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spk01: Good morning and welcome to Byline Bangkok fourth quarter 2023 earnings call. My name is Carla 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 the star followed by the number one on your telephone. If you would like to withdraw your question press star followed by two. If you are listening via speakerphone, please lift your handset prior to asking your question. If you require operator assistance, please press start, then zero. Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, head of investor relations at the Byline Bancorp, to begin the conference call.
spk12: Brooks Rennie Thank you, Carla. Good morning, everyone, and thank you for joining us today for the Byline Bancorp fourth quarter and full-year 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 reference 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 uncertainties please see the forward-looking statement and non-GAAP financial measures disclosure in the earnings release. I would now like to turn the conference call over to Alberto Paracini, President of Byline Bancorp. Thank you, Brooks.
spk02: Happy New Year, and thank you all for joining us this morning to review our fourth quarter and full year 2023 results. As always, joining me this morning are Chairman and CEO Roberto Varencia, Tom Bell, our CFO and Treasurer, and Mark Fusinato, our Chief Credit Officer. Before we get into the results for the quarter, I want to pass the call on to Roberto to comment on a few items. Roberto?
spk04: Thank you, Alberto. Good morning and best wishes for a healthy and happy new year to all. I start my remarks by acknowledging byline shareholder and friend Dan Goodwin, who passed away in Chicago last weekend. Dan's story as a human being and business leader is simply remarkable. I met Dan almost 14 years ago and most recently interacted with him prior and after the merger between Bioline and Inland Bank. It was important to him that we refer to our coming together as a merger, not an acquisition. That alone tells you much about him and his value system. He was pleased with how we negotiated the key points of the merger. and he was happy to have become a shareholder of Byland. I think he was happiest when he learned we had selected Pam Stewart as his representative on our board. And if you've met Pam, you would know why that is the case. Our sympathy and heartfelt prayers go to his wife and family, as well as his extended Inland Bank and Real Estate Group family. We have lost the Chicago Titan, no doubt. Importantly, we have gained so much more for his actions and legacy. A few seconds of silence to honor his memory are appropriate. Thank you. Dan would have been as pleased as I am with the results for the quarter and the full year. 2023 was a breakout year for Byland. Our performance, which Alberto and Tom will cover shortly, was excellent, and several important profitability metrics now rank in the top quartile of our peer group. Results and budgets for most banks in 2023 were derailed by the March-April events, with earnings deviating materially from plans and boards and management teams grasping for ways to justify weaker results on a relative basis. We are proud to be part of that group and to be able to have delivered within estimates and plan. It took hard work. We believe the Chicago banking market will continue to be disrupted by events ranging from smaller banks getting weaker, mergers between larger banks with headquarters and decision-making moving outside of state, as well as management changes and turnover. That disruption fuels our organic growth, and our strategy, simply put, being home to the best commercial banking talent, continues to shine under those conditions. This is easier said than done. When done well, however, from having the right credit and risk processes, using the right technology, focus on key people practices, and nurturing the team that can finish each other's sentences, the strategy is hard to replicate. We are optimistic about the future and the value our franchise can deliver to our shareholders. With that said, Alberto, back to you.
spk02: Excellent. Thank you, Roberto. Per our practice, I will start by walking you through the highlights for the full year and quarter. I will then pass the call over to Tom, who will provide you with more detail on our results. Following that, I'll come back to wrap up with some closing remarks before opening the call up for questions. Moving on to slide three of the deck and to start. Before I turn to the highlights, I would first like to thank our employees for their hard work and contributions this past year. 2023 was another solid year for the company. We navigated through a challenging rate environment, the market disruption stemming from the failure of several institutions earlier in the year, and an economy that continued to surprise to the upside in terms of growth. Against that backdrop, our diversified business model and continued focus on executing our strategy served us well. In addition, we successfully closed the $1.2 billion merger with Inland, converted systems, and fully integrated the operation into Byline within the calendar year. All in all, 2023 was certainly a busy year. For the year, net income was $108 million, or $2.67 per diluted share, on revenue of just under $387 million. Adjusted for the effects of the merger, our return and profitability metrics were very strong, with pre-tax preparation ROA of 235 basis points, ROA of 145 basis points, and ROTC of just under 18%. Year-on-year loan growth, inclusive of Inland, was strong at 23%, and better yet, all the growth was funded by deposits, which grew 26%. Our efficiency ratio improved by over two percentage points to 52.6%, and five percentage points to under 50% on an adjusted basis. Lastly, capital remained strong, with TCE ending the year at 9%, CET1 at 10.35% and total capital at 13.4%. All of these ratios reflect increases on a year over year basis, notwithstanding the impact of the Inland transaction in the third quarter. Turning to slide four, results were also strong for the quarter with net income of 29.6 million or 68 cents per diluted share on revenue of $101 million. adjusted for merger-related charges, net income was $31.8 million, or $0.73 per diluted share. Profitability and return metrics were also solid, with record adjusted pre-tax preparation income of $50.2 million, pre-tax preparation ROA of 227 basis points, ROA of 144 basis points, and ROTCE at 18%. Revenue was slightly down from the previous quarter, but up 20% year on year. The revenue decline was driven by lower net interest income due to a lower margin, as expected, offset by higher non-interest income stemming from higher servicing income. From a balance sheet standpoint, we saw continued growth in both loans and deposits during the quarter. Loans increased by $81.7 million, or 5% late quarter annualized, and stood at $6.7 billion as of quarter end. Net of loan sales, origination activity moderated from the previous two quarters, but remained healthy at $241 million, with the increase coming primarily from our CNI and leasing businesses. Payoff activity increased as anticipated, and line utilization remained stable at around 55%. Our government guaranteed lending business continued to originate at a healthy level with $135 million in closed loans, which, as expected, was higher than the previous quarter. Moving on to the liability side. Deposits grew by $223 million, or 12.8% annualized, and stood at $7.2 billion as of quarter end. Non-interest-bearing deposits account for 27% of our deposit base, and overall deposit cost increases are starting to moderate. Tom will certainly provide you with additional color on the margin and our outlook given the market expectations for lower rates this year. Expenses remain a focus and were well-managed for the quarter, coming in at $53.6 million. More broadly, we were able to drive down our efficiency ratio and bring our adjusted cost-to-asset ratio to 228 basis points. This represents a decline of seven basis points link quarter, and importantly, 43 basis points on a year-on-year basis. Turning to asset quality, provision expense came in at $7.2 million, lower than the prior quarter. Charge-offs were elevated at $12.2 million compared to last quarter, reflecting charge-offs taken against loans with previously established reserves as they near resolution. and a charge on a purchase credit deteriorated loan subject to a credit mark. The allowance for credit losses stood at 152 basis points. NPLs increased 17 basis points to 96 basis points. We added additional detail to the NPL chart on page 11 of the DAC so you can distinguish between the PCD and non-PCD trends in NPLs. Lastly, front-end delinquencies remain flat, notwithstanding the impact of a mortgage servicing transfer completed at the end of the year. We also added additional disclosure on risk ratings, numbers of loans, and a balanced stratification for our office portfolio. You can find that on page 17 of the deck in the appendix. We did not repurchase any shares during the quarter. However, our board approved a new stock repurchase program that authorizes the company to repurchase up to one and a quarter million shares of the company's outstanding common stock. The program is an important component of our overall capital management strategy, which includes investments in the business, M&A, share repurchases, as well as our regular quarterly dividend. With that, I'd like to turn over the call to Tom, who'll provide you with more detail on our results. Tom?
spk05: Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on slide five. Total loans and leases were $6.7 billion on December 31st. The increase was across all lending categories with the strongest growth coming from our commercial and leasing teams. Average loan balances increased link quarter and were higher by 23% on a year-over-year basis driven by organic growth and the inland merger. We expect loan growth over the course of 2024 to be in the low-mid single digits. Turning to slide six. Our government guaranteed lending business finished the quarter with $135 million in closed loan commitments, which is up 19% and 12% on a linked quarter and a year-over-year basis. At December 31st, the on-balance sheet SBA 7A exposure was relatively unchanged at $453 million. Our allowance for credit losses as a percentage of the unguaranteed loan balances was 7.8% as of quarter end, lower as a result of loan upgrades, payoffs, and charge-offs related to fully reserved loans, as Alberto mentioned. Turning to slide 7, we continue to focus on deposit gatherings. In the fourth quarter, total deposits increased to $7.2 billion, up 13% annualized from the end of the prior quarter. We saw robust organic deposit growth of $223 million in the quarter, which was net of a $69 million reduction in brokered CDs. Average deposit balances increased quarter over quarter and were slightly higher by 24% on a year-over-year basis, inclusive of inland transaction. excluding the transaction deposit growth was a healthy 9.1 percent for the full year our deposit mix continues to moderate as expected with the decelerating pace link quarter ddas as a percentage of total deposits was 27 compared to 28 from the prior quarter and we expect the shift in mix to continue to moderate and stabilize during 2024. on a cycle to date basis deposit betas for total deposits was 45% and interest-bearing deposits was 61%, driven in part by the repricing of our CDE portfolio. In 2023, the CDE average maturity rate was 2.32%. For 2024, we expect that CDE repricing will have less of an impact given the average rate of the maturing CDE book of 4.67%. Turning to slide eight, net interest income was $86.3 million for Q4 down 6.7% from the prior quarter. The decrease in NII was primarily due to higher interest expense on deposits and lower accretion income on acquired loans of $5.2 million offset by loan growth. Our net interest margin remained strong at 4.08% on a reported basis, which was in line with our NII guidance. Accretion income on acquired loans contributed 24 basis points to the margin in the fourth quarter, compared to 50 basis points for the prior quarter. Earning asset yields decreased 26 basis points linked quarter, driven by lower accretion and an increase in fixed rate loans during the quarter. For 2023, net interest income was up $65 million, or 25%, which translates to the NIM increasing by 31 basis points year over year and ending the full year at a strong 4.31%. Looking forward, given the forward rate curve forecast, we continue to make steps to reduce our asset sensitivity, as highlighted in the IRR section. Based on the factors previously discussed, our estimate for net interest income for Q1 is in the range of $83 to $85 million. Turning to slide nine, non-interest income stood at $14.5 million in the fourth quarter, up 17% linked quarter, primarily driven by a $2.4 million improvement in our loan servicing asset valuation, reflecting lower discount rates, and a $1.2 million gain in the change in fair value of equity securities. Sales of government guaranteed loans decreased $13 million in the fourth quarter compared to Q3. The net average premium was 8.5% for Q4, slightly higher than prior quarter, primarily due to more favorable market conditions and mix of loans sold. Our gain on sale income for Q1 is forecasted to be in the $4.5 million to $5 million range, in line with our historical trends of lower loan production in the first quarter. Turning to slide 10, our non-interest expense came in at $53.6 million for the fourth quarter, down $4.3 million from the prior quarter, primarily driven by merger-related expenses taken in Q3. On an adjusted basis, our managed expense stood at $50.6 million, $3 million below our Q4 guidance of $53 to $55 million. We continue to manage our expenses tightly and prioritize investments that are more critical to achieving our strategic objectives. Looking forward, our managed expense full year guidance is unchanged at $53 to $55 million per quarter. Turning to slide 11. The allowance for credit losses at the end of Q4 was $101.7 million, down 4% from the prior end quarter. In Q4, we recorded a $7 million provision for credit losses compared to a $9 million in Q3. Net charge-offs were $12.2 million in the fourth quarter compared to $5.4 million in the previous quarter. NPLs to total loans and leases increased to 96 basis points in Q4 from 79 basis points in Q3. NPA to total assets increased to 74 basis points in Q4 from 60 basis points in Q3. And total delinquencies were $36.1 million on December 31st, essentially flat and in quarter. Turning to slide 12, which recaps our strong liquidity and securities portfolio. Our loan-to-deposit ratio decreased 182 basis points linked quarters to 93.4%. We are pleased with this progress and continue to work towards bringing down this ratio over time. Our available borrowing capacity grew to $2.3 billion and our uninsured deposit ratio stood at 26.7%, which remains below all peer bank averages. Notably, We have the highest insured deposits among the proxy peer group as a result of our very granular deposit base. Moving on to capital on slide 13. Our capital levels at quarter end improved with our TCE ratio at 9.1% and our CET ratio at 10.35%. Both ratios improved nicely over the quarter. We grew capital by 29% on a year-over-year basis and our tangible book value per share increased nicely by 11% in 2023 to $17.98, driven by our positive earnings. Given our strong balance sheet, liquidity, and capital position, we believe we are well positioned to grow the business and capitalize on market opportunities throughout 2024. With that, Alberto, back to you.
spk02: Thank you, Tom. Moving on to slide 14, I'd like to wrap up today with a few comments about the outlook and our strategic priorities for 2024. We entered 2024 on solid footing and with great momentum. In terms of our strategy and priorities, they don't change much and remain consistent from year to year. We believe we can grow our franchise and continue to create value for shareholders. We do this by growing and expanding customer relationships, pursuing disciplined loan growth, improving the efficiencies of the business to allow for continued reinvestment, maintain credit, and capitalizing on market opportunities to both add talent and pursue M&A. Again, we believe we are well positioned to capitalize on opportunities to continue to grow the value of our franchise. And with that, operator, let's open the call up for questions.
spk01: Thank you. If you would like to ask a question, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Your first question comes from Nathan Race of Piper Sandler.
spk08: Yes. Hi, everyone. Good morning. If everyone's doing well. Good morning. Thank you for taking the questions. I was hoping to just start off on the charge-offs this quarter. You know, and looking through the slide deck, it looked like an office commercial real estate property contributed to some of those charge-offs. So I would be curious maybe to get some additional color from Mark in terms of the outlook for the remaining portfolio and kind of what you're seeing in terms of potential maturities and how those maturities kind of stack up with cap rates going up and so forth, and just the overall asset quality outlook within that portfolio.
spk06: We have a good handle on the office maturities going out the next two years, and we've been discussing it a lot right now, what's coming up the first two quarters of the year. We're in very good shape. We're actually seeing some opportunities for some of these customers to refinance their office buildings, which is a little bit of a surprise to me. But we're in good shape overall on the office book in terms of a percentage of our overall portfolio. There are going to be situations where some of them are going to be criticized assets, but as you know, they're unique and we're going to approach them with a tailored kind of strategy with the customer to see what the outcomes are going to be with of any credit issues that we see. On the charge off, yes, we had a charge off on an office asset. But again, that's part of our strategy that we're using to resolve that particular asset. and we're open to achieve those results here during the course of 2024.
spk08: Okay, very helpful. Thank you. Maybe changing gears, thinking about the NII for this year, I apologize if you touched on it in your prepared remarks, Tom, and I didn't catch it, but just in terms of kind of the outlook for kind of core NII execution over the next couple of quarters, assuming the Fed remains on pause, and then We get a couple of rate hikes in the back half of the year. How do you kind of see NII trending over the course of 2024?
spk05: Yeah, hi. Good morning, Nate. In the prepared remarks, I basically, you know, we're using the forward curves as our estimate for interest rates, and the market is anticipating 150 basis points in Fed Fund reductions for the year. So given that, with I think the first fees happening in March, We've given guidance of $83 to $85 million for NII. And in the supplemental stuff, we have the accretion forecast in the back for your reference. Just kind of split that out.
spk08: Okay, so if we do get, you know, that degree of rate cuts this year, it's fair to expect NII would contract. But, you know, if we just get maybe a couple in the back half of the year, it's fair to assume maybe a little bit of growth year over year.
spk05: Yeah, that could be possible, again, subject to what happens with the Fed and market expectations. On the net interest income page of the deck on page 8, we provided some information on our interest rate risk sensitivity over one year. And we've been able to reduce our sensitivity by 1.8% year over year. But we still are asset sensitive. So you can see both in a ramp scenario and a static scenario what the give up in NII is. you know, to the bank's net interest income number. So we provided in 100 basis point down where it's about 3.3% in a ramp and it's 2.5%. I'm sorry, that's 3.5% on a static and ramp is 2.5% decline. And we provided you the quarterly cuts as well on an annualized basis.
spk02: I think, Nate, to add to what Tom is saying there just more broadly. So I think if you look at kind of what the market has priced in, in terms of rate cuts for 2024. As you can see from the materials, we remain asset sensitive. Certainly, as Tom covered in the prepared remarks, we're seeing moderation in terms of deposit pricing, as well as moderation in kind of mixed changes. rate declines certainly will help in that regard. That being said, we remain asset sensitive. So rate declines are going to impact the asset side negatively in the sense that you're going to be repricing assets and that's going to have an impact that's going to be faster than the reprice and liabilities. That being said, that assumes you know, kind of the market view in terms of interest rates to the degree that rates move lower faster or come earlier in the year faster. That obviously impacts, you know, the margin negatively. To the degree that they're slower, it impacts the margin positively. But all in all, we still feel pretty good about, you know, our ability to grow assets and continue to expand net interest income.
spk08: Got it. And just within that kind of outlook, you know, if the Fed remains on pause for the first half of this year and just kind of thinking about the cadence and loan yields from here, I imagine you guys are putting new loans on the portfolio above kind of the rate that we saw or the yield that we saw in the fourth quarter. And we'd just also be curious to hear in terms of, you know, those 48% of loans that are fixed, what amount of maturity do you have over the next 12 months that, you know, could reprice higher?
spk05: Well, I mean, you have to remember if you're doing fixed rate loans, the market's already kind of priced in the Fed easing. So, you know, we price for market takers, so to speak. So, you know, we price to a spread to the curves. And so in some cases, right, the punitive thing to that interest income right now is fixed rate loans because you tend to lose spread on a marginal cost basis, like if you were going to the home loan bank. So I think that... you have to be mindful of that. Whether you do balance sheet hedges or other things to protect the earnings, you're technically layering on some fixed rate loans that, you know, that are in the seven and a half range that, you know, maybe on a floating rate basis would be higher just given the spread on SOFR.
spk08: Gotcha. If I could just ask one last one on just kind of the outlook for deposit growth. You know, it looks like you had some nice core deposit generation in the fourth quarter. Is the expectation that core deposit growth will largely follow that kind of load of mid-single-digit outlook for loans in this year?
spk02: I don't know that we've ever given guidance in terms of deposits, Nate, but as you've been covering us for a long time, and I think you know how important we feel deposits are and the ability for us to continue to grow deposits, and I think the plans are to continue to do that. obviously the um you know that's subject to you know client preferences that subject to doing the right thing for customers um and obviously our competitors who are trying to do the same thing but i think broadly i would say you know look we continue to want to have you know strategies in place to continue to grow deposits i think this quarter um As Tom mentioned, we saw a nice decline on our loan to deposit ratio. We want to continue to drive that over time. You know, we're operating, you know, we were, if you recall, we were operating closer to 95%. We gave guidance that said that we wanted to bring that ratio down over time. And we are very much wanting to continue to do that. So I think, you know, you should, you know, think in the context of continuing to see that ratio come down closer to 90%, even below 90% over time.
spk08: Gotcha. And was there any seasonality in the core deposit growth in the fourth quarter, or was it more just kind of blocking and tackling and ongoing market share gains?
spk05: Blocking and tackling.
spk02: Yeah, I think the latter, as you know, we tend to see seasonality. We have a, you know, we have obviously a commercial focus in our business, inclusive in the liability side. So, you know, you have tax payments, you have all those things that tend to happen right around the first quarter. So we'll see some seasonality there. But that was not the case at the end of the year.
spk08: Okay, great. I appreciate all the color. Thanks, guys. Great. Thank you, Nate.
spk01: Your next question comes from Terry McEvoy from Steven Zinc.
spk07: Hi. Good morning, everybody. Good morning, Terry. I just may start with a question on expenses. If you grow organically, let's say 10% a year, you're going to cross $10 billion in less than two years. So I guess my question is, how much of the incremental expenses from crossing $10 billion are in that current run rate of, what, 53 to 55? Should I be should I be worried about a step up in 2025?
spk02: I think let me answer the question maybe to two ways. First off is, Terry, we've always kind of run the business on the expectation that, you know, we want the company to be able to you know, from a risk management, from a, you know, kind of reporting from a control perspective, not get behind to the growth of the business. And what I mean by that is over time, we've always consistently invested to make sure that we have the requisite level of controls, the requisite level of investment to keep in conjunction to, you know, the growth of the business. So to answer your question, Just by the mere fact that at some point we will cross that $10 billion mark doesn't necessarily mean that you're going to see a step function of an increase in expenses that would be, call it, very significant. That being said, along with growth in assets, along with growth in revenues and the growth in expenses that would correspond with that, I think you can anticipate expenses to increase for us to continue to make sure that we're making the right investments to meet the higher expectations that come with crossing that $10 billion mark. So proportionately, I think we want to continue to operate along the lines of what we've mentioned during our calls. We have always been you know, keeping an eye on expenses, maintaining discipline around expenses. As you saw this quarter, we saw a nice decline on the cost to asset ratio. We took that to, on an adjusted basis, to 228 basis points. That's a material decrease from where we were operating last year. So, we want to make sure that we continue to, you know, proportionately gain scale, you know, irrespective of if we cross the $10 billion mark or not. So hopefully that gives you some color in terms of how we think about that.
spk07: Yeah. Thanks for the color there. Helpful. And then just kind of getting out of the earnings model, what's it going to take to get utilization rates back to pre-COVID levels, which kind of what, 62, 63. And if we get back there, what does that mean to non-interest bearing deposit balances? And is it that case where you got to watch what you wish for?
spk02: That's a really good question. The short answer is, Terry, we really don't know. You would have expected that you would have seen utilization revert back by now, post-COVID. I think there's a couple of things that are probably coming into play. we're a larger bank now. We're a little different than we were right before COVID. So maybe, you know, the mix that we have today is slightly different, which could be impacting kind of overall line utilization or call it the line utilization percentage that we report. The second piece is, you know, I'm a little skeptical of, you know, mean reversion going back to call it, you know, kind of 2019 levels, uh, from the fact that given the discrepancy from borrowers with much higher interest rates today, if you were sitting on cash and you had the flexibility, um, you would probably just pay down the line or you would frankly move the money to a higher yielding alternative. We've seen some of it, but we haven't seen that in mass in our book. So I guess what you're hearing is we're probably a little skeptical of that utilization rate fully mean reverting back to what it was in 2019.
spk07: Thanks for taking my questions and enjoy the weekend.
spk02: Great. Thank you. Likewise.
spk01: Our next question is from David Long from Raymond James. David, your line is now open. Please go ahead.
spk03: Thank you. Good morning, everyone. Good morning, David. I wanted to follow up on the deposit discussion. And, you know, as you look out for the rest of the year, if we do get some rate cuts, what do you expect out of the deposit beta on the downside at this point?
spk05: That's a good question. I think, you know, again, subject to the Fed, short-term rates are certainly higher today. We're actually inverted right on overnight to one year, which we were flat before. So we're already seeing some benefits to repricing some of our, I'll call it, book of CDs that, you know, are on the shorter end of the curve. But, you know, we have our CD book is about eight and a half months. So it's relatively short, and we've been positioning the bank to try and adjust betas down. Obviously, the CD book will reprice more on an 85% to 90% reduction. And then the core accounts will continue to operate as we have in our model. Again, some of our products, the rack rates haven't really moved, so you can't really lower those rates. But your high-yield money market accounts, certainly we expect the betas to be pretty substantial on the way down.
spk03: Got it. Thank you, Tom.
spk02: David, just to add two things to what Tom said. I think in Tom's remarks earlier, when you think about that CD book, The average rate on the maturities that we're seeing for 2024 was like 4.67%, I think. So just keep that in mind relative to kind of, as Tom said, if the duration of that portfolio is eight and a half months and you have a rate at 4.67, you kind of can see where market rates are. So that gives you a sense in terms of kind of what the reprice would be, all else being equal. if you have declines in rates obviously that's going to you know come into play obviously subject to competitive dynamics and the market and so forth but you know i think to tom's comments and and the comments earlier in the call you know i think the the deposit pricing is starting to moderate i think it'll be rate dependent if we get rates you know declining faster obviously that's going to that's going to impact that in a quicker fashion. If rates lag for a little bit, that's going to be slower. But on that end, to the degree that it's slower than what the market repricing, given our interest rate positioning at this point, that's probably to our benefit as opposed to our detriment. So just keep that in mind.
spk05: The only other thing I would add to, David, is, you know, this quarter, right, we had a significant reduction in our FHLB borrowings, and we had a brokerage CD mature. So that's $384 million of wholesale-type pricing. And that, you know, which then ultimately gave us less cash at the Fed, so to speak. So, you know, liquidity is still really strong, even improving. So that's going to help just the NII numbers as well.
spk03: Got it. Okay, cool. Thanks. And then wanted to talk M&A just for a second here. The inland deal seems to have gone pretty well. Integration mostly done with that. First question is, are you seeing a pickup in discussions or serious discussions? And then secondly, what is Byline's appetite to do something else at this point?
spk02: I think, let me take the latter question first. I think our appetite is high. I think we are certainly, you know, open to entertaining, you know, M&A. To the prior question, to the first part of the question, in terms of kind of what's the environment for M&A, I think, look, I think it's clearly with the rallying rates towards the end of the year, I think a lot of the friction that was causing M&A to be very difficult for a lot of institutions, meaning the impact of AOCI, the impact on interest rate marks on portfolios, that's gotten better. It's not to say that we've reverted back to where it was maybe 18 months ago, but it's certainly gotten better, which I think Given the recent announcements that you've seen, I think it's indicative of the fact that M&A and the M&A math, so to speak, is getting a little bit easier for people. So as far as we're concerned, you know, look, we remain, you know, we have our, you know, kind of our framework for evaluating M&A. We continue to think that there's going to be consolidation. We think we are a terrific partner for institutions that are looking for a long-term partner. And we're hopeful that there will be some activity in 2024. Great.
spk03: Thank you guys for taking my questions. You're welcome. Thank you. Thank you.
spk01: Thank you. Your next question comes from Damon from KBW.
spk09: Hey, good morning, everyone. Most of my questions have been asked and answered, but just a couple little ones here. Regarding the outlook for expenses here in the first quarter, I think the guide was $53 to $55 million. Tom, can you just kind of help walk us from kind of like the operating number of sub-51 up to that level? Does it come in through Salaries and benefits, or is it data processing? Just kind of looking for some guidance there.
spk05: Some of it is definitely salaries and benefits. We've had some delays and some hires that we're still looking to seek out, as well as some new teams to bring into the organization from a business perspective. The real estate numbers that came in were actually a little bit lower than what we originally accrued for, and so that won't materialize in 2024. You know, we're trying to give full year guidance there. You know, I think we would expect to be a little bit on the lower side, you know, on the guidance side of 53 maybe for Q1. But absent that, we think just given the spends that we want to make to invest in the business and bring on teams, we're going to have to, you know, increase costs to do that.
spk09: Got it. Okay. All right. That's helpful. Thank you. And then as we think about the provision expense going forward and kind of like a normalized net charge off level. You know, I think you had like 38 basis points last quarter and, you know, that's on the rise from the last two years, understandably. But do you think that, you know, high 30s, 40 basis point level is reasonable going forward?
spk02: I think we've always said, Damon, somewhere in the kind of the 30 to 40 basis point range historically. And I still think we're comfortable, you know, with that. Keep in mind a couple of things that maybe are a little different today than historically. We added some additional disclosure for, you know, PCD loans. I mean, those are loans that over time you can expect us to try to move those out of the bank relatively quickly. We'll add, you know, to the degree that we take charges related to those. As you know, those are obviously subject to a credit mark, so we'll disclose and give you color around that.
spk09: you know i i back to the first part of your question in terms of kind of like the underlying rate i still think that that 30 to 40 basis point is is reasonable got it okay um and then just lastly i you know looking at the deposit base um do you have uh any any deposits that are tied specifically to a uh to an index rate um so that if if and when the fed does cut rates you'll get some relief in that portion of the portfolio
spk05: Yes. I mean, we have some, um, some of the deposits we have that are like brokered money market accounts, they're tied to fed funds and they're on for our balance sheet hedge purposes. So we'll see an immediate, um, benefit from that. Um, and then there's a few clients that are more in the public entity space where we were tied more to an index there. So we'll get definite relief immediately, you know, a hundred percent.
spk09: Okay. Great. That's all that I had. Thank you very much.
spk03: You're welcome. Thank you.
spk01: Thank you. Your next question is from Brian Martin from Janie Montgomery Scott.
spk11: Hey, good morning. Hey, Brian. Good morning. Hey, just to follow up, Tom, I was going to ask you to Damon's question, you know, can you walk through what on a rate cut, what are the prices on the asset side and, and, you know, immediate or lag, and then on the deposit side, if you can just quantify some of that, can you give some color on what moves, you know, immediately versus it being a lag and just how much of it?
spk05: Well, again, I would point you to slide eight where we have our interest rate risk profile. You know, we give you the scenarios of how we've reduced our asset sensitivity on a year-over-year basis, and then, you know, what happens in a static 100 basis point decline and a ramp decline of 100. that would include our assumptions around repricing of both assets and liabilities. So, you know, we are asset sensitive and, you know, we have a, you know, in a static a hundred basis points, it's $3 million per 25 basis points. So that would be the earnings. That would be the NII give up on an annualized basis. So, you know, again, subject to the timing, you know, it's challenging because, you know, if the fed, as you know, if the fed eases in March, Well, the SBA book gets repriced immediately in April. And if they ease in May, then that actually takes place in July. So timing matters both on the asset side and the liability side. And based on the forward curves, which we're using for our rate forecast, the expectation is the numbers I quoted you on the NII basis.
spk10: OK. And how much of the loan book is variable?
spk05: Go ahead, I'm sorry. No, it's under 50%. You know, we have 48% in fixed rate and then, you know, the combination of prime and sulfur, the other part. So it's kind of 50-50-ish. But again, you have investment per boil that's straight as well. So it's a little bit skewed 60-40, you know.
spk02: Yeah, and if you, even when you think about, and I think brian i think this is an important point so even when you think about the the fixed rate component which let's say it's roughly around 48 percent um remember a lot of those are really commercial loans which are going to be shorter in tenor than for example a fixed rate mortgage loan so those are going to be you know typically it's you know, let's assume it's like a three-year, three-and-a-half-year duration on those assets. So every year you have about a third of that component, roughly speaking, that is going to be repricing as well. So just keep that in mind.
spk10: Yeah.
spk05: Yeah, we'd say our loan rate is about 22%. Yeah.
spk11: Okay. Just, I guess, a couple others or one or two others. Just on the capital, you talked about M&A. Just as far as the buybacks, Can you talk about your appetite there versus the M&A? It sounds as though M&A might be more of interest in the short term than the buyback and having the buyback in place if something doesn't pan through on that. Secondly, as a follow-up on your M&A outlook, just remind us if you talk about what are the characteristics of a target that are valued to you today?
spk02: So in terms of the first part of your question, I think, Brian, we're very, very consistent in how we think about capital allocation. First and foremost, when you think in terms of priorities, it's to support the growth of the business. So we want to make sure that we have more than enough capital to continue to grow our business, continue to invest in the business, talent, infrastructure, et cetera. As it pertains to the next several categories, the dividend, the M&A, or ultimately the buybacks, obviously we want to – we're endeavoring to continue to make sure that we're paying our dividend, and M&A is really a function of you need obviously a counterparty that has to be like-minded. You need to strike a transaction and that transaction from a return perspective, from an earn back perspective, from a strategic and also culturally for the business has to make sense. So if all of those categories, we can check the box on those categories, then that's basically telling you that we feel like M&A is, you know, superior to we have excess capital, we have no better use for it, and therefore we can look to the buyback, you know, to return that capital back to shareholders. So I would, you know, think about that in that priority. And then you asked a question about targets. I think when you When we think about targets today, obviously we're a slightly larger company. We've grown as a company over time, but we still think that kind of the target market is somewhere between 250, 300 million to up to about $4 billion in the greater Chicago metropolitan market. that comes about to around 50 targets in that category today. You know, and that I would say would be kind of continues to be our target market.
spk11: Got you. Okay. That's helpful. And then maybe we just want from Mark on the credit side, just with the, can you comment, Mark, just on the change, if there was any, and if you put this in the deck and I missed it, I apologize, the special mention credits, you know, kind of how they trended from third to fourth quarter, and then just, you know, areas that, you know, I guess you're paying closer attention to today, given some of the dynamics here the last 90 days or so in the market.
spk06: Special mention credits, you said? Okay. Well, special mention credits, you know, they just, there was an increase, but we also had good resolutions in that area also. We continue to see good resolutions. But at the same time, we're dealing with a lot of our PCD credits that have moved in terms of rating. And I expect that to be a lot of the same activity we're going to see this year. There'll be ins, there'll be outs. But some of the moves we're making strategically on these credits that we want to either exit or look to upgrade is going to be the key. Can we execute those strategies which are unique to each particular deal? I think we can. There's no trend in terms of what particular asset class is in the criticized book. We're not seeing one area where we're seeing a big increase. It's just been, you know, there's been things in the commercial book. There's been things in the SBA book. There's been things that have popped up in different asset classes, but no trends.
spk11: Okay.
spk06: I'm not sure if that answers your question, Brian, or not.
spk11: Yeah, broadly just the trend is what I'm looking was trying to get my arms around so they have any ins and outs helps and just in terms of you know areas you're you know, maybe Watching more closely this year, you know in the near term. Can you give any commentary on that?
spk06: I'm watching obviously like everybody else in this country office carefully and Even though that's not a big part of our portfolio, we spend a lot of time looking at it, upcoming maturities, appraisal values, and what our sponsors are saying about those assets. And then, you know, the SBA book is still dealing with the higher rates that impacts their customers. And that is not going to ease up too quickly. So we have to keep an eye on that portfolio also to see if these companies can continue to sustain their payments at those rates that they've had to deal with for the last 18 months.
spk11: Okay, gotcha. That's helpful. And maybe just last big picture question for Alberto. Just Alberto, if you look at, you know, talking about last year being a breakout year for byline, if you look at, you know, where you feel like the greatest opportunity for byline is this year, kind of given, you know, the market conditions today, can you just speak broadly to that where you where you feel like you guys in your business model can really excel today? Is there any certain areas that are, you know, more, more, you can be more opportunistic this year?
spk02: I think the short answer, Brian, is yes. And I would say we remain very optimistic about the current market position that we have here in Chicago. To give you an example, and I think we might have touched on this at some point towards the latter, maybe the second quarter call or the third quarter call, There seemed to be a lot of, you were hearing the word risk weighted asset diets, primarily coming from larger super regionals or larger regional banks in anticipation of potentially kind of the Basel III endgame. Where we saw a lot of people in the market simply closed their doors to new opportunities. we are a relationship-oriented bank. We want to be able to be there for clients and lend through the cycle. And we certainly saw opportunities to do that over the course, particularly the latter part of 2023. I think some of that will continue into 2024. I also think As you well know, we benefit from any type of disruption in the market when it comes to customers and also importantly for us when it comes to our ability to pick up high quality banking talent. We anticipate that we will see opportunities to do that and we expect to do that in 2024. optimistic about our ability to to grow going forward and our ability to continue to add talent and customers in in the market gotcha okay thank you for taking all the questions in a great year thank you brian thanks brian thank you as a reminder if you would like to ask a question
spk01: Please press Start followed by 1 on your telephone keypad. Thank you for your questions today. I will now turn the call back over to Mr. Alberto Parachini for any closing remarks.
spk02: Great. Thank you, Carla. And thank you all for joining the call today and for your interest in byline. We look forward to speaking to you again next quarter. And before we leave, I just want to, Brooks, want to give you a heads up on our conference schedule for the first half of the year.
spk12: Thanks, Alberto. Yes, for investors, this quarter we plan on attending the KDW Conference along with the Piper Sandler West Coast Conference. With that, that concludes our call this morning. Hope everyone has a nice weekend. Goodbye.
spk01: This concludes today's call. Thank you all for your participation. You may now disconnect your lines.
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