Byline Bancorp, Inc. (NYSE:BY) Q3 2023 Earnings Call Transcript

Byline Bancorp, Inc. (NYSE:BY) Q3 2023 Earnings Call Transcript October 27, 2023

Operator: Good morning, and welcome to the Byline Bancorp Third Quarter 2023 Earnings Call. My name is Adam, and I’ll be your commerce 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. [Operator Instructions] Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call.

Brooks Rennie: Thank you, Adam. Good morning, everyone. And thank you for joining us today for the Byline Bancorp third 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. During the course of the call today, management may make certain statements that constitute 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. The company’s risk factors are disclosed and discussed in its SEC filings.

In addition, our remarks may referenced non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. Reconciliation for these numbers can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release. I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Alberto Paracchini: Thank you, Brooks. Good morning, everyone, and thank you for joining the call this morning to go over our third quarter results. With me on the call are Roberto Herencia, our Chairman and CEO; Tom Bell, our CFO; and Mark Fucinato, our Chief Credit Officer. Before we get into the results for the quarter, I’d like to pass the call on to Roberto for to comment on a few items.

Roberto Herencia: Thank you, Alberto, and good morning to all. We had another strong quarter and are delighted to have welcomed our inland colleagues and shareholders after a successful core system conversion and integration in the third quarter. Speaking about welcoming, it is important to call out the addition of two very accomplished individuals to our Board. You have seen their bios, so I won’t go into those details. Pamela Stewart joined us as part of — at the close of the inland merger in early July. We did not know Pam other than through our selection and evaluation process at the board level. But we can tell you that in just a few months that we’ve been working with her, we’re just delighted with her contributions, and we know we’ve made a great selection there.

Carlos Ruiz Sacristán joined the Board in early October. We have known Carlos for many years. And more importantly, he knows us very well. Carlos is the identical twin brother of the late Jaime Ruiz Sacristán, who was one of our founding shareholders and served on our Board. The addition of these two individuals keeps in line with our commitment to building diverse, high-performing teams at all levels that reflect our core values of diversity and inclusion and we believe these make us stronger. In an environment where Mr. Market has elected to punish the banking sector. Our performance and execution have been excellent. We saw nothing mixed this quarter other than Mr. Market being significantly disconnected from our strong fundamentals, as Alberto and the team will cover.

We have been posting top quartile numbers in several important metrics. In this quarter, some of those metrics move even higher or into the top quartile. But these are just numbers. And what really matters to us, people, strategy and long-term shareholder value, we feel uniquely positioned, especially because of the uncertainty in the economy. We have created a place where the best lenders want to work and grow in a market handing us disruption opportunities. In addition, we have strategic pathways for inorganic value creation such as the inland merger that you just saw. On top of that, we have a very special group of long-only long-term shareholders, which provide us the runway where this value creation started to unfold for years to come, and I want to highlight for years to come.

I think this is easy and Christa did enough for analysts and Mr. Market to grasp. It connects us to the future. You can use quarters as signposts, but understand that this is much more than that. Alberto, I’d like to turn it back to you.

Alberto Paracchini: Great. Thank you, Roberto. In terms and moving on to the agenda, I’ll start with some comments and highlights for the quarter. Tom will follow and cover the financial results in detail, and then I’ll come back and wrap-up at the end before we open the call up for questions. As a reminder, the deck we’re using for today’s call is on our website, so please refer to the disclaimer at the front. Starting on slide 3 of the deck. The third quarter was not only a strong quarter financially for the company, but also a very productive one. During the quarter, we closed the Inland merger on July 1st and successfully completed the systems conversion in mid-August and wrapped up the integration project by quarter end.

The merger added roughly $1 billion in deposits, $800 million in loans and 10 branches located primarily in attractive west and northwest suburbs of Chicago. I’d like to welcome all former Inland customers, employees and stockholders to Byline. Lastly, I’d like to thank all of our colleagues who played a critical role in making the conversion and integration projects as success. We reported net income of $28 million or $0.65 per share on revenue of $105 million. These results include the impact of merger-related charges taken in connection with the Inland transaction. Excluding the impact of these, net income was $33 million or $0.77 per diluted share. These figures represent new benchmarks for the company since our IPO, with increases of 5% and 40% on a quarter-on-quarter and year-on-year basis, respectively.

Profitability and return metrics were also strong with an ROA of 130 basis points and an ROTCE of 16.15%. Adjusting for merger-related charges, ROA was 153 basis points and ROTCE just under 19%. Our pretax pre-provision income hit a record $46.9 million, which translates to a pretax pre-paration ROA of 216 basis points or 246 basis points one excluding merger-related charges. Total revenue was $105 million, up $14 million for the quarter and 30% year-on-year. Growth in the quarter was driven by a $16 million or 21% increase in net interest income, stemming from higher loan balances. Noninterest income declined largely due to a negative fair value mark on our servicing asset, despite increased gain on sale revenue. Expenses inclusive of all merger-related charges were $58 million for the quarter, up 17%.

Excluding charges, operating expenses remain well managed at $51 million, marking a 6.8% increase from the prior quarter. Operating expenses relative to assets came in at 235 basis points, excluding charges, representing a 25 basis point improvement from the prior quarter and a 21 basis point improvement year-on-year. The margin remained strong at 446 basis points, which includes approximately 50 basis points of loan accretion income coming from the transaction. Excluding acquisition accounting, the margin came in as expected at just over 400 basis points. As an aside, I’d like to point you to additional disclosures we added in the appendix related to loan accretion income on Slide 18 and updated slides on Pages 15 and 16 on our office exposure inclusive of inland.

Lastly, our efficiency ratio stood at 53.7% or 47.3% adjusted, which represents a 4 and 7 percentage point improvement over the prior quarter and year, respectively. Moving on to the balance sheet. Loans increased by approximately $1 billion and stood at $6.6 billion as of quarter end. The increase was primarily due to the inland transaction, notwithstanding, excluding the impact, we still saw growth in the portfolio of approximately $216 million or 4% on a linked-quarter basis. This marked the 10th consecutive quarter of loan growth for the company. Business development activity remained healthy, driven by our commercial and leasing businesses. Our government-guaranteed lending business also had a good quarter, with commitments closed totaling $113 million.

Deposits as of quarter end stood at $7 billion, up $1 billion largely due to the transaction. Adjusting for that, deposits increased by $74.4 million or 5.8% on a linked quarter basis. Asset quality inclusive now of the inland portfolio remained stable for the quarter. Credit costs came in at $9 million, inclusive of net charge-offs of $5.4 million and the reserve build of $2.6 million. The allowance for credit losses ended the quarter at 1.6% of total loans. Liquidity and capital remained ample and strong with a CET1 ratio of 10.1% and total capital of 13.2%. TCE ended the quarter at 8.18%, which is within our targeted operating range of 8% to 9%. Moving forward, our capital priorities remain unchanged. And with that, I’d like to pass the call over to Tom, who will provide you with more detail on our results.

Tom Bell: Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on Slide 4. Total loans and leases were $6.6 billion at September 30th, an increase of $1 billion from the prior quarter. Inland contributed approximately $800 million in total loans. Notwithstanding, we saw increases across all of our major lending areas with the strongest growth coming from commercial and leasing teams. Net of loans sold, we originated $311 million during the quarter and payoffs were lower than we expected at $185 million compared to $256 million in the second quarter. Looking ahead, we expect loan and lease growth to be in the low to mid-single digits for the remainder of the year. Turning to Slide 5. Our government-guaranteed lending business finished the quarter with $113 million in closed loan commitments which was lower than the second quarter.

At September 30th, the on-balance sheet SBA 7(a) exposure was relatively unchanged, and we saw an uptick in the USDA business. Our allowance for credit losses as a percentage of the unguaranteed loan balances was 8.1% as of quarter end, lower as a result of loan upgrades and payoffs. Turning to Slide 6. Total deposits increased to $7 billion at September 30th. Deposits grew $74.4 million or 5.8% annualized from the end of the prior quarter. DDA as a percentage of total deposits was 28% compared to 30% from the prior quarter. The change in mix was primarily driven by a lower DDA percentage on the assumed deposit portfolio. Commercial deposits represent 48% of total deposits and accounts for 77% of non-interest-bearing deposits. Our deposit costs for the quarter came in at 213 basis points, an increase of 43 basis points from the prior quarter, which was primarily driven by higher rates on money market accounts and time deposits.

On a cycle-to-date basis, deposit betas, both for total deposits and interest-bearing deposits stood at 39% and 55%, respectively. Turning to Slide 7. Net interest income was $92.5 million for Q3, up 21% from the prior quarter, primarily due to the merger, organic loan and lease growth, and higher yields offset by increased interest expense. Our net interest margin was 4.46%, up 14 basis points from the prior quarter, stemming primarily from the merger. Accretion income on acquired loans contributed 50 basis points to the margin in the third quarter, up from three basis points in last quarter. Earning asset yields increased a healthy 50 basis points driven by higher loan yields. Going forward, given the higher-than-expected accretion in Q3, we estimate net interest income of $85 million to $87 million for Q4.

Turning to Slide 8. Non-interest income stood at $12.4 million in the third quarter, down $1.9 million linked quarter, primarily driven by a $3.6 million negative fair value mark on our loan servicing asset due to higher discount rates and increased prepayments, which was partially offset by an increase of $769,000 in net gain on sale of loans due to higher volumes. Sales of government-guaranteed loans increased $16 million in the third quarter compared to Q2. The net average premium was 8% for Q3, lower than the prior quarter, primarily due to changes in the mix of loans sold and tight market conditions. Assuming we avoid a government shutdown in November, we are forecasting gain on sale income in the $5.5 million range for Q4. Turning to slide 9, our non-interest expense came in at $58 million for the third quarter, up $8.6 million from the prior quarter, primarily due to the impact of the Inland acquisition.

On an adjusted basis, our net interest expense stood at $51.2 million, $2 million below our Q3 guidance of $53 million to $55 million. We continue to remain disciplined on our expense management, and we are on track to meet projected cost savings. With one-time merger cost behind us, our non-interest expense guidance is unchanged at $53 million to $55 million per quarter. Expenses are well managed, and we believe we have the right balance of investing versus spending to achieve our strategic goals. Turning to slide 10. The allowance for credit losses at the end of Q3 was $105.7 million, up 14% from the end of the prior quarter. The increase includes an adjustment of $10.6 million for Purchase Credit Deteriorated loans, PCD and a $2.7 million provision for acquired non-PCD wells.

In total, for the quarter, we recorded a $9 million provision for credit losses, compared to $6 million in Q2. Net charge-offs were $5.4 million in the third quarter, compared to $4.3 million in the previous quarter. NPLs to total loans and leases increased 79 basis points in Q3, from 69 basis points in Q2. The increase in NPLs was attributed entirely to loans assumed as part of the merger. NPAs to total assets increased to 60 basis points in Q3 from 54 basis points in Q2. And total delinquencies were $36.9 million on September 30 a $27 million increase in the linked quarter. The increase was primarily due to the merger, which contributed approximately half of the delinquency increase. Turning to slide 11. We ended the quarter with approximately $429 million in cash and $1.2 billion of securities, which represents roughly 19% of total assets.

Our available borrowing capacity stood at $1.7 billion and our uninsured deposit ratio stood at 26.1%, which remains well below all Pure Bank averages. Total security yields increased a healthy 39 basis points to 2.48% from Q2. Turning to slide 12. Our CET1 came in at 10.1% and our TCE ratio stood at 8.2% and remains within our targeted TCE range. Going forward, we are focused on executing our strategy, and we expect our capital levels to grow given our earnings outlook. With that, Alberto, back to you.

Alberto Paracchini: Thank you, Tom. So to wrap-up, on slide 13, you have a summary of our strategy, which has remained consistent and continues to work very well for us. We were pleased with another quarter of strong results and notwithstanding the significant sources of uncertainty present in the environment. We remain optimistic about our ability to continue to differentiate ourselves in the marketplace and deliver results for both our customers and stockholders. With that, operator, let’s open the call up for questions.

Operator: [Operator Instructions] Our first question today comes from Damon DelMonte from KBW. Damon, please go ahead. Your line is open.

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Q&A Session

Damon DelMonte: Hey, good morning, everyone. I hope you’re all doing well today.

Roberto Herencia: Good morning, Daman.

Damon DelMonte: Good morning. Just wanted to start off with a question on the margin. So the reported margin, I think it was like 4.47, and you guys had noted there was around 50 basis points of benefit from the merger accounting there. And you did provide a table in a slide deck with expected accretable yield going forward. So do we basically just take out the $10.3 million this quarter to get to a core number of like 3.97. And then if we kind of layer on the expected accretable yield, we can kind of back into the core margin for next quarter to get to the guided NII, is that fair, Tom? So, I guess what I’m trying to get at is it sounds like the core margin is trending lower from third quarter to fourth quarter.

Tom Bell: I think that’s generally accurate. I think you have to remember that there’s a number of repricing things going on. And I think that you would see the margin stable to maybe slightly up just given we have balance sheet hedges. And we have the SBC loans repriced to another 25 basis points higher in Q4. So I would say flat to slightly up.

Roberto Herencia: I think the construct to add to what Tom was saying, Damon, I think the construct is correct. I think you’re thinking about it the same way. Just one word of caution with accretion that’s our best guess, obviously, as it’s going to fluctuate. In some cases, we may see that accretion to par be faster. I think you saw some of that this quarter. But that’s our best estimate at this point in time. Just know that it can vary plus or minus some percentage on a quarter in, quarter out basis. The second point to just add to what Tom said is, I think what you’re seeing, absent another increase in rates or call it a significant change in short-term market rates as I think the margin, call it, the core margin, so to speak, is reached a trough, so to speak.

So just plus or minus. I mean, we — it’s impossible to predict these things within a basis point or two, but just plus or minus, just know that it could bounce around a little bit. But generally speaking, what we’re seeing is probably relatively flat core number with the accretion number on top. Hope that helps.

Damon DelMonte: Got it. It does. Yes. Thank you for that color and clarification. And then with regards to the expenses, Tom, I think you said that the guide for next quarter is in the $53 million to $55 million range. Is that correct?

Tom Bell: Yes.

Damon DelMonte: So if we were to kind of back out the merger charges in the quarter and I think…

Tom Bell: Sorry, I didn’t mean to interrupt you. Go ahead, Damon. That goes beyond the fourth quarter.

Damon DelMonte: It goes beyond the fourth quarter, okay. But if we kind of back out the nonrecurring, nonoperating stuff here in this quarter, we’re in the $51 million range. Is that fair?

Tom Bell: Yes.

Damon DelMonte: So, I guess, what’s the transition from this quarter’s level up to that 53% to 55%? Are there – just inflationary expenses that are causing us to go higher, or are there may be some onetime savings this quarter that don’t recur in the coming quarters?

Tom Bell: I mean, there’s a little of the — we don’t expect many acquisition costs, merger related costs in Q4, we think we’re done. And then there’s obviously some employees that work through the conversion, so to speak, that are no longer here. So there’ll be some saves there, but we are dealing with inflationary pressures. And we think given the projects and the things we want to continue to invest in the business, we’re trying to find some other opportunities, but we’re trying to manage to the lower end of the range.

Damon DelMonte: Got it. Okay. That’s helpful.

Roberto Herencia: I think, to add to what Tom said. And I think the point that he said kind of like in between is like. I think that guide is — goes beyond the quarter. Just think of that also kind of going into 2024. So if you, kind of, take the, call it, the run rate adjusted for charges and you take that run rate on the guide with that range. I think what you’re seeing there is probably just an update into next year that — I mean, I’m sure you can kind of do the back of the envelope there. But that’s just inflation and probably just also incorporate some of the growth that we’re seeing into next year.

Damon DelMonte: Got it. Okay. That’s helpful. And I guess, just lastly, kind of broader speaking on credit. You know any updated thoughts on particular areas of your footprint or the portfolio where you might be seeing some softening or you’re keeping a more watchful eye?

Roberto Herencia: Other than the office space, obviously, we haven’t seen any trends in the other asset classes that we currently have in the portfolio. We’re spending a lot of time being vigilant, doing our portfolio reviews. We’re focused on solutions when we do have problems. And our business units have been — they’ve been very good about staying in touch with the customers and looking for any science-based at problems.

Damon DelMonte: Got it. Okay. Thank you very much. Appreciate all the color. It’s all that I had.

Roberto Herencia: Thank you.

Alberto Paracchini: Thanks, Damon.

Operator: The next question comes from Terry McEvoy from Stephens Inc. Terry, your line is open. Please go ahead.

Terry McEvoy: Hi. Good morning, everyone.

Roberto Herencia: Good morning, Terry.

Alberto Paracchini: Good morning, Terry.

Terry McEvoy: And thanks for the appendix slide, very, very helpful. I don’t have to ask Tom the accretion question. So thanks for that. Maybe just stepping out of the model a little bit. You’ve got — we’re hearing larger players in Chicago are shrinking or deemphasizing certain areas. So are you getting more incoming calls from lenders? And how are you thinking about kind of playing more offense, given some of the changes in the competitive landscape that I’m hearing about?

Roberto Herencia: I think probably, Terry, in general terms, it’s — what we’re seeing is a lot of the so-called risk-weighted asset diets that some of the larger players are kind of going through. A lot of what we’re seeing is initially, those seem to be very much on transactional-driven business. So not necessarily — we’re not necessarily — we’re not in a lot of those businesses. We — as you well know, we don’t have a significant consumer business. We’re not in the mortgage space. So we’re not really, kind of, seeing opportunities to kind of pick up where others maybe that are more capital constrained are looking to lighten up on risk-weighted assets. We’re more focused on opportunities where it’s relationship driven. What we are seeing though in the market is more and more, particularly some of the larger players looking to participate or syndicate transactions and actually be willing to offer more of the relationship to others in order to entice them to participate.

And that’s a mark change from what we had seen in the past. But again, it’s not necessarily something that we are — it’s not necessarily something that we do on a day-to-day basis. I would say we just are really, really focused on the entire relationship, building relationships and focusing on customer dislocation as a result of mergers and transactions that have happened here in the past. So to answer your question directly, yes, we’re seeing some of it not necessarily in areas where we really would be looking to capitalize on.

Terry McEvoy: Perfect. And then as a follow-up question, I don’t think anybody should be surprised on Page 17, the office portfolio metrics with NPL delinquencies criticized higher in the quarter. So I guess my question is if I go back to Slide 16, are there any other areas within CRE, retail or senior housing where you have maybe an upward migration in some of those credit stats, but just not to the degree that we’re seeing in office, or are those portfolios still performing, I guess, the trends are relatively stable.

Mark Fucinato: Hi, Terry, Mark Fucinato. The — we haven’t seen that in terms of any trends in the other asset classes. We don’t have a lot of senior housing or health care. We did — we do come across one from the Inland transition that we’re looking at that’s of size. But other than that, we just haven’t seen any real kind of trend of any increases in the other asset classes. The office has been our focus for quite some time in our legacy book, and obviously, in the book that came over from Inland. So we’re working on those. We’ve been focused on solutions for those. And we spent a lot of time confirming our risk ratings since we got the Inland portfolio and that we’re going to continue to approach it that way. But I have not seen any other breaks in the asset classes for commercial real estate.

Terry McEvoy: Thanks for taking my questions. And I hope everybody has a nice weekend.

Roberto Herencia: Great. Likewise, Terry.

Mark Fucinato: Thanks, Terry.

Operator: The next question comes from Nathan Race, Piper Sandler. Nathan, your line is open. Please go ahead.

Nathan Race : Yep. Hey guys. Happy Friday.

Roberto Herencia: Good morning, Nate.

Tom Bell : Good morning, Nate.

Nathan Race : Going back to the margin discussion on a core basis, curious kind of what that contemplates in terms of the size of the earning asset base hit in the fourth quarter. Obviously, cash balances were higher end-of-period borrowings were also up in the quarter. It looks like you were able to sell down a portion of the Inland securities portfolio. So just curious how you guys are thinking about those dynamics in terms of maybe deleveraging the balance sheet in the fourth quarter, just given some of those dynamics between securities and the overnight funds.

Tom Bell : Hi, Nate. Yes, good morning. It’s Tom. Thanks for the question. Yes, I mean, our cash position was slightly elevated at the end of the quarter. I mean, that’s not something we would normally maintain. As we mentioned in prior meetings, we weren’t investing securities cash flows. And so we’re back on board, we’re doing that now just given where rates are and our asset sensitivity, I think we were still mindful of if rates decline, the impact to us from an NII perspective. So you’ll see some of that cash move into securities throughout the next quarter here. And then we’ll plan on continuing to reinvest cash flows as we move forward. But the cash position was just timing at quarter end for the most part, being elevated.

Mark Fucinato: Yes, Nathan. And to add to that, I mean, Tom gave guidance as far as kind of what we’re anticipating as far as loan growth is concerned. One just caveat with that, we anticipate that we are going to see not necessarily runoff that would cost deleveraging, but it’s going to be probably a remixing of the portfolio as we have runoff primarily stemming from the transaction, we’ll look to reinvest that over time. So you may see our cash position at times just go up, because we’ve got payoffs and those payoffs, we’re anticipating we’ll get those redeployed over the course of time in our different portfolios. So, there’s always a little bit of remixing that will take place. And we anticipate we’ll see some of that probably starting next quarter, but certainly more into 2024.

Nathan Race: Got it. But in terms of kind of the overnight borrowings that were at in the quarter, do you expect those balances to come down over the next couple of quarters, or is it just contingent on loan growth, the success and…

A – Tom Bell: No, I mean we would — we normally would not hold that high of a balance. And again, if we went to the whole loan bank and borrow the money, it’s sat at the Fed. So it was kind of a neutral P&L trade for us. So if you see the other borrowings increase, really could assume that the other borrowings would decline as the cash position declined.

Mark Fucinato: Yes. It’s kind of like a — given where rates — given the rates that you get paid on reserves at the Fed, I mean, I think what Tom said, you might just want to just net those two numbers out and look at a net number because the financial impact of that is going to be pretty negligible. So — but so just keep that in mind.

Nathan Race: Got it. No, very helpful. And just kind of thinking about the balance sheet growth trajectory in the next year, I think Tom alluded to kind of low to mid-single-digit loan growth for the fourth quarter. Curious in terms of how the pipeline looks and kind of the prospects going into next year relative to Terry’s question around some of the competitive dynamics in Chicago, curious, how you guys are thinking about overall growth in loans and core deposits in 2024.

Mark Fucinato: I think I would kind of refer to what the guidance that Tom gave at this point. I mean pipelines are healthy. Activity is — I mean, generally speaking, solid. I mean there are some areas, notably real estate. I mean real estate is no surprise, no — as you would expect slower given its probably the most interest rate sensitive sector of our portfolio. So you have lower activity both on the origination side and on the payoff side. So we’re anticipating, no change there. We’re anticipating that will continue into 2024. We’re also anticipating the point that we just made right before in terms of some remixing within the portfolio, we’ll pay attention to what kind of like our core origination rates are – but just know that in some cases, we will get pay-offs, we won’t renew loans, we’ll get the cash and then we’ll redeploy that within the portfolio.

So you don’t necessarily will see net loan growth, so to speak, but it’s just being — it’s just assets being replaced by – by originations into our core businesses. But to answer your question, I mean, obviously, we had, I think, the number — the GDP number yesterday kind of explains and points to the fact that the economy has remained pretty healthy, we tend to be more cautious. Our view is more cautious. There’s a lot of uncertainty out there. And we’re tending to – to want to have a more cautious view of that. But so far, pipelines remain healthy, particularly on the commercial side. Our government-guaranteed lending business is a bit slower compared to years past, but they’re seeing a fair number of opportunities. So that remains, I think, okay, given the rate environment.

Our leasing business has shown really, really good growth over the past year. Some of that is a catch-up from supply chain issues that were happening earlier as people had put orders for equipment, we just couldn’t get the equipment, and therefore, that kind of delays. So we’re catching up with that, which is helping in terms of growth. But all in all, I think the – the guidance provided may should give you a good picture in terms of kind of what we’re seeing at this point in time.

Nathan Race: Yes. That makes sense. And if I could just ask lastly on credit quality. Obviously, some continued normalization charge-offs this quarter. Curious how much of that was driven by SBC and just generally kind of what you’re seeing in SBC credit quality these days. I think that’s just increasingly a topic of concern across investors just given the rate shocks that have impacted

Alberto Paracchini: Yes. I mean so – two comments, and I’ll let Mark jump in, but two comments generally speak. I mean all of the charge-offs that we saw this quarter, just think about, it’s just basically taking charges against reserves that we established in prior periods. So it’s just a realization of the asset got worked out. And essentially, we just took the charge accordingly. And that’s just normal course of business. I don’t think SBC was any different this past quarter as far as charge-offs. That portfolio, as we stated in prior calls, that portfolio has behaved fairly well above expectations given the environment, borrowers there have, I think, prepared and anticipated for rate increases and have absorbed those, I think probably looking back better than we anticipated. Mark?

Mark Fucinato: Yes, I agree, Alberto. I would call it really steady. Our SBA teams are – are very focused on looking at their portfolio. They’ve actually stepped up their portfolio management monitoring in the last couple of quarters. But it has been really steady. We haven’t seen any big jump in any one area for their book either, as of where we are today. The rate increases concern me because all those small business owners are dealing with that reality. But so far, it’s been pretty consistent.

Nathan Race: Okay. Great. If I could just squeeze one last one in on just kind of how you guys are thinking about the reserve trajectory from here. It sounds like growth is understandably slowing on the lending side of things. You guys are obviously still operating from a position of strength relative to peers in terms of where your reserve stack up. But I guess just absent significant macro deterioration within the CECL framework, how you guys are kind of thinking about the structure of the reserve going forward?

Roberto Herencia: A couple of things. I mean the macro trajectory is certainly important. But other factors that we — that — kind of we see in the environment. I mean, as I said earlier, there’s a fair amount of uncertainty in the environment. To give you an example certainly, everybody knows and everybody is paying attention to office but really, any other areas were — maybe it’s not necessarily something that we are seeing, but it’s something that happening in the environment and not yet reflected in your historical or in your forecast, we can obviously use factors to adjust for that. So just keep that in mind. Second, I think just — I think you nailed in terms of kind of how we think about provisioning and the reserve, just keep two things in mind.

One is any — you obviously are going to see a higher reserve overall with growth in the portfolio. So that’s one thing. And then the other thing, obviously, we have loans that that where we took marks on as a result of the Inland transaction, we are active in wanting to move those loans out. So you may see charge-offs related to that come through, we will make sure to basically show those separate so that you guys are aware of what we’re doing there. But in the course of the year, we will look to work out of situations that have been identified. So you may see an uptick in charge-offs on any given quarter related to that. But outside of that, it’s — I think it’s consistent with what the guidance that we provided in the past.

Nathan Race: Okay. Great. I appreciate all the color and you guys taking the questions. Thank you.

Roberto Herencia: Thank you, Nate

Tom Bell: Thanks, Nate.

Operator: [Operator Instructions] The next question comes from Brian Martin from Janney, Brian, Please go ahead. Your line is open

Brian Martin: Hey, good morning, everyone.

Roberto Herencia: Morning, Brian.

Tom Bell: Good morning, Brian.

Roberto Herencia: Maybe just one quick question on — maybe I think it was Tom that talked about the SBA or Alberto. Just it sounds like maybe the revenues are down a little bit in the quarter — next quarter. Is that more a function of — it sounds like the margins are holding up. I mean, is that maybe just a little less sale activity, or kind of how are you thinking broadly about that decline? What’s driving a little bit lower outlook for next quarter?

Tom Bell: For next quarter, I mean, obviously, there’s — the government shutdown is a risk for one thing as a caveat. I mean we’re — borrowers are — interest rates are high. So borrowers that will qualify, right? They have to be a little bit stronger just given the rate environment and the loan yields that they’re going to have. And then just given the mix and the appetite out there right now. We just think the market is not giving us the same premiums that we were getting before. And as a result, we’ve just kind of given a little bit lower guidance here.

Roberto Herencia: Okay. So kind of a combination of both volume and pricing is in the conservative

Tom Bell: Yeah, I mean, there’s always, again, things can pick up. I mean, pipeline looks pretty decent right now, but it’s a little bit slower, just as we speak.

Alberto Paracchini: Yeah. Just keep in mind, Brian, it’s hard to do on and we actually don’t manage the business that way. It’s hard to do this on a quarter-by-quarter basis. So just try to look at it more kind of like over a 12 month period, just because, like for example, this quarter, the third quarter, we just had a different mix in the assets that we sold compared to the second quarter. So that mix of assets to give you an example, if we have on any given quarter, if we have more USDA than we had the prior quarter or less USDA, that may impact. Those loans command a significantly higher premium relative to SBA because they have certain characteristics in them that you don’t have certain protections for investors that give them the incentive to be able to pay more for those assets.

And that can impact on any given quarter, the mix changes we sell more 10-year relative to 15-year, 20-year, that also has implications. So just keep that in mind. The mix on any given quarter is going to — can potentially impact margins and dollars as well.

Roberto Herencia: I think the last thing I would say too is fully funded loans. It matters, right? So some loans are in the pipeline but haven’t fully funded so that means we can’t really go out and sell them in the marketplace. So there’s just a timing delay as Alberto mentioned. We can’t specifically hit one quarter for a number. If it doesn’t fund and sell this quarter, it’ll fund and sell next quarter.

Brian Martin: Yeah. And I apologize if I was leading, it was going lower, I just didn’t understand, I just was trying to understand rate or volume, and there was something you guys were thinking about more so than another, but I understand the annual look as you guys are suggesting, so I appreciate that. As far as the — maybe one for Mark. Just on the — maybe you mentioned this if I missed it, but just where the criticized and classified levels are with the quarter close here? I mean, were they — I thought you said that delinquencies were up. Maybe I missed that. But criticized and classifieds, were they up in the quarter with the transaction?

Mark Fucinato: They were up, I would say, slightly in the quarter. Our criticized actually came down a little bit because we had a resolution of a large criticized asset during the quarter. But, yes, The transition of some of the inland credits, which again, we knew which credits were coming in that were going to be criticized or classified, resulted in an increase, yes.

Brian Martin: Okay. So an increase in just to criticize or is it both?

Mark Fucinato: It was criticized with slightly down because of a resolution of a Byline legacy criticized asset. I would say classified was pretty well, just a slight increase. But the NPL increase overall wasn’t that much different from where we were the previous quarter. In other words, we did have some resolutions of our criticized and classified assets and NPLs from the Byline book, but obviously, we had increases come back in from the inland book.

Brian Martin: Yeah. Okay. Understood. Okay. And then maybe just one, as far as what — the loans repricing, what level of loans do you guys have on a fixed rate basis that are repricing maybe over the next 12 to 18 months? Do you have some color on that? And just kind of what new origination yields are. Maybe that’s in the deck and I missed it. If I can look at that if I miss that.

Tom Bell: So, let’s – maybe come back to you.

Brian Martin: We can follow-up if you don’t have it, Tom.

Tom Bell: No, no. Maybe we can follow-up with you, but I mean it’s we’re asset sensitive. The loan mix is kind of 505-ish fixed floating, I would say that it’s the average life is three years, so a-third, a-third and a-third. But I guess, with Inland now it’s 42% fixed. And then it just really depends on, as Alberto mentioned, right, some of the Inland portfolio pays off, then that’s going to get re-priced or if it refinances. But we’re still primarily absent floating rate.

Alberto Paracchini: But just as a rule of thumb, Brian, to kind of — so that you can — as you think through this, if you take what Tom just said, if you 42% is fixed. I mean, these are not a 30-year or 15-year residential mortgages. These are essentially kind of like three and a half year assets. So just assume that 42% is effectively re-pricing over the course of a three and a half year life. And that kind of just gives you a sense of kind of how much of that fixed rate portfolio we’re going to get to see being re-priced on a yearly basis. I mean, it doesn’t deviate too far from that.

Brian Martin: Okay. That’s helpful. And just the last one was on the — on M&A, given with this one being done? I know it’s quick to turn the page. But just as far as what opportunities you’re seeing today, I know you talked about the inorganic opportunities that are out there. But how does the outlook look on the M&A side as far as, I guess, activity or just calls you guys are having today even if it seems like the merger of mass is obviously a little bit more difficult to get some things done today but – ?

Alberto Paracchini: Yes. I think we remain open to that. I think you hit the nail. I think you hit the nail on the head though, I think the channel, the math for transactions is challenging given the — for some folks that would be potential sellers the issue is just the amount of capital that remains after you factor in the interest rate marks, both on the loan portfolio and on the investment portfolio. That’s I mean, to be completely transparent, that’s the biggest impairment today.

Brian Martin: Okay. So all right. I appreciate you guys taking the questions. A nice quarter.

Alberto Paracchini: Thank you, Brian.

Tom Bell: Thanks, Brian.

Operator: Thank you for your questions today. I will now turn the call back to Mr. Alberto Paracchini for any closing remarks.

Alberto Paracchini: Yes. Thank you, operator, and thank you all for joining the call today and for your interest in Byline. And we look forward to speaking to you again in early 2024, and Happy Halloween to all of you. Thank you.

Operator: This concludes today’s call. Thank you very much for your attendance. You may now disconnect your lines.