Byline Bancorp, Inc. Q2 FY2020 Earnings Call

Good day and welcome to the Byline Bancorp Inc. Second Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. Please note this event is being recorded. I would now like to turn the conference over to Tony Rossi from Financial Profiles. Please go ahead, sir.

Thank you, Cole. Good morning everyone and thank you for joining us today for the Byline Bancorp second 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 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?

Thank you, Tony, and good morning and welcome to everyone on the call. We appreciate all of you joining us this morning. With me on the call today are Lindsay Corby, our CFO; Owen Beacom, our Chief Credit Officer; along with Mark Fucinato. Last night in addition to the regular earnings release, we also announced Owen would be retiring effective August 14th. Owen joined Byline with the acquisition of First Evanston in 2018 and has been a valuable member of the credit and executive management team since that time. Personally, I've had the privilege of knowing Owen since well before that, and the organization has benefited from Owen's many contributions over the last several years. While we will certainly miss seeing and working with Owen on a day-to-day basis, I know we can continue to count on his friendship, support, and counsel in the years to come. I want to take this opportunity to formally thank Owen for his work and contributions during his time at the company. Mark Fucinato will be taking over for Owen as our next Chief Credit Officer. We are fortunate to have someone of Mark's caliber, experience, and knowledge of credit and banking in the organization. Mark joined Byline one year ago from MB Financial where he had been a Senior Credit Officer in commercial banking. Prior to this time at MB, Mark had served in similar roles at FirstMerit and JPMorgan Chase and its predecessors. Mark is very familiar with our credit culture, has excellent working relationships inside and outside the company, and is a seasoned credit officer and manager. I would like to welcome Mark. I know you will very much enjoy getting to know him over the coming quarters. Next, I'm going to go through the highlights for the quarter and provide you with an update on our efforts to support clients and the actions we took to navigate through the current environment. I will then pass the call over to Lindsay who will go through our financials in more detail. I'll come back at the end with some closing remarks before opening the call up for questions. As always, you can follow our comments with the help of the deck you can find in the Investor Relations section of our website. Clearly, the COVID-19 pandemic has created a challenging operating environment for traditional banks, characterized by a high degree of economic uncertainty, unprecedented government actions, and extremely low interest rates. Notwithstanding, I'm very proud of the way our team executed to support customers and take actions to further solidify the balance sheet and deliver solid financial performance given the environment. From a performance standpoint, net income for the quarter came in at $9.1 million or $0.24 per diluted share, while our pretax pre-provision net income was $28.4 million, up $18.5 million quarter-over-quarter. This quarter we continued to build our reserve with provision expense increasing by $1 million to $15.5 million, which increased our allowance for loan losses to 136 basis points from 108 basis points last quarter if we exclude the impact of PPP loans. Total revenue increased 5.5% from the prior period to $65.4 million. Although, we had strong earning asset growth, the impact of lower rates brought our margin down to 371 basis points, which result in flat net interest income compared to last quarter. We made significant progress in repricing liabilities and saw our cost of deposits decline 39 basis points from the prior quarter to 36 basis points at the end of June. Non-interest income was up 39% from the first quarter and we saw gain on sale revenue rebound nicely. Over the course of the quarter, demand and pricing for government-guaranteed loans returned to more normal levels after the dislocation we saw during the first quarter. The quality of our deposit franchise was again evident in the second quarter, as total deposits increased by 17%, with almost all the growth coming in non-interest-bearing and other core deposit categories, which favorably impacted our deposit mix. The asset side was primarily impacted by funding over $630 million in PPP loans, provided to over 3,600 customers. This helped drive strong growth in loans and deposits given the majority of those dollars stayed on the balance sheet. Loans excluding PPP declined slightly for the quarter and were reflective of the uncertainty in the environment. On the expense front, we saw expenses decline during the quarter, reflecting both lower costs and the impact of PPP loans, despite increased costs related to COVID-19. Our efficiency ratio improved to 53.7%, reflecting both lower expenses and higher revenue during the quarter. Given the rate environment, additional costs and changes related to the pandemic, and the need to continue investing in both our infrastructure and digital capabilities, we continue to explore opportunities to operate more efficiently. Credit quality showed good improvement during the quarter. Past due levels remained stable and nonperforming loans declined both in absolute terms and as a percentage of the portfolio to less than 1%, reflecting solid resolution activity. Net charge-offs increased to 57 basis points from 48 basis points last quarter and were impacted by the resolution of a nonperforming commercial relationship. Provision expense remained elevated and we remain cautious given the uncertainty around the virus economic downturn and the impact of any additional relief efforts. With respect to capital and liquidity, we took the opportunity to increase our Tier 2 capital by adding $50 million in subordinated debt, which pushed our total risk-based capital ratio to just under 16%. Our balance sheet liquidity continues to remain strong and is reflected by the decline in our loan-to-deposit ratio to 88.6%, a higher proportion of investment securities, and approximately $2.7 billion in total funding availability. We believe the combination of our strong capital and liquidity position, positions us well to continue to support clients and communities throughout the crisis. Lastly, we paid a common dividend of $0.03 per share for the quarter. Slide 4 provides additional information on our COVID-19 response efforts and detail on the PPP program. As I mentioned earlier, we were able to help more than 3,600 companies access $630 million in PPP loans. The average loan came in at $168,000 and 74% of the loans made were for less than $150,000. We continue to originate new PPP loans and expect to begin processing forgiveness applications requests in August. We anticipate most of the balances will be forgiven and expect the process to be completed later this year and in the beginning of 2021. The PPP program had a significant impact on various line items and metrics in the second quarter. Included in the appendix, we have provided a summary of the areas where it had the most impact so that you can better understand our performance both with and without the impact of PPP. Turning over to slide 5, we approved more than 1,800 loans and leases for deferral totaling $639 million or approximately 17% of our portfolio. The modifications were primarily 90-day deferrals of principal and interest payments. Commercial deferrals were granted on a case-by-case basis, and we require customers to provide a formal request, which included a customer statement on the condition of the business, the steps they're taking to recover from the disruption to the business, and the deferral need. In most cases, we ask for some type of credit agreement enhancement to the loan in consideration of the deferral. We remain in contact with borrowers who receive deferrals and are receiving regular updates on their business. We utilize this information evaluating extensions on deferrals. As of July 16, we had granted second deferrals on less than 10% of the initial deferral amount and expect second deferrals to be no greater than 30% of the original deferral amount. The majority of borrowers coming off deferrals have resumed normal payment activity. Slide six provides an update on our exposure to industries that have seen the most impact from COVID-19. We continue to have a small level of exposure, with these industries collectively representing 10.5% of our total loan and lease portfolio excluding PPP. The largest exposure continues to be restaurants at $142 million or 3.8% of the portfolio, excluding PPP. Slide seven and eight provide additional detail on the individual portfolios that make up the select COVID-19 industries. Details include basic portfolio characteristics, industry concentrations, as well as the percentage of borrowers receiving deferrals or SBA subsidy payments, in the case of our government-guaranteed borrowers. In the appendix, we have also included detail on the collateral makeup for each of these industries, along with PPP funding, which includes borrowing and non-borrowing customers. The main takeaway from this summary is that while we have limited aggregate total exposure to early impact industries, the portfolio is characterized by good granularity and our exposure to any one particular industry segment is manageable. Now, I would like to turn over the call to Lindsay who will provide more detail on our results.

Thanks, Alberto. Good morning, everyone. I'll start with some additional information on our loan portfolio on slide nine. Our total loans and leases were $4.4 billion at June 30, a net increase of $531 million from the prior quarter. Our originated loan portfolio increased by approximately $611 million net for the quarter, primarily due to the PPP loans. This was partially offset by a decrease of $80 million in our acquired loan portfolio. The outstanding balances on our lines of credit remained relatively stable from the end of the prior quarter, decreasing by just $5 million, although the utilization rate decreased to 58.5% from 62.8% in the prior quarter. Turning to slide 10, we'll look at our government-guaranteed lending business. We would like to recognize our Small Business Capital team for being ranked number two at SBA 7(a) lending as of June 30. Congratulations to the whole team for their hard work and dedication to small businesses. Our traditional SBA business saw a significant slowdown at the end of the first quarter and extending into April and May. During June and July, we have started seeing stronger production of SBA 7(a) and USDA government-guaranteed loans. We had $80.3 million of loan commitments at the end of the quarter, which was comparable to the prior quarter, but still well below our normalized level of activity. During the second quarter, our managed government-guaranteed portfolio increased by $119 million to over $2 billion in service loans. Deposit trends are outlined on slide 11. They were up significantly in Q2. We had a very strong quarter of core deposit growth, with our total deposits increasing $720 million to $5 billion at June 30. The growth was almost entirely driven by increases in our lower-cost deposit categories, most notably non-interest-bearing demand and interest-bearing checking deposits. At June 30, non-interest-bearing deposits had increased to 35.7% of total deposits, up from 30.5% at the end of the prior quarter. The growth in these lower-cost areas and the flat yield curve allowed us to reduce our time deposits, improving our overall deposit mix, and resulted in our total cost of deposits to decline by more than half, or 39 basis points from the prior quarter, while our cost of interest-bearing deposits declined 53 basis points. Moving on to net interest income and margin. Our net interest income came in relatively flat for the quarter, at $52.6 million. Our net interest margin was 3.71% in the second quarter, down 46 basis points from last quarter. Accretion income on acquired loans of $3.2 million contributed 22 basis points to the margin for the second quarter, down from 29 basis points in the last quarter. Excluding accretion income, our net interest margin was 3.49%, a decrease of 39 basis points. The decrease was due to a decline in earning asset yields resulting from the decrease in short-term interest rates, the addition of lower-yielding PPP loans, an effective yield of 2.65%, and the excess liquidity on our balance sheet. The earning asset compression was offset by the decline in our time deposits and borrowing costs. Primary drivers of the lower funding costs were due to the cost of time deposits decreasing by 63 basis points and money market deposits by 62 basis points. Our lower cost of deposits and the growth in non-interest-bearing deposits offset the margin compression as outlined in the drivers of NIM change. Looking ahead to the third quarter, we would expect to see some continued compression in our reported net interest margin given the full quarter impact of the PPP loans as well as additional drag due to operating with our levels of liquidity. We expect to offset this pressure to some degree with additional reductions in our cost of time deposits as deposits in June were 14 basis points lower than the average for the quarter. We have $573 million in CDs maturing at a weighted average rate of 1.23% in the second half of the year. But even with the lower cost of deposits that we expect, we don't believe it will be enough to prevent further compression in the margin. Included in our appendix is a slide that provides our projected accretion on our acquired loan portfolio. Turning to non-interest income on slide 13. In the second quarter, our non-interest income increased by $3.6 million from the prior quarter. The increase was primarily due to higher net gains on sales of government-guaranteed loans as well as a decrease in the fair value adjustments on our servicing assets. During the second quarter, we sold $78.7 million of government-guaranteed loans compared with $61 million of loans in the prior quarter. For the second quarter sales, the net average premium was 9.27%. While this is below the level we saw last year, it is still high enough for the economics of selling the loans to be more beneficial than retaining them. During June and into July, we are seeing improvements in the secondary market as buyers have returned and demand is increasing. Gain on sales premiums are beginning to return to a more normalized level and closer to pre-pandemic premiums. Turning to slide 14. Our non-interest expense was $37 million in the quarter, a decrease of $6.5 million from the prior quarter. Expenses were managed during the quarter and did benefit from the deferral of salaries and benefits expense associated with the origination of PPP loans and other expenses trending down for the quarter. We continue to spend prudently, support our associates and operate safely and efficiently to serve our customers. Due to the combination of our higher revenue and lower expenses, our efficiency ratio improved to 53.7% in the second quarter from 67.2% in the prior quarter. Looking ahead to Q3, we anticipate that the expense level should stabilize next quarter back in the range of $42 million to $43 million. Next we'll take a look at asset quality. As Alberto mentioned, we saw positive trends in the quarter. Our non-performing assets decreased to 82 basis points of total assets from 105 basis points at the end of the prior quarter primarily due to the resolution of non-performing loans. As of June 30, our non-performing assets included $3.8 million of government-guaranteed loans down from $5 million at the end of the prior quarter.

Our provision expense was $15.5 million, which was largely related to an increase in qualitative factors. The quarter included $7.3 million to address the impact of COVID. The provision increased our allowance for loan losses to 117 basis points to total loans and leases. In addition to the traditional allowance as a percent of loan and lease metrics, we also analyzed the allowance in conjunction with acquisition accounting adjustments impacting our acquired portfolio. At June 30, the acquisition accounting adjustments plus our allowance for loan lease losses represented 160 basis points of total loans and leases or 186 basis points when PPP loans are excluded. Turning to my last slide on our liquidity and capital position. Our liquidity and capital positions are very strong. We significantly increased our liquidity during the pandemic. And at June 30, our cash and securities as a percentage of assets was just under 25%. During the second quarter, we increased our regulatory capital issuing $50 million of subordinated debt in June. This additional capital affords us 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. We did not repurchase shares during the quarter and maintained our modest common dividend. Our capital ratios increased during the quarter. Total capital increased by 136 basis points to 15.86% and our CET1 ratio increased by 9 basis points to 12.33%. Our capital ratios are strong and in excess of well-capitalized levels. At June 30, our tangible book value per share was $15.47, up 3.5% quarter-over-quarter and up 12% year-over-year. With that, I would like to pass the call back to Alberto.

Thank you, Lindsay. I would like to wrap up today with a few comments about our outlook for the remainder of 2020 and our priorities going forward. For most of the past few months, our focus in terms of loan production and the demand from clients was largely centered around PPP. Now that we are largely through that process, we are resuming our traditional business development efforts, and loan pipelines are just now starting to build back up. We anticipate the build to be gradual, given the uncertainty in the outlook. Accordingly, excluding PPP loans which we expect to start paying off during the second half of the year as forgiveness is granted, we would expect our total loans to be relatively flat for the remainder of 2020. The one area where we are seeing improving loan demand is for 7(a) loans, and our pipeline of government-guaranteed loans is building faster and should continue to drive a solid contribution of gain on sale income in the back half of the year. A challenging environment for generating net interest income growth puts more focus on expense management and we're continuing to tightly manage our spending. From a longer-term perspective, the pandemic has clearly accelerated the trends towards digital banking and we are seeing more customers becoming comfortable conducting transactions digitally. This will provide additional opportunities for us to evaluate the appropriate size of our branch network and make adjustments that will further enhance our level of efficiency. In closing, while the pandemic is ongoing, we will continue to operate with a conservative approach. While the economy has shown signs of improvement, it's impossible to predict the continued impact of the pandemic in the economy and the effectiveness of any additional government stimulus if any. Our capital and liquidity levels remain robust providing us with a great degree of flexibility. Furthermore, the quality of our franchise and most importantly, our team of talented and engaged employees positions us well to manage through this period. With that, operator, we can open the call up for questions.

And our first question today will come from Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning.

Good morning, EB.

Good morning, EB.

I guess first question. So it was good to see a little bit of a rebound back in the DLO sale of loans Alberto, and you mentioned that looks pretty strong going into 3Q. Can you just give us a sense of just the margin and what you're seeing as things are kind of bouncing back? And do you see that sort of line item and activity going back to what we saw in 2019 or even potentially exceeding that? Just a little bit more color around what you're seeing in the sustainability of the outlook?

Sure. So let me break that question into two components. First, I'll address the kind of the pricing and demand for government-guaranteed loans in the market. So I think there, EB, I think what we saw during the quarter and we saw it really from the start of the quarter all the way through to the end of June and it continues is that pricing rebounded. So, the dislocations, the impact on just overall capital markets that we saw in March seem to have worked themselves out of the system. And we saw premium levels really bounce back very nicely over the course of the quarter. And they continue to approach what we would say, would be pre-COVID levels from prior to, let's say March. So that's certainly a positive. As far as just overall loan demand for government-guaranteed loans so our – as I just mentioned in the prepared remarks our pipeline there has certainly started to build. It's building faster so we're seeing demand. We're seeing good opportunities. I would characterize that as not dissimilar to what we saw during other times of stress, where borrowers look to government-guaranteed loans and they become a viable means of financing for a larger number of borrowers. So, to come back to the point of your question, what we do see is we see with pipelines building back up, it's a gradual build. It's not overnight. But we certainly expect volumes to continue to recover to pre-COVID levels so to speak over the course of the second half of the year.

Got it. And I guess just a separate question Lindsay, you mentioned on margin expect some compression going forward which is not surprising. But if you could give maybe a little more color around just the level of compression we expect from this point on what the pressure points are? And do you expect any of the deposit growth that came in this quarter? How much of that was PPP related? How much of that do you see leaving the bank in third quarter? Any color on the deposit trends would be helpful.

Sure. So, EB on your first question in regards to the NIM, I was referring to Q3 and I do think that there will be compression in Q3 just given the full impact like I said on the PPP loans being in our numbers for the entire quarter. So, I think that's going to drive some of it. Also, you will see a little bit more pressure in terms of our floating rate loans. So I think we'll continue to see a little bit of pressure there. I don't think the compression will be as drastic as we saw this quarter. It will definitely be more muted, but you'll still see a slight pressure down. And then going forward, excluding accretion in PPP, I do see it flattening more into 2021. And then the second I was going to answer the second part of your question real quick regarding the deposits and the PPP funds. A lot was PPP funds. I think some of it too is just higher liquidity in the system and people carrying more cash currently. In terms of the PPP funds coming out, we do think it will trend down slowly over time. Whether or not it's all going to be gone EB at the end of the fourth quarter, I don't know and we'll see. I do not anticipate that 100% of it will go but I think it will start to normalize out to more traditional levels come in Q4.

Got it. And just one last question Alberto, in terms of as things gradually get back to normal in the statement I guess we're going to go on and off, but just talk to us in terms of market disruption. We talked about like hiring talent. Like is this too soon to focus back on those areas and looking at growth, or and if so, like when do you think you get back to that mode in terms of hiring talent bringing in sort of new revenue producers?

Yes. The quarter was undoubtedly significant, reflecting our internal focus. The PPP initiative was a major undertaking. Following the completion of PPP, we began returning to more typical lending activities in both our conventional lending segments and our government-guaranteed business. However, we remain cautious. Regarding talent, opportunities for hiring may not always align perfectly with our scheduling. We are open to exploring talent addition as long as it aligns with our business objectives and fits our credit appetite. Additionally, on the M&A front, most are aware that the environment is currently subdued, with notable declines in activity and discussions. We require greater clarity in the short term concerning the virus's trajectory this fall, the economy's potential recovery, and improved outlook for 2021. Therefore, it may take longer before we have a clearer view of the operating environment.

Thanks for taking my questions. Thank you.

And our next question will come from Nathan Race with Piper Jaffray. Please go ahead.

Hi guys. Good morning.

Nate, good morning.

Good morning, Nate.

I wanted just to start on the outlook for the credit cost going forward. I appreciate like half the provision in the quarter was tied to just economic deterioration and so forth. So just trying to get a sense going forward and assuming the charge-off they had in this quarter was more unique in nature and it doesn't necessarily repeat going forward, just how we should kind of think about the provision at least in the 3Q, just given how the world stands today?

I think Nate, what we would say is we remain cautious there. It's very much outlook dependent and how things evolve from where they are today. So I would say, we continue to expect provision expense to remain elevated for the time being.

Fair enough. Is it fair though to assume that it probably comes down at least relative to the second quarter with less impairments? And I guess within that context just trying to get a sense of how criticized classified trends unfolded over the course of the second quarter?

Yes. On balance – go ahead. Go ahead, Lindsay. You got that.

Sorry. Yes. In terms of what you're seeing with the decrease in terms of the non-performing loans that should help. But again, just given the uncertainty in the environment, we do expect it to be elevated. However, I think it's fair Nate to – assuming that the credit environment stays as is and things don't change and the government continues to support our small businesses, I think that's fair. But again to Alberto's point, I think it will still remain elevated and charge-offs as well going into the coming quarters.

Okay.

Nate, in response to your question and adding to what Lindsay mentioned regarding criticized and classified loans and past due balances, I believe the credit situation remained stable overall. We saw a slight decrease in past dues during the quarter, while criticized and classified loans increased a bit in absolute dollar terms, though they improved as a percentage of our portfolio. I would characterize the trends as stable for the quarter. Of course, this is dependent on future outlooks, but we were satisfied with the credit performance during this period. Regarding the specific commercial relationship we discussed earlier, this pertains to the same relationship we highlighted back in 2018 involving a different operator of gym facilities in Chicago. As noted in our last earnings call, we have been monitoring this situation closely. The business underwent a change in ownership and was significantly affected by the pandemic, which led to a shift in their strategic direction. We ultimately reached a final resolution, wrote off the debt, and are no longer carrying that credit on our balance sheet. There may still be some potential upside if we see a recovery.

Got it. That's very helpful. I appreciate that color Alberto. Just going back to the core margin outlook from here. Lindsay, I think you alluded to excess deposit levels and liquidity kind of staying elevated at least to some extent in the third quarter. I just wanted to clarify that in particular.

Yes. In terms of the PPP deposits, they've obviously been elevated, so you can see our liquidity has gone up. And as I noted in my remarks, our cash and securities as a percentage of assets is just under 25%. So given all of that excess liquidity, it is causing a drag on our margin here. So I think that's what you're seeing. And as that comes down over time and we're able to redeploy our excess liquidity into loan growth, that will help improve the margin going forward.

Understood. I guess, I was just trying to get at I mean with that excess liquidity kind of sitting around for at least a little bit here, I mean is the plan to just let it sit idle, or do you guys plan to reinvest in securities in the interim, or just kind of any thoughts on how that liquidity maybe reinvested at least early in 3Q here?

In Q3, yes, we are investing it in securities and you saw that in Q2 and are going to have to continue doing that if the loan demand is not there.

Okay. Great. Sounds good. Appreciate all the color and all the added disclosures in the slide deck as well. Thank you.

And our next question comes from Terry McEvoy with Stephens. Please go ahead.

Hi, good morning.

Good morning, Terry.

Good morning, Terry.

Hi. I always like to cover your investor deck and this quarter in particular made me smile. So thanks for whoever puts that together. Let me start with, so if I look at hotels versus retail both have a pretty similar deferral rate. Restaurant has a little more PPP. What portfolio has higher reserves, or what portfolio in your mind do you think has a greater loss content given the uniqueness and some of the stress in both those areas?

Terry, I'll take a stab after Owen and Mark comment.

I think that the restaurants probably offer a greater risk. I think we're in pretty good shape on the hotels. Some of the larger hotel exposures are very well capitalized and we feel pretty decent about those. On the restaurant side, it's more granular. We have a lot of long-time operators of restaurants that have done very well and we expect them to continue to do well. But just in comparison of the two, I think the risk would be higher in the restaurant portfolio.

Terry and I would also look to separate the conventional loans from the SBA loans. Government-guaranteed borrowers are currently benefiting from significant subsidy payments from the SBA. Typically, these borrowers tend to have weaker credit profiles than those in the traditional commercial banking sector. However, we have good detail on these loans since the size of loans on the SBA side tends to be smaller. When considering risk, restaurants are an industry significantly affected by COVID-19. How well these businesses manage after they stop receiving subsidy payments will be crucial for assessing their ability to resume operations and grow their businesses. This will help us evaluate their performance at that time and in the future. That additional perspective aligns with Owen's comments.

Thanks. And then Alberto, it looks like 30% of your locations are not open. From an outsider, just looking at results it seems to be working. But you tell me, what are the customers that their branch is shut down, what are they doing? Is it going to another branch using their phone to conduct a transaction? And then I guess my real question there is are there opportunities to rethink the size of the branch network based on what you've experienced over the last three, four months?

I believe the answer to your questions includes all of the mentioned factors. We are closely examining the situation to analyze and understand the differences between short-term impacts and more permanent changes. In response to your questions, we have observed that customers are adapting. Some have successfully embraced the by-appointment model, while many are actively utilizing online and mobile banking services compared to before. Calls to the call center have remained steady and have increased as expected during this time. In short, customer behavior has changed and adapted. We need to ensure that as we evaluate how to move forward, we make sensible decisions that maintain the attractiveness and convenience of our network as a whole. Nevertheless, we do see potential opportunities arising from this experience.

Thanks for that. And then just one last question. You said August, you'll begin forgiveness application request. Do you feel confident that that portal or platform will be open in August for that to happen, or maybe it's open as we speak?

So I think the last word that we got from the SBA on that, I think, yesterday we saw communications from them saying that the portal will be available August 10. I think personally. I think that would be terrific. That being said, as it's been the case with this program, it's really a week-by-week kind of evolution here. So we remain optimistic Terry. I think from our point of view is we'll be prepared and we'll be prepared when that portal opens and we can submit information to the SBA, we'll be prepared to do so. But at this point that's the best guess that we have. So we'll leave it at that.

Perfect. Thanks for everything.

Thanks, Terry.

And our next question comes from Brian Martin with Janney Montgomery. Please go ahead.

Hey, good morning guys.

Good morning, Brian.

I have a couple of follow-up questions about the PPP. With so much uncertainty surrounding the forgiveness process, do you have a clearer idea of how you are approaching forgiveness in terms of total percentage, considering the low level of your loans? Additionally, as you assess the situation today, can you share your thoughts on the timing of when these amounts may be recognized this year versus next year? I understand there are still many details pending.

Sure. Alberto, do you want me to take that one?

Yes, please.

In terms of the PPP, the situation is uncertain as the rules are still being finalized, and the program is evolving. As mentioned in our remarks and materials, over 70% of our loans are $150,000 or less, which we believe will have a quicker processing time. The specific details are yet to be determined, but this portion of our portfolio should progress faster than the rest. The remaining loans will be addressed more cautiously regarding forgiveness, as we do not expect the entire portfolio to be forgiven. We anticipate that a significant portion will be forgiven in the fourth quarter and into early 2021.

Got you. Okay. I appreciate it, Lindsay. And then maybe just back to the – one follow-up on the last question. I don't know, if Owen answered that. But just the reserve levels, I guess just on that restaurant and maybe the government-guaranteed book kind of where those sit today? Just can you give any sense for what those were?

Well, basically there – it's all part of the build in the reserve in our general reserves that we did over the last two quarters. So they're not specifically identified to the restaurant or the hotel industry. It's just general reserves for the change in the economy.

Got you. I figured that was the case in the given answer. And then just the deferrals, I guess, it sounds as though you guys would expect the deferrals to be back down to – to use your 30% number maybe low single digits when you've gotten through all of them as you look at maybe third and fourth quarter from where they are today. Is that right?

That's right. Yeah.

That's correct.

All right. And then just the last one was just on expenses. Alberto, you mentioned that you guys continue to look for ways to operate more efficiently given the environment. I mean, outside of maybe some branch consolidation, which you guys have done are there other items kind of on the slate that you guys are thinking about, or just, if you could elaborate a little bit more on your comment there on how you're thinking about that prospectively?

I think branches are certainly one area. But I think, Brian, I think more generally is just continuing to find ways to look for reductions in the cost to operate. I think given where revenue pressures are in the industry today, certainly, putting aside the fact that credit costs are and remain elevated, when you look at where the yield curve is, the absolute level of rates today pressures on revenues and margins and the fact that we need to continue to invest in the franchise, invest in our capabilities, invest in our infrastructure, we have to continue to find ways to operate more efficiently. So I think that was more the nature of my general comment.

Got you. Okay. All right. I appreciate it. Thanks guys.

And at this time, there are no further questions I'd like to turn the conference back over to management for any closing remarks.

Thank you, operator. And I think from our perspective, first and foremost, I hope you all thank you for joining the call this morning. I hope you all remain healthy and safe during this period. I feel very confident about the strength of our franchise, the strength of our team, and our ability to navigate through this environment. So thank you for joining the call. And we look forward to talking to you again next quarter. With that, operator that concludes the call, and I'll pass the call over back to you.

Thank you. And this will conclude today's conference. We'd like to thank you for today's participation. And you may now disconnect your lines at this time.