Cardinal Health Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2023

There are 10 speakers on the call.

Operator

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 speakers' remarks, there will be a question and answer period. Please note the conference is being recorded.

Operator

At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call.

Speaker 1

Thank you, Adam. Good morning, everyone, and thank you for joining us today for the Byline Bancorp Third Quarter 2023 Earnings Call. In accordance with Regulation FD, this call is being recorded and is available via webcast, our Investor Relations website, along with our earnings release and 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 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 addition, our remarks may reference non GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.

Speaker 1

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 and non GAAP financial measures disclosures in the earnings release. I would now like to turn the conference call over to Alberto Paracini, President of Bylane Bancorp.

Speaker 2

Thank you, Brooks. Good morning, everyone, and thank you for joining the call this morning to go over our Q3 results. With me on the call are Roberto Huerincia, our Chairman and CEO Tom Bell, our CFO and Mark Fusunato, 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.

Speaker 3

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 Q3. Speaking about welcoming, it is important to call out The addition of 2 very accomplished individuals to our Board, you have seen They're biased, 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.

Speaker 2

But we can tell you that

Speaker 3

in just the few months that we've been working with her, we're just delighted And we know we've made a great selection there. Carlos Ries Sacristan joined the Board in early October. We have known Carlos for many years. And more importantly, he knows us very well. Carlos He's the identical twin brother of the late Jaime Ruiz Sacristan, who was one of our founding shareholders And served on our Board.

Speaker 3

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.

Speaker 3

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.

Speaker 3

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.

Speaker 2

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.

Speaker 2

Starting on Slide 3 of the deck. The 3rd 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 1, successfully completed the systems conversion in mid August And wrapped up the integration project by quarter end. The merger added roughly $1,000,000,000 in deposits, $800,000,000 in loans and 10 branches located primarily in attractive West and Northwest suburbs of Chicago. I'd like to welcome all former inland customers, employees and stockholders to Byline.

Speaker 2

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 $28,000,000 or $0.65 per share on revenue of $105,000,000 These results include the impact of merger related charges taken in connection with the Inland transaction. Excluding the impact of these, net income was $33,000,000 or $0.77 per diluted share. These figures represent new benchmarks for the company since our IPO with increases of 5% 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 percent.

Speaker 2

Adjusting for merger related charges, ROA was 153 basis points and ROTCE just under 19%. Our pre tax pre provision income hit a record $46,900,000 which translates to a pre tax pre provision ROA of 2 16 basis points or 246 basis points when excluding merger related charges. Total revenue was $105,000,000 up $14,000,000 for the quarter and 30% year on year. Growth in the quarter was driven by a $16,000,000 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.

Speaker 2

Expenses inclusive of all merger related charges were $58,000,000 for the quarter, up 17%. Excluding charges, operating expenses remain well managed at $51,000,000 marking a 6.8% increase from the prior quarter. Operating expenses relative to assets came in at 2 35 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 4 46 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.

Speaker 2

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 1516 on our office exposure inclusive of inland. Lastly, our efficiency ratio stood at 53.7 percent or 47.3% adjusted, Which represents a 4 and 7 percentage point improvement over the prior quarter year respectively. Moving on to the balance sheet. Loans increased by approximately $1,000,000,000 and stood at $6,600,000,000 as of quarterend. The increase was primarily due to the inland transaction.

Speaker 2

Notwithstanding, excluding the impact, we still saw growth in the portfolio of approximately 2 $16,000,000 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 $113,000,000 Deposits as of quarter end stood at $7,000,000,000 off $1,000,000,000 largely due to the transaction. Adjusting for that, deposits increased by 74,400,000 or 5.8 percent on a linked quarter basis.

Speaker 2

Asset quality inclusive now of the inland portfolio remained stable for the quarter. Credit costs came in at $9,000,000 inclusive of net charge offs of $5,400,000 and the reserve build of $2,600,000 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 percent and total capital of 13.2%. TCE ended the quarter at 8.1 8%, which is within our targeted operating range of 8% to 9%. Moving forward, our capital priorities remain unchanged.

Speaker 2

And with that, I'd like to pass the call over to Tom who will provide you with more detail on our results.

Speaker 4

Thank you, Alberto and good morning everyone. Starting with our loan and lease portfolio on slide 4. Total loans and leases were $6,600,000,000 at September 30, An increase of $1,000,000,000 from the prior quarter. Inland contributed approximately $800,000,000 in total loans, notwithstanding we saw increase This is across all of our major lending areas with the strongest growth coming from commercial and leasing teams. Net of loans sold, We originated $311,000,000 during the quarter and payoffs were lower than we expected at $185,000,000 Compared to $256,000,000 in the 2nd quarter.

Speaker 4

Looking ahead, we expect loan and lease growth to be in the low to mid single digits for the remainder of Turning to slide 5. Our government guaranteed lending business finished the quarter with $113,000,000 in closed loan commitments, Which was lower than the Q2. At September 30, the on balance sheet SBA 7 exposure was relatively unchanged And we saw an uptick in the USDA business. Our allowance for credit losses as a percentage of the unguaranteed loan balances Was 8.1% as of quarter end, lower as a result of loan upgrades and payoffs. Turning to slide 6.

Speaker 4

Total deposits increased to $7,000,000,000 at September 30. Deposits grew $74,400,000 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 costs for the quarter came in at 2 13 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.

Speaker 4

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 7. Net interest income was $92,500,000 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 3rd quarter, up from 3 basis points in the last quarter.

Speaker 4

Earning asset yields increased to healthy 50 basis points driven by higher loan yields. Going forward, Given the higher than expected accretion in Q3, we estimate net interest income of $85,000,000 to $87,000,000 for Q4. Turning to Slide 8. Non interest income stood at $12,400,000 in the 3rd quarter, down $1,900,000 linked quarter, Primarily driven by $3,600,000 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 $16,000,000 in the 3rd quarter compared to Q2.

Speaker 4

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 $5,500,000 range for Q4. Turning to Slide 9. Our non interest expense came in at $58,000,000 for the Q3, up $8,600,000 from the prior quarter, Primarily due to the impact of the Inland acquisition. On an adjusted basis, our net interest expense stood at $51,200,000 $2,000,000 below our Q3 guidance of $53,000,000 to $55,000,000 We continue to remain disciplined on our expense management And we are on track to meet projected cost savings.

Speaker 4

With one time merger costs behind us, Our non interest expense guidance is unchanged at $53,000,000 to $55,000,000 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 $105,700,000 up 14% from the end of the prior quarter. The increase includes an adjustment of $10,600,000 for purchase credit deteriorated loans, PCD, And a $2,700,000 provision for acquired non PCD loans.

Speaker 4

In total, for the quarter, we recorded a $9,000,000 provision for credit losses Compared to a $6,000,000 in Q2. Net charge offs were $5,400,000 in the 3rd quarter compared to $4,300,000 in 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.

Speaker 4

And total delinquencies were $36,900,000 on September 30, a $27,000,000 increased linked quarter. The increase was primarily due to the merger, which contributed approximately half of the delinquency increase. Turning to Slide 11. We ended the quarter with approximately $429,000,000 in cash and $1,200,000,000 in securities, which represents roughly 19% of total assets. Our available borrowing capacity stood at $1,700,000,000 and our uninsured deposit ratio stood at 26 0.1%, which remains well below all peer bank averages.

Speaker 4

Total security yields increased a healthy 39 basis points 2.48 percent from Q2. Turning to Slide 12. Our CET 1 came in at 10.1 percent 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.

Speaker 2

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 Our first question comes from the line of David. Please go ahead.

Operator

Our first question today comes from Damon DelMonte from KBW. Damon, please go ahead. Your line is open.

Speaker 5

Hey, good morning, everyone. Hope you're all doing well today.

Speaker 2

Good morning, Adam. Good morning, Adam.

Speaker 5

Just want to start off with a Good morning. Just want to start off with a question on the margin. So the reported margin, I think it was like 4.47% and you guys Had noted there's around 50 basis points of benefit from the merger accounting there. And you did provide a table In the slide deck with expected accretable yields going forward, so do we basically just take out the $10,300,000 this quarter to get to a core number of Like $397,000,000 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 kind of basically, I guess, what I'm trying to get at is Sounds like the core margin is trending lower from Q3 to Q4.

Speaker 4

I think that's generally accurate. I think you have to remember that there's a number of repricing things going on and I think that you would see the margin stable to maybe slightly up just given we have balance sheet hedges and We have the SBC loans repriced another 25 basis points higher in Q4. So I would say flat to slightly up.

Speaker 2

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 Yes. Obviously, it's going to fluctuate.

Speaker 2

In some cases, we may see that accretion to par Be faster, 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 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 another increase in rates or call it a significant change And short term market rates, I think the margin, call it the core margin, so to speak, It's kind of reached a trough, so to speak. So just plus or minus, I mean, we It's impossible to predict these things within a basis point or 2, 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.

Speaker 5

Yes. It does. Yes. Thank you

Speaker 6

for that color and

Speaker 5

clarification. And then with regards to the expenses, Tom, I think you said that the guide for next quarter is in the $53,000,000 to $55,000,000 range. Is that correct?

Speaker 2

Yes.

Speaker 5

So if we were to kind of back out the merger chart in

Speaker 6

the quarter and I think

Speaker 4

Sorry, I didn't mean to interrupt you. Go ahead, David. Okay. That goes beyond

Speaker 7

the Q4. It

Speaker 5

It goes beyond the Q4, okay. 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 $51,000,000 range, is that fair? Yes. So kind of I guess what's The transition from this quarter's level up to that 53% to 55%, are there 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?

Speaker 4

I mean there's a little of the we don't expect many acquisition costs, Merger related costs in Q4, we think we're done. And then there's obviously some employees that work through The conversion so to speak that are no longer here, so there'll be some saves there. But we are dealing with inflationary pressures and we think given The projects and the things we want to continue to invest in the business, we're trying to find some other offsays, but we're trying to manage to the lower end of the range.

Speaker 5

Got it.

Speaker 2

Okay. Yes. And I think to add to what Tom said and I think The point that he said kind of like in between is like, I think that guide goes beyond the quarter. Just think of that Also kind of going into 2024. So if you kind of take The call it the run rate adjusted for charges and you take that run rate on the guide With that range, I think what you're seeing there is probably just an uptick into next year that I mean, I'm Sure, you can kind of do the back of the envelope there, but that's just inflation and probably just Also incorporates some of the growth that we're seeing into next year.

Speaker 5

Got it. Okay, that's helpful.

Speaker 6

And I guess just lastly, kind

Speaker 5

of broader speaking on credit, any updated thoughts on particular areas of your footprint or the where you might be seeing some softening or you're keeping a more watchful eye?

Speaker 7

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 Our business units have been very good about staying in touch with their customers and looking for any science based problems.

Speaker 5

Got it. Okay. Thank you very much. Appreciate all the color. That's all that I had.

Speaker 2

Thank you. Thanks, Damon.

Operator

The next question comes from Terry McEvoy from Stephens Inc. Terry, your line is open. Please go ahead.

Speaker 8

Hi. Good morning, everyone.

Speaker 2

Good morning, Terry.

Speaker 8

Thanks. 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, you've got we're hearing large Players in Chicago are shrinking or deemphasizing certain areas.

Speaker 8

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?

Speaker 2

I think probably Terry in general terms it's what we're seeing is A lot of the so called risk weighted asset diets that some of the larger players are kind of Going through, a lot of what we're seeing is initially those seem to be very much on transactional driven business. So, not necessarily we're not necessarily we're not in a lot of those businesses. 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 Opportunities to kind of pick up where others maybe that are more capital constrained are looking to lighten up on risk weighted assets.

Speaker 2

We're more focused on opportunities where it's relationship driven. What we are seeing though in the market It is more and more, particularly some of the larger players looking to participate or syndicate transactions And actually be willing to offer more of the relationship to others in order to entice them to And that's a marked change from what we had seen in the past. But again, it's not Necessarily something that we are it's not necessarily something that we do on a day to day basis. I would say we just I really, really focus 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.

Speaker 8

Perfect. And 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 higher in the quarter. I guess my question, if I go back to Slide 16, are there any other areas within CRE, retail or senior housing where you have Maybe an upward migration in some of those credit stats, but just not to the degree that we're seeing in office or are those portfolios still performing? I guess the trends are relatively stable.

Speaker 7

Hi, Terry, Marc Giussonato. 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 did 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.

Speaker 7

The office It's 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.

Speaker 8

Thanks for taking my questions and I hope everybody has a nice weekend.

Speaker 2

Great. Likewise, Terry. Thanks, Terry.

Operator

The next question comes from Nathan Race, Piper Sandler. Nathan, your line is open. Please go ahead.

Speaker 9

Yes. Hey, guys. Good morning. Happy Friday.

Speaker 2

Good morning, Nate.

Speaker 9

Going back to the margin discussion on a core basis, Curious kind of what that contemplates in terms of size of the earning asset base in the Q4. 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 how you guys are thinking about those dynamics in terms of maybe Deleveraging the balance sheet in the 4th quarter, just given some of those dynamics between securities and the overnight funds.

Speaker 4

Hi, Nate. Yes, good morning. It's Tom. Thanks for the question. Yes, I mean our cash position was slightly elevated at the end of Quarter, I mean that's not something we would normally maintain.

Speaker 4

As we mentioned in prior meetings, we weren't investing securities, Cash flows and so we're back on board with doing that now just given where rates are And our asset sensitivity, I think we were still mindful of if rates decline the impact to us From an NII perspective, so you'll see some of that cash move into securities throughout the next quarter here. And then we'll plan on continuing to reinvest cash flows as we move forward. But the cash position was just timing at quarter end for the most part being elevated.

Speaker 2

Yes, 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 run off that would cost deleveraging, but it's going to be probably a remixing The portfolio as we have run off primarily stemming from the transaction, we'll look To reinvest that over time, so you may see our cash position at times just go up 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 probably starting Next quarter, but certainly more into 2024.

Speaker 9

Got it. But in terms of kind of the overnight borrowings that were at 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 and success and

Speaker 4

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 and 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 decline.

Speaker 2

Yes. It's kind of like a given where rates given the rates that you get paid on reserves at the 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 keep that in mind.

Speaker 9

Got it. Very helpful. And just kind of thinking about the balance sheet growth trajectory in the next year, I think Tom alluded to kind of lowtomidsingle digit loan growth for the Q4. 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?

Speaker 2

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, 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.

Speaker 2

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 in some cases, we will get payoffs, we won't renew loans, we'll get the cash and then we'll redeploy that Within the portfolio, so you don't necessarily will see net loan growth, so to speak, but it's just being replaced 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 To the fact that the economy has remained pretty healthy, we tend to be more cautious.

Speaker 2

Our view is more cautious. There's a lot of uncertainty out there and 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.

Speaker 2

Some of that is a catch up from Supply chain issues that were happening earlier as people had put orders for equipment but just couldn't get the equipment and therefore that Kind of delayed. So we're catching up with that, which is 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.

Speaker 9

Yes. That makes sense. And if I could just ask lastly on credit quality. Obviously, some continued normalization 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 just increasingly a topic of concern across investors just given the rate shocks that have impacted.

Speaker 2

Yes. I mean, 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 taking charges against reserves that we established In prior periods. So, it's just a realization of the asset got worked out, and essentially, we just took the charge Accordingly.

Speaker 2

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 stated in prior calls, that portfolio has Behave 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?

Speaker 7

Yes. I agree Alberto. I would call it really steady. The 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, well it has been really steady.

Speaker 7

We haven't seen any big jump in 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.

Speaker 9

Okay, great. If I could just squeeze one last I want in on just kind of how you guys are thinking about the reserve trajectory from here. It sounds like growth is understandably slowing on the lending side of things. You guys are obviously still operating from a position of strength relative to peers in terms of where your reserve stacks up. But I guess just absent Significant macro deterioration within the CECL framework.

Speaker 9

How you guys are kind of thinking about the trajectory of the reserve going forward?

Speaker 2

A couple of things. I mean, the macro trajectory is certainly important, What other factors that we that are kind of we see in the environment? I mean, as I said earlier, there's a fair amount of uncertainty in the environment. To give you an example, certainly, everybody knows and everybody's paying Attention to office, but really any other areas where 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. We can obviously use Factors to adjust for that.

Speaker 2

So just keep that in mind. 2nd, I think just I think you nailed in terms of kind of how we think about provisioning and the reserve. Just keep two things in mind. One is you obviously are going to see a higher reserve overall With growth in the portfolio, so that's one thing. And then the other thing, obviously, we have loans that where we took marks On as a result of the inland transaction, we are active in wanting to move those loans out.

Speaker 2

So, you may see charge offs related to that come through. We will make sure To basically show those separate so that you guys are aware of what we're doing there. But In the course of the year, we will look to work out out of situations that have been identified. So you may See an uptick in charge offs on any given quarter related to that. But outside of that, I think it's Consistent with what the guidance that we provided in the past.

Speaker 9

Okay, great. I appreciate all the color from you guys taking the questions. Thank you.

Speaker 2

Thank you, Nate. Thanks,

Operator

The next question comes from Brian Martin from Janney. Brian, please go ahead. Your line is open.

Speaker 6

Hey, good morning, everyone.

Speaker 1

Good morning, Brian. Good morning, Brian.

Speaker 6

Say maybe just one quick question on maybe I think it was Tom that talked about the SBA or Alberto. Just It sounds like maybe that the revenues are down a little bit in the quarter, next quarter. Is that more a function of it sounds like The margins were holding up. I mean is that maybe just a little less sale activity or kind of how you're thinking broadly about that decline? What's driving a little bit lower outlook for next quarter?

Speaker 4

For next quarter, I mean, obviously, there's the government shutdown is a risk, for one thing as a caveat. I mean, Borrowers are 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 just given the mix and the I'll tell you out there right now. We just think the market is not giving us the same premiums that we were getting before. And as a result, we've just kind of given a little bit lower guidance here.

Speaker 6

Okay. So kind of a combination both volume and pricing is in the conservative Yes.

Speaker 4

I mean there's always again things can pick up. I mean Pipeline looks pretty decent right now, but it's a little bit slower just as we speak.

Speaker 2

Yes. Just keep in mind, Brian, it's It's hard to do on and we actually don't manage the business that way. It's hard to do this on a quarter by quarter basis. So just try to look at it more kind of like over a 12 month period just because Like for example, this quarter, Q3, we just had a different mix in the assets that we sold compared to the Q2. So that mix of assets, 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.

Speaker 2

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. The mix changes, 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 going to can potentially impact Margins and dollars as well.

Speaker 4

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 specifically hit 1 quarter for a number.

Speaker 4

If it doesn't fund and sell this quarter, it will fund and sell next quarter.

Speaker 6

Yes. And 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, if there was something you guys were Thinking about more so than another, but I understand the annual look as you guys are suggesting, so I appreciate that. 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 With the quarter flows here, I mean, were they I thought you said the delinquencies were up, maybe I missed that or but criticizing Classifies, were they up in the quarter With the transaction?

Speaker 7

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.

Speaker 6

Okay. So an increase in just to criticize it or is it both?

Speaker 7

It was criticized but slightly down because of a resolution of a byline legacy criticized asset. I would say classified It 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, Obviously, we had increases come back in from the inlet book.

Speaker 5

Yes.

Speaker 6

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, can you give some color on that and just kind of what new origination yields are?

Speaker 6

Maybe that's in the deck and I missed it,

Speaker 4

So Let's maybe come back to you.

Speaker 6

We can follow-up with you.

Speaker 4

No, no. Maybe we can follow-up with you, but I mean it's Yes. We're asset sensitive. The loan mix is kind of 50 ish percent fixed floating. I would say that it's The average life is 3 years, so a third, a third and a third.

Speaker 6

But That's fine.

Speaker 4

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 asset floating rate.

Speaker 2

But just as a rule of thumb, Brian, to kind of so that you can as you think through this, if you take what Tom just said, if 42% is fixed. I mean, these are not 30 year or 15 year residential mortgages. These are essentially kind of like 3.5 year assets. So just assume that that 42% is effectively repricing over the course of a 3.5 year life And that kind of just gives you a sense of kind of how much of that fixed rate portfolio we're going to get to see being repriced On a yearly basis, I mean it doesn't deviate too far from that.

Speaker 6

Okay. That's helpful. And just the Last one was on the on M and 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 inorganic opportunities that are out there, but how does The outlook on the M and A side as far as, I guess, activity or just calls you guys are having today, It seems like the merger math is obviously a little bit more difficult to get some things done today, but

Speaker 2

Yes. I think we remain open to that. I think you hit the nail on the head though. I think The math for transactions is challenging given the for some folks that would be potential sellers. The issue is just the amount of capital that remains after you factor in the interest rate marks Both on the loan portfolio and on the investment portfolio.

Speaker 2

That's I mean to be Completely transparent, that's the biggest impediment today.

Speaker 6

Okay. So, all right. I appreciate you guys taking the questions. Nice quarter.

Speaker 2

Thank you, Brian. Thanks, Brian.

Operator

Thank you for your questions today. I will now turn the call back to Mr. Alberto Carracini for any closing remarks.

Speaker 2

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.

Operator

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

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Earnings Conference Call
Cardinal Health Q3 2023
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