Byline Bancorp, Inc. (BY) Q4 2020 Earnings Report, Transcript and Summary

Good morning, and welcome to the Byline Bancorp Fourth Quarter 2020 Earnings Conference Call. [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, Riley. Good morning, everyone, and thank you for joining us today for the Byline Bancorp fourth quarter 2020 earnings call. We will be using a slide presentation as part of our discussion this morning. Please visit the Events and Presentations page of Byline’s Investor Relations website 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 website. 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 website 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. Alberto?

Great. Thank you, Tony and good morning everyone and welcome to our fourth 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. You can follow our discussion with presentation materials. You can find in the Investor Relations section of our website. Joining me this morning are Lindsay Corby, our CFO; Mark Fucinato, our Chief Credit Officer; and Roberto Herencia, our Chairman. As a reminder, you can follow our discussion with presentation materials that are in the Investor Relations section of our website. We’re happy to be presenting to you the results for the quarter and the year 2020, which we will no doubt remember for the rest of our careers. At this time last year, we had started to pay attention to a virus outbreak in the not so well-known province of Wuhan and had no foresight of what was to come. Banks had to come to grips with an economic crisis, collapsing interest rates and the effects of a once in a century pandemic. We adapted quickly to a work-from-home environment, supported customers through multiple rounds of PPP, strengthened our capital position, built reserves, resume growth, reduced expenses and continue to invest in the business. All in all, we accomplished a lot in a challenging operating environment. Before we get into the presentation, I want to comment on the appointment by our Board of Roberto Herencia who has served as non-Executive Chairman of the Board since 2013 as Executive Chairman and CEO of Byline Bancorp. Seldom does one have the privilege of working with someone of Roberto’s caliber for an extended period of time. I have been fortunate enough to work with Roberto directly for 27 years and look forward to continuing to work closely with Roberto in the years ahead. Moving on to our results. For the quarter net income came in at $12.3 million or $0.31 per diluted share. This was a decline when compared to the previous quarter, but these results include charges related to both the previously announced consolidation of 11 branches, which was completed at the end of December and impairments taken to accelerate the disposition of assets held for sale. Collectively, this reduced our net income by approximately $0.15 per diluted share. Our adjusted pretax pre-provision revenue was solid at $30.7 million for the quarter and our adjusted pretax pre-provision ROA came in at a healthy 191 basis points. Revenue for the quarter was $73.7 million and was driven by an increase in net interest income, which was up 4.7% from the third quarter and strong non-interest income, albeit, lower than the record levels from last quarter. Our margin expanded across the board and also benefited from our ability to continue to lower deposit costs. Moving onto the balance sheet. Loans, excluding PPP increased by $70.4 million or 6.4% from the linked quarter. As previously discussed our pipeline strengthened gradually over the second half of the year and we saw the benefit of that during this quarter with originations increasing to $230 million up from $204 million in the previous quarter. Overall production was broad-based across our commercial, commercial real estate, sponsor and specialty lending areas, including yet another productive quarter from our Equipment Leasing Group, which saw originations rising to $49 million. Our government guaranteed lending business also had a strong quarter of production with guaranteed loans sold topping $108 million and $9.4 million of gain on sale income, which was below the record level set in the third quarter, but up on a year-over-year basis. Total deposits decreased by $58 million, largely due to seasonal fluctuations and public fund balances. Despite the continued strong inflows of commercial non-interest bearing deposits, our mix was outstanding and we ended the year with DDA balances representing 37.1% of total deposits. Moving on to asset quality. Asset quality improved with both NPAs, NPLs, charge-offs and provision expense declining from the prior quarter. We continue to add two reserves and ended the year with the allowance representing 153 basis points of total loans or 174 basis points, excluding PPP balances. Loans on deferral increased by $72.6 million to $100.6 million representing 2.6% of loans excluding PPP. The increase in deferrals was driven by modifications granted to SBA borrowers coming off Cares Act subsidy payments during the fourth quarter. We anticipate that approximately 95% of these borrowers will be eligible for the next round of subsidy payments starting in February. Notwithstanding the improvement in the credit – the outlook for credit, we remain vigilant in identifying weaknesses in our portfolio and continue to perform targeted portfolio reviews across our different business lines. On the business side, we completed the closing of 11 branches identified for consolidation at the end of December. To date, we have not seen any meaningful deposit runoff. As a result of these consolidations, the efficiency of our network continues to improve with deposits per branch topping $100.3 million, excuse me, $103.3 million at the end of the year, up from $84.4 million at the end of September. Our capital position remains strong with a CET ratio of 12.2% and total capital of 6.2% at the end of the quarter. Given the strong financial performance, capital position and improving outlook, our Board authorized the doubling of our quarterly dividend from $0.03 to $0.06 per share, and the reinstatement of our stock buyback program. This provides us with the ability to manage our capital position and deliver returns to shareholders, while retaining flexibility to continue organic and strategic growth. Slide 5 provides additional information on our COVID-19 response efforts and the detail on the PPP program. During the in the fourth quarter, our focus shifted to helping clients navigate through the forgiveness process. At the end of the quarter, we had $286 million of loans in some stage of forgiveness with approved applications totaling $110 million. In January, we began accepting applications for the current round of the PPP program. Through January 26, we have received over 1,900 applications, totaling just over $290 million and have already funded approximately $166 million. Turning to Slide 6, we provided an update on our loan deferrals. Within our conventional loan portfolio total modifications remain relatively unchanged from the prior quarter and continue to be less than 1% of total loans. As I mentioned earlier, we granted modifications to SBA loans coming off Cares Act subsidy payment. Each modification request was reviewed and analyze with updated financial information to determine need and confirm the integrity of our risk ratings. These modifications provide these borrowers with a bridge to the next round of subsidy payments starting on or after February. Slide 7 provides an update on our exposure to industry, seeing the most impact from COVID-19. These exposures have remained manageable with these industries collectively representing less than 10% of our portfolio, excluding PPP. Please refer to the appendix for additional detail on these exposures. Now I'd like to turn the call over to Lindsay, who will provide you with more details on our results. Lindsay?

Thanks, Alberto. Good morning, everyone. I'll start with some additional information on our loan portfolio on Slide 8. Our total loans and leases were $4.3 billion at December 31, down from the end of the prior quarter, due to the runoff of the PPP loan. Excluding the PPP loans, our total loans and leases increased by approximately $70 million. Our originated loan portfolio increased by $32 million or $136 million when PPP loans are excluded. We saw broad growth across our commercial, commercial real estate and equipment leasing, which helped offset anticipated runoff in our residential portfolio. Turning to Slide 9, we'll look at our government guaranteed lending business. We had another very strong quarter of production with $117 million of loan commitment. Although this was down from the record level we saw last quarter. During 2020, the business originated approximately $450 million, despite the disruption for the business in the first half of the year. At December 31, the on balance sheet SBA 7(a) exposure was $436 million, including $53 million of which is guaranteed by the SBA. The USDA on balance sheet exposure was $89 million, of which $54 million is guaranteed. As we continue to work through the pandemic, we have proactively provided for the uncertainty around this portfolio. At December 31, our allowance as a percentage of the unguaranteed loan balance represents approximately 8%. We continue to actively support our small business customers through both the second round of PPP and through other government program. The new relief bill made some enhancements to the traditional SBA program. For example, the SBA guarantee on 7(a) loans increases from 75% to 90%, fee waivers on loans as well as additional subsidies as Alberto discussed. We believe these SBA program enhancements will help our customers during this time. Moving over to deposit, our total deposits decreased $58.2 million from the end of the prior quarter. During the third quarter, we had seasonal inflows of public funds due to tax receipts. And in the fourth quarter, we saw seasonal outflows that those customers utilize those tax payments for their budgetary needs. These outflows from public funds were partially offset by continued inflows of commercial deposits that increased our non-interest bearing deposits by $44 million. Our deposit activity during the quarter continued to result in a positive shift in our mix of deposits. Non-interest bearing deposits increased to 37.1% of total deposits from 35.7% at the end of the prior quarter, demonstrating the core strength of our franchise. The positive mix shift helped to drive a 7 basis points decline in our cost of deposits, which included a 12 basis point decline in our cost of interest bearing deposits. Moving on to net interest income and margin, our net interest income was $56 million for the quarter, nearly 5% higher than the prior quarter. This was primarily due to the net fee income we recognize related to the $110 million of PPP loan forgiveness during the quarter, as well as lower funding costs. Our interest margin was 3.77% for the quarter, up 17 basis point from last quarter. Accretion income on acquired loans contributed 16 basis points to the margin for the fourth quarter, down from 26 basis points in the last quarter. Excluding accretion income, our net interest margin was 3.61%, an increase of 27 basis points. The increase was due to PPP fee income recognition. The decline in our average cost of deposits and more favorable mix of new loan production that positively impacted our earning asset yields. Excluding PPP loans, the average yield on loans in the fourth quarter was 5.08% versus 5.06% in the previous quarter. With our average cost of deposits declining to just 14 basis points in December. Our ability to continue reducing our deposit costs is limited, and we will not see the same level of benefit from the time deposits we're pricing this year. As the result we expect to see some modest compression and our net interest margin, excluding PPP stemming from higher securities balances before we redeploy into loans. Speaking to the impact out of the PPP loans on the margin, the remaining effect of the first round is approximately $9 million of net processing fees. We believe this income will be more concentrated in the first half of the year. The impact of the second round of PPP in 2021 is still in process. And as Alberto mentioned, we're at about 50% of what we originated in round one. We hope to be able to provide additional guidance on the second round of PPP by the end of the first quarter. Turning to non-interest income on Slide 12. In the fourth quarter, our net interest income decreased by $4.5 million from the prior quarter. The decrease was primarily attributed to couple of factors. We had a $3.2 million decline in net gain on sales of government guaranteed loans, due to a decrease in the volume of loan sold. We had a $2.3 million loan servicing asset revaluation charge, which resulted in a swing of $3.4 million in this line item, following the positive adjustment we had in the prior quarter. These factors were partially offset by a $3.1 million in net gains on securities sales in the fourth quarter. Although the contribution from our government guaranteed loan group was lower than the record levels we saw in the third quarter, we still had a very strong end to the year from a historical perspective. During the fourth quarter, we sold $108.1 million of government guaranteed loans, which was up 6.5% from the comparable quarter in 2019. The net average premium continued to be very strong at 11.9% as a result of lower inventory in the market and investors searching for yield. As we move through 2021, we would expect premiums to return to a more normalized level. Moving to non-interest expense trends, our non-interest expense was $47 million in the fourth quarter, up from $41.7 million from the prior quarter. As Alberto previously mentioned, our fourth quarter expenses included charges related to branch consolidations and impairment charges on assets held for sale. We took these charges to accelerate the disposition of our non-operating real estate portfolio. We will continue to look for opportunities to further reduce overall square footage, given the impact of this pandemic. Excluding the branch consolidation and impairment charges, our non-interest expense declined $2.4 million from the prior quarter, primarily due to a decrease in legal expense and lower loan and lease related expenses due to the lower volume of government guaranteed loan production this quarter. Loan origination and workout costs were well-controlled throughout the year, despite the pandemic. On an adjusted basis, our efficiency ratio was up from the prior quarter, primarily due to the lower net gain on sales loans. However, year-over-year, our efficiency improves to 58.4% in the fourth quarter from 61.1% [ph] year ago. We would expect our expense run rate to be in the $41 million to $42 million range to start 2021. Remember the first quarter tends to be more elevated as a result of payroll taxes and other business lines seasonality expenses. We continue to prudently manage our expenses and find opportunities to lower costs throughout the organization. Next, we'll take a look at asset quality. We saw good trends in the conventional portfolio during the quarter. Our non-performing assets declined 5 basis points to 74 basis points of total assets. OREO decreased by $1.8 million and our non-performing loans declined 4 basis points to 95 basis points of total loans and leases. Our net charge-off also declined in the quarter to 47 basis points of average loans from 53 basis points last quarter. As of December 31, 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 $10.2 million, which was primarily driven by the growth in our originated portfolio and a further increase in the reserves held against our unguaranteed portion of the government guaranteed loans. With that, I would like to pass the call back to Alberto.

Thank you, Lindsay. Turning over to Slide 15, I'd like to wrap up today with a few comments about our outlook and priorities for 2021. As far as the environment is concerned, we remain cautiously optimistic and expect growth to pick up, particularly in the second half of the year. That, of course, is continuing on the vaccine and the current course of the pandemic. Our priorities remain the same for 2021. We want to continue profitably growing our business, drive returns higher, maintain a high level of engagement with our employees, continue to invest in the business and capitalize on both organic and strategic growth opportunities in the market. With that operator, let's open the call up for questions.

[Operator Instructions] Our first question today comes from Ebrahim Poonawala with Bank of America.

Good morning, guys. I’d just like – just first, if you could for touch based on the CEO change, and obviously there's no question about Alberto's experience, but just talk to us in terms of why the change, what you expect to do differently going forward following the change. Just give us some color around that because it's fairly unusual to see something like this. So help us.

Sure. Roberto, you want to take it.

Happy to Alberto. Ebi, good morning, happy New Year to all of you. Ebi, first, I think, this is in part an alignment for the role, right? And the actions that I have been playing in the organization since inception since 2013, so in part, the Board is aligning, what my role been with the right title, right? The other part is clearly, you know how the industry and the world have changed, right? We have an acceleration of trends. Our planning cycles have got them compressed. And so there is a premium on execution here. Alberto and I have been fortunate enough to have worked very closely together for almost 30 years. And I think that we all feel that we can benefit from formalizing that relationship and taking this to a different level. There is really no mystery behind it. It's an opportunity that we feel exists and that we can benefit from what we think is going to be a major disruption in the marketplace over the next few years.

Got it. And this side to go back to this, Roberto, so I get the title change, but is there anything strategically as a shareholder, we should expect the bank to do differently versus what we were doing previously in terms of how you're pursuing organic growth and the roll-up strategy. I'm just wondering, is anything changing strategically that becomes a lot more possible because of this split in roles, which was not possible previously?

No. Alberto mentioned that our strategic priorities have now changed. We think we have a terrific strategic plan in place. You know our aspirations here it's to be the best commercial bank, middle market bank in the Chicago area. Those opportunities are there today more than ever. So there is no change to our strategy and our approach. We are going through, through this change try to accelerate on some of the execution opportunities that are in front of us and accelerate them, but no change to our direction.

Got it. And I guess just one quick one, moving to credit quality, Lindsay, just talk to us in terms of the outlook on credit, just your comfort level in terms of having observed these portfolios over the last few quarters, the new PPP. How do you think about future in reserve base provisioning on losses as you think about the next year?

Yes. Ebi, I'll take that. So a good question, very relevant question. So obviously, we are the – look at this point, last year, we were starting to become aware of the pandemic and then in about a month or so we were facing an environment that I don't think any of had seen an anticipating the year to be a very challenging year from a credit standpoint. I think it's fair to say that, that the environment turned out largely as a result of all of the stimulus that was done, the different programs, the different facilities that were put in place, the environment from a credit standpoint was a bit more benign than any of us had expected. That said, as we look to the future, I think it's – as I said in the comments, our outlook is, we're cautiously optimistic. We think that hopefully we get this pandemic in the rearview mirror. We think economic growth will pick up. Obviously, contingent on the vaccine, but we see economic growth picking up particularly in the second half of the year. And assuming that's the case, we do anticipate credit to essentially moderate. I've spoken in the previous quarters about seeing probation expense be at elevated levels. Obviously, we saw that moderate in the fourth quarter, and we anticipate that to further moderate obviously. And the big caveat is, absent the setback as it pertains to the pandemic here in 2021. So as far as what we have seen, look, I think we are – when we look our portfolios, we are – since early on last year, we began to really do enhanced – further enhance the type of monitoring that we do. In terms of constantly doing portfolio reviews, constantly being on top of clients, trying to understand what the impact of the environment is through their business. We continue to do that. And I think on the conventional side, the portfolio has held up very, very well. So we are very constructive there. On the SBA side, I think we saw, and we spoke about this at the last call. We mentioned that we would be monitoring borrowers coming off the subsidy payments here in the fourth quarter, we saw that. You saw that we did about $75 million roughly of modifications there, which are essentially deferrals. No surprises there. Those portfolios are largely restaurants, hospitality amusement. So the industries that you would expect would be impacted by restrictions, lockdowns, et cetera. Good news is, I think with the flexibility that we're providing to those borrowers as a result of the modifications plus the fact that a large, large portion of those of that portfolio is going to be eligible to receive another round of subsidy payments. What we anticipate is, obviously, a lot of those businesses are going to have a very good opportunity to be able to get through to the other side of the pandemic. So those portfolios, we took the opportunity now, when we had to touch them to go through the modifications. It was a one-by-one process with each borrower getting updated financials. We confirmed our risk ratings and rated them accordingly. So, no, if we saw that something was a criticized asset, we classified it as criticized. If we saw that it was a classified assets, we rated it as classified based on updated information. So furthermore, you're going to see an uptick in our criticized and classified levels. That optic is essentially 100% driven by what we did in that portfolio. So we pretty much boxed in that exposure pretty well. And obviously we'll continue monitoring accordingly. I hope that answered your question, Ebi.

Got it. Thanks for taking my questions.

Our next question comes from Terry McEvoy with Stephens.

Good morning, everyone. Nice to see the commercial loan growth in the fourth quarter, and it sounds like you're expecting maybe growth to accelerate in the second half of 2021. Under that scenario is that the opportunity, Lindsay, to reduce securities kind of build up the loan portfolio. And is that, what's it's going to take to provide some core NIM stability?

You bet. It’s spot on Terry.

Okay. And then going back to Roberto, maybe as you think about the strategic plan there's growth, which was mentioned in the press release, and then there's actually increasing shareholder value. I'm just curious your philosophy as someone who's been in the industry for a long time, you were with – been with Byline since day one. What are the opportunities to increase shareholder value for Byline? Is it M&A? Or is it having more of an impact and in call it presence in middle-market commercial banking in Chicago, or maybe it's a little of both? Thank you.

Thanks, Terry. And Alberto and Lindsay please chime in, because we talk about this all the time, Terry. And I think one of the attributes of the franchise that we've built is exactly optionality, right? So it's both right. We see strong opportunities in the organic area and as we've shared with you all along and we see some other – some really interesting opportunities as well on the M&A side, which we would only execute per the guidelines that we've shared with you in the past, right. We we've done acquisitions that have been, I think smart, well priced within the metrics that we've shared with you. So it's both. But we like very much where we're sitting. We're a commercial bank, right. That's should be pretty clear to everyone. And we have terrific teams on the C&I side, on the CRE side. We have some niche businesses that are very powerful that offer us some really nice opportunities. And so it's the optionality built in our franchise. Nobody has mentioned the increase in dividends, but we had a very low dividend. We raised it to a point where it's still very low. We talked about the share buyback. So those are options for us. Our focus is still relatively as low dividends. So we continue to believe in our growth strategy and as you know, we've sat we're sticking to that.

Appreciate that. Thanks everyone.

Our next question comes from Michael Perito with KBW.

Good morning. Happy New Year.

Happy New Year, Mike.

I wanted to spend a minute on the – excuse me, sorry. On the SBA outlook, you guys alluded to kind of the changes there, and I think for at least a temporary period of time here, fees to the borrowers with which are pretty significant are being waived. And I think there's also fee, a smaller fee to you guys as well, right? That will be waived. And then, I can't help, but notice the strength in the back half of the year, the PPP program, I'm wondering maybe if larger banks are pulling back into space a little bit. I was just curious if maybe you can provide us an update. I mean, it feels like there's forces at work that could keep this SBA origination platform elevated near term. I'm just wondering, do you kind of agree with that? And is there anything else that we should be thinking about as we kind of look over the next couple of quarters and try to forecast what the SBA revenue line could look like?

Yes. Sure, Mike. So a couple of things, I think the answer to that is yes. The only short term caution I would give you is the fact that the PPP, it just – the SBA has done a lot of things in a very, very short period of time very quickly. And you have a new round of PPP, there were a lot of changes, I think for the most part despite some – so many issues that are always going to be there anytime you have a program of this size. They've done a good job in trying to modernize and facilitate their ability to process a large number of loans in a relatively short period of time. But it's caused some delays. I mean, I think you've probably read some, they're a little bit delayed on certain things that they want it to do as it pertained to forgiveness. And that's updating forms, getting us certain things to allow for that. So that's – there'll be some short-term disruption on that. As far as the new – some of the new enhancements to existing programs that Lindsay talked about. Look, we want to take advantage of that. Clearly, there are – aside from the increase in the guarantee, which is certainly very much a positive. You have the fees that you mentioned. And so we want it – to the extent that we can, we want to make sure that our borrowers benefit from that. So if it gives you an example, if we have a borrower, that's going to close a loan today and we can wait a week or so or until the SBA allows for those reduction in fees to take hold, we're going to do the right thing for the borrower. We're not just going to rush to have the borrower incur higher fees when a week later they're going to substantially save some money. So that's the caveat that I will give you. There's a little bit of a disruption until the agency can get all of these things off the ground and running and put in place, so that we can kind of resume business accordingly. But that being said, I mean, we think that there is – I mean, I think our outlook for the year factors in the fact that there is some pent-up demand that we see there that hopefully, we'll be able to capitalize on as the vaccine, we continue to see progress with respect to the vaccine. And hopefully, COVID, we can look at it in the rearview mirror. So hopefully that gives you some construct of that.

Understood, that’s really helpful. And then Lindsay, on the expense side, I think the core number has been kind of between $42 million and $43 million in 2020, outside of that second quarter, which was abnormally low. And I’m just curious, I know you guys have some cost savings coming in from the branch closure, some of that’s being reinvested. It sounds like growth is picking up. So, I mean, is it fair to maybe kind of stay in that $42 million, $43 million type range in your term here? Or do you there’s enough coming out that that there should be a little wiggle room down from that as we look to the first half of this year, I guess.

So Mike, we always look for wiggle room to continue moving down. So we want to make sure we’re running the organization in an efficient manner. So we will continue to try to push it down. I think the range that I gave you, I still feel is a solid one here over the course of the year, there are ebbs and flows as I hinted to. We are looking at the square footage of our real estate throughout the organization and trying to determine what that looks like post-pandemic. So again, we’re going to look to find levers and opportunities wherever available.

Helpful. And then just lastly for me, Roberto, you commented about how the environment is kind of rapidly changing. I imagine a big piece of that is, technology and digital and mobile adoption and whatnot. Just curious, how those responsibilities or that oversight and leadership decision-making will be split kind of going forward. And is that kind of incorporated in terms of the general comment you made about – there’s just a lot to do, I guess, right and more hands on deck will certainly help.

Yes. Mike and I obviously want to be sensitive Alberto and I have talked about many of these things, but we haven’t – we always want to talk to our troops first, and our people first. And so clearly, we just announced a change, Alberto and I have talked about the things that we need to push. Yes, digital banking is one of them. So clearly we have and Alberto is really in my opinion, one of those few bright minds that is on top of that game. So we want to use going forward our talents in a way that can maximize the execution. So you bet that we’re going to be smart around how we spend our time working closely together, but that’s really work to in progress.

Yes. Mike, and if I could add a little bit to what Roberto just said. You bet that there is a lot. And as you well know the financial services landscape, particularly with what banks and I don’t mean just the notion of what is your mobile app look like, or what is your online banking application look like. There’s an entirely different environment out there today in terms of the way financial services are provided or the user experience seems to be separated from the provision of the actual banking services. That’s – in our opinion, that’s very interesting fertile ground that we definitely want to explore in a more deliberate way. So in terms of things to do and kind of exciting opportunities that we think are there for a bank like us. I mean, those are things that we want to have the capacity to be able to look at and explore to see what opportunities are there for the company.

Yes. No, I totally agree. It makes a lot of sense. And thank you guys for taking my questions. I appreciate it.

Thanks, Mike.

Our next question comes from Nathan Race with Piper Sandler.

Yes. Hi everyone. Good morning.

Hey, Nate.

A question on just the SBA government guaranteed kind of charge-off outlook. I appreciate that that was kind of the main driver in charge-offs here in the fourth quarter. And I guess with the latest round of stimulus, how should we think about maybe charge-offs within the SBA unit trending in the second quarter as those payments roll off that are being supported at the government level into the second quarter again, into the back half of 2021 as well.

Nate, I’m sorry, but you were kind of breaking up a bit coming in. We didn’t quite get the – probably the full question there. But we’ll take a stab and just please feel free to add on after we try to answer. But I think your question was more around kind of what’s the outlook more so in terms of timing of charge-offs related to the SBA business in light of subsidy payments, deferrals, et cetera. And I think the short answer is, look, I think that timing certainly could be impacted because, borrowers are going to gain additional flexibility to hopefully try to navigate and be on the other side of the pandemic and have the best opportunity possible for their business to be able to make it through. So, one thing of note, remember the subsidy payments applied to businesses that are not in liquidation. So if we have loans that we are in the process of liquidating, those loans essentially are not going to be eligible for the subsidy payments. And we’ll continue to work out those loans accordingly and take the charges when appropriate. So I think it’s – our sense is more, inflows are probably going to be delayed a bit because you have loans that obviously are receiving payments and the borrowers are certainly benefiting from that. So hopefully that answered your question, but feel free to ask anything else that we didn’t cover.

Yes. No, that’s helpful. I guess, I’m just trying to get a sense with the 8.5% reserve roughly on the guaranteed portion. I guess, how conservative or do you guys feel that at this point?

Well, I think we feel it’s the appropriate level of reserves for that exposure. And you know, us we’re concerned about this. So we think that’s what’s appropriate relative to the risks that we have in those portfolios.

Got you. And so just generally speaking, it sounds like charge-offs, just given the decline in deferrals the government guaranteed portion of the portfolio liquid remain pretty low over the next few quarters at the very least. Is that just the right way to think about the contribution of charge-offs over the course of 2021.

Yes. Just remember Nate that, again, to the degree that we have workouts in progress, we’ll continue to do those and handle those accordingly. I think, I would think like there would be some deferral or kind of pushing out losses overtime a little bit. But obviously the ones that we have that we’re actively working on that are not benefiting from any sort of additional forbearance or additional form of subsidy payments saying, we’ll continue to try to move those out as quickly as we can.

Understood. That’s helpful. I appreciate you guys taking the questions. Thank you.

[Operator Instructions] Our next question comes from Brian Martin with Janney Montgomery.

Hey good morning.

Good morning, Brian.

Hey Brian.

Yes. I just wanted to touch a couple things just the capital deployment. And just, if you can talk a little bit about – I obviously heard the comments about the dividend and saw that. Just as far as the buyback, how are you thinking about that today and then just kind of the M&A activity or just discussions and kind of competitive landscape in Chicago? And I guess, Wisconsin, how you guys are – just thoughts on that at this point.

So I think Brian one word first and foremost is flexibility. Obviously, I think you saw the action that our Board took with the dividend, I think hopefully that’s well received by shareholders. We started – as Roberto just mentioned a little bit ago, when we instituted the dividend, it was a very modest dividend, obviously doubling it is certainly something that we view as a way to get back and return capital to shareholders. So that’s one thing there. And hopefully that’s something that over time we can continue to evaluate that periodically as the company continues to grow. As far as the buyback, obviously you saw that we reauthorized our buyback program that authorization is for 1.25 million shares that authorization is there for two years. And we are – our board is authorizing us to look to go out in the market and repurchase shares as market conditions warrant. So our view there is that something that that we will certainly be looking to do, again, subject to market conditions. I know that some of you are probably going to ask us, what our targets are. Obviously, we’re not going to share that with you for obvious reasons. But we will look to put capital work and return capital back to shareholders using that tool accordingly, which obviously provides us with flexibility to continue to support the organic growth of the banks and the opportunity that we have there. And look – continue to look strategically at acquisition opportunities.

Okay. And just the discussions or just the commentary on M&A activity Alberto, I guess, had discussions been pretty similar. Have they been – it seemed like they had been lower for a while, any pickup in activity in the Chicago area that you’re – I guess you’re sensing at this point.

I mean, definitely a pickup. I think you saw one transaction here being announced, not that long ago. So I think – I don’t think that would have happened at this point. I don’t think that would’ve happened last year. And I think it’s fair to say, I think conversations have picked up. The one thing I will tell you, which is always the case particularly when you’re dealing with smaller privately held companies is, the gap the bid-ask between what folks think their institution is worth relative to really what the market value of those institutions. But that’s part and parcel for that process. And I think, again, I would say that if we compare the pace of where these conversations were, let’s say, over the course of last year, there certainly more activity at this point is what I – the way I would answer the question, Brian.

Got you. Okay. That’s helpful. Maybe just one for Lindsay here on the margin, Lindsay. Can you talk about or just quantify, what was the impact this quarter of the PPP to the margin?

So we gave you the breakout, there was about $5.5 million of impact on the margin that came through. So we we’ve given you all of that in the materials, Brian. But I think as I provide in my materials, we still have about $9 million left from round one. And that’ll be coming through over, we believe it’ll be concentrated more in the first half of the year.

Okay. Got you. All right. And then I missed that, Lindsay. I saw the increase, I didn’t see the total, so apologize for that.

No problem.

Just the loan pipeline, it sounds as though you guys were expecting more in the second half, so maybe the first half is a little bit slower. Is that how the pipeline looks today? Is that, I guess kind of what I’m understanding?

Just remember Brian, so PPP is the second draws are taking place right now. So borrowers are certainly the people that can take advantage of it and can qualify and can get them. That’s kind of where their focus is. Also don’t discount the fact that liquidity for clients is pretty good right now. We see it a little bit in terms of the usage of lines of credit. So their need to borrow money immediately, I mean, is being kind of buffered by the fact that they’re carrying, they tend to be carrying a little bit more liquidity as a result of the PPP. So that’s factoring in. All that being said, when we look at pipelines, pipelines are healthy, are we back yet to where we were kind of pre-COVID? No, but we continue. Again, I would stand by the comments we gave last quarter. We see continued progress and building back up through those levels and therefore, that’s kind of what drives our commentary there.

Brian, real quick, I wanted to add. We do have some level of seasonality in our business line, so just make sure, kind of look at our historical run rates and trends and things like that, because I think that’ll give you some good insight. And in particular, the SBA business, the first quarter does tend to be lighter just on the historical basis.

Yes. Okay. I appreciate it, Lindsay. Thank you guys for taking the questions.

You bet.

At this time, I show no further questions. So I’d like to turn the call back to management for any closing remarks.

Great. And thank you operator. So that concludes our call for today. I would like to thank each and every one of you for participating in the call this morning and thank you for your interest in Byline. With that, we look forward to talking to you again next quarter. Thank you. Operator?

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.