and pricing is in the conservative-
Tom Bell (CFO and Treasurer)
Yeah, I mean, there's always- You know, again, things can pick up. I mean, pipeline looks pretty-
Brian Martin (Equity Research Analyst)
Yeah
Tom Bell (CFO and Treasurer)
...decent right now, but it's a little bit slower, you know, just as we speak.
Alberto Paracchini (President, CEO, and Director)
Yeah, just-
Tom Bell (CFO and Treasurer)
Yeah.
Alberto Paracchini (President, CEO, and Director)
Just keep in mind, Brian, it's hard to do on one hand, 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-
Brian Martin (Equity Research Analyst)
Yeah
Alberto Paracchini (President, CEO, and Director)
... 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, you know, 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, you know, give them the, the incentive to, 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, 20-year.
That also has implications, so just keep that in mind. The mix on any given quarter is gonna, you know, can potentially impact, you know, margins and dollars as well.
Tom Bell (CFO and Treasurer)
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-
Brian Martin (Equity Research Analyst)
Yeah
Tom Bell (CFO and Treasurer)
...one quarter for a number. It's if it doesn't fund and sell this quarter, it'll fund and sell next quarter.
Brian Martin (Equity Research Analyst)
Yeah, if I apologize if I was leading to it was going lower. I just didn't understand. I just was trying to understand rate or volume, and if there was something you guys were thinking about more so than another. But, I understand the, 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 or but criticized and classified, were they up in the quarter with the transaction?
Mark Fucinato (Chief Credit Officer)
They were up, I would say slightly in the quarter. Our criticized actually came down a little bit because we had a resolution of a large criticized asset during the quarter. 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.
Brian Martin (Equity Research Analyst)
Okay. So an increase in just the, just the criticized, or is it both?
Mark Fucinato (Chief Credit Officer)
Criticized was slightly down because of a resolution of a Byline legacy, a criticized asset.
Brian Martin (Equity Research Analyst)
Right. Yeah.
Mark Fucinato (Chief Credit Officer)
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.
Brian Martin (Equity Research Analyst)
Yep. Okay, understood. Okay, and then maybe just one. As far as the loans repricing, what level of loans do you guys have on a fixed-rate basis that are repricing maybe over the next, you know, 12-18 months? Can you give some color on that, and just kind of what new origination yields are? Maybe that's in the deck, and I missed it. But I can look if I did miss that.
Tom Bell (CFO and Treasurer)
Let's maybe come back to-
Brian Martin (Equity Research Analyst)
We can follow up if you don't have it, Tom.
Tom Bell (CFO and Treasurer)
No, no. Maybe we can follow up with you, but I mean, it's-
Brian Martin (Equity Research Analyst)
Yeah.
Tom Bell (CFO and Treasurer)
You know, we're asset sensitive.
Brian Martin (Equity Research Analyst)
Yeah.
Tom Bell (CFO and Treasurer)
The loan mix is kind of 50-ish% 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. But
Brian Martin (Equity Research Analyst)
That's fine.
Tom Bell (CFO and Treasurer)
You know, it's, 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-
Brian Martin (Equity Research Analyst)
Yeah
Tom Bell (CFO and Treasurer)
... primarily asset floating rate.
Alberto Paracchini (President, CEO, and Director)
But just as a-
Tom Bell (CFO and Treasurer)
Yeah
Alberto Paracchini (President, CEO, and Director)
... 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 know, 42% is fixed. I mean, it's these are not, you know, 30-year or 15-year residential mortgages. These are essentially kind of like 3.5-year assets. So just assume, you know, that that 42%, you know, is effectively repricing over the course of a 3.5-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.
Brian Martin (Equity Research Analyst)
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, you know, 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, even if it seems like the merger math is obviously a little bit more difficult to get some things done today, but.
Alberto Paracchini (President, CEO, and Director)
Yeah, I think we remain open to that. I think you hit the nail on the head, though. I think the challenge, the math for transactions is challenging given, for some folks that would be potential sellers, 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 (Equity Research Analyst)
Okay. So all right. I, I appreciate you guys taking the questions. Nice quarter.
Alberto Paracchini (President, CEO, and Director)
Thank you, Brian.
Roberto Herencia (Executive Chairman)
Thanks, Brian.
Operator (participant)
Thank you for your questions today. I will now turn the call back to Mr. Alberto Paracchini for any closing remarks.
Alberto Paracchini (President, CEO, and Director)
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. Happy Halloween to all of you. Thank you.
Operator (participant)
This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.