Byline Bancorp, Inc.

Good morning and welcome to Byline Bancorp second quarter 2026 earnings call. My name is Ben 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 one again. If you are listening via speakerphone, please lift your handset prior to asking your question. If you require operator assistance, please press star Ben zero. Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, the head of investor relations for Byline Bancorp, to begin the conference call. Thank you, Ben.

Good morning, everyone. And thank you for joining us today for the Byline Bancorp second quarter 2026 earnings call. In accordance with the Regulation FD, this call is being recorded and is available via webcast on our investor relations website along with our earnings release in 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 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 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 of 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, during the quarter, we plan to participate in two upcoming conferences, the Raymond James Bank Conference here in Chicago on September 9th and the Stevens Bank Forum in Little Rock in September. With that, I will now turn the conference call over to Alberto Paracchini, president of Byline Bancorp.

Great, Brooks, and good morning, everyone, and thank you for joining us to go over our second quarter results. With me today, as usual, is our chairman and CEO, Roberto Herencia, our CFO, Tom Bell, and our chief credit officer, Mark Fusinato. In terms of the agenda for today, I'll kick us off with the highlights for the quarter, followed by Tom, who'll take you through our financial results. I'll come back to wrap up before we open the call for questions. As always, you can find the deck for this morning on the IR section of our website. So please refer to the disclaimer at the front. Before we get started, I'd like to pass the call over to Roberto for his comments. Roberto.

Thank you, Alberto, and good morning to all. We appreciate you joining us today and taking the time to engage with byline. and please excuse my voice, which hasn't been a friend in the last few days. Our second quarter results were excellent, a record net income. The consistency of our execution continues to shine. We are very proud of the work our people do, and we thank them for another quarter. We are also grateful to our board of directors for their engagement, support and quality of advice. When we started the creation of Byline, Alberto and I were intent on having a board of directors that could really serve us well, a board of directors with different experiences, a board of directors that could make us better. And I believe that we have achieved that from day one. Our objective remains clear to become the preeminent commercial bank in Chicago. This is not about being the biggest bank or pursuing scale for scale's sake. Success for Bioline is defined by the quality of our customer relationships, the strength of our credit discipline, the talent of our people, and our relevance to middle market businesses throughout the markets we serve, and of course, of course, what we do for our shareholders. We have built a relationship-driven commercial bank grounded in the principles that have long defined successful commercial banking organizations. First and foremost, exceptional talent, discipline underwriting, local decision making, and a commitment to serving customers over the long term. We believe those fundamentals remain enduring competitive advantages. I've been hearing the scale argument for a long time that if you don't buy banks, they'll be more expensive. If you don't buy banks, you won't be able to compete. If you don't buy banks, there will not be enough banks left. And here we are 45 years later and it's still the same argument. Scale matters, but only to the extent that it allows us to serve customers well, attract talent, and investing capabilities. I think scale matters to a lot of banks that are not clear on their purpose and their objectives. We believe we have a significant opportunity in front of us and Byland will likely be a much larger organization in the next three to five years. But that growth will come first and foremost organically. and it will be disciplined. It will come from deepening customer relationships, growing deposits, maintaining strong underwriting standards, attracting quality bankers as we have done. And of course, selectively pursuing strategic opportunities that are within the metrics that we have discussed with the investment community. The area that continues to differentiate Byland is our people. During the quarter, Byland was recognized as one of the 2026 best workplaces in Illinois. Taking the third consecutive year, we have received that distinction. The recognition is especially meaningful because it is based largely on employee feedback and reflects the culture we continue to build across the organization. We have long believed that engaged employees create better outcomes, and recognitions like this reinforce the strength of that philosophy. I would also like to recognize our SPC team. Byland was recently named the 2025 Illinois SBA 7A Lender of the Year, marking the 17th consecutive year we have received that recognition. We were also recognized as the 2025 Illinois SBA Expert Lender of the Year. Consistency like that doesn't happen by accident. It reflects the expertise of our SBA professionals, the strength of the customer relationships, and our longstanding commitment to helping small businesses access capital. We are delighted with our performance throughout the first half of 2026. More importantly, we think we're very well positioned for the second half of the year. We have a strong Capital Days in Alberta. We'll talk to you more about that. We have a talented and engaged workforce and a strategy that remains focused on long-term value creation. With that, Alberto, I'll turn it back to you.

Great. Thank you, Roberto. And picking up on the theme of execution, this quarter we felt was a good example of what discipline execution looks like in practice. We grew profitability. We continued to manage risk carefully. and more importantly we continue to deliver value to our shareholders record net income and excellent profitability really stood out this quarter so let's start with that we delivered net income of 40.2 million or 90 cents per diluted share up from 37.6 million and 83 cents last quarter excluding significant items adjusted EPS was 91 cents per share of 10 percent Linkwater, and 21% year-on-year. For the quarter, return on average assets was 1.63%, up seven basis points, Linkwater, and return on annual common equity was just under 14.5%, up 70 basis points. Pre-tax preparation ROA came in at 249 basis points, up 20 basis points, which marked our 15th consecutive quarter above 2%. Non-interest expenses remain well managed and declined this quarter while revenue grew. Our efficiency ratio improved 285 basis points to just under 47%. Our fourth consecutive quarter of improvement and our best since becoming a public company in 2017. Put another way, we generated positive operating leverage. Revenue of $118 million was up 4.7% against expenses that actually moved lower. and that combination drove to improvement in returns. Tom will walk you through the details of all of that in a moment. Before I finish with the rest of the highlights, I want to spend a moment on the operating environment we find ourselves in today, since it provides a backdrop to a lot of what you'll hear. We came into the year expecting rates to come down. And once again, that hasn't played out the way we or the market expected. Strength in the labor market combined with firmer inflation points to a higher for longer rate environment for the balance of 2026. Against that backdrop, demand for credit remains solid, particularly in our CNI book, though we are seeing price competition pick up, particularly in commercial real estate. On the liability side, competition for the faucets remains elevated, and it's largely a function of banks competing to fund loan growth with the faucet. We think this environment rewards discipline over volume, and that theme runs through the rest of what I'll cover. From a balance sheet standpoint, trends remain stable, with total assets ending at $9.9 billion. Deposits increased 3.5% to $7.9 billion, reflecting growth in interest-bearing deposits, while loans grew 4.2% to $7.6 billion. Net interest income was $101 million consistent with previous guidance, even as our margin moved marginally lower. I'll spend a second on the margin since it's a natural rate of area of focus, given what I just described on rates and competition. Our margin declined slightly for the quarter, largely due to mixed changes, but remained stable and healthy at 4.28%. That said, We manage the business to grow net interest income in dollars since it's what drives profitability and returns, not to a specific margin level. When we see opportunities to add high quality, relationship-oriented business that's accretive to earnings, even at a somewhat lower spread, we are going to take it. Tom will cover the specifics on the margin drivers shortly. On the asset quality front, credit costs for the quarter were $7.2 million, driven by net charge-offs of $4.4 million and a reserve bill of $2.8 million. Our allowance now stands at just under 1.5% of total loans, up two basis points from last quarter. NPL stood at 92 basis points, essentially flat on a year-on-year basis. Our capital levels remain well above regulatory requirements across the board, providing us with significant flexibility. TCE increased to just under 11.5%, CET1 increased to 13%, and our tangible book value per share increased 14% year-on-year to $24.48. During the quarter, we repurchased approximately 275,000 shares, totaling 9.1 million. leveraging our capital flexibility. Between dividends and share repurchases, our total payout ratio to shareholders for the quarter was 36%. In addition, yesterday we announced that our board approved a 16.7% increase in our quarterly dividend to 14 cents per share, which will be paid in the current quarter. This is reflective of the strength of our capital position as well as the earnings profile of the company. I want to take a minute to talk about how we think about capital allocation more broadly. We look at things like share repurchases the same way we look at any other use of capital. Against the returns we could otherwise generate by deploying it to support loan growth, invest it back into the business, or opportunistically into M&A. Our approach is to keep building capital and return it in a disciplined, thoughtful way, which gives us flexibility to play offense as opportunities arise. With that, I'll turn the call over to Tom, who will walk you through the financials.

Thank you, Alberto, and good morning, everyone. Starting with our loans on slide five, total loans increased 4.2% annualized and ended at $7.6 billion for the quarter. Origination activity was solid with $234 million in new loans while payoffs were elevated at $339 million. We are seeing higher payoff activity rather than a pullback in originations as we recycle acquisition loans into new customer relationships. Loan commitments grew slightly during the quarter while draw activity on existing lines supported loan growth. Line utilization increased to 60% from 59% linked quarter. Our origination activity remains healthy as we head into the second half of the year. Assuming payoff activity normalizes in the back half of the year, we expect full-year loan growth in the mid-single digits. Turning to slide six. Total deposits were $7.9 billion for the quarter, up 3.5% annualized from the prior period. From a mixed perspective, growth was driven by interest-checking balances that was partially offset by lower money market balance. Our loan-to-deposit ratio ended the quarter at 96%, up 16 basis points from the prior quarter. We remain disciplined on pricing and continue to prioritize relationship deposits over more rate-sensitive funding. Turning to slide seven. Net interest income was $101 million in Q2, up modestly from the prior quarter, and within our 99 to $100 million range we provided last quarter. The increase was driven primarily by favorable day count, partially offset by higher funding costs. The net interest margin remained healthy at 428, declining five basis points from last quarter. The decrease was primarily driven by higher funding costs related to a maturing balance sheet hedge and changes in earning asset mix. We remain focused on growing net interest income, which we did this quarter. Given the rate outlook and our balance sheet forecast, We expect non-interest income range of $100 to $102 million for the third quarter. Turning to slide 8, non-interest income totaled $17 million in Q2, an increase of $4.3 million, or 35% compared to the first quarter. The increase was primarily driven by favorable fair market marks, higher gain on sale revenue, and stronger swap fee income. Gain on sale revenue totaled $6.1 million compared to $5.5 million in the prior quarter. Additionally, wealth management surpassed the $1 billion in assets under administration. We expect gain on sale revenues to average $5.5 million per quarter and our non-interest income to be in the $14 to $15 million range for the third quarter. Turning to slide nine, expenses came in at $56.5 million down 1.2% from the prior quarter. The decrease was primarily driven by lower salary and employee benefits, lower occupancy expense, and lower OREO-related costs. We continue to focus on operating efficiencies and expense discipline, and as a result, our adjusted efficiency ratio was 46.5% compared to 49.8% last quarter. And our non-interest expense to average assets improved eight basis points to 2.29%. Looking forward, our non-expense full-year guidance remains unchanged at $59 to $60 million per quarter. Turning to slide 10, credit quality trends remain favorable again this quarter. Net charge-offs were $4.4 million, or 24 basis points, down from the 32 basis points last quarter. Criticized loans declined to 3.9% of total loans, down from 4.5% on a linked quarter and year-over-year basis. Non-performing loans were $69.1 million, or 92 basis points of total loans, of marginally linked quarter and flat year-over-year. Our allowance for credit losses was $112 million, or 1.48% of total loans, up two basis points from last quarter, driven primarily by an increase in the individually assessed category. Overall, credit trends remain consistent with our expectations. Moving on to capital on slide 11. Capital levels grew across the board during the quarter. Tangible common equity increased to 11.4% and CET1 increased to 12.9%. Our capital position remains a competitive advantage, providing flexibility to support growth, return capital to stockholders, or pursue strategic opportunities. With that, Alberto, back to you.

Thank you, Tom. So to wrap up, Let me give you a few thoughts on how we're thinking about the rest of the year. First, on the quarter's results, that's reflective of work that's been underway for several quarters now. And we see room to keep building on it through the same focus on discipline execution. Second, given the environment, Solid but selective credit demand, sharper loan and deposit competition that isn't going away. We intend to stay disciplined rather than chase volume or spread that doesn't compensate us properly for the risk. Third, credit quality remains a priority. The trends this quarter support that are underwriting and portfolio monitoring are working as intended. But that said, we need to stay vigilant given the evolving macro environment. Fourth, we continue to prepare for crossing the $10 billion asset threshold, and that preparation informs how we think about growth, expenses, and capital in the meantime. Looking ahead, we enter the second half of 2026 with solid momentum. Our pipeline remains healthy, and we believe we're well positioned to capitalize on opportunities and continue to create value for our shareholders. And with that, Ben, let's open the call up for questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first call comes from the line of Nathan Race with Piper Sandler. Nathan, Your line is open. Please go ahead.

Hey, guys. Good morning. Thanks for taking the questions.

Good morning, Nate.

Alberto, I appreciate your commentary around just the healthy pipeline. And I think Tom alluded to a mid-single-digit growth expectation for this year. But with loans up, call it 1% annualized through the first half of the year, that would imply kind of a ramp to the high single-digit range. for the back half of the year. So I'm just wondering if you could shed some light on the visibility you have into payoffs in the back half of the year and how you expect production to trend as well.

You hit the nail on the head on that, Nate. The area that is usually the most uncertain one is related to timing of payoffs. As you know, our guidance in terms of loan growth has been consistently in that kind of mid to single-digit range. And in the past, I know you guys sometimes have given us a hard time because we've exceeded that. And yet, we stuck with continuing to give guidance in that kind of mid-single-digit range. and I think what you're seeing here is it's actually that effectively being flipped. If you look at our level of originations, those have continued to be pretty consistent. I know if you look at the comparisons on the page, yeah, year over year is down, but if you look at it more over the recent You know, three or four quarters has been pretty consistent in terms of the activity level as far as new business is concerned. And we continue to feel confident around that. What we're probably less confident is the other part, which is the payoffs. That being said, I think part of that, I point to what Tom said, which you've also heard us talk about in the past, where When we've done acquisitions, our approach has been really acquiring deposits for the purpose of recycling those assets over a period of time so that we can redeploy that liquidity into our lending businesses. I think what we've seen over the past couple of quarters, particularly with some of the acquisitions that we've done over the last couple of years, has been that recycling. And I think that has a lot to do with the elevated payoff activity. We think we're past the bulk of it, Nate. That being said, that's the variable that is always more challenging to forecast for obvious reasons. But when we think about the underlying originations and that kind of underlying, call it rate of growth, in that mid-single-digit range. We feel pretty confident about that. That being said, that volatility of payoffs, as we've seen the last couple of quarters, is what is going to ultimately impact the numbers that you're looking at, which is ending balances and calculating growth rates over that. So just be mindful that that volatility of payoffs Pay off activities may impact that. But when we think about the way we run the business is we think about it in the standpoint of we want to see that kind of mid single digit range. And that allows us, as you also probably saw from the numbers and from covering us for some time now, we're really looking to drive that and fund it with core deposits. So, you know, those two really can't deviate too much from one another. So hopefully that gives you color and gives you an answer to your question. Probably a more full answer to the question than what you were hoping for, but hopefully that provides enough color on that.

It does, and very appreciate all that particular commentary around the acquired portfolios. Not to give you guys a hard time to your earlier point, but common expenses, you know, the guy for the back half of the year, you know, that implies a decent step up from the first half. So just curious kind of where you're seeing those upward expense pressures. Is it tied to some additional hires you're anticipating the back half of the year or any other color you can shed just in terms of kind of the increased expense outlook for the back half?

Hi, Nate. Yeah, it's employee expenses, health care costs. Those types of benefits are probably going to be likely higher in the second half of the year. We normally have some higher commissions as well, just due to production through the year. So it's kind of compensation related. And that's why we're giving the higher guidance. I think if you look at, by the way, if you look at last year, I think you kind of see some of the same trends from last year.

Yep, for sure.

Hey, Nathan, you brought a point, and just to give you some additional color on that, you brought up additional hires and so forth. We're actually seeing good, there's, call it, opportunities in the market to do that, and we're always looking for attractive talent. We don't have anything to announce, but if we were to bring on a team of people or be doing... you know hiring uh you know additional bankers where we see an opportunity outside of call it normal course of business um then we would separate that and we would tell you that you know listen our expenses are higher this quarter because you know we added a team or we added a couple of teams uh but you know the market there seems to be enough um Bancorp, Inc., Roberto Paracchini, Thomas Bell, Roberto Rennie, Brian Doran, Dana Rose

OK, great. And then if I could just ask lastly to your earlier comments, Alberto, around just how you're managing excess capital. You guys, of course, have the high quality problem with how quickly you're building capital, just given the profitability profile. But eventually, it's going to kind of depress or kind of bring down your returns on tangible common. So within that light, curious kind of what you're seeing on the M&A front these days and and if you could also just remind us how you think about kind of the the appetite for buybacks around their back period and so forth.

Yeah, I think you you hit the nail on the head. I think, you know, putting aside. Just call it growth and risk weighted assets, balance sheet growth. And obviously you saw the increase and, you know, the increase in the dividend that the board approved, which is obviously a return of capital back to shareholders as well. I think you're left then with M&A opportunities in the market. And I think the environment is active. Obviously, you saw somewhat of a market acquisition here. Obviously, more Indiana than Chicago being announced the other day. And I think it's fair to say that conversations are not that they're never You know, completely inactive. But I think it's fair to say that there's plenty of chatter. You've seen certainly more M&A, broadly speaking, in the kind of the under $10 billion range than you have seen in terms of much larger transactions. And I think that trend is likely to continue. But I would describe the general chatter around M&A as constructive. But going back to your capital deployment question, absent M&A opportunities that we execute on, then given the fact that we've kind of run through the priorities, we would be looking to the buyback program to return capital back to shareholders.

Okay, that's really helpful. I appreciate all the color and hope you feel better. Roberto.

Thank you, Nate. Your next call comes from the line of Brendan Nozzle with HubT Group. Brendan, your line is open. Please go ahead.

Hey, good morning, everybody. Hope you're doing well.

Morning, Brendan.

It is starting off here on asset quality. A lot of nice trends for the quarter compared to, you know, sequential year over year, you kind of name it. If I look at slide 10, I see some really nice cleanup in kind of criticized asset reading. Can you just offer a little bit of color on, you know, what you worked out this quarter, how you managed to avoid meaningful loss content, and then just any broader commentary on kind of your overall observations on the health of your commercial borrowing base?

I'll let Mark take this question, but just a general comment, particularly when you're looking at criticized and classified. Our approach always is going to be we're going to be quick to downgrade. So in other words, we would much rather err on the side of downgrading something very, very quickly and then waiting for Bancorp, Inc., Roberto Paracchini, early to downgrade as opposed to waiting and seeing what develops before making that decision. Just keep that in mind. But I'll pass the call over to Mark.

Thanks, Alberto. So, Brendan, the reduction, as classified, was driven by a few deals that were large in size, but they had been performing much better. And the trends we saw with the operating companies were over an extended period, so we felt comfortable increasing the risk rating to more of a past credit. That was one factor. And then we had a large resolution from one of our workout situations where an operating company had a large mortgage exposure also, and they were able to sell that asset and pay off our exposure completely. And that was a non-performing loan. that we had reserved against, so we got a bit of a recovery also on a previous charge-off. Those are the three main factors in driving the numbers down. As you know, with our portfolio, we tend to have idiosyncratic situations that come up. We don't see a trend in any of the asset classes for our line of business, but those three specific ones were the reason that we saw the big improvement quarter over quarter.

That's a helpful color. I appreciate it. Maybe just to circle back to the topic of conversation earlier in the call on deposit competition, can you just unpack the environment a little bit more on kind of what sort of institution you're seeing push the envelope on pricing and then just how it's evolved over the course of the year and kind of what the temperature is today on funding competition versus over the prior six months?

I think I'll start and then jump. I'm sure we'll jump in as well. But I think, you know, it's interesting that we're having this discussion today because there was an article in the Wall Street Journal this morning talking about larger institutions kind of coming back into the commercial real estate market. And I think specific to that particular book or that particular business, that's exactly what we're seeing and that's are consistent with what we have kind of noticed and have noticed in the market going back a couple of quarters. I think that's largely due to clarity around Basel III. If you recall, probably 18 months ago, 24 months ago, we were having exactly the opposite conversation, you know, risk weighted asset diets and the larger banks were a bit more, had a bit more lack of clarity in terms of where Basel III was going to end up. They were looking at potentially increases in capital. Now they're kind of looking at an environment that's going to be flat to potentially declining. And I think they had let those books either stay relatively stable, if not declining, because of office exposure. And I think what we have seen, particularly in asset classes like multifamily, like industrial, is Those larger institutions have been coming back to market. There's more capital that they're trying to put to work. Transaction activity in the market in general, I would say relative to before the rate hikes, is still lower. So there's less deals, more capital, and then you have a compression in pricing, which is kind of what we're seeing in that particular book. As far as the rest of the business, CNI is always competitive, and rightly so. You're looking at hopefully having long-term relationships that you're trying to fund with deposits, and there's an acquisition cost of those relationships up front, and that's reflected in pricing. But I think in general is what you're seeing, one, what we just covered on the asset side, and then just banks looking to fund that loan growth with deposits. And Tom can add more to that.

Yeah, I would say on the commercial side, it's business as usual. The relationship is competitive, but it's not exception pricing going on on the deposit side. So the core deposits we get from that are very stable and very low cost. On the margin, if you're trying to increase your deposit base and you're using the consumer network to do that, two things I would say. One is the expectations of the Fed going from cutting rates earlier in the year to now potentially raising rates later this year. You're seeing more extension of CDs, if you will. Our book has been very short just because of the expectations of a cut that we thought was going to happen. That's certainly reverse course. So it's not like we're going to have a lot more repricing on lower levels. So it just comes down to the short curve, meaning overnight to one year is steeper, that you're going to pay incrementally more in rate. But spreads haven't really materially changed. I think it's still competitive, as Alberto alluded to, but not competitive. It's still rational relative to where it's been in the past.

Okay. All right. Well, thank you all for offering your thoughts. I appreciate it.

Thank you. Your next call comes from the line of Brian Martin with Breen Capital. Brian, your line is open. Please go ahead.

Good morning, everyone. Hi, Brian. Hey. Can you just touch on, with the credit quality this quarter, just kind of a bigger picture question, and that is, as the SBA book has gotten smaller, just as other businesses have kind of outgrown them, when we think about the big picture on charge-off trends, you know, kind of going into the future, I know this quarter had some recoveries and what you just talked about, but just should we think about the charge-off rate maybe being a little bit lower than it has been historically? Is that You know, dynamic continues to play out and you're growing your organic piece of the business maybe a little bit faster than the commercial side rather than the SBA side. Given kind of commentary today, it sounds like it continues to keep similar pace in terms of what it's delivering. But is that an accurate way to frame it as we look in kind of the out years?

I think it's, Brian, I think that's an acute observation and I think what you're saying is accurate. I think also what I would say is in the short run we're still in that kind of, you know, if you're asking us what's your view, how should we think about charge-offs, I think in the short run we're still in that category of 30 to 40 basis points. I think what you have seen the last couple of quarters is that we're being certainly, you know, going towards the lower end of that range. I think, as Mark alluded to, we had some nice recoveries this particular quarter, so we went lower than the range. But I would say still in the short run, that 30 to 40 basis points is still a good range. That being said, in the long run, I think what you're saying is correct, meaning as the balance sheet continues to grow, and as proportionally that business and that portfolio continues to be proportionally a smaller part of the portfolio and the balance sheet in general, yes, I think that those charge-off levels are probably going to end up migrating a bit lower.

Okay. No, that's helpful, Roberto. That seems like where it's going. So that's just a little color that's helpful. And just in terms of I guess the NII or NIM outlook. I don't know if you can give any thoughts. I mean your comments about being disciplined on pricing in terms of both loans and deposits and the competition in the market kind of feels like maybe the focus on maintaining the margin kind of worth that here and maybe that would be the outlook. Maybe just general comments if you can provide it on the margin but maybe a bigger picture question is is it better to think about it in terms of the NII growth which is what you guys usually offer a bit more on if Maybe a mid-single-digit growth in NII is how we should be thinking about the balance sheet, and I guess that NII number going forward, maybe into next year, that's the best way to think about it as you manage the business here for the environment.

Hi, Brian. Good morning. Yeah, NII, I think we gave guidance for the quarter. I mean, pretty consistent. As we talked about, payoffs are the wild card, so to speak, that if they are slower, certainly earnings could be higher. you know as far as you know again deposit wise I think we're we're doing well on the margin the deposit costs aren't bad relative to the spreads we're getting certainly there's repricing going on on the asset side that's going to help us but I think you know the cost of funds side is probably flat you know moving forward here we did have a balance sheet hedge that was material in a maturity size and impacted the margin a couple basis points so That's kind of out of the way right now. And I think as we continue to grow relationships and get our fair share of business, you know, the margins should be stable, you know, in the coming quarters.

Yeah, Brian. And just to add just an additional, you know, some more perspective on that. I think Tom answered it well in terms of kind of net interest income really being the kind of how we manage the business as opposed to thinking margin always first and therefore you kind of, you know, net interest income as a result of that. That being said, you know, as we said earlier, we kind of look to net interest income because that's ultimately what drives profitability. It's obviously what drives returns. We don't manage specifically to a margin, call it target, so to speak, But, you know, when we think about growth, I kind of think of it as a, you know, and Roberto even touched on it on his remarks at the beginning, you know, discipline is a good thing. You know, in certain cases, we're going to look at taking a lower spread, which say it may impact the market, the margin negatively. to do business that we think in the long run is going to make sense for the institution to do because it will build franchise value and it will generate long-term returns, which at the end of the day is what we're trying to achieve. So we may have situations where you may see, okay, there's margin pressure, we're adding to the business, but will be selective on those. And there'll be times when maybe that's emphasized more because of opportunities in the market, as opposed to times where we don't see those opportunities, in which case maybe we don't grow as fast or you see the margin expand. But that's a high-class problem. And as you saw this quarter, What happens then is if we're not supporting growth, then we're building capital. So then the decision that we have to make is, how do we return that capital back to shareholders? And you saw us do that this quarter as an example. So it's a balance that we're playing. It's balance between long-term growth and balancing that against the short-term opportunities that we see. in the day-to-day aspect of the business.

And I would just add one last thing just to remember. You talked about the SBA business, right, as becoming a smaller piece of the overall organization. Over a longer period of time, that will continue, and obviously that's a higher-risk, higher-return business, so that would have an impact on the margin in a longer-term way, not necessarily next quarter or the following year, but just gradually increasing. You would expect those higher yielding assets to be a smaller piece of the overall earning assets.

Got you. No, I appreciate it. And you mentioned asset repricing, Tom. Is there something that you, I guess deposits may be being stabilized, but remind me what assets, just the asset repricing looks like here the next couple quarters?

There's about roughly $300 million of loans and leases that are repricing in the next quarter. and call it 250 to 275 in the fourth quarter. And those are yields that are kind of in that 630 range. So on average, we're probably slightly higher than that as new production comes in on a blended basis.

Gotcha. Okay. That's helpful. And I think the comments about the NII, the way to think about it in terms of just that mid-single-digit growth seems like what you guys are suggesting. So, okay. And then maybe just the last one for me was on the – you spent some time talking about the M&A environment and just kind of the capital flexibility and how you think about those returns. Just remind us, if you are successful in finding something on the M&A side that fits your wheelhouse, the discipline that you have on – Can you just run through the parameters on what your discipline is on the M&A front, how you're thinking about when we see a deal, if there is one for you guys, what those parameters are, what your guideposts are there?

I mean, generally speaking, and it's going to be, obviously, Brian, it's going to be dependent on the quality of the franchise, but I think what we have stated in the past is we're looking for an earn back that's inside of three years. We're looking for a reasonable tangible book value solution relative to the earnings accretion that the institution would add to the company. And obviously, you have to adjust that for size, obviously a smaller acquisition. Now at the size of the company, in terms of accretion, it's going to be impacted by size, but that's generally the parameters that we manage to.

Gotcha. Okay. Thank you for all the insights in the call today. I appreciate it. Thanks, Brian.

Your next call comes from the line of Daniel Tamayo with Raymond James. Daniel, your line is open. Please go ahead.

Thank you. Good morning, everyone. I guess most of my questions have been asked at this point, but just on the balance sheet and the crossing $10 billion, which you mentioned, it looks like you're almost there. Just thoughts on timing, if you think that's still going to happen in the back half of this year, that might be able to be pushed to $27 billion.

It's a good question, Danny. We're not running the business today with really any constraint on that. And we'll continue to do that. I would say this quarter and probably the months of October and November, if we get to the beginning of December and we have the ability not to be over $10 billion, then we would probably take you up on that and we would just manage the balance sheet accordingly. But outside of a situation like that, that would really push the impact of Durban out to kind of mid-2028, there's really no, we're not doing anything out of normal course in terms of managing the balance sheet.

Okay. I appreciate that, Alberto. And then maybe not to... Be a dead horse on the margin here, but different side of it. The purchase accounting accretion, obviously volatile, but was kind of a little bit higher this quarter than it was last quarter. Tom, if you have any thoughts on where you think that might run and another way to kind of back into the core going forward would be helpful.

Yeah, we took the slide out because it's becoming non-material. It's about a million dollars a quarter right now. in accretion expectations. Obviously, if some loans pay off faster, you know, we might get some recoveries, etc. But it's going to be, it's less and less material forward. And you can refer to last quarter's deck for, you know, the guidance of the future quarters.

Okay.

But it'll be under a million dollars coming up.

Okay. Thanks, Tom. and maybe just the last one again on the margin. But, you know, it seems like maybe the environment in the second quarter was one where, you know, deposit costs started to rise in anticipation of a hike and banks were more willing to pay up for that, thinking maybe that we are going to get a hike with your balance sheet sensitivity a little bit on the asset side. You know, is it fair to think maybe if we do get that hike, that the environment might normalize a little bit and deposit costs may not rise as fast as loan yields and you get a little bit more benefit from a hike than what your stated sensitivity is. And I guess the flip side to that is if we don't get a hike, maybe the competition outweighs how you're thinking and the margin could decline. Is that fair or...

are you guys just kind of managing for I'm giving you an out here are you just just managing for the current environment that's a good question I think a couple things to think about is one the market is already pricing in the tightening so if the Fed were to raise rates we're going to benefit from that and we're already paying in other words for the tightening in the deposit side if somebody's going out and doing a one year CD for example because it's already expecting a 25 basis point increase so we've We would benefit from that because all the assets would reprice higher, with the exception of the fixed rate loans that aren't maturing or repricing. So, yeah, we would definitely benefit more. And I think we tried to show kind of the sensitivity on the deck on page seven. But we'd benefit roughly for 25 basis points, $2.1 million in rates up versus rates down of $1.6 million.

Yeah. And that sensitivity is soon.

Sorry, go ahead. Again, the deposit side is already starting to price it in, at least in the CD book. It's not in the money markets and now in savings. So I think we benefit.

Okay. Well, I appreciate the color. Thanks, guys.

Thank you. Your next call comes from the line of Brandon Rudd with Steven Zink. Brandon, your line is open. Please go ahead.

Morning. Thanks for taking my questions.

Hi, Brandon. Hi, Brandon. Good morning.

Maybe just one, most of an answer, but the success on the interest checking accounts, both on a period and an average basis, was there a specific initiative that helped drive that, or was that just run-of-the-mill business? You kind of fleshed out that increase on both, I guess, a sequential and year-over-year basis.

It was more commercial accounts that were just converting or consolidating from money market. They maybe had both categories, and they had moved to interest-bearing just for various reasons. Nothing that I would point to drove the increase other than just consolidation of accounts within the organization.

Okay, so then that explains the money market a little bit.

That's actually a really good question, Brandon, because that's usually not necessarily immediately, but that's usually a marker for when you see particularly corporate or companies doing that. It points to the fact that they're seeing or likely to see uses for that capital, and they don't want to have the restrictions that they have in a money market account relative to an interest-bearing checking account.

Interesting. Okay. Thank you for that. That was my question. Thanks.

Thank you. If you would like to ask a question, please press star 1 to raise your hand. Your next call comes from the line of Damon Del Monte with KBW. Damon, your line is open. Please go ahead.

Hey, good morning, guys. Hope everybody's doing well today. Just a couple of quick ones that most have been asked and answered. Tom, probably for you, the average securities increased again this quarter. Just kind of curious your thoughts on that going forward. Will future dollars be allocated to the portfolio, or do you expect to use excess liquidity to be deployed into loans?

Ideally, it's loans, Damon. Probably flat on the securities at this point, and clearly, given where we're close to $10 billion, I don't think we're looking to grow the portfolio at this point.

Okay, great. And then I don't think this was asked already, but regarding like the provision outlook and kind of balancing that with the reserve level, you know, I think, Alberto, I think you said net charge-offs should still probably be in that 30 to 45 basis point range or something in the near term. But, you know, as we think about the back half of this year and going into 2017, can we expect the reserve level to kind of drift a little bit lower as credit quality continues to strengthen?

I mean, it may. It may, Damon, but as you well know, it's going to be completely dependent on how actuals come in relative to the outlook. What I mean by that is you see a pick, you know, more loan growth, you know, the loan portfolio growth. We're obviously going to probation for that. I think that what you what you quoted me on in terms of kind of the short run kind of charge off, you know, expectation in the 30 to 40 basis point range that is that remains consistent. So just, you know, when you think about that math, just know that the variable that is harder to predict is is that loan growth, you know, that end end of period kind of balance. and the dynamics that that that plays into, you know, provisioning relative to relative to where charges are coming in. So hopefully that that gives you some color on that.

Yep. Yep. No, that makes sense. Thank you. And I guess lastly, the tax rate going forward, Tom, is something in the 20, you know, 25 percent range reasonable. Twenty five and a half.

Twenty five and a half. Seems reasonable.

Okay, great. That's all that I had. Thanks a lot for taking my questions today.

You bet, Eamon. Your next call comes from a line of Brendan Nozzle with HubT Group. Brendan, your line is open. Please go ahead.

Hey, just to circle back on this fee income outlook, I think, Tom, you said a range of $14 to $15 million for the third quarter. Totally get that gain on sales going to trend back to that 5.5 number on average. What are the other drivers of kind of getting into that lower range for next quarter, just as we work through the various line items?

Again, remember, fair market value of securities, was hired this quarter, and the servicing asset impairment write-down was lower. So we've been trending in that $14 million to $15 million range over the last six to eight quarters. So I think that's a good guide for us right now. We're still trying to grow our non-interest income. As we alluded to, wealth management continues to improve. Our customer swap business is helping us out, and we continue to try and collect fees where we can.

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

Great, Ben. Thank you. Before I wrap up, I'd like to recognize an important milestone for us here at Byline. The end of the quarter marked our 13th anniversary as Byline and and for a lot of people on the call, it was our ninth year as a public company, so thank you to all of you investors that have been investors with us across that nine-year period and certainly to all of the analysts on the call and their firms for covering us as a public company. We very much appreciate that. Please know that we want to also thank everyone who has been part of our journey and contributed to our success along the way. So with that, to everyone on the call, thank you for joining us today. We appreciate your continued interest in Byline and look forward to talking to you again next quarter.

This concludes today's call. Thank you for attending. You may now disconnect.