Byline Bancorp, Inc. (NYSE:BY) Q3 2024 Earnings Call Transcript

Byline Bancorp, Inc. (NYSE:BY) Q3 2024 Earnings Call Transcript October 25, 2024

Operator: Good morning, and welcome to Byline Bancorp Third Quarter 2024 Earnings Call. My name is Kate, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer period. [Operator Instructions] 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, Kate. Good morning, everyone, and welcome to Byline Bancorp’s third quarter 2024 earnings conference call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and the corresponding presentation slides. As part of today’s call, management may make certain statements that constitute projections, beliefs or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are 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 for each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release. As a reminder for investors, this quarter, we plan on attending the Hovde [ph] Financial Services Conference and the Piper Sandler East Coast Conference. With that, I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Alberto Paracchini: Thank you, Brooks. Good morning, everyone, and thanks for joining us today to go over our third quarter results. With me this morning are Roberto Herencia, our Chairman and CEO; Tom Bell, our CFO; and Mark Fucinato, our Chief Credit Officer. Before we get into a review of our results for the quarter, I would like to pass the call on to Roberto for his comments. Roberto?

Roberto Herencia: Thank you, Alberto, and good morning to all. Our performance this quarter was once again solid across the board with strong profitability metrics, several of which continue to rank top quartile among our peer group. We’re proud to continue to deliver strong results. They showcase the consistency and resiliency of the franchise and our business model. We believe the marketplace in time will reward a franchise with these attributes and prospects with a premium valuation. We’re also excited about the announced merger with First Security, which Alberto will touch on in a minute. This is yet another disciplined merger with a quality group of shareholders and within the merger metrics we have had in place since we started Byline back in 2013.

We continue to feel excited and optimistic about our ability to build out a preeminent commercial bank in Chicago. The Chicago banking market continues to be our kind of market, rich with opportunities to gain market share in the spaces we know well and punch above our weight. As we said before, we’re keenly focused on being home to the best commercial banking talent in town. We recently were recognized with two new workplace awards. Chicago’s Best Workplaces for 2024, ranking Byline as one of the Top 25 Workplaces in the City by the Chicago Sun Times and Best Workplaces in Illinois by Best Companies Group and the Illinois Society for Human Resources Management. These awards are in addition to the award from U.S. News & World Report as one of the Best Companies to Work For in the Midwest that we received earlier this year and we shared on our last call.

We’re thrilled and humbled at the same time to receive these awards in recognition and celebration of our people and the culture we have built at Byline. The awards, which are significantly driven by employee feedback, demonstrate that the investments we’re making in employee development, inclusion, competitive compensation and benefits are making an impact indeed. With that, I’m delighted to pass the call back to Alberto.

Alberto Paracchini: Excellent. Thank you, Roberto. In terms of the agenda this morning, I will start with some comments and highlights for the quarter, Tom will follow and cover the financial results in more detail and I’ll come back to wrap up before opening the call up for questions. As a reminder, you can find the deck we’re using for today’s call on our website. And as always, please refer to the disclaimer at the front. Let me start by saying that we are proud of our overall performance and results for the quarter. Aside from the continued strong financial performance of the company, which I will get to shortly, we also announced a transaction with First Security Bancorp here in Chicago. The transaction will add approximately $355 million in assets, $201 million in loans, and importantly, $323 million in deposits, of which we consider 96% to be core.

We believe the transaction is financially attractive, as reflected by minimal tangible book value dilution, a short earn-back period, EPS accretion and return in excess of our cost of capital. Furthermore, the transaction is in line with our track record of executing franchise-enhancing M&A opportunities that are consistent with our strategy of becoming the preeminent commercial bank in Chicago. I’d like to take this opportunity to welcome First Security employees and shareholders that are on the call this morning. And we look forward to completing the transaction in the first half of 2025. Moving on to our results, starting on Page 3. For the third quarter, we reported net income of $30.3 million or $0.69 per diluted share on revenue of $102 million.

Excluding transaction-related charges, net income was $30.7 million or $0.70 per diluted share. Turning to profitability and return metrics. They also came in strong with an ROA of 129 basis points and a return on tangible common equity of 14.5%. The lower ROTCE this quarter compared to last quarter was driven not by declining profitability, but rather by growth in our capital base, stemming from retained earnings and AOCI recapture. Our pre-tax preparation income set a new record for the company at $47.5 million, resulting in pre-tax preparation ROA of 202 basis points, marking the 8th consecutive quarter of that metric exceeding 200 basis points. Total revenue increased to $102 million, up $2.5 million for the quarter. The increase was driven by higher net interest income stemming from higher average earning assets, which offset a decline in the margin as expected.

Non-interest income increased to $14.4 million, driven by a lower fair value mark on our servicing asset and increases in other fees. Expenses, excluding transaction-related charges, came in at $53.9 million and continued to remain well managed for the quarter. The ratio of operating expenses adjusted for transaction charges to average assets declined 5 basis points to 2.29% from the prior quarter. As far as the margin is concerned, which Tom will cover in more detail shortly, we saw a 10 basis point decline to 3.89% for the quarter as expected. That said, excluding accretion, the margin compressed by only 6 basis points. Notwithstanding, earning asset growth drove net interest income higher for the quarter. Lastly, our efficiency ratio stood at 52%, remaining stable on a quarter-on-quarter basis.

Moving on to the balance sheet. Loans remained relatively flat at $6.9 billion. Higher pay-offs of acquired loans towards the latter part of the quarter impacted end-of-period balances. We made good progress on reducing non-core loans in the portfolio coming from prior acquisitions. You’ll notice that we carried higher cash balances at quarter end, which bodes well going forward as we deploy that cash into loans. That said, average balances grew modestly for the quarter. We anticipate loan growth for the rest of the year to be in the mid-single-digit range. Business development activity remained healthy, driven by commercial and leasing teams and our government-guaranteed lending business also had a good quarter with commitments closed totaling $114 million.

Shifting on to the liability side. Total deposits stood at $7.5 billion and grew by $151 million or 8.2% annualized from the second quarter. In prior calls, we’ve discussed our desire to bring down the loan-to-deposit ratio to plus or minus a target level of 90%. We made good progress on that front with the ratio declining to 92% from the second quarter and it’s down 319 basis points on a year-on-year basis. Asset quality remained stable from last quarter with NPLs excluding government-guaranteed balances increasing 3 basis points to 86 basis points at the end of the quarter. Charge-offs declined by $1 million from last quarter to $8.5 million or 49 basis points and include approximately $2.4 million related to PCD loans. Excluding that impact, charge-offs were $6 million or 35 basis points for the quarter.

The allowance remained strong and ended the quarter at 1.44% of total loans. Having and maintaining strong capital levels gives us the ability to grow organically, invest back into the business and provides us with flexibility to take advantage of opportunities. Our capital ratio strengthened further this quarter with CET1 and total capital coming in at 11.35% and 14.4% respectively. With a TCE ratio of 9.72% as of quarter end, we remain above our targeted operating range of 8% to 9%. Lastly, we also continued to steadily grow tangible book value per share. In summary, we delivered strong results in the quarter and remain well positioned to continue to grow the business going forward. We’re in the middle of our strategic planning process and I can’t recall a time when the opportunity set in front of us has been more attractive.

With that, I’d like to turn over the call to Tom, who will provide you with more detail on our results.

Thomas Bell: Thank you, Alberto, and good morning, everyone. Despite the changing interest rate environment, we had strong results for the quarter, driven by higher net interest income, fee revenue growth and well-controlled expenses. As a result, we grew capital nicely this quarter, which resulted in higher TCE, tangible book value, CET1 and all other regulatory capital ratios. All in all, this was another great quarter for Byline. With that, we can start on Slide 4 with the loan and lease portfolio. Total loans stood at $6.9 billion at September 30, flat from the prior quarter. We originated $212 million in new loans and pay-offs were higher for the quarter, coming in at $267 million, up $32 million linked quarter. Pay-off activity increased largely by run-off in non-core portfolios, which was offset by growth in new business relationships.

Line utilizations grew for the 5th consecutive quarter, up 1% to 59%. As we look ahead for the remainder of the year, pipelines are stronger and we expect loan growth to continue in the mid-single-digits for 2025. Turning to Slide 5. Total deposits increased to $7.5 billion, up 8.2% annualized from the second quarter. The increase in deposits was driven by growth in commercial money market accounts and consumer time deposits. Non-interest-bearing demand deposits accounted for 23% of total deposits, down slightly from Q2, primarily driven by commercial client needs. The mix was stable after accounting for seasonal customer activities for the quarter. We are pleased with our loan-to-deposit ratio results, which decreased 319 basis points from a year ago.

Turning to Slide 6. Net interest income was $87.5 million for Q3, up 1% from the prior quarter, higher than guidance, primarily due to increases in interest income, offset by higher interest expense on deposits. The NIM for the quarter was 3.88%, down 10 basis points linked quarter, driven by higher cash balances and lower accretion. Depending on the Fed rate path, going forward, we expect net interest income for Q4 in the $85 million to $87 million range and we continue to focus on stable to growing net interest income. Turning to Slide 7. Non-interest expense income totaled $14.4 million in the third quarter, which was up 12% linked quarter, primarily driven by a change in fair value of equity securities, an increase in both our wealth management and customer swap businesses.

The volume of government guaranteed loans sold was higher compared to Q2. The average premium was 9.7% for Q3, lower than the second quarter, primarily due to mix of loans sold. We expect gain on sale income in the $5 million to $6 million range for Q4. Turning to Slide 8. Our non-interest expense remained well managed and came in at $54.3 million for the third quarter, up 2% from the prior quarter. The uptick in expenses was mainly due to higher salaries, employee benefits and acquisition costs. Discipline on expense management remains evident as noted by our track record of improving our expenses to average assets to a record low 2.31% as well as consistently maintaining an efficiency ratio in the low-50s. As we look ahead, we expect non-interest expense to increase in the fourth quarter, mainly due to one-time costs related to investments in our digital banking platform and seasonality in our advertising spend.

For Q4, we expect expenses between $55 million and $57 million. And for 2025, we expect our expenses to range in the $54 million to $57 million area. Turning to Slide 9. Provision expenses for the quarter came in at $7.5 million, up from $6 million in Q2, primarily attributed to increases related to individually assessed loans in the government guaranteed loan portfolio. The ACL at the end of Q3 was $98.4 million, down 1% from the end of the prior quarter. Net charge-offs trended down by 11% this quarter to $8.5 million compared to $9.5 million in the previous quarter. NPLs to total loans increased by 9 basis points to 1.02% in Q3. Excluding government guaranteed loans, NPLs stood at 86 basis points, up 3 basis points from the previous quarter and NPAs to total assets stood at 75 basis points in Q3.

Due to our consistent track record of delivering pre-tax, pre-provision above 2%, we are well positioned to absorb higher credit costs, while maintaining strong financial results. Turning to Slide 10. During the quarter, our cash position stood at approximately $453 million, which decreased $278 million from the second quarter, primarily due to the repayment of the term facility trade. Our liquidity remains strong, which positions us well to fund future business development. Moving on to capital on Slide 11. Our capital levels continued to grow during the quarter. We are very pleased to see that CET1 now exceeds 11% and stood at 11.35% as of quarter end, which is ahead of our schedule after the Inland transaction. Our total capital increased by 55 basis points linked quarter to 14.41%.

Additionally, TCE to TA ratio stood at 9.72%, up 90 basis points linked quarter. We remain positive about the opportunities ahead as we execute on our strategy and enhance our franchise value. With that, Alberto, back to you.

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

Operator: Absolutely. We will now begin the question-and-answer period. [Operator Instructions] The first question will come from the line of Nate Race with Piper Sandler. Nate, your line is now open.

Q&A Session

Nathan Race: Hey guys. Good morning. Hope you’re doing well.

Alberto Paracchini: Good morning, Nate.

Roberto Herencia: Good morning, Nate.

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

Alberto Paracchini: I think the answer to the latter point is yes, Nate. Obviously, we announced a transaction this quarter. And I think still we see opportunities for — continued opportunities to do the types of transactions that are similar to the one that we just announced. So the answer to the latter point is yes. On the first point, look, I — as we look ahead and we look at the position in the market that we have today, we’re obviously today the largest publicly traded commercial bank in the market under $10 billion. When we ultimately cross $10 billion, we will be the largest in the market at our size, same characteristics, so commercial bank, publicly traded with excellent capabilities between $10 billion and $50 billion.

And that just presents excellent runway for us to continue to execute the same strategy that we’ve been focused on executing over the last 11 years. So Roberto touched on our ability to attract talent. We continue to see good opportunities to attract banking talent to our platform to continue to serve customers well. And I’m probably more optimistic today than I was at the time of the recapitalization of the company back in 2013. So hopefully, that gives you color to your answer — to your question, I’m sorry.

Nathan Race: Yes, very helpful. And just speaking of $10 billion, just curious if you could maybe frame up in terms of kind of where you guys are from an infrastructure, compliance, headcount perspective, et cetera, in terms of preparing to cross that threshold? Is it — are you guys 80%, 90%? Just curious if you can kind of frame that up for us.

Alberto Paracchini: Yes, and just also just to touch also on kind of like the timeline, Nate, so this is something that is not a new thing for us. We’ve been preparing for this over time, frankly, since we were a much smaller company. That being said, there will be investments primarily in people as we get close to crossing and as we prepare to ultimately cross the $10 billion pipeline. In terms of percentages, it’s hard for me to kind of say that. I think we want to make sure that particularly when it comes to areas in risk management, in our control — different control functions that we have the capabilities, and more importantly, we have the staff in place with the expertise to be able to comfortably manage and meet heightened regulatory expectations.

In terms of the timeline, I think in the prior quarter, I think we — somebody asked the question about when do you expect to cross? And how is the potential? How is M&A factoring into that? And we just announced an M&A transaction. So I think our view is still that, look, ultimately, this is something that organically potentially could happen between, let’s say, the second half of 2025 to the first half of 2026. I think we have a lot of flexibility still to manage that to a degree without having any negative impact on the business. So that could — what that could mean is take plus or minus one or two quarters to that timeline. Obviously, if there were to be more M&A, transactions take time, you still have to do diligence, you have to go through an approval process.

But I think at this point, it’s fair to say, that kind of range between second half of 2025 or kind of extending to the full-year 2026, I think it’s probably a fair assessment at this point.

Nathan Race: Okay. That’s very helpful. Maybe one last one for Tom. I appreciate the NII guidance for 4Q. Does that include any additional Fed rate cuts through the end of the year? And just generally thinking about NII growth on a legacy Byline basis for next year, assuming the Fed maybe has more gradual rate cutting cadence?

Thomas Bell: Sure. Yes, thanks Nate. Obviously, the 50 basis point cut, we’ll have a little catch-up going on here and I think that was some of the pressure we saw because of the CD book, so to speak. But we think that the NIM is stable and is growing, at least at this point, again, subject to what the Fed does here. But we also think just given our organic growth that we should actually be able to keep NII stable through the period.

Nathan Race: Okay, great. And that excludes the acquisition, right?

Thomas Bell: Yes.

Nathan Race: Okay. Good deal. And sorry, Tom, just one last clarifying question. Was the expense guidance, I think you mentioned $54 million to $57 million for next year. Is that excluding the deal?

Thomas Bell: It is excluding the deal.

Nathan Race: Okay, great. I appreciate the color. Thanks guys. Congrats on a great quarter.

Thomas Bell: You bet. Thanks, Nate.

Operator: The next question will come from the line of Damon DelMonte with KBW. Damon, your line is now open.

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

Alberto Paracchini: I guess, good morning, Damon. First and foremost, thanks for the question. I think we need to see more and also short-term rates coming down a bit certainly will help some. We’ve had a back-up in longer-term rates. So that’s going to impact some as well. As far as the — what we’re seeing in our pipeline, I can tell you that we — our pipeline — our commercial real estate pipeline is higher today than it was at any point over the course of the year so far. So that’s certainly an uptick. I don’t know that I would say that that is strictly rate driven. I think rates would have to come down more so that at the margin you start seeing more, call it rate induced transactions. I would keep a close eye on transaction activity.

That’s usually a good proxy both for originations and pay-offs. I think what we’re seeing is consistent with what you’re seeing in the market, which is well capitalized sponsors have the ability to take advantage of opportunities and they have access to capital. Us and other institutions are certainly in a position to lend those sponsors the dollars that they need to execute their strategies. And I think it’s more driven by that than by strictly rates are — the Fed cut rates 50 basis points and this is kind of where we are today.

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

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

Damon DelMonte: Great. That’s helpful. Thank you. And then I guess just lastly, on capital management thoughts, any updates here? TCE, I think you noted is up to 9.7%, which is comfortably above your 8% to 9% target. The pending transaction shouldn’t have too meaningful of an impact on capital levels. So any near-term thoughts on deploying the excess capital?

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

Damon DelMonte: Got it. Great. Okay. That’s all that I had. Thank you.

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

Terry McEvoy: Thanks. Good morning everyone. And first off, Alberto, thanks for expanding on the opportunity set being really attractive today. I thought that was very insightful and appreciate that. A couple of questions. When I look at the bottom of Page 4, the originations down about a third quarter-over-quarter. Was that being more selective pricing competition or just how the quarter shaped up? And as a follow-up there, Tom, the mid-single digit loan growth, how do pay-offs come into play because they seem to be higher in Q3 for you and the industry overall?

Alberto Paracchini: Yes. Terry, we’re not — we’re still seeing good business development activity in terms of the pipelines. if you look at — I mean, just looking at that chart, there are some quarters going back to like the third quarter of 2023, as you noticed there, we were like at $311 million, then we dipped down to $241 million. I think there’s just quarterly volatility. Some loans don’t happen in one quarter, they bleed into the next quarter. So I think we’re still seeing good activity there. I’m not — I don’t think we have any concerns in that regard. I think on the pay-off side, before I pass it over to Tom, when we announced the Inland acquisition, I think we mentioned at the time that what we wanted to do was allow for some run-off in that portfolio and that would allow us to essentially redeploy those liabilities into our own lending businesses.

And this quarter, we saw some of that. I think we like seeing that. I think we want to do more of that. So some of what you saw there in terms of pay-offs or run-off this quarter is driven by that. And I would point out, you also saw cash balances, and Tom will — Tom touched on it in his remarks as well, cash balances were a little bit elevated at the end of the quarter, which actually bodes really well going forward, because ultimately, we’ll redeploy that cash over time into our lending businesses. So Tom?

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

Terry McEvoy: Yes. Thanks, Tom. And then can you just talk about deposit market pricing, your strategy as rates come down, interest-bearing deposit costs up a little bit more than I was modeling in the third quarter and where you see kind of betas heading as well?

Thomas Bell: Sure. So I mean, our CD book is roughly five months, just to put that in perspective. So we’re going to have a little lag depending on what the Fed does. Obviously, if they do 25 basis points is more gradual for us and that will be less painful. But when we have a 50 basis point cut, it’s going to take a while for us to catch-up on that on the CD front. But to answer your question about pricing, the market definitely has reacted to the expectations and we’ve seen significant declines in the pricing of what I’d call new acquisition accounts. And we’ve also seen just back of book repricing soften up as well. So we expect things to move pretty swiftly here as it relates to pricing betas and declines. Most banks have some exception pricing and we’re in that 90% range on repricing on the exceptions and consistent with the other areas, other product suite where we’re kind of in line with the normal 30 or 40 betas.

Alberto Paracchini: Terry, if I could add to that, just more on a kind of approach to the business — from an approach to the business standpoint. I think in prior calls, we mentioned that we were very willing to add the margin, incur higher funding costs if we saw opportunities to add relationships, add business that we wanted to do in the marketplace. We think the short-term cost of having marginally higher funding costs for a period of time is more than offset by the long-term benefit of growing relationships in the business. The other thing is, philosophically, long run, we want to run the business really with customer deposits. We want to fund loan growth with customer deposits. We want to do as much as we can to achieve that within reason, but in the long run, that’s our strategy, that’s our plan.

And I think, for example, this quarter, we brought down — I think we were down $51.5 million in broker deposits. So those balances keep coming down. We actually replaced that with customer deposits, which given, for example, there’s a notice on proposed rule-making out there on broker deposits. Those deposits can look more attractive. But if you factor in the effect of higher deposit insurance that could come through that as well as changes that could come stemming from that notice of proposed rule-making, we think it’s prudent to look to opportunities to continue to grow customer deposits in favor of other types of funding.

Terry McEvoy: Thanks for that. And then just one quick one. I apologize if this was in the release, but the $200 million of the BTFP I think matured in January. Did you may take any actions given where rates are today or will that be off the balance sheet in January?

Thomas Bell: It’s off now, Terry. When the Fed cut rates, the earnings rate is basically on top of the borrowing rate. So it doesn’t make sense to hold the investment.

Terry McEvoy: That’s what I thought. Okay. Thanks for taking my question.

Thomas Bell: Thank you.

Operator: The next question will come from the line of Brendan Nosal with Hovde Group. Brendan, your line is now open.

Brendan Nosal: Hey, good morning guys. Hope you doing well. Thanks for taking the questions.

Thomas Bell: Good morning, Brendan.

Brendan Nosal: Just as we kind of look ahead to the next year, I mean, the profitability at the bank has been really fantastic for quite some time now. Like you said, eight quarters of PPNR ROA above 2%. Do you think you can hold the line on that 2% number as we move across ’25?

Alberto Paracchini: I think as Tom alluded to — so. Look, I think it’s fair to say that most institutions in our size and certainly in that range between, let’s say, $10 billion to $100 billion, I think what you’re seeing is institutions are trying to reprice liabilities in anticipation of the fact that we’re seem to be headed to a rate easing cycle of some degree here. And there’s going to be a period of adjustment, Brendan. So they’re depending on the tenor of your CD book, you’re trying to — you’re going to try — that book is going to lag a little bit. But essentially, you’re going to come back to balance, at which point the margin — your margin should stabilize and then essentially reset a new base and grow from there.

I think what we’ve said is, and Thomas touched on in terms of kind of the margin guidance, but really the focus on net interest income. And I think that’s driven by the fact that, look, to a degree like we saw this quarter, where the margin compressed a little bit, but we were able to offset it with earning asset growth, then that drives net interest income higher. I think we could, to answer your question, could we see a quarter or two where we’re kind of adjusting, in other words, allowing the lag in those CDs to reprice? Can we see a dip in the margin, call it, consistent with what we saw this quarter? That could certainly happen. Hopefully, we can drive net interest income higher. But at some point, we should be back or we should be at levels that are consistent with the level of profitability that you alluded to in your question.

Hopefully, that answers the question.

Brendan Nosal: Yes, that’s super helpful timing on the cadence and the various factors that are driving that. Okay, good. Maybe another one from me. Looking at others that have reported recently with SBA portfolios, it looks like a fair bit of stress in some of their books. It doesn’t seem like you saw too much in your own portfolio this quarter, saw the allowance coverage on the unguaranteed piece up a bit quarter-over-quarter. But just kind of curious, what stress you’re seeing in that book at this moment?

Alberto Paracchini: Well, I think we’ve — maybe we’ve always been cautious, particularly coming out of the pandemic, Brendan, on that portfolio. I mean, certainly, we have a view that portfolio is a higher risk portfolio. It’s also a higher return portfolio. I think our view has always been balanced in that risk-adjusted returns in that business are attractive. So we like that business very much in that context. The other thing I would say is we have been surprised. We still are somewhat surprised in the sense that we would expect or we would have expected stress in that portfolio to really have originated shortly after kind of the main effects from the pandemic, just simply on the basis of the resumption of business for a lot of these borrowers.

And then two, the fact that the support — the direct support that either the government was provided or some of the programs that small borrowers could take advantage of, we’re going to seize. We didn’t see that, but what we are seeing down is more normalization on that portfolio. Are we seeing stress? Yes, but I think our view has been we’re well prepared of that. We took the position that we would try to anticipate it to the best that we could. And I think we’ve — I think that’s what we’ve done. So — and obviously, you brought up our reserves. We have a view of also the reserves that we need to maintain and operate within that business.

Brendan Nosal: Fantastic. Thank you for taking my questions.

Alberto Paracchini: You bet.

Operator: [Operator Instructions]. The next question will come from the line of Brian Martin with Janney. Brian, your line is now open.

Brian Martin: Hey, good morning guys.

Alberto Paracchini: Good morning, Brian.

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

Alberto Paracchini: I think it’s just going to depend on the opportunity set in front of us, Brian. And also, I would maybe answer it this way. We certainly don’t — we are not going to change our credit philosophy. We’re not going to change our approach to the market in terms of our appetite of risk I don’t think is something that changes very much. So now that being said, if we see opportunities to expand what we’re doing. And what I mean by that, as you know, in the past, we’ve had a lot of success in attracting bankers to our platform. And there’s usually a period of time, there’s non-solicits involved, we bring a banking team. We — that banking team really cannot call on customers for a period of time until those non-solicits are off.

And then that banking team then has an ability to catch-up. And things like that could, at the margin, certainly push your loan growth up. And I think those things are all fair game now and in the future. The other thing that maybe we’re calibrating a bit to is pay-off activity. As you know, when we provide guidance, we’re doing our best in terms of what we think is going to run-off in the portfolio, at least in the short run. But we’re far from perfect in that regard. So if we see lower pay-off activity, originations remain consistent, that’s just going to push loan growth to be higher on a net basis. So it’s a good question. It’s a hard question to answer precisely. But hopefully, we gave you there some of the dynamics that are at play driving that estimate.

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

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

Brian Martin: Got you. Okay. And maybe just the last one or two, just on margin, maybe for Tom. Just have you seen with rates down a bit as far as where the loan pricing is at today, has it gotten more competitive? Do you expect that to kind of play out here?

Thomas Bell: No change on that front. The asset pricing has been very stable, I would say.

Brian Martin: Okay. And new origination yields, Tom, if you gave in the deck, maybe I missed it, but where are they kind of at today in terms of pricing?

Thomas Bell: Depending on the asset class, it’s SOFR plus 300, its prime minus 50 maybe.

Brian Martin: Got you. Okay, perfect. And then last, just one or two here. On the bank term lending program, Tom, just remind us the impact. It sounds like that occurred later in the quarter, but just the impact on the margin percentage. Is it pretty small or what’s that impact?

Thomas Bell: It’s about 6 basis points, maybe 7 basis points tops. So in other words, the margin would expand by 6 basis points to 7 basis points in the coming quarter, because that’s a tight spread transaction.

Brian Martin: Right. Okay. And that was not really impacted in the current quarter, correct? That was because it was done later?

Thomas Bell: Like one week. Yes, it was just the one week. 1 week we didn’t — it was unwound a week ago.

Brian Martin: Yes. Okay, perfect. I just wanted to clarify that. And then the last one was, just your commentary, Tom, on NII and just kind of how you’re thinking about overcoming the potential margin — some margin headwinds here. As far as maintaining or kind of being flat, I guess, is that the outlook, I guess, as you kind of go the next five quarters assuming we get four to five rate cuts? I’m just not sure how you’re thinking about or what’s embedded in your thoughts in terms of rate cuts. But if we do get four or five more rate cuts here and there are kind of steady increases like we expect, then that’s kind of the guide as far as just kind of growing it sequentially quarter-to-quarter?

Thomas Bell: Yes. I mean, we’re trying to have stable NII to growing NII. But I mean, as it relates to the margin, I mean, you have the sensitivity on Page 6 of the deck. So…

Brian Martin: Yes. I was just talking about NII. I understand your comments on percentage. Just in terms of dollars of NII, I just want to make sure I understood kind of your outlook in terms of overcoming…

Thomas Bell: Yes, I think we gave guidance in the $85 million to $87 million range and it’s just subject to if the Fed does more or less.

Brian Martin: Got you. Perfect.

Alberto Paracchini: Hey, Brian, just to add a little bit, just to highlight one trade-off based on — which I think is relevant in the discussion between kind of margin and net interest income. So as you pointed out, the impact of that bank term funding transaction that we had, so let’s say, that adds 5 basis points to 7 basis points potentially to the margin, notwithstanding that, we lose net interest income as a result. So that’s something where, all else being equal, the margin expands, but we actually make less money. So that’s why when Tom talks kind of the emphasis, yes, of course, we want to manage the margin. We pay attention to the margin. But net interest income, like one of our older competitors has said here, is ultimately what pays the bills. So just keep that in mind.

Brian Martin: Yes, understood. That’s what I was asking for, but thanking you for taking the questions and congratulations on another great quarter.

Thomas Bell: Thanks Brian.

Alberto Paracchini: Thank you, Brian.

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

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

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