Byline Bancorp, Inc. (NYSE:BY) Q1 2023 Earnings Call Transcript

Byline Bancorp, Inc. (NYSE:BY) Q1 2023 Earnings Call Transcript April 28, 2023

Byline Bancorp, Inc. beats earnings expectations. Reported EPS is $0.64, expectations were $0.62.

Operator: Good morning, and welcome to Byline Bancorp First Quarter 2023 Earnings Call. My name is Glenn, and I will be your conference operator today. 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 : Thank you, Glenn. Good morning, everyone, and thank you for joining us today for the Byline Bancorp First Quarter 2023 Earnings Call. In accordance with Regulation FD, this call is being recorded, and is available via webcast on our Investor Relations website, along with our earnings release and the corresponding presentation slides. Management would like to remind everyone that certain statements made on today’s call involve projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed.

The company’s risk factors are disclosed and discussed in its SEC filings. In addition, certain slides contain and we may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. Reconciliation for these numbers can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release. Please note any guidance provided excludes the impact of the Inland Bancorp transaction. With that, I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Alberto Paracchini: Thank you, Brooks, and good morning, everyone. Thank you for joining the call this morning to review our first quarter results. We appreciate all of you taking the time to listen in. You can find the deck we will be referencing this morning on our website. And as always, please refer to the disclaimer at the front. Joining me on the call this morning are Chairman and CEO, Roberto Herencia; our CFO and Treasurer, Tom Bell; and our Chief Credit Officer, Mark Fucinato. Before we get into the results for the quarter, I want to pass the call on to Roberto to comment on the recent events that took place in our industry over the past month and a few other items. Roberto?

Roberto Herencia : Thank you, Alberto, and good morning to all. I would first like to start by acknowledging Ed Wehmer, Founder and CEO of Wintrust on his retirement effective May 1. Over the past 30-plus years, under Ed’s leadership, Wintrust has grown into a highly renowned institution, and we want to recognize the positive impact that Ed has had in the Chicago banking market during his time leading Wintrust, and is also a genuine and warm hearted human being who has been very generous with his time and is very active in philanthropy. He has been a friend and a supporter. And on behalf of the Board, we extend our profound appreciation to Ed and wish him well in his retirement. We also wish Tim Crane well in his new assignment.

Equally important, I also want to acknowledge the recent senseless act of violence, devastation and tragic loss that our friends at Old National suffered in Louisville, Kentucky, earlier this month. We know Jim Ryan, Mark Sander, and former CEO Mike Scudder well and can only imagine how difficult this has been. We would like to express our sympathy and on behalf of entire Byline team, our thoughts and prayers are with the affected individuals, their families and everyone at Old National. As Alberto said, we appreciate the time you dedicate to us during this quarterly call. Our team spends a good amount of time preparing for this exchange. And we do it lightly because it gives us another touch point to discuss results from operations, our outlook and market events.

What transpired this past month of March and early April was not business as usual for the industry, and frankly, no bank, whether or not we were experiencing deposit outflows. Hearing some bank executives described those weeks as a nonevent. That’s a way to say we’re fine was at best naive. The idiosyncratic risks associated with the 2 large bank failures and the differences between the 2 banks and a bank like ours and most other banks for that matter, has been well documented by now. We run a simple banking model. We are a community and relationship-based bank, serving small- and medium-sized businesses and consumers who live within the areas of our branches in Chicago and Milwaukee. Within that model, we provide sophisticated banking products and services with a well-trained, experienced and talented team of bankers and a very active and engaged Board of Directors.

We operate our model within a risk appetite statement approved by our Board of Directors, and we designed guardrails around that statement to measure and track items like cybersecurity, liquidity, loan and deposit concentrations, credit and capital stress testing, and actually, actually prepare for unusual events such as this one. This is, of course, a team effort at Byline, but this is supported by a robust enterprise risk management process led by our Chief Risk Officer and her vigilant and talented risk management group. The headline of the events which took place put into action our incident response team out of an abundance of caution. And that meant that we met multiple days — multiple times a day to track social media, customer behaviors, liquidity guidelines, et cetera.

It’s also meant we had the obligation to communicate with our customers proactively to educate them about the situation. All of these was done in a short period of time by a talented group of people we are proud to call Byliners. Since the formation of Byline 10 years ago, we have run a bank by this time with a strong governance by our Board of Directors, 1 of the most diversified loan books in the industry, let alone community banks below $10 billion, and a granular and well diversified deposit base, all anchored by a strong capital base. Our ratio of uninsured deposits to total deposits is well below the median for the industry and our peer group. So rather than say it was business as usual, we opt to give you a view of how we prepare for unexpected events such as this one, Rather than tell you it was a nonevent, we prefer to show you actual results.

Alberto and I and the rest of the team are proud to share the results of what we believe was a very strong first quarter. Alberto, back to you.

Alberto Paracchini: Thank you, Roberto. And now moving on to our results for the quarter. As usual, I’ll start by walking you through the highlights for the quarter before passing the call over to Tom, who will provide you with more detail on our results. Moving on to Page 3 of the deck. At last quarter’s earnings call, we spoke about being cautiously optimistic about 2023, notwithstanding a more challenging rate environment driven by persistently higher inflation and a more cautious outlook on the economy. We expect it to grow organically, continue to add talent to the organization and complete our merger with Inland Bancorp. As Roberto mentioned in his remarks, the failure of 2 banks with fairly idiosyncratic business models, shook the confidence in the system to its core and gave our industry its own version of March Madness.

Putting aside the basketball analogy, we responded accordingly by staying grounded with facts, proactively communicating with customers and employees and being on the lookout for opportunities arising out of the environment. In summary, and notwithstanding the operating environment, we were pleased with our results for the quarter as they reflect the resiliency of our business model and approach to the business. For the quarter, we reported net income of $23.9 million and EPS of $0.64 per diluted share. This was a slight decrease when compared to the previous quarter, but up 14% year-over-year. Profitability and return metrics were strong across the board. ROA came in at 132 basis points, while ROTCE was 16.2%. Pretax preprovision income was $42.1 million for the quarter, which put our pretax preprovision ROA at a strong 232 basis points, up 27 basis points both on a linked quarter and on a year-over-year basis.

Revenues came in at $91 million, a record level for the company and up 3% linked quarter. The increase in revenue was driven by solid interest income reflective of growth in earning assets and a rebound in noninterest income. On to the balance sheet. We saw continued growth in both loans and deposits. Loans increased by $75 million or 5% annualized and stood at $5.5 billion as of quarter end. This was the eighth consecutive quarter of solid loan growth and consistent with our guidance last quarter. The first quarter for us tends to be seasonally slower and notwithstanding the environment, we continue to see solid levels of business activity. Net of loans sold, we originated approximately $250 million in loans coming primarily from our leasing and commercial businesses.

Payoff activity increased this quarter and line utilization remained essentially flat at 55% from the prior quarter. We added some additional detail on line utilization trends going back to 2020 to provide you with context of what we’ve experienced recently and since the outbreak up of pandemic. On a side note, we prepared for, but did not experience any material changes in line utilization or customer draws as a result of the recent market stress. Our government-guaranteed lending business finished the quarter with $71 million in closed loan commitments, which, as expected, was lower than the fourth quarter. As an aside, I want to point you to some additional disclosures that we added to the slide deck, highlighting our deposit portfolio on Slide 7, and our CRE portfolio without particular focus on office on Slides 15 and 16 in the appendix.

Moving on to the liability side. First, with respect to deposits. Total deposits grew by $118 million or 8% annualized and stood at $5.8 billion as of quarter end. The behavior of our deposit portfolio during the quarter was, for the most part, typical of what we would normally see during the first quarter of the year. Seasonal outflows, particularly with commercial customers, driven by taxes and distributions to business owners are to be expected, and this quarter was no different. What was atypical was the volatility created by the failure of the 2 banks, coupled with the amplifying effects of media and a competitive environment that changed in a matter of days. Fortunately, our bankers, as usual, were up to the task. In the days after March 8, we spent a great deal of time, as Roberto noted, reaching out to customers to explain what was happening, point out the material differences between our bank and those in the middle of the crisis, and to reinforce the fact that we stood ready to support them as we normally do on a day-to-day basis.

We also received inquiries from both existing customers and prospects wanting to expand relationships or open new accounts. Some of these resulted or will result in new accounts and relationships, on others we passed. During the quarter, in addition to seasonality and market-related stress, we saw a shift in our deposit mix, which Tom will discuss in more detail, but which is consistent with the rising rate environment, what you would expect to see when deposit competition increases and customer behavior changes. Deposit cost for the quarter came in at 115 basis points, an increase of 42 basis points from the prior quarter. On a cycle-to-date basis, deposit betas for both — for total deposits and interest-bearing deposits stood at 23% and 35%, respectively.

Turning to profitability. Our margin continues to remain strong, both in absolute terms and relative to peers and stood at 438 basis points as of quarter end, reflecting a nominal decline of a single basis point from the prior quarter. Noninterest income came in at $15.1 million, up 31% from last quarter. which, as we previously reported, had been impacted by a negative fair value mark on our servicing asset. On an operating basis, meaning if you strip out the impact of fair value marks in our servicing asset, noninterest income remained consistent between quarters. Expenses were well managed despite cost pressures stemming from higher inflation and came in at $48.8 million. Our efficiency ratio stood at 52.1%, down both against the previous quarter and on a year-on-year basis.

Asset quality remained relatively stable for the quarter, and we continue to be vigilant and proactive with respect to credit given the uncertainty in the environment. Credit costs for the quarters in terms of provision expense came in at $9.8 million and included net charge-offs of $1.2 million or 9 basis points. The resulting net ACL build was driven primarily by 3 single name exposures, changes in economic assumptions and growth in the portfolio. NPLs increased 18 basis points to 84 basis points, and the allowance for credit losses ended the quarter at a strong 164 basis points of total loans. Liquidity and capital levels remained strong, with a CET ratio of 10.3%, total capital of 13.2% and TCE of 8.7% as of quarter end, consistent with our targeted TCE range of 8% to 9%.

In summary, we remain focused on growing our capital base, maintaining a strong liquidity profile and executing our core strategy. With that, I’d like to turn over the call to Tom, who will provide you with more detail on our results.

Thomas Bell : Thank you, Alberto, and good morning, everyone. I will start with some additional information on our loan and lease portfolio on Slide 4. During the first quarter, we had solid loan growth as total loans and leases were $5.5 billion at March 31, an increase of $75 million from the prior quarter. Payoffs were elevated in the first quarter, coming in at $231 million compared to $174 million in the fourth quarter. Looking ahead, our loan goals guidance is mid-single digits for the year. Turning to Slide 5, touching on our government-guaranteed lending business. As part — as Mark — I’m sorry, — at March 31, our on-balance sheet SBA 7(a) exposure was $476 million, down $3 million from the prior quarter, with approximately $100 million being guaranteed by the SBA.

The U.S. on balance sheet exposure was $62 million, down approximately $1 million from the end of the prior quarter, of which $22 million is guaranteed. Our allowance for credit losses as a percentage of unguaranteed loan balances increased to 9.3% compared to 8.9%. The increase was primarily driven by specific reserves for the individually assessed loans. Turning to Slide 6. Total deposits stood at $5.8 billion, increasing 2% from the end of the prior quarter. Noninterest-bearing DDA represents a healthy 34% of total deposits. Commercial deposits account for 47% of total deposits and represents 76% of all noninterest-earning deposits. We experienced good deposit trends prior to the bank failures. During the quarter, we saw seasonal outflows from tax payments distributions by business owners as well as outflows from a handful of customers that were carrying higher-than-normal balances prior to the liquidity event.

Given our diversified deposit base and lower than industry and peer uninsured deposit ratio of 28%, we feel confident knowing that our current available liquidity and borrowing capacity can comfortably cover our uninsured deposit base. Furthermore, our average balance per retail customer sits at $24,000 and approximately $115,000 for commercial clients. As anticipated, we experienced some changes in our deposit mix during the quarter to prevailing market rates, competition and higher-yielding alternatives. Total deposit betas moved higher as expected. Our current quarter betas stood at 23%, below the 31% level experienced during the last cycle. As we mentioned in our prior earnings calls, our experience in rising rate environments is to expect changing customer behavior, increased competition for deposits leading to mix shift within the deposit base.

That said, we remain focused on defending and growing our deposits portfolio. Turning to Slide 7. We show our granularity of our deposit franchise, broken down between consumer and commercial categories. 92% of consumer deposits and 50% of commercial deposits are FDIC insured, which results in 72% of total deposits being insured by the FDIC. Turning to Slide 8. Our net interest income was $76 million for Q1, down 1% from the prior quarter. The reduction was driven by several factors. Day count floating rate index average came in lower than prior quarter and the deposit mix changes. With market expectations for rates to decline in the future, and our asset-sensitive profile, we started a program to reduce our interest rate risk sensitivity.

First, we terminated $100 million of forward starting pay fixed swaps at a pretax gain of $5.7 million. We will recognize the gain through the P&L starting in the second quarter. Second, we executed $100 million in received fixed swaps effective April 1. On a GAAP basis, our net interest margin was 4.38%, down 1-basis-point from the prior quarter. Earning asset yields increased a healthy 41 basis points, driven by an increase of 52 basis points of loan yields at 6.83%. Excluding the impact of the Inland transaction, we anticipate that our net interest income for Q2 will be flat quarter-over-quarter. Turning to noninterest income on Slide 9. Noninterest income increased $3.7 million or 32% linked quarter, primarily due to growth in most fee income categories as well as a $656,000 improvement in our loan servicing asset valuation.

We sold $72 million of government-guaranteed loans in the first quarter compared to $86 million during the fourth quarter. The net average premium was 8.4% for Q1, higher than the fourth quarter. Our pipeline and fully funded government guaranteed loans is forecasted to be consistent with Q1 results. We expect gain on sale premiums in Q2 to be consistent with Q1. Turning to noninterest expense trends on Slide 10. Our noninterest expenses was $48.8 million in the first quarter, a 3.4% decrease from the prior quarter. The decrease was attributable to 2 factors. First, we saw a decrease of $1.4 million in salary and employee benefits, mainly due to lower incentive compensation. Second, we saw a decrease in other noninterest expense due to a $480,000 leasehold improvement charge taken in the previous quarter.

This was partially offset by an increase in occupancy and equipment expenses and an increase in costs related to Inland Bancorp merger. We achieved positive operating leverage in Q1 despite the inflationary environment, and we continue to remain disciplined on expense management and maintain our guidance of $49 million to $51 million. Turning to Slide 11. The allowance for credit losses at the end of Q1 was $90.5 million, up 10% from the end of the prior quarter. In the first quarter, we recorded a $10 million provision for credit losses compared to $6 million in the fourth quarter. The reserve build was largely driven by a $6 million increase in individually assessed portfolio and macroeconomic factors in the collectively assessed portfolio as well as growth in the loan and lease portfolios.

Net charge-offs were $1.2 million in the first quarter compared to $3.2 million in the previous quarter. Our nonperforming assets — total assets increased to 67 basis points in Q1 from 55 basis points in Q4. And total delinquencies were $14.4 million on March 31, a $1 million decrease linked quarter. Turning to Slide 12. We believe our liquidity remains strong. We ended the quarter with approximately $285 million in cash and cash equivalents, and our available borrowing capacity stood at $1.8 billion. Our uninsured deposit ratio of 28% trends well below all peer bank averages, and we have 120% coverage on our uninsured deposits. In mid-March, as a cautionary measure, we added $235 million in brokered CDs to add to our liquidity position and prefund future 2023 maturities.

In addition, given the recent events, we proactively tested our best fund lines and performed a discount window test borrowing for $1,000 for a single day. We made $222 million of securities available to the new Bank Term Funding Program as part of our liquidity management efforts. Turning to Slide 13. Our capital position remains strong. For the first quarter, capital ratios will — were up compared to the previous quarter. Our CET1 stood at 10.3% and our TCE was 8.66%. In addition, if we monetize the entire investment portfolio, the bank would still be well capitalized by all regulatory capital measurements. Our capital levels are strong and typically above regulatory requirements. As we look forward to the rest of the year, we believe we are well positioned to grow our new customer relationships and support existing customers.

With that, Alberto, back to you.

Alberto Paracchini: Thank you, Tom. Moving on to Slide 14. As you can see, our strategy does not change much, and we remain centered on executing it. Moments of market disruption present opportunities to take share, to get new relationships and hire grade talent. On the last point, we recently added several bankers to 1 of our lending businesses. With respect to the Inland transaction, we have received all the requisite regulatory approvals to complete the merger and expect to close the transaction at the beginning of June. Completing the integration and ensuring a smooth transition for customers and colleagues is a top priority for the remainder of the year. In closing, I want to take a moment to thank our employees for all they do and for stepping up on a daily basis to support our customers and our business. With that, operator, let’s open the call up for questions.

Q&A Session

Operator: Our first question comes from Ben Gerlinger from Hovde Group.

Ben Gerlinger : First compliments to Brooks and the team for the slide deck, adds a lot of great information so it’s really helpful. Just had 1 quick cleanup before I get to the bigger picture. Guidance was for roughly flat linked quarter fee income. Was that for — is that the GAAP perspective, i.e., inclusive of the asset revaluation and the fee on spreads?

Alberto Paracchini: So good question, Ben, and glad that you brought this issue up. So we tend to — we run the business looking at the fair value mark on the servicing asset. I mean that servicing asset is not a very large component, but it does, as you know, prepayments change, discount rates change, we tend to really kind of ignore the volatility associated with that. I know some people tend to include it. And as part of operating results, we do not. So we kind of look at the business excluding that volatility. As you know, in the fourth quarter of ’22, we had a pretty negative fair value mark. It was about a negative $3.5 million, which depressed GAAP noninterest income figures. This quarter, we had a fairly benign mark, it was positive by about $656,000.

So when we run the business, we kind of ignore that. So if you strip that out on an operating basis, ignoring that fair value mark, that noninterest income number, for the last 2 quarters, has remained pretty steady. So I think when we talk about it, it’s more around kind of looking at that fair value mark as, look, we’re going to have to mark-to-market this on a quarterly basis. Discount rates change, prepayment speeds change. And like you would if you had a large residential MSR portfolio, you kind of strip that noise out of the results. So hopefully, that answers your question.

Ben Gerlinger : Got it. Yes. No, it does. When you guys think about the margin going forward here, it’s good — I think you can make correct actions to kind of mitigate against volatility up or down. Just curious if you had like a spot rate or anything that — towards the very end of the quarter that you might guide towards, I know that you’re a little asset sensitive, but that’s on a static balance sheet. So any clarity for kind of the next, I don’t know, 90 days is helpful because we’re in a unique environment here.

Thomas Bell : Ben, it’s Tom. Normally, we don’t give guidance on NIM, but we do give guidance on net interest income, and we’re always trying to grow our net interest income, and we’ve given guidance to being flat. Obviously, there’s a lot to forecast the net interest income given what is the Fed going to do, for example, there’s a lot of volatility in interest rates depending on new production coming into the bank. But continuing to grow our net interest income is our focus. And right now, just given where rates are, we think that we’re going to be flat for the quarter.

Alberto Paracchini: Yes. Ben, if I could add to that. When we look at our margin, obviously, on absolute terms, on a relative basis, as you well know, I mean, it’s a pretty healthy margin level. I think as Tom alluded to, it’s really hard at this point when you look at kind of the differences between the expectations that are out there looking forward out into the latter part of the year between the market, between the guidance that the Fed is giving. So I think you said it well when you said there’s a lot of volatility and uncertainty with that, and we feel that, too. So it’s — we’re being cautious. We’re obviously — as Tom said in his remarks, we’re really preparing for at some point or trying to protect for at some point for rates coming down, and we took some action like we did in anticipation of rates going up to protect ourselves. But on a general basis, I think Tom’s point on net interest income is spot on.

Ben Gerlinger : If I could just sneak 1 more in. In the press release, it said — it might be more syntax than anything, but it said that the provision was for a couple of individual loans growth and also CECL economic outlook. So the latter 2 makes sense to me. And then when I look at credit, it seems like a loan or 2 are coming through the pipe here. So when you think about the provision going forward, do you think you’re fully reserved for those? And then is it kind of more just growth in economic outlook? Or any clarity on maybe potentially kind of loan types that might be a little bit more cautious on?

Alberto Paracchini: Yes. So first of all, our reserves are always going to be adequate as of at all times. So we’re — on the 3 single name exposures that I mentioned, I think as we have stated, and as you guys know from just over the years in terms of what our approach is, we’re going to be super proactive. And in this case, 3 single names, I mean, these names were all paying. We were anticipating that they were going to have some trouble at maturity so we are going to be aggressive in classifying them as nonperformers and proceeding to working them out of the bank in the normal course of business. I can tell you that 1 of the credits that came in is already out, so 2 remain. And again, it’s — these were not related — different parts of the business.

I don’t think there’s anything systemic surrounding these. These are each unique credit events pertaining to the particular cases here. But I think, first and foremost, we are always going to be, particularly in an environment like the 1 that we’re in, there’s still the sentiment about a potential slowdown, a potential recession. We surveyed the portfolio actively in normal course, and we want to stay ahead of any type of deterioration in the portfolio, and we will be always proactive in taking action. So I think we view this as this is just simply normal course, and we’re going to proceed accordingly. I think to your second point, in terms of areas in the portfolio. So hopefully, we gave you some detail and some additional disclosure on our CRE exposure and our office categories within that exposure.

I hope you guys find that helpful. But, in general, we’re always going to look accordingly, Ben. We actively do internal portfolio reviews. We’re constantly updating. Our Chief Credit Officer is very much on top of surveying the portfolio regularly. And at this point, Mark is here, he can comment on this further. But at this point, we feel pretty good about where credit stands as of the end of the quarter. Mark?

Mark Fucinato : I mean, we spend a lot of time looking at our loan inventory as I refer to it. We do targeted portfolio reviews and specific asset classes. We have — literally, every day, we’re looking at information from our loan book, whether it’s payment schedules, delinquencies, upcoming maturities. And it is something we have as a practice, and we’ll continue to do that. Are we going to be more cautious on certain things? Absolutely, given what’s going on. But at the same time, we’re not seeing any trends or any specific classes of assets that are moving downward at this time. These are very unique singular type of situations that arose during the first quarter that we decided to move to not performing and set up the appropriate reserves.

Alberto Paracchini: And the last thing I would add to that, Ben, is that we remain open for business and looking at opportunities, particularly in times of stress and periods like these, it usually yields to better structure, better pricing, higher quality sponsors, et cetera. So I think, hopefully, that answers — broadly that answers your question.

Operator: Our next question comes from Damon DelMonte from KBW.

Damon DelMonte : Just wanted to start off with the outlook on loan growth. I think you commented mid-single digit. And I was just kind of wondering, after this quarter’s payoff activity, kind of how that factors into the mid-single-digit growth? Do you expect that to slow and originations are going to be a little bit slower, so net-net, you get there? Or do you expect origination activity to be strong and payoffs to remain elevated, and net-net you still get to that like the mid-single-digit growth?

Alberto Paracchini: Yes. So a couple of things on — let me break that question in 2 ways, Damon. First, as we alluded to at the start of the call. So the kind of the guidance and the view that we’re giving you is excluding the Inland transaction. So we’re going to close that transaction here at the beginning of June, and then we’ll go from there. So you’re going to see that for the first time reflected in our results at the end of the second quarter. And then we’ll talk on a consolidated basis on that kind of going forward during our second quarter call. But to your question, we’re seeing — our pipelines are still what I would call pretty healthy. Are they at the levels that they were at this time last year? I think the short answer is no.

But we’re still seeing pretty good business activity across the board. So we feel good in terms of, call it, the general level of originations. Some parts of the business are slower than others. So for example, I think we’ve commented on this in the past, real estate is a little slower, both on the new origination side as well as on the payoff activity. I think sponsors are adjusting to an environment of higher rates, higher cap rates. And I think you’re seeing the effect on both sides as you would expect. So that will have an impact on payoffs. I think with what we’re saying in terms of the guidance, as you know, our guidance in the past has been kind of mid- to high single digits. I think we’re just simply clarifying that to say we think it’s probably going to be on the lower end of the range.

What the ultimate mix is between — on a net basis, it’s always really hard to guess because of payoffs. But I think at this point, what we’re kind of comfortable with is that idea that’s probably going to be towards that kind of mid-level number of around 5% or so.

Damon DelMonte : Got it. Okay. That’s helpful. And then with respect to the Inland deal, when it closes, just kind of given the frenzy in the market, one of the attractive qualities of this transaction was the depositor base. Is there any concern that you might have some accelerated attrition on that side when those customers come over? Or do you guys still feel good about kind of what you’re bringing over?

Alberto Paracchini: We feel good about the transaction. We feel good about the customer base, Damon. I mean, as you know, Inland is — today is still a private company, so we’d rather not comment on the specifics, but we’ll be able to comment on that after we close the transaction this coming quarter.

Operator: Our next question comes from Nate Race from Piper Sandler.

Nate Race : Just want to maybe zoom out on the margin outlook a little bit. Assuming we get a Fed rate hike in May, and maybe it’s a higher for longer rate environment thereafter, do you guys think — and I appreciate you guys don’t give specific guidance around the NIM. But do you guys think it’s possible to maintain the margin above 4% over the next few quarters?

Alberto Paracchini: I don’t — Nate, I don’t think we’re going to — I mean, I think you’re asking a theoretical question with some assumptions around rates and so forth. I think we’ll give you maybe a theoretical answer to that. And it’s — as you know, it’s hard for the reasons that you stated. Higher for longer, I think just for the industry in general, I think you’re going to get to a point like you get to, and we have seen in previous interest rate cycles, once you start getting to kind of the peak of where the tightening cycle is going to get to and the Fed will come to a halt or the upcoming hikes are going to be smaller relative to what’s been done cumulatively, obviously, there’s going to be a lag with the repricing of the processes, right?

You have liability, you have CDs that are repricing over time. So that’s going to be a lag. And that’s going to, at some point, eat into the margin, no question. I think that’s a broad statement for everybody. I think it would be silly for us not to think that we would be immune from that. That being said, I think also that at some point, the markets, and I think you’re seeing it today, particularly when you look at the discrepancy between what market implied rates are forward vis-a-vis kind of what Fed — kind of where the Fed has it. And that’s a big difference. I know some other institutions are kind of giving a lot of caveats around they’re assuming that rates are going to decline later in the year and then correspondingly, maybe the pressures on funding are going to subside.

I don’t — we’re not good enough to comment on that. I think what we would say is, I think we’re well positioned, irrespective of what the environment is. And as Tom alluded to in his comments, at some point, the cycle is going to turn, and I think we’re taking precautions to prepare ourselves for that. Tom, I don’t know if you want to…

Thomas Bell : I think that was well said, Alberto. We’ve done a few balance sheet hedges here to protect us on rates down. We still would probably do more in the future, but we’ll see. We have to bring in Inland and then look at that risk profile. So I think we still have a very strong margin. And I think we got to — we need to continue to remind ourselves how good our margin really is. We’re top quartile. And we’re going to do whatever we can to try and protect that margin. And — but we’re more focused on net interest income growth or stability around those numbers.

Nate Race : Understood. That’s helpful. And just kind of thinking about the deposit growth outlook from here. Obviously, you guys had some outflows in noninterest in the quarter. I guess how much more of that do you think is yet to come? And how much more of a mix shift change in deposits can we expect as you guys continue at least from what it seems, be willing to grow CDs at this point to support kind of that unchanged loan growth outlook?

Alberto Paracchini: I think so, Nate. I think — look, it’s a higher rate environment. And I think we’ve — in previous quarters, I think we commented on the fact that everybody seems a lot of our — a lot of banks in the industry were so focused on holding back betas and artificially keeping costs down simply because there was excess liquidity in the system. And as that started to change and liquidity started to get drained as a result of QT, as a result of the reserve repo facility, et cetera, it was going to get tighter. And I think, finally, I think the circumstances here in March, I think, pointed out that, hey, everybody now is paying close attention to the fact that it’s really hard to keep interest rates being offered to people at levels that are 200 to 300 basis points, if not more, compared to market alternatives.

And I think depositors are — have woken up to that fact. And I think the reaction that you’re seeing is the industry has finally kind of said, we are going to have to be more responsive if we want to keep our deposit base, and we want to keep customers banking with us, in a lot of ways, we’re going to have to look at products that offer higher rates of return. Otherwise, the funds are going to walk out to another bank or they’re going to go to other higher-yielding alternatives. And I think, further — I think if you go back prior to the great financial crisis, and you look back at what deposit compositions historically have been for banks in periods of higher interest rates like they are now, I think the deposit compositions are going to reflect the fact that you are — the mix of products is likely going to be different.

How long are rates going to stay up? How — kind of where do we go here in terms of the outlook for rates? I think that will dictate kind of the changes in mix and how do we revert back to the way things were, let’s say, right before the financial crisis? Or are we going to settle somewhere in between of kind of where we were recently and that point, I think that remains to be seen. But I think it’s — I think we have to be realistic to the fact that there’s probably going to be some mix changes that are going to occur broadly in deposit portfolios.

Nate Race : Understood. That makes sense. And maybe just going back to credit, and I appreciate the comments earlier that seemed perhaps more geared towards the conventional portfolio. But as we — as you guys look at kind of the credit metrics across the SBA book, it looks like those — or that portfolio contributed a large chunk of the charge-offs here in the first quarter. What do you guys see more broadly in terms of kind of criticized classified trends within that portfolio specifically? We saw earlier in the earnings season, another larger prominent SBA lender has some credit issues. Are you guys seeing any major upticks in delinquencies or negative migration across that?

Mark Fucinato : We have not seen that in the SBC book. No major jumps in delinquencies. They continue to work and monitoring them — they literally monitor them on a regular basis every week. I’m in those meetings myself. And they did have some new deals that popped up during the quarter, but they also had some deals that got resolved during the quarter that were previously recoveries of charged-off loans. So I anticipate that to continue. I’m not seeing, again, a trend or a particular asset class in their book that is causing any problems.

Nate Race : Great. If I could just ask 1 last 1 on expenses. I appreciate you guys are maintaining the guidance that was provided last quarter. I guess in terms of the drivers for that, I mean, are you guys anticipating some additional opportunities in commercial RM hires over the course of this year? Or do you have some new projects planned that would drive the run rate up from what appeared to be a pretty strong cost quarter here in 1Q?

Alberto Paracchini: So, Nate, as I mentioned earlier, so we just added several bankers to our ranks, and that was an opportunistic hire like we’ve done in the past. That will have some impact, but we should be able to — we should be able to absorb that within the guidance that we’ve given. And then, going forward, obviously, post — once we are consolidated with Inland, I think we’ll probably — Tom will probably kind of give you a better sense on a consolidated basis in terms of what that guidance is going to look like.

Nate Race : Okay. Sounds good. I apologize. I didn’t catch that comment earlier about some hires recently.

Alberto Paracchini: Yes.

Operator: Our next question comes from Terry McEvoy from Stephens.

Terry McEvoy : I guess first off, Roberto, I really appreciate your comments on our friends in the Chicago banking circle. It’s small world, and it’s nice to set back every now and then out of our spreadsheets and ticker symbols and make this personal. So I appreciate that. And moving on to a question, I’ll ask going into an analyst question. Maybe, Tom, the cash from the securities portfolio, that $130 million, do you think that will fund loan growth over the next 3 quarters? If not, what are new loan yields that you see in the marketplace because I think they did fall quarter-over-quarter?

Thomas Bell : Yes. Terry, that’s a good question. I mean, currently, we’ve been letting the cash flows run to support loan growth. The risk-adjusted returns on the loans are certainly much higher than security purchases. So yes, that is still the plan and select cash flows run off and obviously subject to the acquisition of Inland Bancorp, the balance sheet will be bigger and a little bit different. So — but yes, the plan is to use those cash flows to fund loan growth. Again, loan yields, I think we’re still seeing really good pricing on loan yields, and it’s just depending on which loans are maturing, et cetera, during the quarter that’s kind of brought those yields into a different category.

Alberto Paracchini: Terry, also to add, Tom, and maybe you can comment a little bit. Still you have the effect of the lag on the quarterly reset.

Thomas Bell : Yes. That’s right.

Alberto Paracchini: So just keep that in mind on the SBA side.

Terry McEvoy : Okay. And then maybe on the deposit side, are you seeing any cooling down from March in terms of promotional deposit activity and overall competitive pricing in your markets?

A –Alberto Paracchini: No.

A –Thomas Bell : Yes. It’s very competitive.

A –Alberto Paracchini: Very competitive.

Operator: We have our next question comes from Brian Martin from Janney.

Brian Martin : Just 1 question on, I guess, maybe for Mark. Just the — I appreciate the color on the added disclosures on the office. Can you remind us on Inland what their exposure was just in general, broadly where the — on that office exposure is just kind of real estate?

Mark Fucinato : Yes. We’re not allowed to kind of discuss the Inland asset classes at this point in time. As you know, they’re private, and we’ve been working closely with them, but I can’t tell you anything at this point in time.

Alberto Paracchini: Yes. We’ll be better — we’d be happy to give you that what it looks like on a — at the end of the second quarter once we have them consolidated into our results.

Brian Martin : Okay. And how about just — Mark, just on the criticized trends, I think there was a question about the SBA, but just broadly for the entire portfolio, when we see the numbers come out, how did the criticized trends trend this quarter relative to where they had been?

Mark Fucinato : Criticized actually dropped this quarter from year-end. Again, we had some resolutions of some criticized assets that occurred during the quarter. The NPL uptick was, as we mentioned before, those 3 specific singular deals that impacted the NPLs. But overall, the criticized ratio went down quarter-over-quarter.

Brian Martin : Okay. And in your assessment today is kind of the biggest area of risk, I mean, it looks like the office exposure, I mean, relative size is certainly relatively small and diversified. But as far as where are you seeing — I guess, kind of where you see the biggest risk in the portfolio today, can you kind of just give a high level of view of where you’re more mindful of today given the circumstances in the market?

Mark Fucinato : Yes. Again, I don’t see a particular asset class. With anything in commercial real estate at this point, just like anybody else in the market here, we’re being cautious about what we see, what we do. We’re mindful of upcoming maturities. We’re focused on collateral values. We’re also focused on — more than ever on who we’re doing business with, what’s the capability of the sponsors, whether it’s in commercial real estate or any of our loans? What’s their ability to step up if there’s an issue with their business or their property? That’s kind of been our focus is, again, we’re lucky not just to have good underwriting and credit metrics. We’ve got great relationships with our customers. So we know if something is going to happen in the near future or down the road that we’re talking about with them early. I think that’s part of the key to our success.

Brian Martin : Okay. And just last 2. Just with regard to the SBA business, I mean, it looks like the margins have ticked up a little bit this quarter. I think the volume was a little bit lower. But just in general, anything consequence change-wise we should think about over the next couple of quarters that moves that number — moves either of those numbers significantly 1 way or the other?

Thomas Bell : No, Brian. I think — I mean, we’ve given guidance that we think flat quarter-over-quarter here. And we’ll just have to see what happens with the Fed. But obviously, there’s a lag in the repricing and then interest rates are going to be higher and they can be towards that 11%. So — but we’re still trending at the pace we’re at, which is probably lower than what we probably would have normally trended at. So — but stable for now.

Brian Martin : Okay. And then last 1 was just on the buyback. I guess can you comment about just how you’re thinking about capital here and just the buyback perspectively?

Alberto Paracchini: Yes. So as you know, we have a transaction with Inland so we haven’t really been in the market. We’re obviously going to issue shares as a result of that, Brian. So I think in terms of capital priorities, still, it’s really, first and foremost, continue to support the growth in the franchise, the dividend. M&A., obviously, we’re doing a transaction. We still think that there will be opportunities there. And then as we’ve stated in the past, we kind of used the buyback as a kind of like that valve that we can tune up or down, depending on if we have immediate uses of capital or have excess capital and there’s ways that we can kind of return it back to shareholders. So no change really in that regard.

Operator: We have a follow-up question from Ben Gerlinger from Hovde Group.

Ben Gerlinger : A quick follow-up. Just kind of strategy oriented with Inland now basically a month away or so from closing, when you think about the integration, I think, at least in my notes you remark that the cost savings kind of fall to the bottom line. With that said, when you think about Byline pro forma, and you guys have always kind of been a tech focus, but also opportunistic hire and leading rather than playing defense, is there any opportunities that we could see like a reinvestment of both savings? Or should we still expect them to fall to the bottom line?

Alberto Paracchini: I still think we’re kind of on the camp, Ben, of what we stated previously. I don’t think there’s any change on that. I think the only thing I think we would say at this point, if there was a change, I think we would obviously speak to it at that appropriate time in the future. But as of right now, I think we’re viewing the transaction the same — in the same way as we did when we announced it.

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

Alberto Paracchini: Okay. Great. Thank you, operator. So thank you for joining the call today and for your interest in Byline. I’m going to pass the call over to my colleague here, Brooks, because he’s got some reminders for all of you. But from all of us, again, thank you for your time this morning, and we look forward to speaking to you again next quarter. Brooks?

Brooks Rennie : Yes. Thank you, Alberto. For investors, this quarter, we plan on attending the Stephens Chicago Bank Conference on May 11, located here in Chicago. And then in addition, earlier this week, we probably released our inaugural ESG report. This report provides information on how we operate our business, which we believe is as important as what we do. As we look into the future, I am excited to see how our ESG efforts evolve. Byline’s leadership looks forward to engaging with each of you and to seeing the values and the priorities detailed in this report continue to be a guiding light and a valuable part of Byline’s customer and employee-centric culture. Byline’s ESG report can be found on our ESG website at bylinebancorp.com in our Investor Relations section. And with that, that concludes our call today. We’ll talk to you next quarter. Thank you.

Operator: Thank you. Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect your lines.