Byline Bancorp, Inc. (BY) Q3 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the Third Quarter 2020 Byline Bancorp Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead.

Thank you, Andrew. Good morning everyone and thank you for joining us today for the Byline Bancorp third quarter 2020 earnings call. We'll be using a slide presentation as part of our discussion this morning. Please visit the Events and Presentations page of Byline's Investor Relations Web site for access to the presentation. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Byline Bancorp that involve risks and uncertainties, including the impact of the COVID-19 pandemic. Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's Web site. The company disclaims any obligation to update any forward-looking statements made during the call. Management may refer to non-GAAP measures which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the Web site contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. And with that I'd like to turn the call over to Alberto Paracchini, President and CEO. Alberto?

Thank you, Tony. Good morning everyone and welcome to our third quarter earnings call. Thank you for participating on the call this morning and I hope you and your families are doing well and staying healthy. Joining me today are Lindsay Corby, our CFO and Mark Fucinato, our Chief Credit Officer. I will start the call with a summary of our results and provide you with a highlights and important developments for the quarter before I pass the over to Lindsay who will provide you with more detail on our financials. After that, I'll come back with some closing comments before opening the call up for questions. As a reminder, always, you can follow our discussion with presentation materials you can find in the Investor Relations section of our Web site. Obviously, we continue to operate in an uncertain environment as a result of a pandemic. Notwithstanding, I'm proud of the way our team has responded to this challenge. We continue to support our customers on a daily basis maintain efficient and highly productive operations and produce strong results relative to the environment. I would like to personally thank all of our team members for their extraordinary efforts during this unprecedented time. Moving on to performance, net income for the quarter came in at 13.1 million or $0.34 per diluted share up from 9.1 million or $0.24 per diluted share at last quarter. Our pretax preparation income was strong at 34.1 million up from 28.4 million on a quarter-over-quarter basis. Pretax preparation ROA came in at 212 basis points up from 185 basis points last quarter. The operating improvement was primarily driven by higher fee income from the sale of SBA loans, while maintaining disciplined expense management, which in turn drove operating leverage higher. Net interest income increased by just under $1 million despite the NIM declining by 11 basis point. That said the decline in the NIM was largely impacted by lower yielding PPP loans and the higher level of liquidity we are currently carrying, offsetting this and reflective of the quality of our deposit franchise was a 14 basis points decline in deposit costs that drove our cost of deposits to just 22 basis points at quarter end. As I mentioned earlier, our government guaranteed business are strong production levels this quarter, which resulted in a record level of gain on sale income, as high demand in the secondary market for government guaranteed loans drove an increase in the premiums received for sold loans. Our team has a lot of experience in this space has gone through cycles before and operated through periods where SBA loans can become very attractive for potential borrowers. Higher origination levels this quarter were partly driven by borrowers looking to take advantage of the six-month principal and interest subsidy on SBA loans closed prior to the end of the quarter. Notwithstanding the expiration of that benefit as well as tighter standards, we continue to see good demand for loans through the end of the quarter. Lastly, we were once again recognized as the top SBA 7A lender in both the states of Illinois and Wisconsin, we actually number three lender in Indiana as well, and moved up to the number two position nationally. Turning over to a balance sheet, total assets grew by about 100 million over the prior quarter to 6.5 billion, primarily driven by an increase in our securities portfolio. Loans declined by 16 million from prior quarter with the decline driven by borrowers curtailing their line usage from earlier in the year. Commercial pipelines continue to increase during the quarter which should lead to higher production levels going forward. Deposits remain relatively stable except for seasonal fluctuations and core balances primarily related to tax payments and plan runoff of higher cost time deposits. The mix remain strong with non-interest bearing representing 35% of total deposits, which contributed to the aforementioned 14 basis points reduction in deposit costs, again, underscoring the quality of our franchise. Operating expenses were stable after adjusting for one-time items impacting the prior quarter and declined by 5.8% from the prior year. The combination of higher revenue with discipline expense management led to a decline in our efficiency to 52.5%. During the quarter, we also announced a consolidation of 11 branch locations which should contribute to further efficiency improvement and allow for continued investments in our digital capabilities and franchise. Moving on to credit quality. We saw generally positive trends and asset quality during the third quarter. Loans on deferral, [defined] [ph] throughout the quarter and stood at 78 basis points at the end of September. NPLs and NPAs were stable while net charges off decline. Criticized and classified levels held steady and we continue to actively monitor the portfolio, communicate with borrowers and perform targeted reviews. Notwithstanding and against the uncertain backdrop of the pandemic and the potential for additional stimulus, we continue to build reserve levels, our allowance for loan loss increased to 140 basis points of loans from 123 basis points at the end of the second quarter. Capital and liquidity remained very strong and we opted to add an incremental 25 million and subordinated debt to further increase year two capital. Our CET-1 increased to 12.55% and total capital to 16.7% at the end of the quarter. Slide 4 provide some additional information on the continuation of the actions we've taken to optimize the size of our retail branch network. We've identified 11 branches for consolidation this year, which will mark the third time we've done this since our recapitalization seven years ago. All combined, we've consolidated over 56 branch locations representing approximately 55% of our network inclusive of acquired branches. This resulted in material reductions in operating expenses what manageable iteration, which has helped us improve the efficiencies and increase aggregate branch productivity, as evidenced by the [indiscernible] per branch increasing from $25 million at the time of the recap to 45 million at the time of the IPO to over 100 million after we complete these consolidations in the fourth quarter. It's also allowed us to reinvest dollars back into our digital capabilities and make other upgrades to our business, Slide 5 provides additional information on our COVID-19 response efforts and detail on the PPP program. We originated a small amount of additional PPP loans during the third quarter. And now our primary focus is on helping clients navigate through the forgiveness process. We have about $160 million of loans in various stages of forgiveness, with approximately 29 million that has already been submitted to the SBA for approval. The PPP program had a significant impact on various line items and metrics this quarter and included in the appendix we provide a summary of the areas so you can better understand our performance both with and without the impact of PPP. Turning to Slide 6, we provided an update on our loan deferrals about 96% of the loans that received the modification have now returned to regular payments status. At September 30, we had 79 loans last on active deferral, representing just 78 basis points of total loans and leases, roughly two-thirds of the active deferrals are loans that have been granted a second deferral, with most of those commercial exposure is common in the manufacturing, entertainment and food services sectors. Slide 7 provides an update on exposures to industries that have seen the most impact from COVID-19. The exposures there remain manageable with these industries collecting collectively representing less than 10% of our portfolio excluding PPP, the largest exposure continues to be restaurants at 133 million or 3.6% of the portfolio excluding PPP. Slide 8 and 9 provide more detail on the individual portfolios making up the select COVID-19 industries and with that, I'd like to pass the call over to Lindsay, who provide you with more detail on our results.

Thanks, Alberto. I'll start with some additional information on our loan portfolio on Slide 10. Our total loans and leases were 4.4 billion at September 30, essentially unchanged from the end of the prior quarter. Our originated loan portfolio increased by 41 million, primarily due to gross and leasing, commercial and construction loans, which offset run off we are seeing in our residential real estate portfolio. We originated a small amount of PPP loans during the quarter and our balances grew by 11 million from the end of the prior quarter. The growth in the originated portfolio was offset by a decrease of 58 million in our acquired loan portfolio, including 18.9 million or 8% in the acquired impaired portfolio. Our total loan originations of 204 million in the third quarter were well in excess of 107 million in payouts we had. However, total loans in the quarter were negatively impacted by a $167 million increase in net line utilization. The overall utilization rate dropped from 57.2% from 58.5% last quarter, and it's now below pre-COVID level. Turning to Slide 11, we'll look at our government guaranteed lending business. As Alberto discussed, our team delivered a record quarter of loan production. They had 176 million of loan commitments in the quarter, which was more than double the levels we saw during the first half of the year. We did this by pivoting quickly from our PPP efforts, and we focused on numerous lending relationships that were less likely to be impacted by COVID. The top three industries included finance and insurance, administrative and support services and specialty trade contractors. During the third quarter our managed government guaranteed portfolios increased to just under 2.1 billion in service loans. At September 30, the on balance sheet SBA 7A exposure was 434 million, including 72 million of which is guaranteed by the SBA. USDA on balance sheet exposure was 88.7 million of which 62% is guaranteed. We have been actively monitoring this portfolio and communicating with borrowers as they make the transition back to their scheduled loan payments. The impact of the pandemic on these loans remains uncertain, as we continue to monitor the duration and severity of COVID-19 as well as any further federal stimulus actions. Moving over to deposits. As we have discussed in prior quarters, we are diligently managing our cost of funds and have continued to reduce higher cost deposits. We continue to see a positive shift in our deposit mix, with time deposits declining to 16.8% of total deposits from 18.7% at the end of last quarter. In addition, average non-interest bearing deposits increased 50 million versus last quarter. The positive mix shift helped to drive a 14 basis points decline in our cost of deposits likely driven by 20 basis point decline in our cost of interest bearing deposits. Moving on to net interest income and margin, our net interest income was 53.5 million for the quarter approximately $1 million higher than the prior quarter. This was primarily due to higher average balances of loans and leases which offset the decline of repricing assets. Our net interest margin was 360 in the third quarter down 11 basis points from last quarter. Accretion income on acquired loans contributed 26 basis points to the margin for the third quarter up from 22 basis points in the last quarter. Excluding accretion income, our net interest margin was 334 a decline of 15 basis points. The decline was due to lower earning asset yields as we continue to see repricing in our loan and securities portfolios and the quarter impact of the lower yielding PPP loans as well as excess liquidity. We also had an increase in our borrowing costs resulting from the issuance of our subordinated debt. These were offset by the continued decline in our cost of deposits as outlined in the drivers of NIM change. Excluding PPP loans, the average yield on loans in the third quarter was 506 versus 494 in Q2. While the impact of repricing in our portfolio was moderate, a bit going forward, we will not have the same levels of high cost deposits as an offset. With our cost of deposits now at just 22 basis points, our ability to further reduce deposit costs is limited. As a result, we expect to see slight compression and our reported net interest margin in the fourth quarter. However, not to the same degree as we experienced in the third quarter. Turning to non-interest income on Slide 14. In the third quarter, our non-interest income increased by 9.5 million from the prior quarter. The increase was primarily due to net gains on sales and government guaranteed loans, a positive fair value adjustment on our servicing asset, a general increase in customer activity that resulted in higher fees and $425,000 net impact from securities also contributed to the increase this quarter. During the third quarter, we sold 121.2 million of government guaranteed loans up from 78.7 million of loans sold in the prior quarter. For the third quarter sales, the net average premium was 11.7%, which was a historically high level for this business. We don't anticipate premiums remaining at this level for an extended period of time, premiums have been driven by demand from investors searching for yield and the liquidity in the market. Turning to Slide 15, our non-interest expense was 41.7 million in the third quarter, up from 37 million from the prior quarter, which benefited from the higher amount of salary and benefit costs as we differed as a result of loan origination. Excluding the variance from PPP, our expenses were well controlled this quarter, although we did see higher loan related expenses, which was driven by the strong quarter of government guaranteed loan production. We also had approximately $700,000 in charges recognized during the quarter related to our planned branch consolidations. Compared to the third quarter of last year when merger related and other non-recurring expenses are excluded, our adjusted non-interest expense declined by nearly 6%, which reflects the success we have had in managing our expense levels and improving our operating leverage. With our revenue growth exceeding our expense growth, our efficiency ratio improved to 52.5% in the third quarter from 53.7% in the prior quarter. Looking ahead to Q4, we anticipate expense levels to be elevated including just over 5 million of expenses associated with a branch consolidation. Next, we'll take a look at asset quality. We saw good stability in the loan portfolio during the quarter. Our non-performing assets were consistent at 79 basis points to total assets. We had an increase in non-performing loans, but this was offset by a decline in our RPO and lower net charge off than the prior quarter. As of September 30, our non-performing assets included 3.7 million of government guaranteed loans, which was comparable to the end of the prior quarter. Our provision expense was 15.7 million, which included 6.4 million in specific impairments. With the remainder largely related to an increase in qualitative factors. The quarter included 8.4 million to address the continued economic uncertainties caused by the COVID-19 pandemic. We continue to leverage qualitative factors in our incurred loss allowance methodology related to the uncertainty of the pandemic on our portfolio, including the uncertainty around the unguaranteed portion of the SBA 7A loans coming off with a subsidy payments later in the year. Turning to my last slide on our solid liquidity and capital positions. As of September 30, we continue to have strong liquidity at 2.6 billion, while cash and securities represent 25% of our balance sheet. We increased our regulatory capital issuance 50 million of subordinated debt in June an additional 25 million in August, for a total of 75 million. This additional capital affords us the flexibility of the holding company and bank level. We view this as an opportunistic time to raise capital and solidify our balance sheet during an uncertain environment. Our capital ratios continue to increase during the quarter, total capital increased by 81 basis points to 16.67% and our CET-1 ratio increased by 22 basis points to 12.55. With that, I would like to pass the call back to Alberto.

Thank you, Lindsay. I'd like to wrap up today with a few comments about our outlook and areas of focus going forward. While the economy has and hopefully continues to recover the path of that recovery remains uncertain. The pandemic its impact on businesses and consumers as well as the impact of any additional fiscal stimulus gives us reason for caution. We also expect the current rate environment to continue for an extended period of time. That's said, we've adapted well and remained focused on those areas that we can control namely supporting existing clients managing credit quality, capitalizing on pockets of demand and controlling expenses. Our high levels of capital, liquidity, balance sheet strength, and the hard work of our talented team positions as well to manage through this period, execute our strategy and continue enhancing the value of our franchise. With that operator, we can open the call up for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Michael Perito of KBW. Please go ahead.

I had a few things I wanted to hit. I wanted to start on the -- a clarification question on your margin comment, Lindsay. I think you said if I heard correctly, that the reported margin will be down again in the fourth quarter, but less so than the third quarter. I was curious to what is that excluding any potential PPP forgiveness?

Yes. So the margin is a difficult thing to predict, as you all know, on the call, just given the environment, Mike. But yes, when I'm talking about the margin in my prepared remarks, it's around the reported margin. So again, that PPP timing remains uncertain. But as you've been hearing from us and from others, it's a slow go here in terms of getting the approvals and getting the processing fees through. So you'll see some in Q4, but I don't think it's going to be as material as it will be into 2021 for sure. So that's the guidance there, it’s more around reported, though.

All right. So is it fair to say that there could be a smidgen of upside to that just relative to the forgiveness rate, which is basically anyone's guess, at this point of how much we'll actually, quote, get through by the end of the year?

That's fair.

Okay. And then on the expense side, I was wondering, obviously, you guys have taken a lot of great actions here to kind of protect earnings a bit in this rate environment. I was just wondering if you could boil it down a little bit for us here. And as you looked at the -- I guess, two part question, the third quarter expense run rate, is it fairly clean to kind of layer in some savings onto? And do you have any feel for where kind of the early 2021 cost quarterly expense run rate will settle? I know there's -- I think there's some items that might take longer to bleed into the savings before that, but just that would be helpful kind of starting point here for us.

Sure. So in terms of expenses, Mike, I think that the previous guidance that I had given last quarter was the $42 million to $43 million range. And so obviously, we did a great job this quarter, really controlling the expenses. So there was some noise in there that I outlined for you. Looking at Q4, again, there's a lot of uncertainty out there. And so I hate to give perfect guidance, just given all of the changing dynamics here in the market. And but I think, we've done a good job here, Mike, in terms of controlling expenses so far. And then, looking into 2021, I think in 90 days, I'll have better color for you, we're still going through the process, we will obviously have adjustments continued investments. And then obviously, I've given you some guidance around the branch consolidations about $4 million in 2021 and about 25% of that will be reinvested back into the franchise. So I think I've given you decent guidance there. But again, it's still just too uncertain and we'll have more color in 90 days.

It's fair to think that the quarterly expenses could see a step up in the fourth quarter, even if it's just modest before a lot of the savings hit in the early part of next year, would you disagree with that or?

I would agree with that. I would agree with that. You will have the $5 million from the branch consolidations, hitting in Q4 as well.

Right. Okay. And then my last question is for you, Alberto, I was looking back and it was quick, but I can't remember the last time your pretax protrusion ROA was north of 200 basis points with less than 30 basis points of critical yield flowing through the margin. Obviously, a really strong print here and I'm just curious, how confident are you that that, I know, there's going to be some moving parts and things. But as we get into next year, how confident are you that that the outlook can support, something more in this range relative to kind of where it's been over the last year? So any color there would be great.

Yes. Mike, I think obviously, that's a very good question. And I can -- as I said, in some of the comments during the prepared remarks, we're focusing on the things that we can control. And as Lindsay alluded to expenses, as you well know, has been an area that focus managing the margin and the things that we can control with respect to the margin, has obviously something that we've been focused on going back to 2019. In the environment that we're in kind of looking at pretax preparation and trying to do the things that we can to make sure that we're creating room in what is a tough revenue environment, because of where rates are is obviously a priority for us. I think to my comments earlier, I think the quarter that we had both from a production standpoint and in terms of the gain on sale margin premiums were very, very attractive, I think we've talked about historically going back and looking at premium levels and this quarter they were as high as we have seen, I think as high as I have seen in my career and I think that's driven largely by the items that Lindsay mentioned, as well as the fact that we have these fed facilities providing support to the market and that obviously has helped. So, I'm constructive on that, Mike, it's an area of focus, however, if that's going to fluctuate around a bit and it's going to be driven really by what happens on the revenue front what's the -- what happens from here on out, the economy has recovered, continues to recover, but the pandemic is not over, are we going to get more stimulus or not. So revenues are going to be depending on that if we can continue to get good momentum in terms of loan growth. And if we can continue to kind of inch up revenues, then I think we will continue to perform steadily. But you're asking me for a specific kind of range in a number that can fluctuate by things that we can’t control and also by things that we can control. And right now, we're just focused on the things that we can control there.

Yes, no, that's fair. I'm not sure looking for a specific number. But do you think it's reasonable for us to sit here today and look at some of the things you guys done and it seemed like you guys are maybe a little bit of an inflection or a turning point here where there's a framework in place to drive some steadier and higher returns. Would you agree with that?

We're focused on that, Mike. I think that's fair.

The next question comes from Nathan Race of Piper Sandler. Please go ahead.

Question on the SBA unit, looking back, I think this is probably the strongest quarter that we've seen in terms of SBA closed commitments. And I guess I'm just curious, as we look into 4Q in 2021, how much of the strong binds that we saw this quarter a function of some of the disruption that's maybe existing in the market? I think, you guys due to the fact that there's been strong demand for the seven eight products. I'm just trying to parse through how much of those just nuanced demand versus just kind of how, the sales team and the pipeline has just increased organically of late?

Yes. I'll comment generally. So obviously, there is definitely some impact this quarter by -- that was driven by the fact that the product became very attractive for borrowers because of the fact that on any new origination close before the end of the quarter, September 27, to be exact, borrowers obviously benefit from six months worth of principal and interest. So that's that was certainly a very attractive feature. And certainly drove borrowers to try to capitalize on that. That said, we continue to see pretty good demand. I would say, if you strip out some of that extraordinary effect demand was good. And we continue to see good demand, even after we started telling borrowers that, look if you're coming to us here at the end of August or at the beginning of September thinking that we're going to be able to close your loan before September 27. We're not going to be able to do that. And we saw the pipeline continued to build throughout that period. And that to me just shows that there's still decent demand out there. And we've seen demand continue through. So Nate, I think, yes, no question. It was an impact, that we expect that impact to be there every single quarter? Of course not. But the underlying demand, I think I would put it as being pretty good right now.

Okay, great. That's helpful color, and then perhaps a way from the SDA unit, here's kind of get your thoughts, loan balances, ex-PPPP came down a bit in the quarter, you guys are also working through some of the more COVID sensitive industry exposures that are within the loan portfolio. So just curious if you guys are kind of seeing a trough and kind of loan balances coming out of third quarter graphics and expect to see some growth in 4Q into 2021, as well.

Yes. I think we saw as Lindsay said in her comments, I think we saw pretty, I mean, decent originations, aside from the SBA from the government guaranteed business, I think the one offset that we had was we saw kind of line usage revert back to levels to kind of more normalized levels free pandemic. So that was obviously a negative in the sense that people pay down their balances to the degree that they had drawn their lines and just sat on that liquidity in a precautionary manner. We saw some of that revert back to very much levels that were at earlier in the year. So, and that had some impact on balances, Mike. So, pipelines overall in the commercial side, so both, C&I, commercial real estate, built -- we built pipelines throughout the quarter, are they at pre-COVID levels? Not yet, but I think we're pretty comfortable and pretty happy with the way we're seeing transactions, we're seeing deal flow. It's not yet what it was, but it was a -- certainly has been a nice recovery this quarter. So we feel pretty optimistic about being able to see some growth, obviously, with that comes pay down. So, we anticipate that we're going to see probably some higher pay down activity, if nothing bought for the fact that pay downs this year have been pretty muted, for obvious reasons. So we may see some pay downs here in the fourth quarter. But, overall, I think loan demand, I mean, we're certainly open for business selectively looking at clients and trying to prudently grow our business. And I think we're getting our first shot at that.

Okay, that's helpful. If I could just ask one more on capital, you guys are assisting with very high capital levels, currently, and stocks still trading below tangible book value. So just curious to know what would you need to see from an environmental perspective or perhaps internally from a credit perspective or otherwise to no resume the buybacks that we saw earlier this year in the first quarter?

So I think, first and foremost, Nate, I think it's just hopefully some first and foremost is the pandemic. And I think, getting that pandemic under control and as you well know, you're in Illinois, we're seeing cases rising again, so we're monitoring that and more importantly, the impact that has in terms of businesses potentially having to shut down again, or slow down again. So any type of disruption there, obviously, in the short run, will impact businesses and will impact activity. So getting the pandemic under control, I think is important. Having a little bit more certainty in terms of any additional fiscal stimulus coming from the federal government is also important. And, credit trends have been reasonably stable so far, but, there's still a lot of uncertainty in the environment. That said longer term, as, as we stated before, is, we want to have flexibility first and foremost for safety and soundness, second to support organic growth and then third to try to take advantage of opportunities that we see in the market. And that, really remains the case at this point.

The next question comes from Terry McEvoy of Stevens, please go ahead.

I guess my one question is what type of assumptions did you make within the quarterly reserve analysis as it relates to those SBA 7A loans that are coming off the SBA principal and interest guarantee?

Yes, I think definitely we are factoring – that was a factor in our reserving this quarter, can we the [indiscernible], I think we may, we obviously went through a period where these borrowers were getting. And remember these were borrowers who were current pre-pandemic and we are eligible to receive connection these payments as a result? We are looking and now we are seeing, okay, as here in the month of October a lot of these, most of these borrowers are resuming their payments, we are obviously monitoring that, seeing the as they come off the borrowers to making their payments. But look we suspect that absent any additional action from the federal government here. I think like any part of our portfolio we're going to see some borrowers that we're going to look at, they will – will see where their business is to the degree that they require the furrow or work with those borrowers. If it makes sense. And if it doesn't, then we will proceed to work out those loans in the normal course of business. But to answer, going back to your first point, of course, yeah, that was certainly I mean, an element of uncertainty there, as these borrowers are coming off these subsidy payments.

And then just as my follow up, Slide 7, the COVID-19 Industries, that slides been consistent since it was first published after first quarter earnings. And my question is, as you think about the next few quarters, what comes off that slide and then maybe more importantly, or is there anything else maybe office CRE or something that has the potential to kind of find its way onto that slide?

I think we will know as more time passes, Terry right now, that's kind of like our view on that. Knock on wood, we don't -- you mentioned office -- we don't have a lot of exposure to office. So, at this point, we feel, okay, with what we have, but our sense right now is those are probably the industries that still remain to be the most impactful ones.

[Operator Instructions] Next question comes from Brian Martin of Janney Montgomery. Please go ahead.

Just wondering, could you guys comment just on the trends in the classifieds and criticize or just kind of the migration trends in the quarter, just relative to kind of the either reviews of the loan portfolio now you've had a chance to kind of take a look at just -- wondering it didn't sound like there's anything significant that occurred in the migration this quarter. Is that correct or just elaborate a little bit on the migration you're seeing about at all?

Mark, you want to take that?

I wouldn't say migration is the word. We've had loans go into the C&C portfolio classification. We've had some exit. It’s still a good environment for resolution of prime loans because there's so much capital out there, there's so much desire to acquire assets of all types. And people are taking advantage I believe. So we had some go in, we have some go out. So I think that's going to be a continued theme for us going forward with our loan portfolio, but I don't anticipate a big changes going forward. But with all the uncertainty, can we have a surprise? Sure. But we think we have a good handle on what's in our C&C list right now and we'll continue to look at our loan inventories and as on a frequent basis here going forward.

Okay, perfect. That's why I thought stable, I guess migration was the wrong word. I heard you there. So okay. And then how about just on the going back to the SBA question, I guess, I mean, just Alberto do these loans, or just so I understand the process, when those loans come off the debt relief from the SBA, it sounds as though they do qualify or they would qualified for deferrals or I guess is how does that process work? And I guess your expectation is what you'd have more clarity, I guess the timing of when your loans come off that debt relief, is much of it already occurring? Or is it expected to occur in the next month or so just kind of timing issues would be helpful?

Yes, I think maybe the framework to think about that, Brian is to kind of look back at where those loans were at the time that Congress passed the CARES Act. So to qualify for that, you're you essentially had to be a performing borrower. So those loans were performing at the time of the Cares Act. And remember, this was more of a broad based program, where there wasn't any distinction in terms of, okay, this industry, or this type of loan, or the following characteristics, or you need the following criteria, in order to qualify for these payments, if you had a, if you had an SBA loan, if you were, you know, a performing borrower, essentially, you were going to get six months worth of principal and interest. And as these loans come off, that they're basically returning to kind of their pre-CARES Act state, and then they resume their monthly payments. And as we proceed through this, you so just like we would with these loans, or any loan in our portfolio, we will, monitor these portfolio to resume making their payments to the flowers that A borrower’s late, we will follow up with that borrower in the normal course, agree that a borrower comes to us and basically says, listen, I'm struggling, because my business is not yet open or, whatever the circumstances are, we'll work through with that borrower to determine what makes the most sense, if a deferral makes sense, we will consider that. Obviously, if Congress were to act which is -- there's been bills going, back and forth, as you know, before between the Senate, the White House and the house. So if that were to happen, then we'll monitor and see what the impact of that is. But if not, we will make a termination as to what is in the best interest of the borrowers and ourselves in terms of granting a deferral, or if not then proceeding to working out the asset and exceeding the relationship. So I would say, it's -- we will handle that as we would normally would any part of our portfolio, the caveat being here is that, or call it, the nice thing about this particular subsidy is that if you think about our traditional deferral portfolio, there was no principal forgiveness, there was no interest forgiven. I mean, it was just simply a deferral of that. When you think about this CARES Act payments and this subsidy, maybe think about it in the context of these borrowers, essentially received an equity injection in the form of six months of principal and interest. It's not like payments accumulate, and now the borrower has more debt that they have to pay now, they're just simply going to resume making payments as they normally would on their obligations. So we'll see, it's obviously something that we're monitoring closely, as we come through here in the month of October and the month of November, so we'll know more as time passes here, in the next, couple of months.

Got you. Okay, thanks for all the color and just maybe last one or two for me was just the reserve bill this quarter. You kind of talked about it, but I guess at this point with where the criticizing classifies are the stability there, then I guess is your expectation if they don't see any significant underlying change in trends, that much of the reserve bill from COVID, at this point is done?

Yes. I think that's a fair comment, Brian. I think I would caution and I know we said this a few times here today, but there's still a fair amount of uncertainty in the environment. And obviously, I think it's prudent to be cautious given that, but I think we want to see how the outlook develops from here. And how the portfolio continues to perform. But I think your question and your comment is fair.

Okay. And then just one last, the pipelines, you said, Alberto, I know they're coming back on the loan side, but is there any -- I guess, can you talk about what's driving the growth in the pipeline today? I mean, what areas are you seeing activity and you talked about some of the business activity kind of picking up a little bit at the discussions?

Yes. So we're seeing, C&I, we continue to see, I think, pretty good activity there. I think one thing to remember is, we had made a number of hires last year, that had customers, as you know, those individuals are typically have [indiscernible] placed for a period of time before they can start actively calling on their customer bases. So those time periods have largely expired. So we're seeing the efforts of those individuals, starting to translate into potential customer activity there on the C&I side. We're also seeing a resumption in activity and borrowers, existing borrowers wanting to do things, wanting to continue on projects that maybe they had put on pause, earlier in the year because of the pandemic, so some of those things, they're coming back to us to request additional capital for equipment for things that that essentially got suffered. On the real estate side, we're seeing good transaction activity is good, you're seeing a fair share of deals. We're obviously being, very targeted and very focused on what we consider there, but I think we're seeing pretty good transaction flow and that pipeline is building back up nicely. On the sponsor side, again, to the degree that you had sponsors that had a lot of dry powder, they're in a position to look at acquisitions and try to take advantage of the environment. And we've seen some sponsors, essentially do that. So we're seeing again, good transaction flow there, as well. So we're getting -- let's put it this way, we're getting a fair share of looks. And as long as we continue to be to sit in the batter's box and be selective at the things that we swing at, I think we'll continue to be -- build our pipelines accordingly.

I show no further questions, I would like to turn the call back to management for any closing remarks.

Great. Thank you, operator. So that concludes our call this morning. Thank you for participating today and your interest in Byline. We hope you stay safe and healthy and look forward to speaking to you again next quarter. Thank you.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.