Byline Bancorp Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 28, 2023

There are 11 speakers on the call.

Operator

Morning, and welcome to Byline Bancorp Second Quarter 2023 Earnings Call. My name is Glenn, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer period. At this time, I would like to introduce Brook Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call.

Speaker 1

Thank you, Glenn. Good morning, everyone, and thank you for joining us today for the Byline Bancorp 2nd Quarter 2023 Earnings Call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and the corresponding presentation slides. Management would like to remind everyone Certain statements made on today's call involve projections or other forward looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed.

Speaker 1

The company's risk factors are disclosed and discussed in its SEC filings. In addition, certain slides contain, Reconciliation for these numbers can be found within the appendix of the earnings release. For additional information about risks Please see the forward looking statement and non GAAP financial measures disclosures in the earnings release. I I'd now like to turn the conference call over to Alberto Paracini, President of BioLine Bancorp.

Speaker 2

Thank you, Brooks, and good morning, everyone. We appreciate you taking the time You may now disconnect your call this morning to review our Q2 results. The deck we will be referencing can be found on our website. Please refer to the disclaimer at the front. Joining me on the call this morning are Chairman and CEO, Roberto Herncia our CFO and Treasurer, Tom Bell and our Chief Credit Officer, Mark Cusonato.

Speaker 2

Before we get into the results for the quarter, I want to pass the call on to Roberto for a few items. Roberto?

Speaker 3

Thank you, Alberto, and good morning, everyone. Before Alberto and the team go over the strong results for the Q2 and answer your questions, I wanted to highlight an important milestone in our story. At the end of June, we marked The 10 year anniversary of the recapitalization of the Metropolitan Bank Group, MBG, which as you know, We renamed shortly thereafter EyeLine. At the time, the $200,000,000 plus recapitalization Was the largest recap of the Bank in Chicago in over 25 years. What has been accomplished In our 10 years is remarkable and a true story of transformation.

Speaker 3

Looking back to March of 2013, the quarter before we closed the rehab, MBG had 12 bank charters, 88 branches and total assets of 2,400,000,000 Biowin, of course, has only one charter.

Speaker 4

And at the

Speaker 3

end of June, not including inland, which as you know, closed effective July 1st At 38 branches, 50 percent fewer and total assets of $7,600,000,000 more than 3 times. MBG had total deposits per branch of $25,000,000 and non interest bearing deposits to total deposits of 26%. Today, BioIn has $153,000,000 per branch and non interest bearing deposits to total deposits of 30% plus. We have a tough quartile margin and better than median profitability in our peer group. Five acquisitions later, Again, excluding inland, but including the MBG recap, our Board and management team have shown Your expertise in integrating and adding value post acquisitions.

Speaker 3

Growth has been evenly distributed between well executed acquisitions on organic growth driven by talented bankers who have joined Bioin amid disruption by larger bank mergers in our area. We expect this to continue over the next 5 years. There are a few critical factors that have supported our success. And this is not the forum to discuss those, but the one which I firmly believe Is the main driver, people. Our investment in people, our colleagues and collaborators is palpable at this organization.

Speaker 3

It shows up in our engagement surveys and our ability to continue to attract, retain and inspire talent. I cannot emphasize enough how nuanced this topic is at Byline. Being home to the best commercial bank in town in Chicago And within the line of business, we operate is hard to replicate by others, especially A few days ago as one of Forbes, America's Best Small Employers, we were the only Illinois bank and one of only 6 Illinois companies to be recognized. This is thanks to our team members who support our customers, serve and work in our communities and continually look for ways to do better today And yesterday, and of course, our dedication and commitment to the well-being of our people. I am as confident as ever in BioN's positioning as Chicago's Largest community bank.

Speaker 3

Our ability to outperform through the cycle and to deliver products and service offerings that improve lives for all our stakeholders. As you can tell, we are optimistic about Viomi. And frankly, I'm just thankful to be part of a team that will steward the bank into the future. With that, I'll pass the call back to Alberto.

Speaker 2

Great. Thank you, Roberto. And now in terms of the agenda, I'll start by providing Highlights for the quarter followed by Tom, who will walk you through our results in more detail. After that, I'll provide some closing comments Before we open the call up for questions. At the time of our last call last quarter, we were coming off a Challenging period for the industry that ultimately saw the failure of 3 institutions and was characterized by a degree of uncertainty that shook The confidence in our system.

Speaker 2

Our priorities at the time were to remain focused on executing our strategy, Capitalize on opportunities to grow relationships and hire talent. We also wanted to remain vigilant on credit And manage our capital and liquidity conservatively. Lastly, we wanted to complete the inland transaction. Our performance and results this past quarter show meaningful progress against those priorities. Before we jump to the highlights, let me first give you an update on the Inland transaction.

Speaker 2

As previously announced, Transaction closed effective July 1st and key milestones in the integration have been completed as planned. The bank subs have merged and former inland employees were successfully onboarded into our systems. Our focus is now centered on integrating them into the company, our culture and their respective teams so they can get back out into the market. Up next comes to rebranding under the Byline brand and the product and systems conversion, which remain on track for completion later this quarter. Due to the timing of the closing, the impact of the transaction on the second quarter was minor, save for some merger related expenses.

Speaker 2

Next quarter, aside from the usual noise from one time charges, you will see a full quarter of consolidated results. As we disclosed in our earnings release, pro form a for the acquisition, Byline now has approximately $8,800,000,000 in assets, $6,400,000,000 in loans and $6,900,000,000 in deposits with 48 branch locations. Moving on to Page 3 of the deck. For the Q2, we reported net income of $26,100,000 and EPS of $0.70 per diluted share. If we adjust for merger related charges, net income was $27,300,000 or $0.73 per diluted share, Both figures representing record levels for the company since going public and up 9% and 20% on a quarter on quarter and year over year Profitability and return metrics continue to remain strong across the board.

Speaker 2

ROA came in At 141 basis points, while ROTCE was 16.8%. On an adjusted basis, ROA was 148 basis points and ROTCE came in at strong 17.5%. Adjusted pre tax pre provision income was $42,500,000 for the quarter, which put our adjusted Pre tax preparation ROA at 230 basis points down, 5 basis points linked quarter, but up 43 basis points year over year. Total revenue was flat quarter over quarter at $90,000,000 but up $14,500,000 or 19 percent over the prior year, driven by higher net interest income stemming from loan growth and higher rates. Non interest income came in at $14,300,000 lower than last quarter as expected but in line with the prior year.

Speaker 2

Adjusting for the impact of fair value marks on our servicing asset, non interest income remained consistent between the quarters. Expenses came in at $49,000,000 inclusive of merger related charges. If we exclude those, expenses were well managed At $48,000,000 Netting these two figures translated into positive operating leverage on a year over year basis. Moving on to profitability. The margin remains solid at 4.32%, declining only 6 basis points from the prior quarter, Notwithstanding higher funding costs, our adjusted efficiency ratio came in at 51%, down both against The previous quarter and lower by over 3 50 basis points on a year over year basis.

Speaker 2

Moving on to the balance sheet. Loan growth moderated consistent with guidance and the portfolio stood at $5,600,000,000 as of quarterend. Notwithstanding the environment, this was the 9th consecutive quarter of growth in loans, and we continue to see solid levels of business activity. Originations were solid, and we saw an uptick in payoff activity during the quarter. Results We're driven largely by our commercial banking, sponsor and leasing businesses.

Speaker 2

Our government guaranteed lending business had a solid quarter with $141,000,000 in closed loans, up from the prior quarter and 12% year over year. I'd like to acknowledge and give a shout out to our team, who earlier this month was recognized by the SBA as the top 7 lender For the 14th consecutive year, we were also recognized as the top 504 and export lender in the state of Illinois for fiscal year 2022. In terms of liabilities, total deposits ended the quarter at $5,900,000,000 up $104,000,000 from the Q1. Average deposits were also up 1.7% Quarter on quarter driven by flows related to new customers. As we anticipated, this quarter we continue to see a shift in mix that Tom will cover in more detail shortly towards higher yielding products consistent with a higher rate environment.

Speaker 2

Asset quality improved with NPL decreasing 15 basis points to 69 basis points At the end of the quarter, credit costs were $6,500,000 inclusive of net charge offs, which were $4,300,000 or 31 basis points, And we had a net reserve build of $2,200,000 This quarter, we took advantage of opportunities to accelerate some NPL resolutions, which drove the uptick in charge offs. The allowance for credit losses ended the quarter at a strong 1.66 Capital and liquidity were further bolstered this past quarter with CET1 ratio increasing by 37 basis points to 10.6 percent and our total capital and TCE ratio ending the quarter at 13.5% And just under 9%, respectively. With that, I'd like to turn over the call to Tom, who'll provide you with more detail on our results.

Speaker 5

Thank you, Alberto, and good morning, everyone. I will start with some additional information on our loan and lease portfolio on Slide 4. Total loans and leases were $5,600,000,000 at June 30, an increase of $53,000,000 from the end of the prior quarter. Net of loans sold, we originated $312,000,000 during the quarter, an increase of 25% quarter over quarter. We saw increases across all our major lending areas with the strongest growth coming from commercial and leasing groups.

Speaker 5

Payoffs increased in the Q2 to $256,000,000 compared to $231,000,000 in the Q1 And line utilization remained flat at 54%. Looking ahead, we continue to expect loan and lease growth quarter was $141,000,000 in closed loan commitments, which was higher than the Q1 and better than expectations. At June 30, the on balance sheet SBA 7 exposure and USDA exposure was relatively unchanged quarter over quarter. Our allowance for credit losses as a percentage of the unguaranteed loan balances was 9.1% as of quarterend. Turning to Slide 6.

Speaker 5

Total deposits stood at $5,900,000,000 increasing 2% from the end of the prior quarter. Non interest bearing DDA was down $159,000,000 excuse me, dollars 158,000,000 quarter over quarter driven by customers seeking higher rate options, Seasonality and other business activity. DDAs continue to represent a healthy 30% of total deposits. Commercial deposits accounted for 48% of total deposits and represent 75% of all non interest bearing deposits. As anticipated, we saw continued changes in mix during the quarter due to prevailing market rates, competition and higher yielding alternatives.

Speaker 5

Deposit costs for the quarter came in at 170 basis points, an increase of 55 basis points from the prior quarter. On a cycle to date basis, deposit betas both for total deposits and interest bearing deposits stood at 32% 47%, respectively. We continue to remain focused on funding loan growth with our core deposits. In addition, the Inland Bank transaction brings approximately $705,000,000 Core deposits to our balance sheet. Turning to Slide 7.

Speaker 5

Our net interest income was $76,000,000 in Q2, up 1% from the prior quarter, primarily due to loan and lease growth and higher yields offsetting higher interest expense on deposits. On a GAAP basis, our net interest margin was 4.32%, down 6 basis points from the prior quarter. Earning asset yields increased a healthy 30 basis points driven by an increase of 35 basis points in loan yields to 7.18%. Going forward on a standalone basis, we expect our net interest income to be flat quarter over quarter and with inland on a preliminary basis, We estimate net interest income will grow by $12,000,000 to $14,000,000 in Q3. Turning to Slide 8.

Speaker 5

Non interest income stood at $14,300,000 in the 2nd quarter, down 5.6% linked quarter, primarily driven by A $865,000 negative fair market value on loan servicing assets due to an increase in prepayments, which was partially offset by an increase of $556,000 in net gain on sale of loans due to higher volumes and higher net premiums. Sales of government guaranteed loans picked up in the 2nd quarter by $14,000,000 compared to the Q1. The net average premium was 8.6% for Q2, Higher than the Q1. Our pipeline and fully funded government guaranteed loans is forecasted to be consistent with Q2 results. We expect gain on sale income in Q3 to remain consistent with what we experienced in Q2.

Speaker 5

Turning to Slide 9. Our non interest expense was well managed and came in at $49,000,000 in the 2nd quarter and on an adjusted basis $1,000,000 below our Q2 guidance of $49,000,000 to $51,000,000 The increase was attributed to merger related expenses And higher marketing costs due to deposit gathering initiatives. We continue to remain disciplined on expense management and are updating our guidance related to the Inland acquisition. Going forward with inland, we believe quarterly non interest expense run rate will trend between $53,000,000 $55,000,000 Turning to Slide 10. The allowance for credit losses at the end of Q2 was $92,700,000 up 2% from the end of the prior quarter.

Speaker 5

In the Q2, we recorded a $6,000,000 provision for credit losses compared to $10,000,000 in the Q1. The reserve bill was largely driven by loan and lease growth and a $6,500,000 increase in the individually assessed portfolio. Net charge offs were $4,300,000 in the 2nd quarter compared to $1,200,000 in the previous quarter. Our NPLs to total loans and leases decreased to 69 basis points in Q2 from 84 basis points in Q1. Our NPAs to total assets decreased to 54 basis points in Q2 from 67 basis points in Q1.

Speaker 5

And total delinquencies were $9,600,000 on June 30, a $5,000,000 decrease linked quarter. Turning to Slide 11. Our liquidity remains robust. We ended the quarter with approximately $320,000,000 of cash and cash equivalents, And our available borrowing capacity stood at $1,700,000,000 Our uninsured deposit ratio fell to 25.9% and remains Below all peer bank averages. In addition, the uninsured deposit coverage ratio stood at 132%.

Speaker 5

Turning to Slide 12. Our capital position remains strong. For the Q2, we grew capital, and as a result, our capital ratios improved quarter over quarter. Our CET1 grew to 10.6%, up 31 basis points and our TCE ratio increased to 8.9%, Up 21 basis points and is well within our targeted TCE range. Going forward, we are focused on growing capital, maintaining our strong liquidity position and executing on our strategy.

Speaker 5

With that, Alberto, back to you.

Speaker 2

Thank you, Tom. Slide 13 summarizes our strategy And we remain focused on its execution. We are proud of the strong operating performance the company delivered this past quarter. Notwithstanding the uncertainties present and the potential headwinds that may emerge, we remain optimistic about our ability to deliver solid results. In closing, I would like to welcome all of our new colleagues that recently joined the company from inland and thank our employees for their hard work and dedication on a daily basis.

Speaker 2

With that, operator, let's open the call up for questions.

Operator

Thank you. Your first call comes from the line of Nathan Race from Paper Sandler. Nathan, your line is now open.

Speaker 6

Good questions. Just in thinking about future deposit growth expectations, it's nice to See the pace of increase in deposit costs slow versus the Q1 and we also saw the pace of core deposit outflows also decline versus 1Q. So just curious how we should be thinking about kind of core deposit growth and overall balances into the back half of the year On an organic basis and kind of what you're seeing from a deposit pricing perspective in the Chicago area these days?

Speaker 2

Sure. So good morning, Nate. So let me let you break that question into 3 parts In terms of kind of like the outlook, in terms of kind of core deposit growth going forward, what we're seeing in terms of the mix And lastly, kind of the competitive dynamics that we're seeing. So on the first part, look, I think our intention is To continue to fund loan growth with core deposits. And that's been our strategy.

Speaker 2

That has served us well over the years. And we will continue to try to do that through the cycle. So in terms of growth, I think the guidance that we'll give you is as goes loan growth, our Long term, what we want to do is fund that growth with core deposits. On any given quarter to the degree that we have Slightly faster loan growth and 1 quarter visavisanother, there's going to be some ebbs and flows on that. But generally speaking, as you see growth in the portfolio, just know that what we're trying to do is fund that growth with core deposits.

Speaker 2

The second question regarding the mix, I think, look, I think it's going to be rate dependent. I think Tom Can jump in here in a second. But I think we're seeing some stabilization in terms of Kind of the mix change is not to say that we're not and we will continue to see mix change going forward, particularly as rates continue to be Hi. But certainly the pace of the mix change seems to have slowed down a bit And we feel it's stabilizing. Lastly, the third question in terms of the dynamics, Look, it's a competitive environment.

Speaker 2

I think the banks that were sitting in a position where they had some excess liquidity, I think they're getting to a point where they're seeing that liquidity leave the bank and they're being forced or they have an impetus To raise rates, to retain and more importantly to grow in order to continue to fund their business. That being said, I think also we are seeing kind of the competitive environment probably Stabilizing as opposed to what we saw right after, call it, the events of March where it Seemed like a lot of institutions in mass were felt like they had a need to have to reprice pretty aggressively in a Short period of time. Tom, if you want to add? Yes.

Speaker 5

I think that's well said, Alberto. I think first and foremost, we're going to Go with the transaction accounts and our relationships that we're growing on a DDA perspective, but you can see it that the money market and savings account is about 36 And you could expect that given where rates are and the shape of the flat curve, so to speak, and inverted curve further out, That money market in CDs will be kind of the areas in which we have additional deposit growth. But again, those rates are right on top of each other just given The shape of what the Fed has done recently and so, but we'll continue to focus on core deposits and core transactions accounts from our commercial clients, First and foremost. On the competitive side, obviously, the Fed raised rates the other day and we haven't as Alberto said, it Seems to have stabilized. That's what we're seeing now.

Speaker 5

I guess we'll have to wait and see next week. But I think the liquidity events are way behind us now and I think that The market is adjusting and they're adjusting prudently on pricing.

Speaker 6

Got it. That's really helpful. I appreciate that you guys don't give specific guidance on the margin going forward. I guess just directionally thinking about kind of The pace of potential compression in the back half of the year, is it fair to assume it kind of increases relative to the 2nd quarter level ex accretion? Obviously, you got inland coming out in their margins below your guys', but I imagine there's also an opportunity to maybe delever the balance sheet To some degree?

Speaker 5

Yes. That's a good question. I think we gave NII guidance of flat and I think that you would expect probably the same Type of margin analysis on a standalone basis, Nate, but with inland, you would expect the margin to expand.

Speaker 6

And that's excluding accretion, Tom?

Speaker 5

That would include accretion.

Speaker 2

That includes accretion. So If you want to think and this is all hypothetical now obviously because this quarter In September, when we have this call in the month of October, we'll be reporting on a consolidated basis. But on a hypothetical basis, we just had a rate increase on Wednesday. So just I know that's going to add a little bit of noise because we're going to reprice the portfolio and that'll certainly help. But Putting that aside, if you thought about the margin in terms of where we are, I think it's fair to say That we would see some pressure on the margin with stabilization of it coming probably in the by the Q4.

Speaker 2

So think of it in the context of 432 today, think of it in the context of 410 to 415 And then kind of pro form a for the acquisition, you would see that margin including accretion Coming right back up to around 4:30 kind of 4:35 ish. So hopefully that's enough guidance. Obviously, This coming quarter, we'll be able to give you a lot more clarity to that and break down the components between The gross margin and the accretion component as well.

Speaker 6

Got it. That's very helpful. And if I could just ask A couple more around credit. Charge offs were up a little bit this quarter. It seems like it was more driven outside the SBA portfolio.

Speaker 6

So I would just be curious to get some color On what drove the charge offs in the second quarter? And obviously with inland coming on, you'll have to see some impacts In the Q3 from a provisioning perspective, so just curious how you guys are thinking about maybe the reserve trajectory into the Q4 and to next year In light of the current environment?

Speaker 2

So just to comment on charge offs. So we had an opportunity To accelerate the resolution of a few loans this past quarter And we took advantage of it, meaning we felt that resolving these assets, as some of our competitors have said, Just cleaning up the runway, so to speak, quickly as opposed to having planes Seeing on the runway for a period of time as you work through the asset that was advantageous and that Essentially drove the uptick in charge offs. Mind you, charge offs were we usually historically I've been in the kind of the 30 to 40 range. I know more recently we've been a lot lower than that. So, but let's say if you took that 30 basis point kind of target or 25 basis point to 30 basis point kind of target And we're up one basis point above that.

Speaker 2

So we don't we kind of just didn't really think too much. We had an opportunity to lower NPLs nicely, which you saw the 15 basis point reduction in NPL levels. We also saw a reduction in NPAs and we just decided that that was In the best interest of the company to do that as opposed to kind of just have those reductions come through over time. So that's really the story there, Nate. Understood.

Speaker 2

I'm sorry. And then You asked the question on the reserve trajectory. So putting aside Inland, I think obviously we feel that our reserves are Strong and adequate as of the end of the quarter. The changes in the reserve quarter over quarter really Sam from largely growth in the portfolio, as well as some Additional reserves that we assign to individual loans that are evaluated individually for impairment. So aside from that, I think it's fair to say, if we continue to see loan growth, as Tom said, given the guidance, I think you could expect the reserve to continue to inch along supported by that.

Speaker 6

Okay, great. And then just one last one, maybe for Mark. Just on the office commercial real estate portfolio as detailed on Slide 16, Have you guys seen any negative credit migration within that portfolio recently?

Speaker 7

We We

Speaker 8

haven't seen any negative migration. We're looking very carefully at certain situations. We don't have a lot, but we have a few that we're watching very carefully. And again, the test is going to be for these customers. We have office, especially in certain locations.

Speaker 8

Is that cash flow going to be there? We have to resize the deal. What will new appraisals have Say when they come in, so I expect that to be at the top of our kind of our list of things to keep an eye on. We just don't have a lot of them, But we are focused on the ones that we are examining pretty much regularly every month in terms of what's going to happen next with them. Good morning, Pat.

Speaker 8

Good morning, Pat.

Speaker 6

Congrats on.

Speaker 8

We've got about

Speaker 9

okay, sorry.

Speaker 8

We've got about 10 deals that are Maturing over the next year in office, 5 this year, 5 next year that we're watching and staying focused on with those customers.

Speaker 6

Got it. I appreciate all the color. Congrats on a great quarter. All the successes over the last 10 years and the 10 year anniversary as well.

Speaker 2

Excellent. Thank you, Nate.

Operator

Thank you, Nathan. Your second question comes from the line of Ben Jellinger from Hovde Group. Ben, your line is now open.

Speaker 6

Good morning, everyone.

Speaker 3

Good morning, Glenn.

Speaker 9

Congrats on tenure. It seems like you capped it off a decade well with this quarter. Now that the Inland deal is closed, usually when there's M and A, it's symbiotic. Obviously, the bigger bank, I. E.

Speaker 9

Byland It's a little bit more deposits and branch footprint and then the smaller bank can sell the bigger balance sheet and lending opportunity, anything else I see. So I'm a holistic fee revenue generation to legacy clients. So when you think about just the synergistic nature Outside of the extension and footprint and this really healthy relationships that come with great deposits, Is there anything else that legacy byline can get from this? Now that the deal is closed, I was curious if you could show some ingredients to the special sauce.

Speaker 2

Well, certainly the opportunity to become more efficient as an organization There's one thing to highlight there, Ben. I mean, I think Roberto said it well. If you think about Like our trajectory originally 10 years ago to kind of where we are today pro form a for that acquisition, Certainly, I think over time, I think we have shown that we've been able To deliver and gain scale profitably gain scale over the course of those years, Taking into account organic growth and obviously the deals that we've done. So we don't think this transaction would be any different. In terms of what other things, I mean, we have certain capabilities that they did not.

Speaker 2

So for example, our treasury management suite is a more sophisticated product suite than what They had as a standalone entity. So certainly there'll be some opportunities with customers to improve And do more business with those clients. I'd say wealth management is also a capability that we have That they did not. So hopefully there'll be some opportunities there. Lastly, they as you know, they had A very successful primary shareholder that is a significant has a significant real estate Business here in the Chicago area that is broad in terms of their scope of their activities.

Speaker 2

I think over time there'll be opportunities to do some business with them. We're not really Factoring that in, we're not modeling that in what we're assuming for the transaction. But certainly, larger bank, it's a well known, very reputable real estate business. We look forward to being able to do some business with them. But aside from that, I think you've covered the other items pretty well.

Speaker 9

Got you. And then kind of just dovetailing off of that, can you just say the guidance for fees? I understand the expense, so just I can't read my own handwriting when I took all those notes.

Speaker 5

I think fees would be Assistant, maybe up a little bit, but if you look at what their fee income has been, it's as Alberto mentioned, there's some fee services, treasury management and Well, that would add to the fee income line, but if you look at their running rate on fee income, it would be probably consistent.

Speaker 9

Got you. Okay. So that's kind of what I was getting at here is like, yes, the balance sheet improvement makes sense, but when you think about just potential cross selling, It's clearly not going to happen in the 1st 60, 90, even in the 1st year of the combined entity. But When you think about just the fees outside of the normal kind of gains on for that revenue like the Service fees, ATM, interchange, wealth management. Do we see an inflection point on Knowles sometime in 2024?

Speaker 9

Or is there hiring and staffing that's needed as well? I was just kind of curious just seeing some growth in those areas Now that it includes inland, it should have some cross selling potential, but just trying to think about the bigger picture here.

Speaker 2

Yes. I mean, I think, Ben, like we commented on, I think over time, There'll be some opportunities there. But remember, this was a very traditional banking institution. They historically had had a mortgage business. That is not something that we opted to So that's not going to be part of the business going forward.

Speaker 2

Obviously, that was a source of fee income for them. It was also a source of Expenses for them that will no longer be there. But aside from that, you're taking we're consolidating a pretty traditional institution. So Your sources of fee income are going to be service charges on deposits, some interchange revenue, etcetera. But there's nothing really too exotic.

Speaker 2

We think we can do we could probably do more business on the treasury management side because we have certain capabilities that they did not. But that will be normal course. So I don't know that there's anything extraordinary beyond that, Ben.

Speaker 9

Okay. And then finally, the last one is obviously big picture. And I get that the ink I just tried earlier this month on the deal, but your balance sheet is approaching 9%. Is there any staffing or anything else that's needed from a back office perspective to cross 10? It seems like 10 you have the potential to do organic because of a good growth engine or you could do a deal.

Speaker 9

Either way, you're still going to need to hire some staff Or is it already in place today?

Speaker 2

Yes. There will be we've always operated the company With the notion that we don't kind of do things on a step function that, okay, we get to a certain point and then we need to hire To strengthen certain areas, we need to hire at that point. I think we've always built the company on the idea that the Company will grow over time consistently and we want particularly on the risk management side, we want to stay ahead Of what the regulatory expectations are of the company. So, I think we've always built the company With that in mind, do I think is the question that you're asking is do I think We're going to go through a period where we're going to have to hire as we approach $10,000,000,000 in order to prepare to cross, We'll have to hire to a degree, but I think I'll go back to my earlier comment. I think we have built Gradually staffing and we have built our risk and control functions Pretty steadily over time.

Speaker 2

So we'll have to do some hiring certainly as certain expectations. We have to meet higher expectations, but it's not something where we haven't built those functions and we are starting from And now we have to run to accelerate in order to be prepared for that when the time So hopefully that gives you some perspective on that. Yes, that's great.

Speaker 3

If I can add Just quickly, if you look at the team and the directors, We have certainly been exposed and governed and worked in entities that are Longer than $10,000,000,000 right? So the $10,000,000,000 threshold is not new to this management team And the experience that the team has had over the years in other institutions and neither it is to the directors. So No, we're prepared. Alberto said it well. We are bringing in new talent with the Inland acquisition as well that is Strengthening that area for us in the risk management area and help us to prepare For that jump, right?

Speaker 3

As you know, the regulators do expect A different level of sophistication and you get a different set of regulators as well and a different exam process Once you go over the RMB10 billion. And we've been in constant communication with them about it and I think we're in a really good place.

Speaker 9

Got you. That's helpful color. Appreciate the time. Great quarter and great past decade. It's been impressive to watch.

Speaker 3

Thanks, Ben. Thanks, Ben.

Operator

Thank you, Ben. Your first question comes from the line of Terry McEvoy from of Stephens. Terry, your line is now open.

Speaker 10

Hi, thanks. Good morning and congrats on what you all have accomplished over the last 10 years. It's safe to say everyone in town knows the byline name by now. So maybe and Tom thanks for all the forward looking commentary given some of the moving parts. I appreciate that.

Speaker 10

So maybe just a bigger picture question. A number of the banks Chicago that are larger in market share than Byline, they're shrinking their balance sheets and really focusing more on risk weighted asset optimization After yesterday's capital kind of rules came out. So I guess my question is, are you seeing it and how can you benefit From what some of the larger banks may be doing in your markets?

Speaker 2

Really good question, Terry. And As I think we've always said, any time that there's any type of disruption In the market here and I would categorize what you just described as the equivalent of that Because I think some of the larger institutions are very, very focused right now on reducing risk weighted assets, anticipating higher capital requirements. So to answer that question directly, yes, we are seeing that. And I think That we will benefit from some of that disruption in the market. That being said, we are being Careful and disciplined.

Speaker 2

Just because you have institutions that are passing on business or trying to shed business, It doesn't mean that necessarily we want to do that business where it's priced. We want to do that business Without taking over a full relationship, but I think some other Institutions, some of the larger, particularly out of state institutions in town, I think we are certainly hearing From customers that they feel like they should look outside of that company given You know what the focus is on balance sheet management today. So I think we'll benefit Terry and I think We're optimistic about our ability to capitalize on that.

Speaker 10

Thanks for that. And then a couple of questions on inland. Do you have the conversion date selected? I think you mentioned later in this year. And are you still comfortable with 30% cost savings and the 8% earnings accretion In 2023 that you talked about when you announced the transaction?

Speaker 2

Yes. So two questions there. So on the conversion, yes, We will be by the time we have this call next quarter, we will be fully converted. So that's On schedule and progressing along nicely. And in terms of the accretion, Terry, we're finalizing Mark's.

Speaker 2

I think the biggest driver of the mark like it was when we announced, and obviously you could look at the rate movements, But the interest rate marks are going to add are Obviously significant and we'll add probably I would say at this point probably a bit more Accretion, but we'll be better prepared to cover that in detail at our next call, Next quarter.

Speaker 10

Thanks. And then just one last question. I read a couple of days ago about this proposal to triple The transfer tax of real estate in Chicago, I don't know if that's residential as well as multifamily, but is there anything there? Are there any risk To the real estate market in Chicago and in Byland in particular?

Speaker 2

I think It's probably too early to judge any type of impact. I mean, I think Over the years, there's been any time that there's a change and we've been wrong, Terry, so many times, like There's been a new proposed change, and we think it's going to have X or Y positive or negative impact On the market, we think that maybe transactions are going to slow down, that prices are going to be impacted. And I think what we've learned is like we have We're more often very wrong when we try to guess what the ultimate outcome is going to be. So I guess put it differently, the market is pretty resilient. Our sense is, our Vasquez is the market will adjust accordingly.

Speaker 2

There's usually kind of like a reset period and You proceed along from there. So too early to judge on that at this point, Terry.

Speaker 10

Thanks. Again, thanks for taking my questions and I hope you have a nice weekend.

Speaker 2

Great. Thank you. Likewise. Thanks, Terry.

Operator

Thank you, Terry. Your first question comes from the line of Brian Martin from Janney Montgomery Scott. Brian, your line is now open.

Speaker 4

Hey, good morning, everyone.

Speaker 2

Good morning, Brian.

Speaker 3

Good morning, Brian.

Speaker 4

Just a fun follow-up, Tom, just on the fee income component from Inland, remind me what how big that piece was just as we kind of Size up things looking forward.

Speaker 5

Specifically for inland fee income?

Speaker 4

Yes. What are we adding? Yes, just kind of adding on an annual basis with the acquisition. I know there's some noise in there with the mortgage unit going away. So just trying to understand how to think about that along with kind of your standalone operation.

Speaker 5

Terry, I'm going to have to get back to you on that. Sorry. Just one moment.

Speaker 2

I don't have that. I don't have

Speaker 5

it in front of me right now.

Speaker 4

Okay. All right. And then I guess just I think the commentary on the fee income outside of the fair value mark standalone for Byline, that's been pretty Stable here in the last couple of quarters. Any areas you guys are focused on as far as driving growth there prospectively that I guess we should be thinking about?

Speaker 5

Related to fee income?

Speaker 4

Yes. Just kind of a standalone byline unit. I mean it looks like the last 3 to 3 quarters been pretty When you strip out that, Mark.

Speaker 5

Yes, I think on the fee income side, I think we're continuing to improve our Treasury management opportunities, we do back to back customer swaps. Those are starting to pick up a little bit as well. And then our Wealth Management business is growing, so that's helping too.

Speaker 4

Okay. And the it sounds like the pipeline and the government guarantees, I mean, Expectations next quarter seem pretty consistent with this quarter's first in terms of premiums and production?

Speaker 5

Correct. Correct.

Speaker 4

Okay. Maybe just two last ones just on maybe for Mark, just on the trends in criticizing classifieds. Can you give any update on the quarterly numbers when we see the 10 Q come out?

Speaker 8

Yes. We made some good progress, Brian, in those areas. We're still seeing opportunities to resolve Any criticized classified loans that we have, as you know, there's a lot of capital out there and Right. So people are looking at the opportunities and we're taking advantage of those. We're but we're looking for business solutions on these deals with the customers.

Speaker 8

And we will execute on those very well in the Q2 in both our conventional and our SBC portfolios. So will that continue? The capital is out there. We have to make good judgments and strategies with these customers in an effort to manage those numbers. But even REO, which we don't have a lot of, there's a hunger for REO, if you want to buy anything that we had that's real estate oriented.

Speaker 8

And we were able to take advantage of some of that in the Q2 also.

Speaker 2

Yes. If I could, Brian, just to add to what Mark said, I think for each asset, our approach is we have a we go asset by asset. We have a strategy on each and every single asset. And then you look at alternatives Relative to the value ultimate, the present value of what that strategy is likely to yield you And to the degree that you can accelerate and you can be quicker by disposing assets visavis Where your strategy was, then we opt to perhaps take advantage of that. But it's really just a function of Asset by asset, what's the strategy?

Speaker 2

What maximizes here the recovery on this Particular situation and then comparing that against opportunities that the market kind of brings to you. So that's just a bit of color on the philosophy and strategy.

Speaker 5

Brian, just to follow-up on the Inland fee income, It's roughly $337,000 for the quarter, Q2. Okay. Okay.

Speaker 4

So yes, Q2. Okay. I appreciate that. And then just maybe the last one maybe for Alberto. Just as we think about the margin, I know

Speaker 5

there's a lot of moving parts to the next couple of quarters.

Speaker 4

But just over time, As far as the margin that your model should be able to support, I mean, if you're in the 4% range and you kind of Drift down a little bit legacy and then adding the inland transaction and you kind of get back to where you are today. Is the margin Can you talk about what level of margins sustainability is over time over the longer term for the operation based on kind of the business mix you guys have?

Speaker 5

Yes. Hi, Brian. I'll take that one at least to start. Again, we're asset sensitive, so we expect to make A little more money here given the Fed increase, but the market is now anticipating the Fed kind of on hold Through the end of the year, I guess, data dependence, so we'll have to see. And so if rates do decline as the market is expecting next year on the short end, We would stand to give up some income here because of our asset sensitivity.

Speaker 5

But as you know, we continue to Work on balance sheet hedges to protect for rates down and primarily working on organic strategies on balance sheet to Prepare for the rates down scenario.

Speaker 4

Got you. Okay. That's helpful. And just Yes. I guess maybe last one for me, just more big picture.

Speaker 4

As you guys you talked about the $10,000,000,000 level. I mean, just trying to understand how you guys are viewing that, is if it's Is something just organically keep growing and go over it? Or is there something you see having to do something from an M and A perspective To get over in a more significant way, you guys are all familiar with it certainly as you've outlined, but just trying to understand how you're thinking about it as you approach it.

Speaker 2

Yes, I think Brian, so I think we'll say this. We certainly don't want to be $10,100,000,000 and be there parked at that level. That said, We are also not we don't view crossing the $10,000,000,000 mark as necessarily meaning that you absolutely We have to do something in order to cross it. I think we've had good organic growth. I think if it happens organically, great.

Speaker 2

I think if you look back at our track record over time, we've been able to do both And be able to do both well. So I think that strategy overall has served us well. I think it's not something that we think about. I think Roberto said it well when he said it. It's not something that it will be a milestone when we get there, but we certainly don't want To alter our business or what we're doing as we approach $10,000,000,000 If we have to cross it and we cross it Organically, then we'll continue to grow our business.

Speaker 2

That way, if we have the opportunity to do M and A like we have in the past, Then we will try to execute on that as well. So it will be a mix of I think it will be a mix of Both consistent with what we've done in the past.

Speaker 4

Okay, understood. Okay, I appreciate the Thanks for taking the questions and a great decade guys.

Speaker 2

Super. Thank you, Brian.

Operator

Thank you, Brian. Your next question comes from Damon DeMonte from KBW. Damon, your line is now open.

Speaker 7

Hey, good morning, everybody. Congrats on a 10 year milestone and a nice quarter. A lot of good questions have been asked and answered, but just kind of would like a little bit more color or commentary on the loan pipelines. I'm just wondering if you're seeing any kind of pullback from customer demand just given the higher rates, especially in your commercial real estate Lending area or are you guys becoming a little bit more selective maybe with some of the credits that you're adding just given more macro concerns?

Speaker 2

Good question, Damon. So, I think we would say this. I think on the real estate side, It's consistent with what we've said over the last several quarters and that's been the area where you've More of a material slowdown in activity. We are still seeing deals. We are still seeing opportunities.

Speaker 2

It's just the volume of opportunities that we're seeing there It's not what it was, let's say, a year and a half ago or so. So that area certainly Has seen kind of the brunt of it, as I think the real estate market is adjusting to higher cap Rates, much higher interest rates in terms of that, higher costs if you're looking at construction projects. So I think all of that I think plays a part. But that being said, As I just mentioned, we're still seeing activity there. We're still seeing strong sponsors that can take advantage of situations Are doing that.

Speaker 2

So we're seeing that on the real estate side. As far as the other businesses, The overall level of activity is pretty good. It's pretty good. I think By and large, I think businesses have been able to absorb so far higher rates, the higher cost of capital, Higher inflation, let's not forget that. I think that also helps.

Speaker 2

So to the degree That they're able to pass along and see revenue increases coming from price increases, that certainly Has helped them absorb higher financing costs. But overall, our pipelines are pretty healthy Here as we start the Q3 and the level of activity has been pretty good. So far so good Damon in that regard.

Speaker 7

Great. Are there any areas of Any industries or areas of your footprint that are experiencing early stress versus other areas?

Speaker 9

Mark, you want to take that one?

Speaker 8

Early stress, I mean, Everyone knows that if you say the word office building across the country, someone's going to wince. But I haven't seen an industry Type of situation or any trends in our portfolio or in the market, I just haven't seen that yet. I mean, again, as Alberto said, People are coping with increased rates. Our SBA customers obviously feel the brunt of that the most given the changes there. But even they have managed very well so far this year and I anticipate that to continue.

Speaker 8

So I have not seen a theme As to what's going on in the portfolio we have or the deals we're seeing, just not seeing it yet.

Speaker 7

Got it. Okay, great. Okay, well, like I said, a lot of good questions have been asked and you guys provided good answers. So I'm all set. Thank you very much.

Speaker 2

Super. Thank you, Damon. Thank you, Damon.

Operator

Thank you. Thank you all for the questions today. I will now turn the call Back over to Mr. Alberto Parakhini for any closing remarks.

Speaker 2

Okay. Thank you, operator. So Thank you all for joining the call today and for your interest in Byline. Brooks, you have something that you wanted to comment on?

Speaker 1

Yes. Just for investors this We plan on attending the Raymond James conference as well as the Stevens Bank conference. That concludes our call, And we'll see you next quarter.

Speaker 2

Thank you.

Operator

Thank you. Ladies and gentlemen, if you like, This concludes today's call. Thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Byline Bancorp Q2 2023
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