Byline Bancorp, Inc. (NYSE:BY) Q4 2023 Earnings Call Transcript

Byline Bancorp, Inc. (NYSE:BY) Q4 2023 Earnings Call Transcript January 26, 2024

Byline Bancorp, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Byline Bancorp Fourth Quarter 2023 Earnings Call. My name is Carla, and I will be your conference operator today. [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, Carla. Good morning, everyone, and thank you for joining us today for the Byline Bancorp fourth quarter and full year 2023 earnings call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website, along with our earnings release and the corresponding presentation slides. During the course of the call today, management may make certain statements that constitute projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed.

The company’s risk factors are disclosed and discussed in its SEC filings. In addition, our remarks may reference non-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 disclosure in the earnings release. I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Alberto Paracchini: Thank you, Brooks. Happy New Year, and thank you all for joining us this morning to review our fourth quarter and full year 2023 results. As always, joining me this morning are Chairman and CEO, Roberto Herencia; Tom Bell, our CFO and Treasurer; and Mark Fucinato, our Chief Credit Officer. Before we get into the results for the quarter, I want to pass the call on to Roberto to comment on a few items. Roberto?

Roberto Herencia: Thank you, Alberto. Good morning, and best wishes for a healthy and happy new year to all. I start my remarks by acknowledging Byline shareholder and friend, Dan Goodwin, who passed away in Chicago last weekend. Dan’s story as a human being and business leader is simply remarkable. I met Dan almost 14 years ago and most recently interacted with him prior and after the merger between Byline and Inland Bank. It was important to him that we referred to our coming together as a merger, not an acquisition. That alone tells you much about him and his value system. He was pleased with how we negotiated the key points of the merger, and he was happy to have become a shareholder of Byline. I think he was the happiest when he learned we had selected Pam Stewart as his representative on our Board.

And if you’ve met Pam, you would know why that is the case. Our sympathy and heartfelt players go to his wife and family as well as his extended Inland Bank and Real Estate Group family. We have lost the Chicago Titan, no doubt. Importantly, we have gained so much more for his actions and legacy. A few seconds of silence to honor his memory are appropriate. Thank you. Dan would have been as pleased as I am with the results for the quarter and the full year. 2023 was a breakout year for Byline. Our performance, which Alberto and Tom will cover shortly, is excellent, and several important profitability metrics now rank in the top-quartile of our peer group. Results and budgets for most banks in 2023 were derailed by the March, April events with earnings deviating materially from plans and Boards and management teams grasping for ways to justify weaker results on a relative basis.

We are proud not to be part of that group and to be able to have delivered within estimates and plan. It took hard work. We believe the Chicago banking market will continue to be disrupted by events ranging from smaller banks getting weaker, mergers between larger banks with headquarters and decision-making moving outside of state, as well as management changes and turnover. That disruption fuels our organic growth and our strategy, simply put, being home to the best commercial banking talent, continues to shine under those conditions. This is easier said than done. When done well, however, from having the right credit and risk processes, using the right technology, focus and key people practices, and nurturing the team that can finish each other’s sentences, the strategy is hard to replicate.

We are optimistic about the future and the value our franchise can deliver to our shareholders. With that said, Alberto, back to you.

Alberto Paracchini: Excellent. Thank you, Roberto. Per our practice, I will start by walking you through the highlights for the full year and quarter. I will then pass the call over to Tom, who will provide you with more detail on our results. Following that, I’ll come back to wrap up with some closing remarks before opening the call up for questions. Moving on to Slide 3 of the deck and to start, before I turn to the highlights, I would first like to thank our employees for their hard work and contributions this past year. 2023 was another solid year for the company. We navigated through a challenging rate environment, the market disruptions stemming from the failure of several institutions earlier in the year and an economy that continues to surprise to the upside in terms of growth.

Against that backdrop, our diversified business model and continued focus on executing our strategy served us well. In addition, we successfully closed the $1.2 billion merger with Inland, converted systems and fully integrated the operation into Byline within the calendar year. All in all, 2023 was certainly a busy year. For the year, net income was $108 million or $2.67 per diluted share on revenue of just under $387 million. Adjusted for the effects of the merger, our return and profitability metrics were very strong with pretax preparation ROA of 235 basis points, ROA of 145 basis points and ROTCE of just under 18%. Year-on-year loan growth inclusive of Inland was strong at 23%, and better yet, all the growth was funded by deposits, which grew 26%.

Our efficiency ratio improved by over 2 percentage points to 52.6% and 5 percentage points to under 50% on an adjusted basis. Lastly, capital remained strong with TCE ending the year at 9%, CET1 at 10.35% and total capital at 13.4%. All of these ratios reflect increases on a year-over-year basis, notwithstanding the impact of the Inland transaction in the third quarter. Turning to Slide 4. Results were also strong for the quarter with net income of $29.6 million or $0.68 per diluted share on revenue of $101 million. Adjusted for merger-related charges, net income was $31.8 million or $0.73 per diluted share. Profitability and return metrics were also solid with record adjusted pretax preparation income of $50.2 million, pretax preparation ROA of 227 basis points, ROA of 144 basis points and ROTCE at 18%.

Revenue was slightly down from the previous quarter but up 20% year-on-year. The revenue decline was driven by lower net interest income due to a lower margin as expected, offset by higher noninterest income stemming from higher servicing income. From a balance sheet standpoint, we saw continued growth in both loans and deposits during the quarter. Loans increased by $81.7 million or 5% linked quarter annualized and stood at $6.7 billion as of quarter-end. Net of loan sales, origination activity moderated from the previous two quarters but remained healthy at $241 million, with the increase coming primarily from our C&I and leasing businesses. Payoff activity increased as anticipated and line utilization remained stable at around 55%. Our government-guaranteed lending business continued to originate at a healthy level with $135 million in closed loans, which, as expected, was higher than the previous quarter.

Moving on to the liability side. Deposits grew by $223 million or 12.8% annualized and stood at $7.2 billion as of quarter-end. Noninterest-bearing deposits account for 27% of our deposit base and overall deposit cost increases are starting to moderate. Tom will certainly provide you with additional color on the margin and our outlook given the market expectations for lower rates this year. Expenses remain a focus and were well managed for the quarter, coming in at $53.6 million. More broadly, we were able to drive down our efficiency ratio and bring our adjusted cost to asset ratio to 228 basis points. This represents a decline of 7 basis points linked quarter, and importantly, 43 basis points on a year-on-year basis. Turning to asset quality.

Provision expense came in at $7.2 million lower than the prior quarter. Charge-offs were elevated at $12.2 million compared to last quarter, reflecting charge-offs taken against loans with previously established reserves as they near resolution and a charge on a purchase credit-deteriorated loan, subject to a credit mark. The allowance for credit losses stood at 152 basis points, NPLs increased 17 basis points to 96 basis points. We added additional detail to the NPL chart on Page 11 of the deck, so you can distinguish between the PCD and non-PCD trends in NPL. Lastly, front-end delinquencies remained flat, notwithstanding the impact of a mortgage servicing transfer completed at the end of the year. We also added additional disclosure on risk ratings, numbers of loans and a balanced stratification for our office portfolio.

You can find that on Page 17 of the deck in the appendix. We did not repurchase any shares during the quarter. However, our Board approved a new stock repurchase program that authorizes the company to repurchase up to 1.25 million shares of the company’s outstanding common stock. The program is an important component of our overall capital management strategy, which includes investments in the business, M&A, share repurchases, as well as our regular quarterly dividend. With that, I’d like to turn over the call to Tom, who will provide you with more detail on our results. Tom?

Tom Bell: Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on Slide 5. Total loans and leases were $6.7 billion on December 31. The increase was across all lending categories with the strongest growth coming from our commercial and leasing teams. Average loan balances increased linked quarter and were higher by 23% on a year-over-year basis, driven by organic growth and the Inland merger. We expect loan growth over the course of 2024 to be in the low mid-single digits. Turning to Slide 6. Our government-guaranteed lending business finished the quarter with $135 million in closed loan commitments, which is up 19% and 12% on a linked quarter and a year-over-year basis. At December 31, the on-balance sheet SBA 7(a) exposure was relatively unchanged at $453 million.

Our allowance for credit losses as a percentage of the unguaranteed loan balances was 7.8% as of quarter-end, lower as a result of loan upgrades, payoffs and charge-offs related to fully reserved loans, as Alberto mentioned. Turning to Slide 7. We continue to focus on deposit gathering. In the fourth quarter, total deposits increased to $7.2 billion, up 13% annualized from the end of the prior quarter. We saw robust organic deposit growth of $223 million in the quarter, which was net of a $69 million reduction in brokered CDs. Average deposit balances increased quarter-over-quarter and were slightly higher by 24% on a year-over-year basis, inclusive of Inland transaction. Excluding the transaction, deposit growth was a healthy 9.1% for the full year.

Our deposit mix continues to moderate as expected with the decelerating pace linked quarter. DDAs as a percentage of total deposits was 27% compared to 28% from the prior quarter, and we expect the shift in mix to continue to moderate and stabilize during 2024. On a cycle-to-date basis, deposit betas for total deposits was 45% and interest-bearing deposits was 61%, driven in part by the repricing of our CD portfolio. In 2023, the CD average maturity rate was 2.32%. For 2024, we expect that CD repricing will have less of an impact given the average rate of the maturing CD book of 4.67%. Turning to Slide 8. Net interest income was $86.3 million for Q4 down 6.7% from the prior quarter. The decrease in NII was primarily due to higher interest expense on deposits and lower accretion income on acquired loans of $5.2 million, offset by loan growth.

Our net interest margin remained strong at 4.08% on a reported basis, which was in-line with our NII guidance. Accretion income on acquired loans contributed 24 basis points to the margin in the fourth quarter compared to 50 basis points for the prior quarter. Earning asset yields decreased 26 basis points linked quarter, driven by lower accretion and an increase in fixed rate loans during the quarter. For 2023, net interest income was up $65 million or 25%, which translates to the NIM increasing by 31 basis points year-over-year and ending the full year at a strong 4.31%. Looking forward, given the forward rate curve forecast, we continue to make steps to reduce our asset sensitivity, as highlighted in the IRR section. Based on the factors previously discussed, our estimate for net interest income for Q1 is in the range of $83 million to $85 million.

Turning to Slide 9. Noninterest income stood at $14.5 million in the fourth quarter, up 17% linked quarter, primarily driven by a $2.4 million improvement in our loan servicing asset valuation, reflecting lower discount rates and a $1.2 million gain in the change in fair value of equity securities. Sales of government-guaranteed loans decreased $13 million in the fourth quarter compared to Q3. The net average premium was 8.5% for Q4, slightly higher than prior quarter, primarily due to more favorable market conditions and mix of loans sold. Our gain on sale income for Q1 is forecasted to be in the $4.5 million to $5 million range, in line with our historical trends of lower loan production in the first quarter. Turning to Slide 10. Our noninterest expense came in at $53.6 million for the fourth quarter, down $4.3 million from the prior quarter, primarily driven by merger-related expenses taken in Q3.

On an adjusted basis, our noninterest expense stood at $50.6 million, $3 million below our Q4 guidance of $53 million to $55 million. We continue to manage our expenses tightly and prioritize investments that are more critical to achieving our strategic objectives. Looking forward, our noninterest expense full year guidance is unchanged at $53 million to $55 million per quarter. Turning to Slide 11. The allowance for credit losses at the end of Q4 was $101.7 million, down 4% from the prior-end quarter. In Q4, we recorded a $7 million provision for credit losses compared to a $9 million in Q3. Net charge-offs were $12.2 million in the fourth quarter compared to $5.4 million in the previous quarter. NPLs to total loans and leases increased to 96 basis points in Q4 from 79 basis points in Q3.

NPA to total assets increased to 74 basis points in Q4 from 60 basis points in Q3, and total delinquencies were $36.1 million on December 31, essentially flat linked quarter. Turning to Slide 12, which recaps our strong liquidity and securities portfolio. Our loan-to-deposit ratio decreased 182 basis points linked quarter to 93.4%. We are pleased with this progress and continue to work towards bringing down this ratio over time. Our available borrowing capacity grew to $2.3 billion, and our uninsured deposit ratio stood at 26.7%, which remains below all peer bank averages. Notably, we have the highest insured deposits among the proxy peer group as a result of our very granular deposit base. Moving on to capital on Slide 13. Our capital levels at quarter-end improved with our TCE ratio at 9.1% and our CET ratio at 10.35%.

Both ratios improved nicely over the quarter. We grew capital by 29% on a year-over-year basis and our tangible book value per share increased nicely by 11% in 2023 to $17.98, driven by our positive earnings. Given our strong balance sheet, liquidity and capital position, we believe we are well positioned to grow the business and capitalize on market opportunities throughout 2024. With that, Alberto, back to you.

Alberto Paracchini: Thank you, Tom. Moving on to Slide 14, I’d like to wrap up today with a few comments about the outlook and our strategic priorities for 2024. We entered 2024 on solid footing and with great momentum. In terms of our strategy and priorities, they don’t change much and remain consistent from year to year. We believe we can grow our franchise and continue to create value for shareholders. We do this by growing and expanding customer relationships, pursuing disciplined loan growth, improving the efficiencies of the business to allow for continued reinvestment, maintain credit and capitalizing on market opportunities to both add talent and pursue M&A. Again, we believe we are well positioned to capitalize on opportunities to continue to grow the value of our franchise. And with that, operator, let’s open the call up for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from Nathan Race of Piper Sandler.

Nathan Race: Yes. Hi, everyone. Good morning. I hope everyone is doing well.

Roberto Herencia: Good morning.

Nathan Race: I was hoping to just start off on the charge-offs this quarter. And looking through the slide deck, it looked like an office commercial real estate property contributed some of those charge-offs. So, I would be curious maybe to get some additional color from Mark in terms of the outlook for the remaining portfolio and kind of what you’re seeing in terms of potential maturities? And how those maturities kind of stack up with cap rates going up and so forth, and just the overall asset quality outlook within that portfolio?

Mark Fucinato: We have a good handle on the office maturities going out for the next two years, and we’ve been discussing it a lot right now what’s coming up in the first two quarters of the year. We’re in very good shape. We’re actually seeing some opportunities for some of these customers to refinance their office buildings, which is a little bit of a surprise to me. But we’re in good shape overall on the office book in terms of a percentage of our overall portfolio. So, there are going to be situations where some of them are going to be criticized assets. But as you know, they’re unique, and we’re going to approach them with a tailored kind of strategy with the customer to see what the outcomes are going to be of any credit issues that we see.

On the charge-offs, yes, we had a charge-off on an office asset. But again, that’s part of our strategy that we’re using to resolve that particular asset, and we’re hoping to achieve those results here during the course of 2024.

Nathan Race: Okay. Very helpful. Thank you. Maybe changing gears, thinking about the NII outlook for this year. I apologize if you touched on it in your prepared remarks, Tom, and I didn’t catch your thoughts. Just in terms of kind of the outlook for kind of core NII ex accretion over the next couple of quarters, assuming the Fed remains on pause, and then we get a couple of rate hikes in the back half of the year, how do you kind of see NII trending over the course of 2024?

Tom Bell: Yeah, hi. Good morning, Nate. In the prepared remarks, I basically — we’re using the forward curves as our estimate for interest rates and the market has anticipated 150 basis points in Fed fund reduction for the year. So given that, which I think the first ease happening in March, we’ve given guidance of $83 million to $85 million for NII. And in the supplemental stuff, we have the accretion forecast in the back for your reference, just kind of split that out.

Nathan Race: Okay. So if we do get that degree of rate cuts this year, it’s fair to expect it would contract. But if we just get maybe a couple in the back half of the year, it’s fair to assume maybe a little bit of growth year-over-year?

Tom Bell: Yes, that could be possible, again, subject to what happens with the Fed and market expectations. On the net interest income page of the deck, on Page 8, we provided some information on our interest rate risk sensitivity over one year. And we’ve been able to reduce our sensitivity by 1.8% year-over-year, but we still are asset sensitive. So you can see both in a ramp scenario and a static scenario, what the give up in NII is to the bank’s net interest income number. So, we provided in 100 basis point downward, it’s about 3.3% in a ramp, and it’s 2.5% — I’m sorry, that 3.5% on a static and ramp is 2.5% decline. And we provided you the quarterly costs as well on an annualized basis.

Alberto Paracchini: I think, Nate, to add to what Tom is saying there just more broadly, so I think if you look at kind of what the market has priced in terms of rate cuts for 2024. As you can see from the materials, we remain asset-sensitive. Certainly, as Tom covered in the prepared remarks, we’re seeing moderation in terms of deposit pricing as well as moderation in kind of mix changes. Rate decline certainly will help in that regard. That being said, we remain asset-sensitive. So rate declines are going to impact the asset side negatively in the sense that you’re going to be repricing assets, and that’s going to have an impact, that’s going to be faster than the reprice and liabilities. That being said, that assumes kind of the market view in terms of interest rates to the degree that rates move lower, faster or come earlier in the year faster that obviously impacts the margin negatively to the degree that they’re slower, it impacts the margin positively.

But all in all, we still feel pretty good about our ability to grow assets and continue to expand net interest income.

Nathan Race: Got it. And just within that kind of outlook, if the Fed remains on pause for the first half of this year and just kind of think about the cadence in loan yields from here, I imagine you guys have put in new loans on the portfolio above kind of the rate that we saw or the yield that we saw in the fourth quarter. And would just also be curious to hear in terms of those 40% of loans that are fixed, what amount of maturities do you have over the next 12 months that could reprice higher?

Tom Bell: Well, I mean, you have to remember, if you’re doing fixed rate loans, the market’s already kind of priced in the Fed easing. So, we price for market takers, so to speak. So we price to a spread to the curves. So in some cases, right, the punitive thing to net interest income right now is fixed rate loans because you tend to lose spread on a marginal cost basis, like if you were going to the home loan bank. So, I think that you have to be mindful of that, whether you do balance sheet hedges or other things to protect the earnings, you’re technically layering on some fixed rate loans that they’re in the 7.5% range that maybe on a floating rate basis would be higher just given the spread on SOFR.