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spk01: Good morning and welcome to Byline Bancorp second quarter 2023 earnings call. My name is Glenn and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remark, there will be a question and answer period. If you'd like to ask a question, simply press the star followed by the number one on your telephone. If you'd like to withdraw your question, please press star followed by two. If you're listening via speakerphone, please leave your headset 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 Brooke Rennie, Head of Investor Relations for Byline Bancorp, to begin the conference call.
spk09: Thank you, Glenn. Good morning, everyone, and thank you for joining us today for the Byline Bancorp Second quarter, 2023 earnings call. In accordance with the 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 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 certain slides contain and we may refer to non-gap measures which are intended to supplement but not substitute for the most directly comparable gap 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 Parcini, president of BioLine Bancorp.
spk06: Thank you, Brooks, and good morning, everyone. We appreciate you taking the time to join the call this morning to review our second quarter 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 Herencia, our CFO and Treasurer Tom Bell, and our Chief Credit Officer Mark Fusinato. Before we get into the results for the quarter, I want to pass the call on to Roberto for a few items. Roberto?
spk07: Thank you, Alberto, and good morning, everyone. Before Alberto and the team go over the strong results for the second quarter 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 Byline. At the time, the 200 million plus recapitalization was the largest recap of a bank in Chicago in over 25 years. What has been accomplished in our 10 years is remarkable. and a true story of transformation. Looking back to March of 2013, the quarter before we closed the recap, MBG had 12 bank charters, 88 branches, and total assets of $2.4 billion. Bioin, of course, has only one charter, and at the end of June, not including Inland, which, as you know, closed effective July 1st, had 38 branches, 50% fewer, and total assets of $7.6 billion. more than three times. MBG had total deposits per branch of 25 million and non-interest-bearing deposits to total deposits of 26%. Today, BioN has 153 million per branch and non-interest-bearing deposits to total deposits of 30% plus. We have a top 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 their expertise in integrating and adding value post acquisitions growth has been evenly distributed between well-executed acquisitions and organic growth driven by talented bankers who have joined violin amid disruption by larger bank mergers in our area we expect this to continue over the next five years there are a few critical factors that have supported our success and this is 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 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 that we operate is hard to replicate by others, especially larger players. This has been and will continue to be the key. To wit, Byline was recognized a few days ago as one of Forbes America's best small employers. We were the only Illinois bank and one of only six 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 than yesterday. And of course, our dedication and commitment to the well-being of our people. I am as confident as ever in Byland's positioning as Chicago's largest community bank. 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 filing. 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.
spk06: 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 three institutions and was characterized by a degree of uncertainty that shook the confidence in our system. 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. As previously announced, the 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 the 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. 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 forma for the acquisition, Byline now has approximately $8.8 billion in assets, $6.4 billion in loans, and $6.9 billion in deposits with 48 branch locations. Moving on to page three of the deck. For the second quarter, we reported net income of $26.1 million and EPS of $0.70 per diluted share. If we adjust for merger related charges, net income was $27.3 million 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 basis, respectively. Profitability and return metrics continue to remain strong across the board. ROA came in at 141 basis points, while ROTC was 16.8%. On an adjusted basis, ROA was 148 basis points and ROTC came in at strong 17.5%. Adjusted pre-tax preparation income was 42.5 million for the quarter, which put our adjusted pre-tax preparation ROA at 230 basis points down, five basis points linked quarter, but up 43 basis points year over year. Total revenue was flat quarter over quarter at 90 million, But up 14.5 million or 19% over the prior year, driven by higher net interest income stemming from loan growth and higher rates. Non-interest income came in at 14.3 million, lower than last quarter as expected, but in line with the prior year. 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 million, inclusive of merger-related charges. If we exclude those, expenses were well managed at $48 million. Netting these two figures translated into positive operating leverage on a year-over-year basis. Moving on to profitability, the margin remained solid at 4.32%, declining only six 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 350 basis points on a year-over-year basis. Moving on to the balance sheet. Loan growth moderated, consistent with guidance, and the portfolio stood at $5.6 billion as of quarter end. Notwithstanding the environment, this was the ninth 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 were driven largely by our commercial banking, sponsor, and leasing businesses. Our government guaranteed lending business had a solid quarter with $141 million 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 7A 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 5.9 billion, up 104 million from the first quarter. Average deposits were also up 1.7% quarter on quarter driven by flows related to new customers. So 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. Asset quality improved with NPL decreasing 15 basis points to 69 basis points at the end of the quarter. Credit costs were $6.5 million, inclusive of net charge-offs, which were $4.3 million, or 31 basis points, and we had a net reserve bill of $2.2 million. 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% of total loans. Capital and liquidity were further bolstered this past quarter, with CET1 ratio increasing by 37 basis points to 10.6%, 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.
spk02: 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 $5.6 billion at June 30th, an increase of $53 million from the end of the prior quarter. Net of loans sold, we originated $312 million 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. Payoffs increased in the second quarter to $256 million compared to $231 million in the first quarter, and line utilization remained flat at 54%. Looking ahead, we continue to expect loan and lease growth to be in the mid-single digits for the remainder of this year. Turning to slide five, our government-guaranteed lending business finished the quarter with $141 million in closed loan commitments, which was higher than the first quarter and better than expectations. At June 30th, the on balance sheet SBA 7A 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 quarter end. Turning to slide six. Total deposits stood at $5.9 billion, increasing 2% from the end of the prior quarter. Non-interest-bearing DDA was down $159 million 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. Deposit costs for the quarter came in at 170 basis points and increased to 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% and 47% respectively. We continue to remain focused on funding loan growth with our core deposits, In addition, the Inland Bank transaction brings approximately $705 million in core deposits to our balance sheet. Turning to slide 7, our net interest income was $76 million 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 to $14 million in Q3. Turning to slide eight. Non-interest income stood at $14.3 million in the second 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 second quarter by $14 million compared to the first quarter. The net average premium was 8.6% for Q2, higher than the first quarter. Our pipeline and fully funded government guaranteed loans is forecast to be consistent with Q2 results. We expect gain on sale income in Q3 to remain consistent with what we experienced in Q2. Turning to slide nine. Our non-interest expense was well managed and came in at $49 million in the second quarter, and on an adjusted basis, $1 million below our Q2 guidance of $49 to $51 million. 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 managed expense run rate will trend between $53 and $55 million. Turning to slide 10, the allowance for credit losses at the end of Q2 was $92.7 million, up 2% from the end of the prior quarter. In the second quarter, we recorded a $6 million provision for credit losses compared to $10 million in the first quarter. The reserve bill was largely driven by loan and lease growth and a $6.5 million increase in the individually assessed portfolio. Net charge loss were $4.3 million in the second quarter compared to $1.2 million in the previous quarter. Our MPLs to total loans and leases decreased to 69 basis points in Q2 from 84 basis points in Q1. Our MPAs to total assets decreased to 54 basis points in Q2 from 67 basis points in Q1. and total delinquencies were $9.6 million on June 30th, a $5 million decrease linked quarter. Turning to slide 11, our liquidity remains robust. We ended the quarter with approximately $320 million of cash and cash equivalents, and our available borrowing capacity stood at $1.7 billion. Our uninsured deposit ratio fell to 25.9% and remains below all pure bank averages. In addition, The uninsured deposit coverage ratio stood at 132%. Turning to slide 12, our capital position remains strong. For the second quarter, 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. With that, Alberto, back to you.
spk06: 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. With that, operator, let's open the call up for questions.
spk01: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star followed by one on the telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure your phone is muted locally. Your first call comes from the line of Nathan Reyes from Paper Sandler. Nathan, your line is now open.
spk04: Thank you for the questions. Just in thinking about future deposit growth expectations, You know, it's nice to see the pace of increase in deposit costs slow versus the first quarter. And we also saw the pace of core deposit outflows also decline versus 1Q. So just curious, you know, 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.
spk06: Sure. So good morning, Nate. me let's just break that question into into three parts in terms of kind of like the outlook in terms of kind of core deposit growth going forward um 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 i think our intention is to continue to fund loan growth with core deposits and That's been our strategy 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 wanna do is fund that growth with core deposits. you know, in any given quarter to the degree that we have slightly faster loan growth and, you know, one quarter vis-a-vis another, you know, there's going to be some ebbs and flows on that. But generally speaking, you know, as you see growth in the portfolio, just know that what we're trying to do is fund that growth with core deposits. The second question regarding the I think, look, I think it's going to be rate dependent. I think Tom, you know, can jump in here in a second. But I think we're seeing some stabilization in terms of, you know, kind of the mix change. It's not to say that we're not and we will continue to see, you know, mix change going forward, particularly, you know, as rates continue to be high. 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. 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 the competitive environment probably stabilizing as opposed to what we saw right after, you know, call it the events of March, where it seemed like a lot of institutions in mass, you know, were, you know, felt like they had a need to have to reprice pretty aggressively in a short period of time. Tom, do you want to add to that? Yes, I think that's well said, Alberto.
spk02: You know, I think first and foremost, we're going to go with the transaction counts 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 in the shape of the flat curve, so to speak, and inverted curve further out, that money market and 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. But we'll continue to focus on core deposits and core transactions accounts from our commercial clients, first and foremost. And 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. 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's adjusting, and they're adjusting prudently on pricing.
spk04: Got it. That's really helpful. And 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 second quarter level execution? Obviously you got Inland coming out on their margins, you know, below your guises. But I imagine there's also an opportunity to maybe de-lever the balance sheet to some degree.
spk02: Yes, that's a good question. I think we gave NII guidance a 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.
spk04: And that's excluding accretion, Tom?
spk02: That would include accretion.
spk06: That includes accretion. 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, you know, because we're going to reprice the portfolio and that'll certainly help. But, you know, 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, you know, with stabilization of it coming probably by the fourth quarter. So think of it in the context of, you know, 432 today. Think of it in the context of 410 to 415. And then, you know, kind of pro forma for the acquisition, you would see that margin, including accretion, you know, coming right back up to around 430, kind of 435-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 you know, the gross margin and the accretion component as well.
spk04: Got it. That's very helpful. And if I could just ask a couple more around credit. You know, charge-offs were up a little bit this quarter. It seems like it was more driven outside the SBA portfolio. So we'd 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 the seasonal impacts in the third quarter from a provisioning perspective. So just curious how you guys are thinking about maybe the reserve trajectory into the fourth quarter and to next year in light of the current environment.
spk06: 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, you know, as some of our competitors have said, just cleaning up the runway, so to speak, you know, quickly as opposed to having, you know, planes taxiing on the runway for a period of time as you work through the asset, that was advantageous. And that essentially drove, you know, the uptick in charges. mind you charge-ups were you know we usually you know historically have been in the kind of the 30 to 40 range you know i know more recently we've been a lot lower than that um so but let's say if you if you took that that 30 basis point kind of you know target or 25 to 30 basis point kind of target and we're up one basis point above that 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 to kind of just have those reductions come through over time. So that's really the story there, Nate.
spk04: Understood.
spk06: I'm sorry. And then you asked the question on the reserve trajectory. So putting aside inland, You know, I think obviously we feel that our reserves are, you know, strong and adequate as of the end of the quarter. You know, the changes in the reserve quarter over quarter really stem from largely growth in the portfolio, as well as some, you know, additional reserves that we assign to individual loans that are evaluated individually for impairment. aside from that, you know, 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, you know, supported by that.
spk04: 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?
spk05: We 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. Is that cash flow going to be there? We have to resize the deal. What will new appraisals have to say when they come in? So I expect that to be at the top 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. We've only got about 10 deals that are maturing over the next year in office, five this year, five next year that we're watching and staying focused on with those customers.
spk04: 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.
spk06: Excellent. Thank you, Nate.
spk01: Thank you, Nathan. Your second question comes from the line of Ben Jerlinger from Hofst Group. Ben, your line is now open.
spk08: Good morning, everyone. Good morning, Ben. Congrats on tenure. It seems like you capped it off that decade well with this quarter. I was curious about the Inland deal. it's closed. Usually when there's M&A, it's symbiotic. Obviously, the bigger bank, i.e. Byland, gets a little bit more deposits, a branch footprint, and then the smaller bank can sell the bigger balance sheet and lending opportunity if anything else is needed. So a holistic fee revenue generation to legacy clients. So when you think about this, the synergistic nature, outside of the extension and footprint and this really healthy relationships that come with pretty 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.
spk06: Well, certainly the opportunity to become more efficient as an organization is one thing to highlight there, Ben. I mean, I think Roberto said it well. If you think about like our trajectory originally, you know, 10 years ago to kind of where we are today pro forma for that acquisition, you know, 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. 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. You know, lastly, as you know, they had a very successful primary shareholder that has a significant real estate business here in the Chicago area that is broad in terms of their scope of their activities. 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, a larger bank, it's a well-known, very reputable real estate business. you know, 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.
spk08: Gotcha. And then kind of just dovetailing off of that, could you just say the guidance for fees? I understand the expenses. I just can't read my own handwriting when I took all those notes.
spk02: I think fees would be consistent, maybe up a little bit. But if you look at what their fee income has been, as Alberto mentioned, there's some fee services, treasury management, and wealth that would add to the fee income line. But if you look at their running rate on fee income, it would be probably consistent.
spk08: Gotcha. 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 the first 60, 90, even the first 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 those sometime in 24 or is there hiring and staffing that's needed as well i was just kind of curious just if you need 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 yeah i mean i i think ben and like we commented on i i think over time you know there there'll be some opportunities there but remember we this this was a
spk06: a very traditional banking institution. They historically had had a mortgage business. That is not something that we opted to continue, so that's not going to be part of the business going forward. 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, we're consolidating a pretty traditional institution. So your sources of fee income are going to be service charges on deposits, some interchange revenue, et cetera. But there's nothing really too exotic. We think 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. normal course. So I don't know that there's anything extraordinary beyond that, Ben.
spk08: Okay. And then finally, the last one is obviously big picture. And I get that the ink just dried earlier this month on the deal, but your balance sheet is approaching nine. 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. Either way, you're still going to need to hire some staff or is it already in place today?
spk06: Yeah, there will be. We've always operated the company with the notion that, you know, 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 staff. 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. You know, 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, you know, as we approach $10 billion, you know, in order to prepare to cross, we'll have to hire to a degree. But I think I go back to my earlier comment. I think we have built gradually, you know, staffing and we have built you know, our risk and control functions, you know, pretty steadily over time. 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 scratch and now we have to, you know, run to accelerate in order to be prepared for that when the time comes. So hopefully that gives you some perspective on that.
spk07: Yeah, that's great. If I can add just for quickly, if you look at the team and the directors, we have certainly been exposed and governed and worked in entities that are larger than 10 billion, right? So the 10 billion 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 we're prepared. Alberto said it well. We're bringing a 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. 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 $10 billion. And we've been in constant communication with them about it, and I think we're in a really good place.
spk08: Roger, that's a helpful call. I appreciate the time. Great quarter and great past decade. It's been impressive to watch. Thanks, Ben. Thanks, Ben.
spk01: Thank you, Ben. Your first question comes from the line of Terry McEvoy of Stephen. Terry, your line is now open.
spk03: 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. So maybe just a bigger picture question. A number of the banks in 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?
spk06: Really good question, Terry. And as I think we've always said, anytime that there's any type of disruption in the market here, and I would categorize what you just described as Tad Piper- You know 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. Tad Piper- And I think that we will benefit from some of that you know disruption in the market. That being said, we are being careful and disciplined. 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 what the focus is on balance sheet management today. So I think we'll benefit, Terry, and I think we're... you know, optimistic or about our ability to to capitalize on that.
spk03: 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?
spk06: Yeah, well, 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, you know, Terry, we're finalizing marks. I think the biggest driver of the marks, like it was when we announced, and obviously you could look at the rate movements, But, you know, the interest rate marks are, you know, are going to add, you know, are obviously significant and will add, you know, probably, I would say at this point, probably a bit more, you know, accretion. But we'll be better prepared to cover that in detail at our next call, you know, next quarter.
spk03: Thanks. And then just one last question. I read 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 risks to the real estate market in Chicago and in Byland in particular?
spk06: I think it's probably too early to judge, you know, any type of impact. I mean, I think Over the years, there's been, you know, 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, you know, 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, you know, very wrong when we try to guess what the what the ultimate outcome is going to be. So I guess put it differently, the market is pretty resilient. Our sense is, our best guess is the market will adjust accordingly. There's usually kind of like a reset period, and then you proceed along from there. So too early to judge on that at this point, Terry. All right.
spk03: Again, thanks for taking my questions, and I hope you have a nice weekend.
spk06: Great. Thank you. Likewise. Thanks, Terry.
spk01: Thank you, Terry. Your fourth question comes from the line of Brian Martin from Jenny Montgomery Scott. Brian, your line is now open.
spk11: Hey, good morning, everyone. Morning, Brian. Morning, Brian. Just a fun follow-up, Tom, just on the fee income component from Inland. It reminds me how big that piece was just as we kind of size up things looking forward.
spk02: Specifically for inland fee income?
spk11: Yeah, what are we adding? Yeah, 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 try and understand how to think about that along with kind of your standalone operation.
spk02: Terry, I'm going to have to get back to you on that. Sorry. I just, I don't have that. I don't have it in front of me right now.
spk11: Okay. All right. And then, you know, I guess just, I think the commentary on the fee income, you know, outside of the fair value mark, you know, standalone for byline, that's been pretty stable here the last couple of quarters. Any areas you guys are focused on as far as driving growth there, you know, prospectively that, you know, I guess we should be thinking about?
spk02: Related to fee income?
spk11: Yeah, just kind of a standalone, you know, byline unit. I mean, it looks like the last two or three quarters have been pretty consistent when you strip out that mark.
spk02: Yeah, I think, you know, on the fee income side, I think we, you know, we're continuing to, you know, improve our treasury management opportunities. You know, 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.
spk11: Okay, and in the sound like the pipeline and the government guaranteed, I mean, expectations next quarter seem pretty, pretty consistent with this quarters for terms of premiums and production. Correct.
spk02: Correct.
spk11: Okay. Maybe just two last ones just on maybe for mark just on the on the trends and criticize and classifies. Can you give any update on on the quarterly numbers? We only see the 10 Q come out.
spk05: Yeah, we made some good progress, Brian, in those areas. You know, 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 people are looking at the opportunities, and we're taking advantage of those. But we're looking for business solutions on these deals with the customers, and we were able to execute on those. very well in the second quarter in both our conventional and our SBC portfolios. So will that continue? The capital's out there. We have to make good judgments on 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 have that's real estate oriented. And we were able to take advantage of some of that in the second quarter also.
spk06: Yeah, if I could, Brian, just to add to what Mark said, I think for each asset, our approach is, you know, 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 that you can accelerate and you can be quicker by disposing assets vis-a-vis 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, what maximizes here the recovery on this particular situation, and then comparing that against opportunities that the market kind of
spk11: brings to you so that's you know uh just a bit of color on the the philosophy and strategy brian just follow up on the inventee income it's it's roughly 337 000 for the quarter q2 okay okay yeah q2 okay i appreciate that um and then just maybe the last one maybe for alberto just as we think about the margin i know there's a lot of moving parts here the next couple quarters but just over time as far as the you know the margin you know that the your model should be able to support. I mean, if you're in the 4% range or, you know, 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 a margin, you know, can you talk about, you know, what level of margins, you know, sustainability is over time over the longer term for the operation based on kind of the business mix you guys have?
spk02: Yeah, Brian, I'll take that one at least to start. You know, again we're acid sensitive so we expect to make a little more money here given the feds increase but you know the market is now anticipating the fed kind of on hold you know through the end of the year i guess data dependence so we'll have to see um and so if rates do decline as the market is expecting next year on the short end you know we would stand to give up some you know income here because of our asset sensitivity 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.
spk11: Gotcha. Okay. That's helpful. I guess maybe the last one for me, just more big picture, is you guys, you talked about the $10 billion level. I mean, just trying to understand how you guys are viewing that as if it's you know, something just organically, keep growing, go over it, or is there something you see, you know, having to do something from an M&A perspective, you know, to get, you know, over in a more significant way? You guys are all familiar with it, you know, certainly you've outlined, but just try and understand, you know, how you're thinking about it as you approach it.
spk06: Yeah, I think Brian, so I think we'll say this. We certainly don't want to be $10.1 billion and be there parked at that level. That said, we don't view crossing the $10 billion mark as necessarily meaning that you absolutely have to do something in order to cross it. I think we've had you know, good organic growth. I think if it happens organically, great. 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. So, you know, I think it's not something that TAB, Mark McIntyre, We think about you know I think Roberto said it well when when he said it's it's not something that it will be a milestone when we get there, but. TAB, Mark McIntyre, We certainly don't want to alter our business or what we're doing as we you know approach $10 billion if we have to cross it and we cross it organically then we'll continue to. uh to grow our business you know that way if we have the opportunity to do m a like we have in the past then you know we will you know try to execute on that as well so it'll be a mix of i think it'll be a fix of both consistent with what we've done in the past okay understood okay i appreciate the commentary and thanks for taking the questions in a great decade guys super thank you brian thank you brian
spk01: As a reminder, ladies and gentlemen, if you'd like to ask any further question, please press star followed by one on a telephone keypad. Your next question comes from Damon Damonte from KBW. Damon, your line is now open.
spk10: 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, you know, 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?
spk06: 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 seen more of a material slowdown in activity. We are still seeing deals. We are still seeing opportunities. It's just the volume of opportunities that we're seeing there is 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. um you know higher costs if you're looking at you know construction projects um so so i think all of that i think plays plays a part but that being said as i as i just mentioned we're still seeing activity there we're still seeing you know strong sponsors that can take advantage of situations um you know are doing that so we're we're seeing that in the on the real estate side you know as far as the other businesses um 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. So to the degree that they're able to pass along and see revenue increases coming from price increases, you know, that certainly has, you know, has helped them, you know, absorb, you know, higher financing costs. But overall, our pipelines are pretty healthy here as we start the third quarter. And the level of activity has been pretty good. So, so far so good, Damon, in that regard.
spk10: Great. Are there any areas of any industries or areas of your footprint that are experiencing early stress versus other areas?
spk06: Mark, you want to take that one?
spk05: 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. So I'm not seeing a theme as to what's going on. in the portfolio we have or the deals we're seeing. Just not seeing it yet.
spk10: 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.
spk06: Super. Thank you, Damon. Thank you, Damon.
spk01: Thank you. Thank you all for the questions today. I will now turn the call back over to Mr. Alberto Parachini for any closing remarks.
spk06: 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?
spk09: Yeah, just for investors, this quarter 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. Thank you.
spk01: Thank you. Ladies and gentlemen, if you would like This concludes today's call. Thank you for joining. You may now disconnect your line.
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