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Byline Bancorp, Inc. (NYSE:BY)
Q3 2020 Earnings Call
Oct 23, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Third Quarter 2020 Byline Bancorp Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead.

Tony Rossi -- Senior Vice President

Thank you, Andrew. Good morning, everyone, and thank you for joining us today for the Byline Bancorp third 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, President and CEO. Alberto?

Alberto Paracchini -- President and Chief Executive Officer

Great. 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 on your families are doing well and staying healthy. Joining me today are Lindsay Corby, our CFO; and Mark Fucinato, our Chief Credit Officer.

I'll start the call with a summary of our results and provide you with the highlights and important developments for the quarter before I pass the call 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 website.

Obviously, we continue to operate in an uncertain environment as a result of the 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, last quarter. Our pre-tax pre-provision income was strong at $34.1 million, up from $28.4 million on a quarter-over-quarter basis. Pre-tax pre-provision 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 points. 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 point 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 saw 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 continued to see good demand for loans through the end of the quarter.

Lastly, we were once again recognized as the top SBA 7(a) lender in both the states of Illinois and Wisconsin, we are actually Number 3 lender in Indiana as well, and moved up to the Number 2 position nationally.

Turning over to the 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 continued to increase during the quarter, which should lead to higher production levels going forward.

Deposits remain relatively stable, except for seasonal fluctuations in core balances, primarily related to tax payments and planned run-off of higher cost time deposits. The mix remained 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 disciplined expense management led to a decline in our efficiency to 52.5%. During the quarter, we also announced the 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 in asset quality during the third quarter. Loans on deferral declined throughout the quarter and stood at 78 basis points at the end of September. NPLs and NPAs were stable, while net charge-offs declined. 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 remain very strong, and we opted to add an incremental $25 million in subordinated debt to further increase Tier 2 capital. Our CET1 increased to 12.55% and total capital to 16.7% at the end of the quarter.

Slide 4 provides 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 with manageable attrition, which has helped us improve efficiencies and increase aggregate branch productivity, as evidenced by deposits 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've provided a summary of the area, 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 payment status. At September 30, we had 79 loans left 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 coming into 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.

Slides 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 will provide you with more detail on our results.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

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 growth in 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 pay-offs we had. However, total loans in the quarter were negatively impacted by a $167 million increase in net line utilization. So overall utilization rate dropped to [Phonetic] 57.2% from 58.5% last quarter, and is 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 new lending relationships that were less likely to be impacted by COVID. The Top 3 industries included finance and insurance, administrative and support services, and specialty trade contractors.

During the third quarter, our managed government guaranteed portfolio increased to just under $2.1 billion in service loans. At September 30, the on-balance sheet SBA 7(a) exposure was $434 million, including $72 million of which is guaranteed by the SBA. The 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 payment. 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 point decline in our cost of deposits, largely driven by a 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 3.60% 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 3.34%, 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 5.06% versus 4.94% in Q2. While the impact of repricing in our portfolio will 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 just 22 basis points, our ability to further reduce deposit costs is limited. As a result, we expect to see slight compression in 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 of 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 yields 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 deferred as a result of loan originations. 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 consolidation. 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've 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 the 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 of total assets. We had an increase in non-performing loans, but this was offset by a decline in [Technical Issues] and lower net charge-offs 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 uncertainty 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 7(a) loans coming off of the subsidy payments later in the year.

Turning to my last slide, on our solid liquidity and capital position. 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 issuing $50 million of subordinated debt in June and an additional $25 million in August for a total of $75 million. This additional capital affords us the flexibility at 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 continued to increase during the quarter. Total capital increased by 81 basis points to 16.67% and our CET1 ratio increased by 22 basis points to 12.55%.

With that, I would like to pass the call back to Alberto.

Alberto Paracchini -- President and Chief Executive Officer

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 said, we've adapted well and remain 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 us 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.

Questions and Answers:

Operator

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

Michael Perito -- KBW -- Analyst

Hey. Good morning, guys. Thanks for taking my questions.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Mike.

Michael Perito -- KBW -- Analyst

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

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Yeah. So, the margins are difficult thing to predict, as you all know, on the call just given the environment, Mike, but yeah. When I'm talking about the margin in my prepared remarks, it's around the reported margin, so again the 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 -- but 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, the guidance there is more around reported. So...

Michael Perito -- KBW -- Analyst

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

Lindsay Corby -- Executive Vice President and Chief Financial Officer

That's fair.

Michael Perito -- KBW -- Analyst

Okay. And then on the expense side, I was wondering, obviously, you guys have taken a lot of great actions here to try and 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 look 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 are 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.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Sure. So, in terms of expenses, Mike, I think 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 is 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 a better color for you. We're still going through the process. We'll obviously have adjustments, continued investments and then, obviously, I have 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.

Michael Perito -- KBW -- Analyst

[Indecipherable] it's not -- 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...

Lindsay Corby -- Executive Vice President and Chief Financial Officer

I would agree with that. And you will have the [Phonetic] $5 million from the branch consolidations hitting in Q4 as well.

Michael Perito -- KBW -- Analyst

Right. Okay. And then my last question is for you Alberto. Just I was looking back and it was quick, but I can't remember the last time your pre-tax pre-provision ROA was north of 200 basis points with less than 30 basis points of accretable yield flowing through the margin. Obviously, a really strong print here. I'm just curious, how confident are you 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 the outlook can support something more on this range relative to kind of where it's been over the last year or so? Any color there would be great.

Alberto Paracchini -- President and Chief Executive Officer

Yeah, Mike, I think the -- obviously, it's a -- that's a very good question and I can -- as I said in some of the comments in the -- 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 -- of 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 pre-tax pre-provision 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 dependent 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'll continue to perform steadily. But you're asking me for a specific kind of range and 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.

Michael Perito -- KBW -- Analyst

Yeah, no, that's fair. I'm not necessarily 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 I mean, it would seem like you guys are maybe had a little bit of an inflection or turning point here where there is a framework in place to drive some steadier and higher returns. Do you -- would you agree with that?

Alberto Paracchini -- President and Chief Executive Officer

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

Michael Perito -- KBW -- Analyst

Okay. Great. Excellent. Thank you guys for taking my questions and stay well.

Alberto Paracchini -- President and Chief Executive Officer

Thank you. You bet.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

You bet.

Operator

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

Nathan Race -- Piper Sandler -- Analyst

Yeah. Hi, everyone. Good morning.

Alberto Paracchini -- President and Chief Executive Officer

Hey. Good morning, Nate.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Good morning, Nate.

Nathan Race -- Piper Sandler -- Analyst

First 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 and 2021, how much of the strong volumes that we saw this quarter is just a function of some of the disruption that's maybe exist in the market? I think you guys alluded to the fact that there has been strong demand for the 7(a) products. I'm just trying to parse through how much of that is just nuanced demand versus just kind of how the sales team and the pipeline has just increased organically of late?

Alberto Paracchini -- President and Chief Executive Officer

Yeah. I'll comment generally. And so obviously, the -- 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 the beginning 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 is still decent demand out there and we've seen demand continue through.

So Nate, I think, yeah, no question it was an impact. Do 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.

Nathan Race -- Piper Sandler -- Analyst

Okay, great. That's helpful color. And then perhaps away from the SBA unit, curious kind of get your thoughts. Loan balances ex-PPP came down a bit in the quarter. You guys are, obviously, working through some of the more COVID since the industry exposures that are within the loan portfolio. So, just curious if you guys are kind of seen the trough in kind of loan balances coming out of the third quarter. Can I expect to see some growth in 4Q and into 2021 as well?

Alberto Paracchini -- President and Chief Executive Officer

Yeah, I think we saw -- as Lindsay said in her comments, I think we saw a 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, pre-pandemic. So, that was obviously a negative in the sense that people paid 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 [Phonetic].

So pipelines overall in the commercial side, so both C&I, commercial real estate built -- we were -- 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, it 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 but 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.

Nathan Race -- Piper Sandler -- Analyst

Okay. That's helpful. And if I could just ask one more, on capital. You guys are actually sitting with very high capital levels currently and stocks still trading below tangible book value. So just curious, what you need to see from the environmental perspective or perhaps, internally from a credit perspective or otherwise to resume the buybacks that we saw earlier this year in the first quarter?

Alberto Paracchini -- President and Chief Executive Officer

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 a -- 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 is still a lot of uncertainty in the environment. That said, longer term, 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.

Nathan Race -- Piper Sandler -- Analyst

Okay. Understandable. I appreciate you guys taking the questions and all the color. Thank you.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Thanks, Nate.

Operator

The next question comes from Terry McEvoy of Stephens. Please go ahead.

Terry McEvoy -- Stephens -- Analyst

Thanks. Good morning, everyone.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Terry.

Terry McEvoy -- Stephens -- Analyst

I guess my one question is, what type of assumptions did you make within the quarterly reserve analysis as it relates to those SBA 7(a) loans that are coming off the SBA principal and interest guarantee? I mean, I don't have to tell you $327 million is a pretty big number and it looks like reserves were up in the third quarter. Was that in connection with this?

And then just on the same topic, will we see deferrals within these lending areas kind of pick-up in the fourth quarter as they come off the guaranty?

Alberto Paracchini -- President and Chief Executive Officer

Yeah. Terry, good question. Yeah, I think, definitely we're factoring -- that was a factor in our reserving this quarter. Can we see deferrals? I think we may. We obviously went through a period where these borrowers were getting. And remember, these are borrowers who were current pre-pandemic and were eligible to receive these statements as a result.

So, we're looking and now we're seeing, OK, as here in the month of October, a lot of these -- most of these borrowers are resuming their regular payments, we're obviously monitoring that and seeing the transition back of these 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 -- we'll see where their business is to a degree that they require a deferral, we'll 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.

Terry McEvoy -- Stephens -- Analyst

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

Alberto Paracchini -- President and Chief Executive Officer

I think we will know as more time passes, Terry. Right now that's our -- 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 OK with what we have. But our sense right now is, those are probably the industries that still remain to be the most impactful ones.

Terry McEvoy -- Stephens -- Analyst

Right. Thanks. Have a good weekend.

Alberto Paracchini -- President and Chief Executive Officer

Thank you, Terry.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Thanks, Terry.

Terry McEvoy -- Stephens -- Analyst

Thank you.

Operator

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

Brian Martin -- Janney Montgomery -- Analyst

Hey. Good morning, guys.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Good morning, Brian.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Brian.

Brian Martin -- Janney Montgomery -- Analyst

Hey, just wondering can you -- did you guys comment just on the trends in the classifieds and criticized, or just kind of the migration trends in the quarter just relative to kind of the -- have the 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 is anything significant that occurred in the migration this quarter. Is that correct? Or -- just elaborate a little bit on the migration you're seeing at all?

Alberto Paracchini -- President and Chief Executive Officer

Mark, do you want to take that?

Mark Fucinato -- Executive Vice President and Chief Credit Officer

Sure. Good morning.

Brian Martin -- Janney Montgomery -- Analyst

Hey.

Mark Fucinato -- Executive Vice President and Chief Credit Officer

I wouldn't say migration is the word. We've had loans go into the CNC [Phonetic] portfolio classification where we've had some exit. It's still a good environment for resolution of problem loans because there's so much capital out there, there is so much desire to acquire assets of all types and people are taking advantage of that, I believe. So, we had some go in, we had 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 any 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 CNC list right now. And we'll continue to look at our loan inventories, as you know, on a frequent basis here going forward.

Brian Martin -- Janney Montgomery -- Analyst

Okay, perfect. That's a right thought, stable. I guess, migration was a wrong word. I heard you there. So, OK. And then, how about just on the -- going back to the SBA question, I guess. I mean, just, Alberto, do these loans are 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 qualify for deferrals, or I guess, is -- I guess, how does that process work? And I guess your expectation is what -- you have more clarity, I guess, the timing of when your loans come off that debt relief as much of it already occurring, or is it you expect it to occur in the next month or so? Just kind of timing issues would be helpful.

Alberto Paracchini -- President and Chief Executive Officer

Yeah. I think, if -- maybe the framework to think about that, Brian, is to kind of look back at where those loans were at the time that the -- that Congress passed the CARES Act. So, to qualify for that, you essentially have to be a performing borrowers. So, those loans were performing at the time of the CARES Act. And remember, this is more of a broad-based program where there wasn't any distinction in terms of, OK, 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 an SBA loan, if you were a performing borrower, essentially you're 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, just like we would, with these loans or any loan in our portfolio, we will monitor the portfolio, we will monitor the transition to the -- for these borrowers to resume making their payments to the degree that a borrower is late, we will follow-up with that borrower in the normal course to the degree 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 the deferral makes sense, we will consider that.

Obviously, if Congress were to act, which is a -- had there's -- 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 determination 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 exiting 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.

Brian Martin -- Janney Montgomery -- Analyst

Got you. Okay. Thanks for all the color. And just maybe last one or two for me was just the reserve build this quarter, you kind of talked about it. But I guess, at this point with -- were the criticizing classifieds are the stability there? And then I guess, is your expectation, if we don't see any significant underlying change in trends that much of the reserve builds from COVID at this point is done?

Alberto Paracchini -- President and Chief Executive Officer

Yeah. I think that's a fair comment, Brian. I think I would caution and I know we've said this a few times here today, but there's still a fair amount of uncertainty in the environment and obviously, we're -- 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.

Brian Martin -- Janney Montgomery -- Analyst

Okay. And then just one last one. The pipeline, 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 of the discussions.

Alberto Paracchini -- President and Chief Executive Officer

Yeah. So, we're seeing C&I, we continue to see, I think, pretty good activity there. I think one thing to remember, as you know, we had made a number of hires last year that had customers, as you know, those individuals are typically have non-solicits in place for a period of time before they can start actively calling on their customer bases, so that -- 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 on borrowers. Existing borrowers wanting to do things, wanting to continue on projects that may be 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 essentially got deferred. On the real estate side, we're seeing good -- transaction activity is good. We are seeing a fair share of deals. We're obviously being a very targeted and very focused on what we consider there. But I think we're seeing a 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 that batter's box and be selective at the things that we swing at, I think we'll continue to build our pipelines accordingly.

Brian Martin -- Janney Montgomery -- Analyst

Got you. Okay. Thanks for all the color and taking the questions.

Alberto Paracchini -- President and Chief Executive Officer

You bet.

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Thanks, Brian.

Operator

I'm showing no further questions, and would like to turn the call back to management for any closing remarks.

Alberto Paracchini -- President and Chief Executive Officer

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.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Tony Rossi -- Senior Vice President

Alberto Paracchini -- President and Chief Executive Officer

Lindsay Corby -- Executive Vice President and Chief Financial Officer

Mark Fucinato -- Executive Vice President and Chief Credit Officer

Michael Perito -- KBW -- Analyst

Nathan Race -- Piper Sandler -- Analyst

Terry McEvoy -- Stephens -- Analyst

Brian Martin -- Janney Montgomery -- Analyst

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