Byline Bancorp, Inc.

Good morning and welcome to Byline Bancorp third quarter 2024 earnings call. My name is Kate 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 and two. If you are listening via speakerphone, please lift your handset prior to asking your question. If you require operator assistance, please press star, then zero. Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp, to begin the conference call. Brooks Rennie, Head of Investor Relations for Byline Bancorp, Thank you, Kate.

Good morning, everyone, and welcome to Byline Bancorp's third quarter 2024 earnings conference 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. As part of today's call, management may make certain statements that constitute projections, beliefs, or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are some 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 and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. Reconciliation for each non-GAAP financial measure to the comparable GAAP financial measure 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. As a reminder for investors, this quarter we plan on attending the Hubby Financial Services Conference and the Piper Sandler East Coast Conference. With that, I would now like to turn the conference call over to Alberto Parcini, President of Flywind Bancorp.

Thank you, Brooks. Good morning, everyone, and thanks for joining us today to go over our third quarter results. With me this morning are Roberto Varencia, our chairman and CEO, Tom Bell, our CFO, and Mark Fusinato, our chief credit officer. Before we get into a review of our results for the quarter, I would like to pass the call on to Roberto for his comments. Roberto.

Thank you, Alberto, and good morning to all. Our performance this quarter was once again solid across the board with strong profitability metrics, several of which continue to rank top quartile among our peer group. We're proud to continue to deliver strong results. They showcase the consistency and resiliency of the franchise and our business model. We believe the marketplace in time will reward a franchise with these attributes and prospects with a premium valuation. We're also excited about the announced merger with First Security, which Alberto will touch on in a minute. This is yet another disciplined merger with a quality group of shareholders and within the merger metrics we have had in place since we started byline back in 2013. We continue to feel excited and optimistic about our ability to build out a preeminent commercial bank in Chicago. The Chicago banking market continues to be our kind of market, rich with opportunities to gain market share in the spaces we know well and punch above our weight. As we said before, we're keenly focused on being home to the best commercial banking talent in town. we recently were recognized with two new workplace awards. Chicago's Best Workplaces for 2024, ranking Byline as one of the top 25 workplaces in the city by the Chicago Sun-Times and Best Workplaces in Illinois by Best Companies Group and the Illinois Society for Human Resources Management. These awards are in addition to the award from US News and World Report as one of the best companies to work for in the Midwest that we received earlier this year and we shared on our last call. We're thrilled and humbled at the same time to receive this award in recognition and celebration of our people and the culture we have built at Bylane. The awards, which are significantly driven by employee feedback, demonstrate that the investments we're making in employee development, inclusion, competitive compensation, and benefits are making an impact indeed. With that, I'm delighted to pass the call back to Alberto.

Excellent. Thank you, Roberto. In terms of the agenda this morning, I will start with some comments and highlights for the quarter. Tom will follow and cover the financial results in more detail, and I'll come back to wrap up before opening the call up for questions. As a reminder, you can find the deck we're using for today's call on our website, and as always, please refer to the disclaimer at the front. Let me start by saying that we are proud of our overall performance and results for the quarter. Aside from the continued strong financial performance of the company, which I will get to shortly, We also announced a transaction with First Security Bank Corp here in Chicago. The transaction will add approximately $355 million in assets, $201 million in loans, and importantly, $323 million in deposits, of which we consider 96% to be core. We believe the transaction is financially attractive as reflected by minimal tangible book value dilution, a short earn back period, EPS accretion, and return in excess of our cost of capital. Furthermore, the transaction is in line with our track record of executing franchise enhancing M&A opportunities that are consistent with our strategy of becoming the preeminent commercial bank in Chicago. I'd like to take this opportunity to welcome First Security employees and shareholders that are on the call this morning, and we look forward to completing the transaction in the first half of 2025. Moving on to our results, starting on page three. For the third quarter, we reported net income of $30.3 million, or 69 cents per diluted share, on revenue of 102 million. Excluding transaction-related charges, net income was 30.7 million, or 70 cents per diluted share. Turning to profitability and return metrics, they also came in strong with an ROA of 129 basis points and a return on tangible common equity of 14.5%. The lower ROTC this quarter compared to last quarter was driven not by declining profitability, but rather by growth in our capital base stemming from retained earnings and AOCI recapture. Our pre-tax preparation income set a new record for the company at 47.5 million, resulting in pre-tax preparation ROA of 202 basis points, marking the eighth consecutive quarter of that metric exceeding 200 basis points. Total revenue increased to 102 million, up $2.5 million for the quarter. The increase was driven by higher net interest income stemming from higher average earning assets, which offset a decline in the margin as expected. Non-interest income increased to $14.4 million, driven by a lower fair value mark on our servicing asset and increases in other fees. Expenses, excluding transaction-related charges, came in at $53.9 million and continue to remain well-managed for the quarter. The ratio of operating expenses adjusted for transaction charges to average assets declined five basis points to 2.29% from the prior quarter. As far as the margin is concerned, which Tom will cover in more detail shortly, we saw a 10 basis point decline to 3.89% for the quarter as expected. That said, excluding accretion, the margin compressed by only six basis points. Notwithstanding, earning asset growth drove net interest income higher for the quarter. Lastly, our efficiency ratio stood at 52%, remaining stable on a quarter-on-quarter basis. Moving on to the balance sheet, loans remained relatively flat at $6.9 billion. Higher payoffs of acquired loans towards the latter part of the quarter impacted end-of-period balances. We made good progress on reducing non-quarter loans in the portfolio coming from prior acquisitions. You'll notice that we carried higher cash balances at quarter end which bodes well going forward as we deployed that cash into loans. That said, average balances grew modestly for the quarter. We anticipate loan growth for the rest of the year to be in the mid-single-digit range. Business development activity remained healthy, driven by commercial and leasing teams, and our government-guaranteed lending business also had a good quarter, with commitments closed totaling $114 million. Shifting on to the liability side, total deposits stood at $7.5 billion and grew by $151 million, or 8.2% annualized from the second quarter. In prior calls, we've discussed our desire to bring down the loan-to-deposit ratio to plus or minus a target level of 90%. We made good progress on that front with the ratio declining to 92%. from the second quarter, and it's down 319 basis points on a year-on-year basis. Asset quality remained stable from last quarter with NPLs excluding government guaranteed balances, increasing three basis points to 86 basis points at the end of the quarter. Charge-ups declined by a million from last quarter to 8.5 million, or 49 basis points, and include approximately 2.4 million related to PCD loans. Excluding that impact, charges were 6 million or 35 basis points for the quarter. The allowance remained strong and ended the quarter at 1.44% of total loss. Having and maintaining strong capital levels gives us the ability to grow organically, invest back into the business, and provides us with flexibility to take advantage of opportunities. Our capital ratio strengthened further this quarter with CET1, and total capital coming in at 11.35% and 14.4% respectively. With a TCE ratio of 9.72% as of quarter end, we remain above our targeted operating range of 8% to 9%. Lastly, we also continue to steadily grow tangible book value per share. In summary, we delivered strong results in the quarter and remain well-positioned to continue to grow the business going forward. We're in the middle of our strategic planning process, and I can't recall a time when the opportunity set in front of us has been more attractive. With that, I'd like to turn over the call to Tom, who will provide you with more detail on our results.

Thank you, Alberto, and good morning, everyone. Despite the changing interest rate environment, we had strong results for the quarter, driven by higher net interest income, fee revenue growth, and well-controlled expenses. As a result, we grew capital nicely this quarter, which resulted in higher TCE, tangible book value, CET1, and all other regulatory capital ratios. All in all, this is another great quarter for Byline. With that, we can start on slide four with the loan and lease portfolio. Total loans stood at $6.9 billion at September 30th, flat from the prior quarter. We originated $212 million in new loans, and payoffs were higher for the quarter, coming in at $267 million, up $32 million linked quarter. Payoff activity increased largely by runoff in non-core portfolios, which was offset by growth in new business relationships. Line utilizations grew for the fifth consecutive quarter, up 1% to 59%. As we look ahead for the remainder of the year, Pipelines are stronger, and we expect loan growth to continue in the mid-single digits for 2025. Turning to slide five, total deposits increased to $7.5 billion, up 8.2% annualized from the second quarter. The increase in deposits was driven by growth in commercial money market accounts and consumer time deposits. Non-interest-bearing demand deposits accounted for 23% of total deposits down slightly from Q2, primarily driven by commercial client needs. The mix was stable after accounting for seasonal customer activities for the quarter. We are pleased with our loan deposit ratio results, which decreased 319 basis points from a year ago. Turning to slide 6. Manager's income was $87.5 million for Q3, up 1% from the prior quarter, higher than guidance, primarily due to increases in interest income offset by higher interest expense on deposits. The NIM for the quarter was 3.88%, down 10 basis points linked quarter, driven by higher cash balances and lower accretion. Depending on the Fed rate path, going forward, we expect net interest income for Q4 in the $85 to $87 million range, and we continue to focus on stable to growing net interest income. Turning to slide seven. Non-interest expense income totaled $14.4 million in the third quarter, which was up 12% lean quarter, primarily driven by the change in fair value of equity securities and increase in both our wealth management and customer swap businesses. The volume of government guaranteed loans sold was higher compared to Q2. The average premium was 9.7% for Q3, lower than the second quarter, primarily due to mix of loans sold. We expect gain on sale income in the $5 to $6 million range for Q4. Turning to slide 8, our non-niche expense remained well managed and came in at $54.3 million for the third quarter, up 2% from the prior quarter. The uptick in expenses was mainly due to higher salaries, employee benefits, and acquisition costs. Discipline on expense management remains evident, as noted by our track record of improving our expenses to average assets to a record low 2.31%, as well as consistently maintaining an efficiency ratio in the low 50s. As we look ahead, we expect non-interest expense to increase in the fourth quarter, mainly due to one time costs related to investments in our digital banking platform and seasonality in our advertising spend. For Q4, We expect expenses between $55 and $57 million, and for 2025 we expect our expenses to range in the $54 to $57 million area. Turning to slide 9, provision expenses for the quarter came in at $7.5 million, up from $6 million in Q2, primarily attributed to increases related to individually assessed loans in the government guaranteed loan portfolio. The ACL at the end of Q3 was $98.4 million, down 1% from the end of the prior quarter. Net charge-offs trended down by 11% this quarter to $8.5 million compared to $9.5 million in the previous quarter. NPLs to total loans increased by 9 basis points to 1.02% in Q3. Excluding government guaranteed loans, NPLs stood at 86 basis points, up 3 basis points from the previous quarter. and MPAs to total assets stood at 75 basis points in Q3. Due to our consistent track record of delivering pre-tax, pre-provision above 2%, we are well positioned to absorb higher credit costs while maintaining strong financial results. Turning to slide 10. During the quarter, our cash positions stood at approximately $453 million, which decreased $278 million from the second quarter, primarily due to the repayment of the term facility trade. Our liquidity remains strong, which positions us well to fund future business development. Moving on to capital on slide 11. Our capital levels continue to grow during the quarter. We are very pleased to see that CET1 now exceeds 11% and stood at 11.35% as of quarter end. which is ahead of our schedule after the inland transaction. Our total capital increased by 55 basis points linked quarter to 14.41%. Additionally, TC to TA ratio stood at 9.72% of 90 basis points linked quarter. We remain positive about the opportunities ahead as we execute on our strategy and enhance our franchise value. With that, Alberto, back to you.

Thank you, Tom. So to wrap up, slide 12 does not change very much and gives you a summary of what we think about when running the business. This past quarter, we made excellent progress across all of the categories listed here. We continue to grow our commercial franchise. We further bolstered the strength of our balance sheet. We invested in the business and we announced an attractive acquisition transaction consistent with our strategy and delivered strong financial performance. While we were pleased with our results for the quarter, we remain optimistic about our ability to continue to execute for customers and deliver results for stockholders. I would like to thank all our employees for their hard work and the contributions they make on a daily basis to our organization. With that, operator, let's open the call up for questions.

Absolutely. We will now begin the question and answer period. If you would like to ask a question, you may do so by pressing the star followed by the number one on your telephone. If you would like to withdraw your question, you may do so by pressing star and two. As a reminder, if you are listening via speakerphone, please lift your hands up prior to asking your question. Again, to ask a question, you may do so by pressing the star followed by the number one on your telephone keypad. The first question will come from the line of Nate Race with Piper Sandler. Nate, your line is now open.

Hey, guys. Good morning. Hope you're doing well. Good morning, Nate. Good morning, Nate. Alberto, I was wondering if you could just expand on your comments just in terms of your enthusiasm and excitement coming out of the strategic planning process heading into next year. Curious if you could just touch on some of the aspects of the business that you're most excited about on an organic basis and curious if some of those comments also tie into some optimism on the acquisition front as well.

I think the. The answer to the latter point is yes, Nate. Obviously we announced that transaction this quarter and I think still we see opportunities for. Continue continued opportunities to do the types of transactions that are similar to to the one that that we just announced. So the answer to the latter point is yes, on the on the first point. Look, as we look ahead and we look at the position in the market that we have today, we're obviously today the largest publicly traded commercial bank in the market under $10 billion. When we ultimately cross $10 billion, we will be the largest in the market at our size, same characteristics. So commercial bank publicly traded with excellent capabilities between 10 and $50 billion. And that just presents excellent runway for us to continue to execute the same strategy that we've been focused on executing over the last 11 years. So Roberto touched on our ability to attract talent. We continue to see good opportunities to attract banking talent to our platform to continue to serve customers well. And I'm probably more optimistic today than I was at the time of the recapitalization of the company back in 2013. So hopefully that gives you color to your answer, to your question, I'm sorry.

Yep, very helpful. And just speaking of 10 million, just curious if you could maybe frame up in terms of kind of where you guys are from a infrastructure compliance, headcount perspective, et cetera, in terms of preparing across that threshold. Is it, you know, you guys 80%, 90%? Just curious if you can kind of frame that up for us.

Yeah. And just also just to touch also on kind of like the timeline, Nate. So this is something that is not a new thing for us. We've been preparing for this over time, frankly, since we were a much smaller company. That being said, you know, there will be investments primarily in people, you know, as we get close to crossing and as we prepare to ultimately cross the $10 billion pipeline. In terms of percentages, I, you know, it's hard for me to kind of say that, I think we want to make sure that particularly when it comes to areas in risk management, in our different control functions, that we have the capabilities, and more importantly, we have the staff in place with the expertise to be able to comfortably manage and meet heightened regulatory expectations. In terms of the timeline, I think in the prior quarter, I think somebody asked a question about when do you expect to cross and how is the potential, how is M&A factoring into that? And we just announced an M&A transaction. So I think our view is still that, look, ultimately this is This is something that organically potentially could happen between, let's say, the second half of 2025 to the first half of 2026. I think we have a lot of flexibility still to manage that to a degree without having any negative impact on the business. So what that could mean is take plus or minus one or two quarters to that timeline. Rob Leibowitz, Obviously, if there were to be more m&a you know transactions take time you, you know you still have to do diligence, you have to go through an approval process. Rob Leibowitz, But I think at this point it's fair to say you know that kind of range between you know second half of 2025 or you know kind of extending to the full year 2026 I think it's it's probably a fair. Rob Leibowitz, A fair assessment at this point.

OK, that's very helpful. Maybe one last one for Tom. Appreciate the NII guidance for 4Q. Does that include any additional Fed rate cuts through the end of the year? And just thinking about NII growth on a legacy byline basis for next year, assuming the Fed maybe has more gradual rate cutting cadence.

Sure. Yeah, thanks, Nate. Obviously the 50 basis point cut, you know, we will have a little catch up going on here, and I think that was some of the pressure we saw because of the CD books, so to speak. But we think that the name is, you know, stable and is growing in police at this point. Again, subject to what the Fed does here, but we also think just given our organic growth that we should actually be able to keep and I stable through the period.

okay great and that excludes the acquisition right yes okay good deal and sorry tom just one last clarifying question was the expense guidance i think you mentioned 54 million to 57 million for next year was that excluding the deal it is excluding the deal okay great i appreciate the color thanks guys congrats on a great quarter you bet thanks thanks

The next question will come from the line of Damon Del Monte with KBW. Damon, your line is now open.

Hey, good morning, guys. Hope everybody's doing well today. Just had a question regarding the loan growth outlook. It seems pretty positive as we go into 2025. Have you seen much change in behavior from the commercial real estate side of things with the initial rate cuts? and maybe additional conversations with the expectation that rates could be coming lower?

I guess good morning, Damon, first and foremost. Thanks for the question. I think we need to see more, and also short-term rates coming down a bit certainly will help some. We've had a backup in longer-term rates, so that's going to impact some as well. As far as what we're seeing in our pipeline, I can tell you that our pipeline, our commercial real estate pipeline is higher today than it was at any point over the course of the year so far. So that's certainly an uptick. I don't know that I would say that that is strictly rate driven. I think rates would have to come down more so that at the margin you start seeing more, call it rate induced transactions. I would keep a close eye on transaction activity. That's usually a good proxy, both for originations and payoffs. I think what we're seeing is consistent with what you're seeing in the market, which is well capitalized sponsors have the ability to take advantage of opportunities and they have access to capital. There's, you know, us and other institutions are certainly in a position to lend those sponsors that the dollars that they need to to execute their strategies. And I think it's more driven by that than than by strictly, you know, rates are the Fed cut rates 50 basis points. And this is kind of where we are today.

Got it. Okay, that's helpful. Thank you. And then with regards to credit and specifically net charge offs, if we kind of look at the last couple quarters, it was like 50 basis points this quarter, 56 the quarter before. Would you kind of expect that trend to continue for a little bit longer? Or do you think you kind of go back to, you know, the mid 30 level a little bit more normalized?

Yeah, I think I would point you to Keep paying attention. I think we've talked about this in prior quarters. Keep paying attention to that PCD component, because those are essentially acquired loans that we mark that now you're seeing flowing through charge-offs just because of the way the accounting works today. So keep paying attention. We're improving and added additional disclosure on the deck for that so that you keep track of that. if you exclude what was PCD this quarter, as an example, uh, that charge of rate is roughly in the 35 basis point range, which is consistent with what our rate has been, you know, historically over time.

Great. That's helpful. Thank you. Um, and I guess just lastly, you know, on capital management thoughts, any updates, updates here, you know, TCE, you can notice up to 9.7%, which is comfortably above your eight to 9% target. The pending transaction shouldn't have too meaningful of an impact on capital level. So any near-term thoughts on deploying the excess capital?

Yeah, I think the guidance there, Damon, is consistent with what we've always said is, look, we're not, if we don't have, if we're generating excess capital, if we are operating at a level that's above what we think we need, in the short to medium term, then we'll look for ways, whether it be looking at our dividend over time, whether it's ultimately buybacks, or like it was this quarter, we had an opportunity to act on an opportunity that presented itself in the market. We think it's a really attractive use of capital, and we want to have the flexibility to do that. And before all of those things, comes the ability to continue to support the growth in our business organically. But all that being said, look, if we are generating and operating for a period of time at a level of capital that is in excess of what we think we'll need to deploy and can utilize effectively, then we'll look for ways to return that capital back to shareholders.

Got it. Great. Okay. That's all that I had. Thank you.

Thank you. The next question will come from the line of Terry McEvoy with Stevens. Terry, your line is now open.

Thanks. Good morning, everyone. And first off, Alberto, thanks for expanding on the opportunity set being really attractive today. I thought that was very insightful and appreciate that. A couple of questions. When I look at the bottom of page four, the originations down about a third quarter over quarter, was that being more selective pricing competition or just, you know, just how the quarter shaped up. And that is a follow-up there, Tom, the mid single digit loan growth, how do payoffs come into play because they, um, seem to be hiring Q3 for you and, and the industry overall.

Yeah, Terry, I, uh, we're not, we're still seeing good business development activity in terms of the pipelines. Um, If you look at, I mean, just looking at that chart, you know, there are some quarters, you know, going back to like the third quarter of 2023. So you notice there we were like at $311 million. Then we dipped down to 241. I think there's just quarterly volatility. You know, some loans don't happen in one quarter. They bleed into the next quarter. So I think we're still seeing good activity there. I'm not I don't think we have any concerns in that regard. I think on the payoff side, before I pass it over to Tom, when we announced the Inland acquisition, I think we mentioned at the time that what we wanted to do was allow for some runoff in that portfolio And that would allow us to essentially redeploy those liabilities into our own lending businesses. And this quarter, we saw some of that. I think we like seeing that. I think we want to do more of that. So some of what you saw there in terms of payoffs or runoff this quarter is driven by that. And I would point out, you also saw cash balances and Tom touched on it in his remarks as well. Cash balances were a little bit elevated at the end of the quarter, which actually bodes really well going forward, because ultimately we'll redeploy that cash over time into our lending businesses. So Tom.

Sure. Yeah, I think as Alberto alluded to, some of the Inland Loan payoffs, we had some syndication loans pay off. So call that non-core lending. So we like that, because we can redeploy those funds into customer relationship stuff But I think there's also been a little bit of a slowdown or at least to tap the brakes, just to see what happens with the elections and the outcome from that. But generally the pipelines are very strong as Alberto alluded to, you know, the fourth quarter, I think we've seen elevated pipelines. We'll see what the pull through rate is, but things look very good into the future here for loan demand. Hopefully that answers your question, Terry.

Yeah, no, thanks Tom. And then, um, you just talk about deposit market pricing, your strategy as rates come down.

um interest bearing deposit costs up a bit more than i was modeling in the in the third quarter and uh and where you see kind of betas uh heading as well sure so i mean our cd book is roughly five months just to put that in perspective so we're going to have a little lag depending on what the fed does obviously if they do 25 basis points is more gradual for us and that will be less painful but you know when we have a 50 basis point cut we're it's going to take a while for us to catch up on that on the cd fund but to answer your question about pricing the market definitely has reacted to the expectations and we've seen significantly significant decline in the pricing of what i call new acquisition accounts um and we've also seen um you know just you know back a book for repricing um soften up as well so We expect things to move pretty swiftly here as it relates to pricing betas and declines. You know, most banks have some exception pricing and we're, you know, in that 90% range on repricing on the exceptions and consistent with the other areas, you know, other products where we're kind of in line with the normal 30 or 40 basis betas.

Terry, if I could add to that, just more, more, uh, more on a kind of approach to the business standpoint. I think in prior calls we mentioned that we were very willing to, at the margin, incur higher funding costs if we saw opportunities to add relationships, add business that we wanted to do in the marketplace. We think the Patrick O' The short term cost of having marginally higher funding costs for a period of time is more than offset by the long term benefit of growing relationships in the business. The other thing is, philosophically, long run, we want to run the business really with customer deposits. You know, we want to fund loan growth with customer deposits. We want to do as much as we can to achieve that within reason. But in the long run, that's our strategy. That's our plan. And I think, for example, this quarter, we brought down, I think we were down $51.5 million in broker deposits. So those balances keep coming down. We actually replaced that with customer deposits, which You know, given, for example, there's a notice on proposed rulemaking out there on broker deposits. Those deposits can look more attractive, but if you factor in the effect of higher deposit insurance that could come to that, as well as changes that could come stemming from that notice of proposed rulemaking, we think it's prudent to look to opportunities to continue to grow

um you know customer deposits um in favor of of other types of funding thanks for that and then just one quick one and i apologize if this was in the release but the 200 million of the btfp i think it matured in january did you make take any actions given where rates are today or will that that will that um be off the balance sheet in january it's off now terry um

You know, when the Fed cut rates, the earnings rate is basically on top of the borrowing rate, so it doesn't make sense to hold the investment.

That's what I thought. Okay, thanks for taking my question.

And that was why the cash declined for the quarter.

Yeah, perfect. Thank you.

Thank you. Sure.

The next question will come from the line of Brendan Nussel with Hogd Group. Brendan, your line is now open.

Good morning, guys. Hope you're doing well. Thanks for taking the questions. Morning, Brendan. As we kind of look ahead to the next year, I mean, the profitability at the bank has been really fantastic for quite some time now. Like you said, eight quarters of PPNR are away above 2%. Do you think you can hold the line on that 2% number as we move across 25? I think

As Tom alluded to, so look, I think it's fair to say that most institutions in our in our size and certainly in that range between let's say 10 to $100 billion. I think what you're seeing is institutions are trying to reprice liabilities in anticipation of the fact that we're seem to be headed to a rate easing cycle of some degree here. And there's going to be a period of adjustment, Brendan. So depending on the tenor of your CD book, you're going to try, you know, that book is going to lag a little bit. But essentially, you're going to come back to balance, at which point your margin should stabilize and then essentially reset a new base and grow from there. I think what we've said is, you know, And Thomas touched on in terms of kind of the margin guidance, but really the focus on net interest income. And I think that's driven by the fact that, look, to a degree, like we saw this quarter where the margin compressed a little bit, but we were able to offset it with earning asset growth, then that drives net interest income higher. I think we could, to answer your question, you know, could we see a quarter or two where we're kind of adjusting, you know, in other words, allowing the lag in those CDs to reprice, you know, can we see a dip in the margin, you know, call it consistent with what we saw this quarter? That could certainly happen. Hopefully, we can drive net interest income higher, but at some point, we should be back, you know, or we should be at levels that are consistent with The level of profitability that you alluded to in your question. Hopefully that that answers that answers the question.

Yeah, no, that's super helpful timing on the occasions and the various factors that are driving that. Okay, good. Maybe another one from me, you know, looking at others that have reported recently with SBA portfolios, it looks like a fair bit of stress in some of their books. It doesn't seem like you saw, you know, too much in your own portfolio this quarter, so I'll be

the allowance coverage on the unguaranteed piece up a bit quarter over quarter um we're just kind of curious you know what what stress you're seeing uh in that book if this moment well i think we've we've maybe we we've always been cautious particularly coming out of the pandemic brendan on that portfolio i mean certainly we have a view um that portfolio is a higher risk portfolio It's also a higher return portfolio. I think our view has always been balance and that, you know, risk adjusted returns in that business are attractive. So we like that business very much in that context. The other thing I would say is, you know, we have been surprised. We still are somewhat surprised in the sense that we were, we would expect, or we would have expected stress in that portfolio. to really have originated shortly after kind of the main effects on the pandemic, just simply on the basis of the resumption of business for a lot of these borrowers. And then two, the fact that the support, the direct support that either the government was provided or some of the programs that small borrowers could take advantage of were gonna cease. We didn't see that. But what we are seeing down is more normalization on that portfolio. You know, are we seeing stress? Yes. But I think our view has been we're well prepared of that. We took the position that we would try to anticipate it to the best that we could. And I think that's what we've done. So, you know, and obviously you brought up our reserves. We have a view of also the reserves that we need to maintain and operate with in that business.

Fantastic. Thank you for taking my questions.

Thank you. As a reminder, if you would like to ask a question, you may do so by pressing the star followed by the one on your telephone keypad. Again, to ask a question, it is star followed by the one on your telephone keypad. The next question will come from the line of Brian Martin with Jannie. Brian, your line is now open.

Hey, good morning, guys.

Good morning, Brian.

Hey, just, you know, one thought, Alberto, or just one question. You know, just given kind of the dynamics in the market and kind of your position as you and Roberto outlined, I mean, do you see an opportunity to accelerate the loan growth beyond the mid-single-digit range? you know, as you kind of look here, it sounds like, I mean, you've got both the organic and the inorganic play here, but just in terms of just focusing on organic, I mean, do you see an ability to move that up from where it's at given, you know, the marketplace today?

I think it's just going to depend on the opportunity set in front of us, Brian, and also, you know, I would maybe answer it this way. We certainly don't, we are not going to change our credit philosophy. We're not going to change our approach to the market in terms of our appetite of risk, I don't think is something that changes very much. So now, that being said, if we see opportunities to you know, expand what we're doing. And what I mean by that, as you know, in the past, we've had a lot of success in attracting bankers to our platform. And there's usually a period of time, you know, there's non solicits involved, we bring a banking team, we, you know, that banking team really cannot call on customers for a period of time until those non solicits are off. And then that banking team then has an ability to catch up. And things like that could, at the margin, certainly push your loan growth up. And I think those things are all fair game now and in the future. The other thing that maybe we're calibrating a bit to is payoff activity. As you know, when we provide guidance, we're doing our best Patrick O' In terms of what we think is going to run off in the portfolio, at least in the short run, but we're far from perfect in that regard. Patrick O' So if we see lower payoff activity originations remain consistent that's just going to push loan growth to be higher on a on a net basis so. Patrick O' it's a good question it's a hard question to answer precisely, but hopefully we gave you there some. some of the dynamics that are at play, you know, driving that estimate.

Yeah, it's super helpful, Alberto. It just seems like there's an opportunity there given kind of your positioning and how you're thinking about the world here today. So as you look, you know, given your excitement about, you know, the future. So maybe just a couple, one or two others, just on the deal front, Alberto, it sounds like we should expect maybe smaller deals versus larger deals in the big pictures at kind of where the landscape is at or how you guys are looking at things today or the opportunities in the market?

I think, Brian, we really haven't changed our criteria, you know. So if you think about, you know, first security is in the, call it 350, $375 million range. I think that's been our, you know, that's been kind of like the, Michael Leccese, Ph.D.: : The base level that that we've been at for some time and then going up all the way up to let's say a couple billion dollars in that range that cohort of banks in Chicago is that we still think that there's opportunities there. Michael Leccese, Ph.D.: : And we look forward to having the opportunity to participate in an additional consolidation as it pertains to to those institutions.

Tom Frantz, gotcha okay and maybe just the last one or two just on margin, maybe for time just anything with with rates down a bit as far as where the loan pricing is that today has it gotten more competitive do you expect that to kind of play out here.

Tom Frantz, No change on that front asset price has been very stable, I would say.

Tom Frantz, Okay, and new origination yields timer if you gave him the deck maybe I missed it, but where are they kind of at today in terms of pricing.

You know, depending on the asset class, you know, it's SOPR plus 300. It's, you know, prime, prime minus 50 maybe. Yep.

Got you. Okay. Perfect. And then last, just wanted to hear the, on the bank term lending program, Tom, just remind us the impact. It sounds like that occurred later in the quarter, but just the impact on the margin percentage. Is it pretty smaller? What's the, what's that impact?

It's about six basis points, maybe seven tops. You know, so in other words, the margin would expand by six to seven basis points in the coming quarter because that's a tight spread transaction. Right.

Okay. And that was not really impacted in the current quarter, correct?

Because it was done later? Like one week. Yeah, it was just a one week. You know, one week we didn't, it was unwound a week ago.

Tom Frantz, yep okay perfect this one it's fun to clarify that and then the last one was just your commentary Tom on an eye and just kind of how you're thinking about overcoming you know the potential margin, you know some margin headwinds here. Tom Frantz, As far as maintaining or kind of being flat, you know I guess is that the is that the outlook, you know I guess, as you kind of go the next five quarters, assuming we get. Tom Frantz, Fortified rate cuts are just not sure how you're thinking about or what's embedded in your thoughts in terms of rate cuts, but if we do get.

four or five more rate cuts here and you know they're kind of steady increases like we expect then that that's kind of the guide as far as just kind of growing it sequentially quarter to quarter yeah i mean we're trying to you know have stable nii to growing nii but i mean as it relates to the margin i mean you have the sensitivity on page six of the deck um so I was just talking about NIA.

I understand your comments on percent. Just in terms of dollars of NIA, I just wanted to make sure I understood kind of your outlook in terms of overcoming the rate.

Yeah, I think we gave guidance on the 85 to 87 million range, and it's just subject to if the Fed does more or less.

Got you.

OK, Brian, just to add a little bit, just to highlight one trade off based on which I think is relevant in the discussion between kind of margin and net interest income. So as you pointed out, the impact of that bank term funding you know, transaction that we had. So let's say that adds five to seven basis points potentially to the margin. Notwithstanding that, we lose net interest income as a result. So that's something where, you know, all else being equal, the margin expands, but we actually make less money. So that's why, you know, when Tom talks, you know, kind of the emphasis, yes, of course, we want to manage the margin, we pay attention to the margin, but net interest income, like one of our older competitors has said here, is ultimately what pays the bills. So just keep that in mind.

Yeah, no, understood. That's what I was asking for. But thank you for taking the questions, and congratulations on another great quarter.

Thank you, Brian.

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

Great. Thank you, operator. And thank you all for joining the call today and for your interest in byline. And we look forward to speaking to you again in 2025. So have a great day. Thank you.

That concludes today's call. Thank you all for your participation. And you may now disconnect your lines.