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spk08: Good morning and welcome to the Byline Bank Corp third quarter 2022 earnings call. My name is Amber and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question, simply press star followed by one on your telephone. If you would like to withdraw your question, please press star and two. If you are listening via speakerphone, please lift your handset prior to asking your question. If you require operator assistance, please press star, then zero. 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.
spk03: Thank you, Amber. Good morning, everyone. And thank you for joining us today for the Byline Bancorp third quarter 2022 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 that certain statements made on today's call involve projections or other forward-looking statements regarding the 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 SEC filings. In addition, certain slides contain and we may refer to 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 Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp.
spk02: Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parchini, President of Byline Bancorp. Alberto Parch Starting with financial highlights on slide three of the deck. As you've seen by now, we delivered another strong quarter highlighted by higher earnings, strong loan growth, positive operating leverage, solid profitability, and stable asset quality. For the quarter, we generated net income of $22.7 million, or $0.61 per diluted share, which compared favorably to the $0.54 we earned last quarter. These results continue to show the strengths of our diversified model, commercial focus, and the hard work of our employees. Our return metrics continue to be solid across the board with pre-tax preparation income of $34.7 million, up 8.9%, quarter over quarter, and pre-tax preparation ROA of 1.93%, again, up nine basis points from last quarter. Return on assets came in at a solid 1.26 percent, while ROTCE was 15.4 percent. Total revenue came in at $81 million, up 7 percent quarter-over-quarter. The combination of continued growth in our commercial loan book coupled with higher rates boosted net interest income by 12 percent, and our margin increased by 28 basis points to 4.05 percent. We continue to remain well-positioned to benefit from additional rate increases. Non-interest income was $12 million, which was down $2 million from last quarter. The decline was driven by lower gain on sale income stemming from lower volume of loans sold for the quarter. Expenses were up by $2.4 million, primarily due to higher incentive compensation accruals and lower deferred loan origination costs. Notwithstanding, expenses were well managed as we achieved positive operating leverage for the quarter, and our efficiency ratio remained essentially flat at 55%. T. Moving on to the balance sheet, the third quarter saw growth in both loans and deposits loans increased by 107 million or 8% annualized and stood at 5.3 billion as of quarter end. T. This was the sixth consecutive quarter of solid growth and consistent with our guidance last quarter. T. Net of loan sales we originated 303 million in loans coming primarily from our CNI and leasing businesses. Payoff activity increased this quarter, as expected, and line utilization remained relatively stable at 55.8%. Our government-guaranteed lending business had strong production with $151 million in closed loans, up 21% from the prior quarter. We remain a market leader in this business, and as of the government's fiscal year-end on September 30th, we're the fifth-largest 7A lender in the U.S. Moving on to the liability side, total deposits stood at $5.6 billion as of quarter end, up about 17 percent on a linked quarter basis, with the growth coming primarily from money market and other interest-bearing accounts. The mix remained solid despite the higher absolute level of rates, with DDA representing 38 percent of total deposits. Deposit costs increased 27 basis points to 43 basis points this quarter and were in line with expectations. The faucet betas continue to track with our previous guidance of 40% for the cycle for interest bearing accounts. And we are currently operating below that level. We added some additional detail on the faucet betas for your benefit on page six of the deck. Tom will cover this shortly, but we expect that continued target rate increases by the Fed will obviously impact loan and deposit rates. At this point in the cycle, Given our asset-sensitive position, we expect loan yields will continue to exceed the change in the faucet costs. Asset quality remains stable with NPAs and non-performing loans basically flat to last quarter and charges coming in at 15 basis points, which was nine basis points lower than the previous quarter. A reserves increase consistent with growth in the portfolio and uncertainty in the outlook. While our portfolio metrics remain stable, we are cognizant of the impact that a recession coupled with rapid increases in borrowing costs can have on our portfolio. To that end, we are proactively conducting targeted reviews of different portfolio segments, closely monitoring past dues, and communicating with customers to get a street-level perspective on current performance and the outlook going forward. To date, we have not found much in terms of weakness, but we'll continue to remain vigilant given the uncertainty in the environment. Moving on to capital, capital levels remain strong with a CET1 ratio of 10.3%, total capital ratio of 13%, and TCE inclusive of AOCI of 8.25% as of quarter end, which is consistent with our targeted TCE range of 8 to 9%. This past quarter, we returned capital to shareholders with the repurchase of approximately 174,000 shares of our common stock, along with our quarterly dividend of $0.09 per share. We remain focused on executing our strategy, invest in the business, and continue to look for opportunities to grow the franchise while delivering value to shareholders. With that, I'd like to turn over the call to Tom, who will provide you with more details on our results.
spk07: Thank you, Alberto, and good morning, everyone. I will start with some additional information on our loan and lease portfolio on slide four. Total loans and leases were $5.3 billion at September 30th, an increase from the end of the prior quarter. Of note, our year-to-date origination surpassed $1 billion. Payoffs were elevated in the third quarter, as we expected, and came in at $216 million compared to $128 million in the second quarter. Furthermore, our outlook for the full year on loan and lease growth guidance is unchanged. For the fourth quarter, we believe loan and lease growth will be in the mid-single digits. Turning to slide five, we look at our government guaranteed lending business. At September 30th, the on-balance sheet SBA 7 exposure was $482 million, up $3 million from the prior quarter, with $107 million being guaranteed by the SBA. The USDA on balance sheet exposure was $61 million, down $3 million from the end of the prior quarter, of which $22 million is guaranteed. We continue to see stable credit trends in this portfolio. As a result, our allowance as a percentage of unguaranteed loan balances remains at 6.6%. Turning to slide six. Total deposits increased by $224 million, or 17% annualized from the end of the prior quarter. We saw growth in our money market and interest-bearing checking accounts. We remain disciplined on deposit pricing with our total cost of deposits coming in at 43 basis points for the third quarter. We gave guidance last quarter that we anticipated interest-bearing deposit betas of approximately 40% over the full cycle. Currently, we are operating below that level. Our deposit composition and ability to generate core deposits continues to be a strength of our franchise. Turning to slide seven, our net interest income increased to a quarterly record $69 million and increased to 12% from the prior quarter. This was primarily due to higher interest rates, loan and lease growth, which more than offset the impact of higher interest expense on deposits and borrowing. Net interest income on a year-over-year basis increased 15%, driven by a combination of net interest margin expansion and strong organic loan growth. On a GAAP basis, our net interest margin was 4.04% of 28 basis points from the prior quarter. Accretion income on acquired loans contributed 9 basis points to the NIM of 1 basis point from last quarter. Earning yield assets increased a healthy 63 basis points driven by an increase of 76 basis points in our loan yield to 5.54%. The NIM performed as we expected in Q3, as the margin expansion was primarily driven by higher rates and a well-managed cost of funds. Our margin remains in the top quartile for banks our size. Looking forward, as a result of the rising rate environment, our asset-sensitive profile, and organic growth, we believe the net interest margin will continue to expand in the fourth quarter. Furthermore, our net interest income guidance is unchanged. which, to reiterate, for every 25 basis point increase in rate would result in approximately $4 to $5 million of additional net interest income on an annualized basis. Turning to non-interest income on slide eight. Non-interest income decreased from the prior quarter, primarily driven by lower net gain on sale due to lower volumes of loan sales and lower average premiums. We sold $75.4 million of government guaranteed loans in the third quarter compared to $118 million during the second quarter. The net average premium was approximately 9.1% for Q3, lower than the second quarter as expected. We saw an increase in originated SBA loans that were not fully funded. As a result, they were not available for sale. We anticipate that these loans will be available for sale in the future, and during this holding period, we will benefit from the additional net interest income. With all that said, our pipeline and fully funded government guaranteed loans is forecasted to be consistent with Q3 results. We believe the net premiums next quarter will stabilize, albeit at a lower level when compared to Q3. Turning to non-issue expense trends on slide 9. Our non-issue expense was $46.2 million in the third quarter, an increase of 5% from the prior quarter. The increase was primarily attributable to two factors. First, we saw an increase of $1.9 million in salary and employee benefits, mainly due to higher incentive accruals and compensations paid. It decreased in deferred costs related to lower production, along with the increasing of our minimum wage rate to $18 an hour. And second, we saw an increase of other non-interest expense due to increased marketing costs and higher FDIC insurance and stuff. We are focused on expense management and continue to look for opportunities to gain efficiencies to offset expense pressures as a result of inflation. Going forward, we believe our quarterly managed expense run rate will trend between $49 and $51 million. Turning to slide 10. Asset quality continues to remain stable, reflecting our diverse portfolio and disciplined credit culture. Our non-performing assets to total assets stood at 54 basis points flat from the prior quarter. Net charge-offs were $2 million in the third quarter and total delinquencies were $5.6 million on September 30th, a $10 million or 65% decline linked quarter reflecting lower commercial loan delinquency. Our third quarter allowance increased to $64.7 million from $62.4 million at the end of June and represents 123 basis points of total loans. Reserve bill was primarily due to conventional loan and lease growth, higher uncertainty in the environment, and specific reserve on impaired loans. As a reminder, we are still accounting for our reserves under the incurred loss model, and we will be adopting CECL on December 31st, 2022. Turning to slide 11, we display our strong capital and liquidity position. We have $2 billion of available on-balance sheet liquidity. Through the first nine months of the year, we returned approximately 42% of our earnings to stockholders through the common stock dividend and our share repurchase program. We believe our capital levels and robust liquidity positions us well for a solid foundation to take advantage of both organic and strategic opportunities. With that, Alberto, back to you.
spk02: Thank you, Tom, and moving on to slide 12. So going forward, our strategy remains consistent. We want to continue to grow our business while maintaining credit and pricing discipline. Given the level of uncertainty in the environment, we want to pay particular attention to credit and capital in order to continue to invest in the business and take advantage of opportunities that arise, both on the talent front and with respect to M&A. In closing, we were pleased with our performance for the quarter and our position in the market. Our pipelines remain healthy, and we're in a strong position as we look to the end of the year. As always, I want to thank our employees for their hard work in the third quarter and for all they do to deliver for customers, our communities, and shareholders. With that, Amber, let's open the call up for questions.
spk08: Of course. Thank you. Again, if you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, that's star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from Terry McEvoy with Stevens. Terry, your line is now open.
spk06: Thanks. Good morning, everyone. Morning, Terry. Morning, Terry. Tom, can you maybe just talk about the fourth quarter expense outlook? You reported 46 million last quarter, and I think you said 49 to 51. What's kind of driving that growth? How much of it is maybe a seasonal issue? And then I guess as you think about 2023, how much more opportunities do you have on the branch and kind of real estate side to control inflation, and then, you know, I know investing in digital capabilities and automation right here on slide 12 remains a priority as well.
spk07: Yeah, thanks, Terry. You know, our guidance on expenses, you know, are driven by higher costs related to compensation. And then we have, you know, as I mentioned in my comments, regulatory FDIC assessments are higher going forward. So obviously a larger bank is causing some additional expense there. But other things related to that are incentive compensation. As it relates to branch optimization savings, I think, you know, we're towards the end of that. I mean, we'll continue to look at that, and we're prudent in managing that. But, you know, as you know, we've come a long way there, and we'll continue to look for opportunities. But the pace will definitely be much slower.
spk02: Yeah, Terry, just to add to what Tom said. So for the quarter, some of it, and you saw a little bit this quarter in the sense that we had to boost accruals for incentive compensation. We're clearly expecting to have to do some of that here in the fourth quarter. We instituted an increase in our minimum wage. So now our minimum wage is $18. You know, that went into effect in the latter part of the third quarter. So we'll see the effect of that in the fourth quarter. Obviously, we're operating in a bit higher inflationary environment, so we just want to be cautious as we give guidance out. And we're also continuing to grow, so we're investing in that. So I think from a guidance perspective, I think it's pretty fair as we look out that I think we need to be consistent with that view, incorporating these factors and taking them into account to give, you know, guidance at this point of kind of the 49 to 51 range. One thing I would say with respect to the first quarter is, you know, and I think we kind of highlight this every year, the first quarter is usually high because, you know, you have all of the, you know, traditional kind of tax components of payroll that, you know, essentially subside over the latter part of the year. So that's going to happen again. So we just want to make sure that we give you guidance that's consistent to that view into 2023 at this point.
spk06: Appreciate that. And then as a follow-up, how are you thinking about the credit performance of the SBA portfolio in a rising rate environment as those rates go higher and Maybe the same question, the CRE portfolio, have you stress tested that portfolio as these loans roll into a higher rate?
spk00: Thank you.
spk06: Sure. Mark, do you want to take that one?
spk00: The SBA book still is pretty stable. You can see it from our statistics there. And the portfolio management is very kind of thorough and consistent. I expect that to be moving obviously that may be in a different direction as these rates kick in. But so far, the borrowers, the customers are hanging in there. On the real estate front, again, our commercial real estate books are in really good shape from a credit perspective. Very few issues. We don't have a lot of exposure in some of the areas of real estate you might be concerned with, like office or hotel or even retail. So again, it's an area we're focused on. we kind of target those areas in our portfolio reviews as part of our normal situation here in the fourth quarter. But so far, everything's holding together very nicely, and our outlook is positive.
spk02: Terry, if I could add just one comment there, and it's more from an origination standpoint. One area where you mentioned real estate, Mark covered the existing portfolio, but one area where we are seeing And I think you saw a little bit this past quarter when you look at just originations. I think the Fed is having the effect it intended in terms of slowing down, particularly the rate-sensitive sectors. And I think real estate is one of those, particularly as it pertains to new projects. The market is going through an adjustment. And I think in terms of, you know, probably originations in that part of the book, you know, we're definitely seeing, you know, a slow down there because people are just simply having a harder time with rates, with cap rates, you know, perhaps moving higher with higher expectations as far as the equity component moving higher. People are having a hard time penciling in new transactions.
spk06: Great.
spk02: Thanks again, and hope everybody has a nice weekend. Great.
spk06: Thanks, Derek.
spk08: Our next question comes from the line of Nathan Race with Piper Sandler. Nathan, your line is now open.
spk05: Thank you. Good morning, everyone.
spk02: Morning, Nate. Morning, Nate.
spk05: Just thinking about kind of the deposit growth outlook going forward, obviously it was nice to see some core deposits come back on balance sheet as discussed last quarter. Are you guys kind of thinking about the runway for deposit growth going forward? Is it going to be a function of just a lot of the hires that you guys have made over the last several years, just pulling market share? versus maybe you guys needing to be somewhat price leaders from a deposit pricing perspective to drive a core deposit growth commensurate loans to kind of keep that loan deposit ratio in a comfortable range going forward?
spk02: Yes, Nate. So a complex question there that you threw at us. So let's just unpack it and just kind of go one by one. So when it comes to kind of the the traditional commercial banking business, it's full relationships. So to answer your question is yes. We want to continue to see our bankers focus on that and bringing relationships that maybe they've had in the past, continuing to prospect for additional opportunities to grow both loans and deposits. So the short answer on that one is yes. Carlos Zarazaga- Do your second question about having to become kind of price leaders I don't necessarily think that we will be the absolute price leader in the space. Carlos Zarazaga- That being said, and I think you guys have have seen this this quarter is a lot of the institutions that had seemed to have a lot of flexibility last quarter, having loan to deposit ratios and access liquidity. you know, liquidity has been drained from the system. So I think you're seeing, broadly speaking, loan-to-deposit ratios move higher. And as far as the competitive environment here, we've definitely noticed an uptick. Institutions that were not necessarily very active prior quarter now are very active this quarter. So, you know, that's just part and parcel with where we are in the environment to the degree that And this goes to our comments on the prepared remarks. To the degree that the Fed continues to increase rates, I think you can expect both loans and deposit rates to increase accordingly. Given our position, we feel pretty good about our ability to continue to see margin expansion at this point, given where we are in the cycle. So hopefully that gives you some color into our thinking here.
spk05: Yeah, very helpful. And maybe just within that context in terms of thinking about the margin going forward in the fourth quarter early next year, you know, if we strip out the accretion and the PPP fees from the last couple quarters, it looks like the margin was up about 30 basis points versus the second quarter. It sounds like that pace is going to slow just given the deposit pricing pressures that exist, you know, particularly in Chicago and industry-wide. So maybe, Tom, any thoughts just in terms of kind of the the pace of future margin expansion in 4Q and into the first half of next year as well, assuming, you know, the Fed remains on its current path with, you know, Fed funds, you know, approaching 475 or so?
spk07: Yes, Nate. You know, it really depends on what the Fed does here. I think the market's expecting, you know, 75 here in the next month. And then obviously we'll have to see what happens with December. But I think if you have... the 125 base point increase, given the composition of the assets and the liabilities, we would expect margin expansion to continue. I would also remind you, again, that the SBA loans are on a lag. So we'll get the benefit of that in the next quarter for anything that happens in Q3. And anything that happened in Q3 is effective in Q4. And then same thing goes for Q1 of next year. So that will definitely happen. And then it just comes down to balance sheet growth. If we continue to operate in the mid-single digits, then we won't have as much funding pressure to go out and raise deposits. And I think, as Alberto touched on, competition is moving up, but it's nowhere near where it was before in the last cycle.
spk05: Okay, great.
spk02: And if I could add one more. I think... Yeah, go ahead, Nate. I just was going to add something to what Tom said, because it's, you know, when the Fed moves rates matters. So obviously, if you change, you know, we're potentially getting a rate increase here in November and potentially another one in December. So kind of factor that in as you're thinking about, you know, the margin expanding. We do think that we're position for that here in the fourth quarter. And as Tom said, because of the lag with the SBA book, you'll see that catch up further in the first quarter of next year. So we think we're pretty well positioned here to see the margin expand over the next couple of quarters.
spk05: OK, great. Very helpful. Maybe just one last one, just thinking about kind of the SBA gain-on-sale framework between, you know, retention and selling product in the secondary market. It looked like your, you know, you guys, your commitments were up nicely versus second quarter, yet you opted to sell less loans in the secondary market. Is that just a function of, you know, premiums being kind of below palatable levels these days? And as long as premiums remain near these levels, is that kind of the – the methodology or approach going forward as it relates to how you guys want to manage that product growth going forward?
spk02: Good question. And so a couple of things there. I think there's a couple of things at play. So you're spot on with the first one. As you know, for us, the buy versus the hold versus sell decision is economics. Um, so economics, you know, did play a role in whether or not, um, we decided to, to sell more or less this past quarter. So that, that, that certainly was a factor. Another factor was the fact that, you know, and this is the nice thing of our franchise. We had, um, we have flexibility, you know, we want to see, um, the gain on sale component of our revenues come down over time. Some of that is going to come from growth in other revenue sources, be it fees or be it higher net interest income. Obviously, we saw some of that this quarter. So think of it as we had a fair amount of flexibility to really make purely economic decisions on buy versus hold. or sell versus hold. And the last thing is, you know, the rate increases, you know, do play a role here in the pricing of loans in the short run because of the lag. So we want to make sure that, you know, when we're executing and we're looking to sell loans, we can get absolutely the best execution possible put differently. You know, we don't want to sell loans that just because we wanted to sell them this month as opposed to arbitrarily in two months or so or three months, we could get better execution because the rates would reflect the repricing on those loans. So all of that. And then the last thing I would say, you know, we do a fair amount of loans where the loans are not 100% fully funded. These are, you know, construction loans in some cases, construction loans with equipment. Um, I think this past quarter we saw some of the effects of, um, just what you're seeing in, in, in, in our conventional book, which is projects in some cases are taking longer deliveries of equipment are taking longer. So the nice thing is the fact that the loan did not fully fund simply means that we're basically earning the carry on, on the portfolio. So all in all, I think Nate, that's probably our best, uh, our best take on that going forward.
spk05: Understood. Again, very helpful. And if I could just sneak one last one within that context on SBA and just going back to Terry's last question. In the event that you guys continue to maybe portfolio more SBA production versus selling the secondary market, are you guys maybe tightening your underwriting boxes on the SBA front these days or any notable adjustments expected along those lines?
spk00: I think we're being cautious about certain industries, again, that you would expect. Those are going to be more sensitive to what's going on with the current environment in the country and the economic forces that are at work here. So we're being more cautious, I would say. But again, we're being consistent to the underwriting practices we've had in place for some time at the same time.
spk05: Okay, great. I appreciate all the color. I'll refer to Tom and Mark. Thanks again. Great. Thanks, Nate. Thank you, Nate.
spk08: Our next question comes from the line of David Long with Raymond James. David, your line is now open.
spk01: Good morning, everyone. I wanted to take a closer look at the investment securities portfolio. Yield was up a few basis points quarter to quarter. What are your expectations with the securities portfolio yield and what is the current portfolio duration? And then finally, how much is cash flowing out of that each month or quarter? Thanks.
spk07: Yeah, hi Dave, it's it's Tom. The duration is, you know, 5.6 years and currently we've been letting all the cash flows run down to the bottom line to support loan growth and the estimated cash flows are roughly, you know, in that 20 to $25 million a month range.
spk01: Got it, thank you. Just as a follow-up, just thinking about the loan growth and your appetite for lending, if deposit growth is not keeping up, does that change your appetite to lend or change how you're pricing any of the loans? Thank you.
spk02: Pricing, and so I think the credit and pricing discipline in this environment is paramount, given the broad outlook that we have. Um, that being said, you know, we're still continuing to see, you know, really good opportunities. You know, our pipelines are, are healthy. Um, you know, I, I think in the past several quarters, we've had a run. And I think, I know this is your first call formally covering us, but you know, for all the other analysts on the call, it's, we, we finally kind of got the growth rate down and the loan portfolio to that mid single digit. number that we've been providing guidance. And I still think that's a good number. I think it's probably, you know, in the kind of the mid, you know, single-digit range and that range as opposed to the upper end of mid to high. And we remain comfortable with that. I think it's – we want to obviously continue to see. TAB, Mark McIntyre, A balanced approach, meaning you know our our our philosophy is we want to you know fund the loan portfolio with deposits and having you know multiple strategies and multiple. TAB, Mark McIntyre, ways in which we can continue to you know sustain you know solid growth and quarter bosses is is part of. you know, part of our strategy and part of what we do to continue to grow the bank accordingly. So at this point, we're pretty comfortable where we are. I mean, obviously, you saw the loan to deposit ratio took a downtick this quarter from the previous quarter. We want to, you know, kind of continue to see that. But we also know that, you know, it's it's not perfect, right? If we could time the inflows and the outflows perfectly, we would, you know, have little to do in terms of managing the bulk and managing the company. But philosophically, we want to kind of target that kind of 90% range from a loan to deposit standpoint on a long-term basis. So hopefully that gives you some color and answers the question.
spk01: Definitely, no. I do appreciate it. Both Alberto and Tom, both thanks. Thanks for the color. You bet.
spk08: Thank you. As a reminder, if you would like to submit for a question, that's star 1 on your telephone keypad. Our next question comes from Brian Martin with Jannie. Brian, your line is now open.
spk04: Good morning. morning brian they just wanted to uh circle back one one follow-up on the margin that was asked earlier just tom as far as our alberto um just as far as if if we do appreciate the call around the next couple quarters but i guess if we if we look beyond and get the rate increases that are expected out there today and the fed does pause you know for a bit um you know how do you expect the margin to behave when that pause occurs i guess does it you know, should the margin, you know, compress a bit then? Is it the positive betas continue to catch up and get to your, you know, kind of your 40% level? Is that how to think about the world today?
spk02: I think that's a fair view, Brian. I think it's obviously going to be Fed dependent. We'll see if the Fed stops here in December and puts, you know, pauses and makes an assessment before deciding what to do next, or if they continue to race, you know, into the first quarter of next year. So, obviously, Fed dependent, but, you know, at some point, what you're describing is probably the right way to think about it. At some point, the margin will peak, you know, for us, probably, and again, Fed dependent. So, it's, we don't want to, but probably in the second quarter, uh, is probably where we'll see that. And then, um, then I think what you mentioned is probably there's some effect of lags, you know, with, uh, deposit costs that happen. Um, and then we'll see kind of where we are from a, from a outlook on rates at that point and kind of if the fat is going to be on hold or, or given where the economy is, you know, we, you know, the outlook changes, but I think what you're saying is a, is a fair way to think about it.
spk04: Gotcha. Okay. I know that's helpful. And, um, maybe just, uh, one, one or two others just on the, on the deposit side. I mean, obviously a very, very strong quarter. And like you're saying, the core franchise is, uh, is very strong, but you know, I guess how much is you, if you kind of talk about that goal of the 90% level in the growth you're expecting, How much migration do you expect in the portfolio on the deposit side? I mean, you saw a little bit of a drop down in the non-interest bearing this quarter. I guess just what's kind of a normalized level as we look out over the next couple of quarters, given what's happened with rates and then the growth you're expecting. Is there more migration to come there? Are things beginning to stabilize, do you think, at kind of this 38% level on the DDA side? Brian, we are patient.
spk02: You know, with that, we realize that, you know, we realize that, look, to my comment earlier, if we could match everything perfectly, we can match loan demand with deposit growth perfectly, then we'd always be trying to optimize. But we realize that, you know, we don't necessarily control that. We want to do it in a measured way in which we're ensuring that we're doing it prudently. So the nice thing is we have ample liquidity. Our capital levels are very, very strong. So this is going to be a measured approach as opposed to having to necessarily, gee, we want to get there next quarter. So we need to really drive rates really, really high. I mean, we're not going to do that. So we will, you know, it's a target that, you know, that we will reach, but it's not a target that we necessarily want to achieve, you know, next month or, or by the end of the quarter.
spk04: Gotcha. No, I wasn't expecting it. I just, you know, I got you saying so. Okay. And maybe just the last one for me was just on, on the loan outlook and just the payoffs, the payoffs were up a little bit as you guys had talked about. I mean, with rates where they are, I guess, is your sense that the payoffs may slow a little bit or just be at a lower level than they were this quarter? Is this, pretty indicative more normal today. I know they had been very low the previous quarters, but just given the rate environment and just on the other side of it, the origination side was strong this quarter. Just beyond this quarter, are you beginning to see any cautiousness on your borrowers as you look at the visibility of that origination pipeline beyond fourth quarter?
spk02: The pipelines remain pretty healthy, Brian, I think with respect to the payoffs. We were expecting that. I think in prior quarters, as you well know, payoff activity was much lower than we expected. Some of it was timing transactions that were to happen on a particular date, got pushed over into the following quarter, et cetera. And I think we saw some of that here in the third quarter. I think we have a pretty good view in terms of kind of where payoff activity is going to be. Obviously, it's a holiday season coming up, you know, so things do slow down a bit. But our sense is, you know, probably in the, you know, and we don't give guidance, but, you know, you're asking for some color, probably in the kind of the low $200 million range is kind of what we're, expecting as far as payoffs are concerned. And that should still, you know, translate into kind of that mid-single-digit kind of range for loan growth at this point is our best take on it as things stand today.
spk04: Yeah. No, I appreciate the color, Alberto. It's a tough question. So thank you guys for taking the questions. I appreciate it.
spk02: Anytime.
spk08: Thank you all for your questions today. I will now turn the call back over to Mr. Alberto Pacini for any closing remarks.
spk02: Great. Thank you, Amber. So that concludes our call this morning. On behalf of all of us here, thank you for your time today and your interest in byline. We also want to wish you a happy and safe holiday season and look forward to speaking to you again in the new year. Thank you.
spk08: This concludes the Byline Corp third quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect.
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