Byline Bancorp Inc (BY) 2023 Q4 法說會逐字稿

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.

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 statements 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.

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?

Thank you, Alberto. Good morning, and best wishes for a healthy and happy new year to all.

I'll 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 refer 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 prayers 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, was 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 on key people practices, and nurturing a team that can finish each other's sentences, this 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.

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 disruption stemming from the failure of several institutions earlier in the year, and an economy that continued 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 pre-tax preparation ROA of 235 basis points, ROA of 145 basis points, and ROTCE of just under 18%.

Year on year, on 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 pre-tax preparation income of $50.2 million, pre-tax 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 non-interest 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% late 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 liabilities side. Deposits grew by $223 million, or 12.8% annualized, and stood at $7.2 billion as of quarter end. Non-interest-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 NPLs.

Lastly, front-end delinquencies remain 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 balance 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. 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?

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 a 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 parts 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 remains 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. Non-interest 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 non-interest 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 non-interest 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 non-interest 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 and 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.

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.

(Operator Instructions) Nathan Race, Piper Sandler.

Yes. Hi, everyone. Good morning. I hope everyone's doing well.

I was hoping to just start off on the charge-offs this quarter. Looking through the slide deck, it looked like an office commercial real estate property contributed to 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 what you're seeing in terms of potential maturities and how those maturities stack up with cap rates going up and so forth and just the overall asset quality outlook within that portfolio.

We have a good handle on the office maturities going out the next two years. And we've been discussing it a lot right now what's coming up 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 strategy with the customer to see what the outcomes are going to be of any credit issues that we see.

On the charge-offs, yeah, 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.

Okay, very helpful. Thank you. Maybe changing gears, think about the NII outlook for this year. I apologize if you touched on it in your prepared remarks, Tom, and I didn't catch it, but just in terms of the outlook for core NII execution over the next couple of quarters, assuming the Fed remains on pause, and then we get a couple of rate hikes in the back of the year -- in the back half of the year, how do you see NII trending over the course of 2024?

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 is anticipating 150 basis points in Fed fund reductions for the year. So given that, which I think the first fee is 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 split that out.

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

Yeah, 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 it in 100 basis point down, where it's about 3.3% in a ramp, and it's 2.5% -- I'm sorry, that's 3.5% on a static and ramp is 2.5% decline. And we provided you the quarterly cuts as well on an annualized basis.

I think, Nate, to add to what Tom is saying there just more broadly, so I think if you look at what the market has priced in 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 mixed changes.

Rate declines 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 in liabilities.

That being said, that assumes 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.

Got it. And just within that outlook, if the Fed remains on pause for the first half of this year and just think about the cadence and loan yields from here, I imagine you guys are putting new loans on the portfolio above 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 maturity do you have over the next 12 months that you could reprice higher?

Well, I mean, you have to remember, if you're doing fixed rate loans, the market's already priced in the Fed easing. So we price -- we're market takers, so to speak, so we price to a spread to the curves. And so in some cases, 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 are in the [7.5%] range that may be on a floating rate basis would be higher just given the spread on SOFR.

Got you. If I could just ask one last one on the outlook for deposit growth. It looks like you had some nice core deposit generation in the fourth quarter. Is the expectation that core deposit growth will largely follow that low to mid-single-digit outlook for loans in this year?

I don't know that we've ever given guidance in terms of deposits, Nate. But as you've been covering us for a long time, and I think you know how important we feel deposits are and the ability for us to continue to grow deposits, and I think the plans are to continue to do that.

Obviously, that's subject to client preferences, that's subject to doing the right thing for customers, and obviously, our competitors who are trying to do the same thing. But I think, broadly, I would say, we continue to want to have strategies in place to continue to grow deposits. I think this quarter, as Tom mentioned, we saw a nice decline on our loan-to-deposit ratio. We want to continue to drive that over time.

We're operating -- if you recall, we were operating closer to 95%. We gave guidance that said that we wanted to bring that ratio down over time, and we are very much wanting to continue to do that. So I think you should think in the context of continuing to see that ratio come down closer to 90%, even below 90% over time.

Got you. And was there any seasonality in the core deposit growth in the fourth quarter? Or was it more just blocking and tackling and ongoing market share gains?

Blocking and tackling. Yeah, I think the latter -- as you know, we tend to see seasonality. We have obviously a commercial focus in our business, inclusive in the liability side. So you have tax payments. You have all those things that tend to happen right around the first quarter. So we'll see some seasonality there. But that was not the case at the end of the year.

Okay, great. I appreciate all the color. Thanks, guys.

Great. Thank you, Nate.

Thanks, Nate.

Terry McEvoy, Stephens, Inc.

Hi. Good morning, everybody. Just to maybe start with a question on expenses, if you grow organically, let's say, 10% a year, you're going to cross $10 billion in less than two years. So I guess my question is, how much of the incremental expenses from crossing $10 billion are in that current run rate of, what, 53% to 55%? And should I be worried about a step up in 2025?

I think -- let me answer the question maybe in two ways. First off is, Terry, we've always run the business on the expectation that we want the company to be able to -- from a risk management, from a reporting, from a control perspective -- not get behind to the growth of the business. And what I mean by that is, over time, we've always consistently invested to make sure that we have the requisite level of controls, the requisite level of investment to keep in conjunction to the growth of the business.

So to answer your question, just by the mere fact that at some point, we will cross that $10 billion mark, doesn't necessarily mean that you're going to see a step function of an increase in expenses that would be, call it, very significant. That being said, along with growth in assets, along with growth in revenues, and the growth in expenses that would correspond with that, I think you can anticipate expenses to increase to continue -- for us to continue to make sure that we're making the right investments to meet the higher expectations that come with crossing that $10 billion mark.

So proportionately, I think we want to continue to operate along the lines of what we've mentioned during our calls. We have always been keeping an eye on expenses, maintaining discipline around expenses. As you saw this quarter, we saw a nice decline on the cost-to-asset ratio. We took that to, on an adjusted basis, 228 basis points. That's a material decrease from where we were operating last year. So we want to make sure that we continue to proportionately gain scale, irrespective of if we cross the $10 billion mark or not.

So hopefully, that gives you some color in terms of how we think about that.

Yeah, thanks for the color there. Helpful. And then just getting out of the earnings model, what's it going to take to get utilization rates back to pre-COVID levels, which -- what, 62%, 63%? And if we get back there, what does that mean to non-interest-bearing deposit balances? And is it that case where you got to watch what you wish for?

So that's a really good question. The short answer is, Terry, we really don't know. You would have expected that you would have seen utilization revert back by now, post-COVID. I think there's a couple of things that are probably coming into play.

We're a larger bank now. We're a little different than we were right before COVID. So maybe, the mix that we have today is slightly different, which could be impacting overall line utilization, or call it the line utilization percentage that we report.

The second piece is, I'm a little skeptical of mean reversion going back to, call it, 2019 levels, from the fact that given the discrepancy from borrowers with much higher interest rates today, if you were sitting on cash and you had the flexibility, you would probably just pay down the line, or you would frankly move the money to a higher-yielding alternative.

We've seen some of it, but we haven't seen that en masse in our book. So I guess what you're hearing is we're probably a little skeptical of that utilization rate fully mean reverting back to what it was in 2019.

Great. Thanks for taking my questions, and enjoy the weekend.

Right, thank you. Likewise.

David Long, Raymond James.

Thank you. Good morning, everyone. Wanted to follow up on the deposit discussion. And as you look out for the rest of the year, if we do get some rate cuts, what do you expect out of the deposit beta on the downside at this point?

That's a good question. I think, again, subject to the Fed, short-term rates are certainly higher today. We're actually inverted on overnight to one year, which we were flat before. So we're already seeing some benefits to repricing some of our, I'll call it, book of CDs that are on the shorter end of the curve.

But we have -- our CD book is about 8.5 months. So it's relatively short and we've been positioning the bank to try and adjust betas down. Obviously, the CD book will reprice more on an 85% to 90% reduction. And then the core accounts will continue to operate as we have in our model and that, call it -- again, some of our products, the rack rates haven't really moved. So you can't really lower those rates, but your high yield money market account, certainly, we expect the betas to be pretty substantial on the way down.

Got it. Thank you, Tom.

I think, David, just to add two things to what Tom said, I think in Tom's remarks earlier, when you think about that CD book, the average rate on the maturities that we're seeing for 2024 was like 4.67%, I think. So just keep that in mind relative to, as Tom said, if the duration of that portfolio is 8.5 months and you have a rate at 4.67%, you can see where market rates are.

So that gives you a sense in terms of what the reprice would be, all else being equal. If you have declines in rates, obviously, that's going to come into play, obviously subject to competitive dynamics and the market and so forth. But I think to Tom's comments and the comments earlier in the call, I think the deposit pricing is starting to moderate.

I think it'll be rate dependent. If we get rates declining faster, obviously, that's going to impact that more in a quicker fashion. If rates lag for a little bit, that's going to be slower. But on that end, to a degree that it's slower than what the market repricing, given our interest rate positioning at this point, that's probably to our benefit, as opposed to our detriment. So just keep that in mind.

The only other thing I would add, too, David, is this quarter, we had a significant reduction in our FHLB borrowings and we had a brokered CD mature. So that's $384 million of wholesale type pricing and which then ultimately gave us less cash at the Fed, so to speak. So liquidity is still really strong, even improving. So that's going to help just the NII numbers as well.

Got it. Okay, cool. Thanks. And then wanted to talk M&A just for a second here. The Inland deal seems to have gone pretty well; integration, mostly done with that. First question is, are you seeing a pickup in discussions or serious discussions?

And then secondly, what is Byline's appetite to do something else at this point?

I think -- let me take the latter question first. I think our appetite is high. I think we are certainly open to entertaining M&A.

To the prior question -- to the first part of the question in terms of what's the environment for M&A, I think it's -- clearly, with the rally in rates towards the end of the year, I think a lot of the friction that was causing M&A to be very difficult for a lot of institutions, meaning the impact of AOCI, the impact on interest rate marks on portfolios, that's gotten better. It's not to say that we've reverted back to where it was maybe 18 months ago, but it's certainly gotten better, which I think, given the recent announcements that you've seen, it's indicative of the fact that M&A and the M&A math, so to speak, is getting a little bit easier for people.

So as far as we're concerned, we remain -- we have our framework for evaluating M&A. We continue to think that there's going to be consolidation. We think we are a terrific partner for institutions that are looking for a long-term partner, and we're hopeful that there will be some activity in 2024.

Great. Thank you, guys, for taking my questions.

You're welcome. Thank you.

Thank you.

Damon DelMonte, KBW.

Hey. Good morning, everyone. Most of my questions have been asked and answered, but just a couple of little ones here. Regarding the outlook for expenses here in the first quarter, I think the guide was $53 million to $55 million, Tom, can you just help walk us from the operating number of sub-$51 million up to that level? Is it coming through salaries and benefits, or is it data processing? Just looking for some guidance there.

Some of it is definitely salaries and benefits. We've had some delays and some hires that we're still looking to seek out, as well as some new teams to bring into the organization from a business perspective. The real estate numbers that came in were actually a little bit lower than what we originally accrued for. And so that won't materialize in 2024.

So we're trying to give full-year guidance there. I think we would expect to be a little bit on the lower side on the guidance side of $53 million, maybe for Q1. But absent that, we think just given the spends that we want to make to invest in the business and bring on teams, we're going to have to increase costs to do that.

Got it. Okay. All right, that's helpful. Thank you. And then as we think about the provision expense going forward and a normalized net charge-off level, I think you had like 38 basis points last quarter and that's on the rise from the last two years, understandably. But do you think that high-30s, 40-basis-point level is reasonable going forward?

I think we've always said, Damon, somewhere in the 30- to 40-basis-point range historically. And I still think we're comfortable with that. Keep in mind a couple of things that maybe are a little different today than historically. We added some additional disclosure for PCD loans. I mean, those are loans that, over time, you can expect us to try to move those out of the bank relatively quickly will add to the degree that we take charges related to those.

As you know, those are obviously subject to a credit mark. So we'll disclose and give you color around that. But I -- back to the first part of your question in terms of the underlying rate, I still think that that 30 to 40 basis point is reasonable.

Got it. Okay. And then just lastly, looking at the deposit base, do you have any deposits that are tied specifically to an index rate so that, if and when the Fed does cut rates, you'll get some relief in that portion of the portfolio?

Yes. I mean, we have some of the deposits we have that are like brokered money market accounts. They're tied to Fed funds and they're on for our balance sheet hedge purposes. So we'll see an immediate benefit from that. And then there's a few clients that are more in the public entity space, where we're tied more to an index there. So we'll get definite relief immediately, 100%.

Okay, great. That's all that I had. Thank you very much.

Thanks.

You're welcome. Thank you.

Brian Martin, Janney Montgomery Scott.

Hey, good morning. Just to follow up, Tom, I was going to ask you, to Damon's question, can you walk through what, on a rate cut, reprice is on the asset side and immediate or lag? And then on the deposit side, if you can just quantify some of that, can you give some color on what moves immediately versus being a lag and just how much of it?

Well, again, I would point you to slide 8 where we have our interest rate risk profile, we give you the scenarios of how we reduced our asset sensitivity on a year-over-year basis, and then what happens in a static 100-basis-point decline and a ramp decline of 100. And that would include our assumptions around repricing of both assets and liabilities.

So we are asset sensitive and we have, in a static 100 basis points, it's $3 million per 25 basis points. So that would be the earnings, that would be the NII give up on an annualized basis. So again, subject to the timing, it's challenging because, as you know, if the Fed eases in March, well, the SBA book gets repriced immediately in April. And if they ease in May, then that actually takes place in July. So timing matters both on the asset side and the liability side. And based on the forward curves which we're using for our rate forecast, the expectation is the numbers I quoted you on an NII basis.

Okay. And how much of the loan book is variable because -- go ahead, I'm sorry.

No, it's under 50%. We have 48% in fixed rate, and then the combination of prime and SOFR the other part. So it's 50-50-ish. But again, you have this in maximum portfolio as straight as well. So it's a little bit skewed 60-40.

Yeah. And if you -- even when you think about, and I think, Brian, this is an important point, the fixed rate component, which let's say it's roughly around 48%, remember, a lot of those are really commercial loans which are going to be shorter in tenor than, for example, a fixed rate mortgage loan. So those are going to be -- typically, let's assume it's like a 3-year, 3.5-year duration on those assets. So every year, you have about a third of that component, roughly speaking, that is going to be repricing as well. So just keep that in mind.

Yeah, we could see our loan betas above [22%].

Okay. Just I guess a couple others or one or two others. Just on the capital, you talked about M&A, as far as the buyback, can you talk about your appetite there versus the M&A? It sounds as though M&A might be more of interest in the short term than the buyback and having the buyback in place if something doesn't pan through on that. So that was one.

And then just secondly, a follow-up on your M&A outlook, just remind us what -- if you talk about what are the characteristics of a target that are valued to you today.

So in terms of the first part of your question, I think, Brian, it's just we are very, very consistent in how we think about capital allocation. First and foremost, when you think in terms of priorities, it's to support the growth of the business. So we want to make sure that we have more than enough capital to continue to grow our business, continue to invest in the business, talent, infrastructure, et cetera.

As it pertains to the next several categories -- the dividend, M&A, or ultimately, the buybacks -- obviously, we want to -- we're endeavoring to continue to make sure that we are paying our dividend. And M&A is really a function of -- you need, obviously, a counterparty that has to be like-minded. You need to strike a transaction, and that transaction, from a return perspective, from an earn back perspective, from a strategic, and also culturally for the business, has to make sense. So if all of those categories check -- we can check the box on those categories, then that's basically telling you that we feel like M&A is superior to -- we have excess capital, we have no better use for it, and therefore, we can look to the buyback to return that capital back to shareholders. So I would think about that in that priority.

And then you asked a question about targets. I think when you -- when we think about targets today, obviously, we're a slightly larger company. We've grown as a company over time. But we still think that the target market is somewhere between $250 million, $300 million to up to about $4 billion in the greater Chicago metropolitan market. That comes about to around 15 targets in that category today. And that, I would say, would be -- continues to be our target market.

Got you. Okay, that's helpful. And then maybe just one for Mark on the credit side, just with the -- can you comment, Mark, just on the change, if there was any -- and if you've put this in the deck and I missed it, I apologize -- the special mention credits, how they trended from third to fourth quarter, and then just areas that I guess you're paying closer attention to today, given some of the dynamics during the last 90 days or so in the market.

Special mention credits, you say? Okay. Well, special mention credits, there was an increase, but we also had good resolutions in that area also. We continue to see good resolutions, but at the same time, we're dealing with a lot of our PCD credits that have moved in terms of rating. And I expect that to be a lot of the same activity we're going to see this year.

There will be ins, the will be outs. But some of the moves we're making strategically on these credits that we want to either exit or look to upgrade, that's going to be the key -- can we execute those strategies, which are unique each particular deal. And I think we can. There's no trend in terms of what particular asset class is in the criticized book.

We're not seeing one area where we're seeing a big increase. It's just been -- there's been things in the commercial book, there's been things in the SBA book, there's been things that have popped up in different asset classes, but no trends.

Okay.

I'm not sure if I answered the question, Brian, or not.

Yeah, broadly. Just the trend is what I'm looking -- was trying to get my arms around. So they have ins and outs helps. And just in terms of areas you're maybe watching more closely this year, in the near term, can you give any commentary on that?

I'm watching, obviously, like everybody else in this country, office carefully, even though that's not a big part of our portfolio. We spent a lot of time looking at it, upcoming maturities, appraisal values, and what our sponsors are saying about those assets. And then the SBA book is still dealing with the higher rates that impacts their customers. And that is not going to ease up too quickly, so we have to keep an eye on that portfolio also to see if these companies can continue to sustain their payments at those rates that they've had to deal with for the last 18 months.

Okay, got you. That's helpful. And maybe just last big picture question for Alberto. Just Alberto, if you look at talking about last year being a breakout year for Byline, if you look at where you feel like the greatest opportunity for Byline is this year, given the market conditions today, can you just speak broadly to that? Where you feel like you guys and your business model can really excel today, is there any certain areas that are more -- you can be more opportunistic this year?

I think the short answer, Brian, is yes. And I would say we remain very optimistic about the current market position that we have here in Chicago. To give you an example, and I think we might have touched on this at some point towards the latter -- maybe the second-quarter call or the third-quarter call, there seem to be a lot of -- you were hearing the word risk-weighted asset diets primarily coming from larger super regionals or larger regional banks in anticipation of potentially the Basel III endgame, where we saw a lot of people in the market simply close their doors to new opportunities. And we are a relationship-oriented bank. We want to be able to be there for clients and lend through the cycle. And we certainly saw opportunities to do that over the course -- particularly the latter part of 2023. I think some of that will continue into 2024.

I also think, as you well know, we benefit from any type of disruption in the market when it comes to customers and also, importantly for us, when it comes to our ability to pick up high-quality banking talent. We anticipate that we will see opportunities to do that, and we expect to do that in 2024. So we're optimistic about our ability to grow going forward and our ability to continue to add talent and customers in the market.

Got you. Okay. Thank you for taking all the questions, and great year.

Thank you, Brian.

Thanks, Brian.

Thanks, Brian.

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

Great. Thank you, Carla, and thank you all for joining the call today and for your interest in Byline. We look forward to speaking to you again next quarter. And before we leave, I just want to, Brooks, give you a heads up on our conference schedule for the first half of the year.

Thanks, Alberto. Yes, for investors, this quarter, we plan on attending the KBW conference, along with the Piper Sandler West Coast conference.

With that, that concludes our call this morning. Hope everyone has a nice weekend. Goodbye.

This concludes today's call. Thank you for your participation. You may now disconnect your lines.