Q2 2023 Byline Bancorp Inc Earnings Call
Okay.
Good morning, and welcome to the Byline Bancorp second quarter 2023 earnings call.
It's Glenn and I'll be your comments, operator today all of them.
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Investor Relations for bank.
<unk> bank crop.
Beginning of conference call.
Thank you Glenn good morning, everyone and thank you for joining us today for the byline Bancorp second quarter 2023 earnings call.
In accordance with regulation FD. This call is being recorded and is available via webcast on our Investor Relations website, along with our earnings release and a corresponding presentation slides.
Management would like to remind everyone that certain statements made on today's call involve projections or other forward looking statements regarding future events or the future financial performance of the company.
We caution that such statements are subject to certain risks uncertainties and other factors that could cause actual results to differ materially from those discussed.
The company's risk factors are disclosed and discussed SEC filings.
In addition, certain slides contain and we remain referred to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures.
Reconciliation for these numbers can be found within the appendix of the earnings release.
For additional information about risks and uncertainties. Please see the forward looking statement and non-GAAP financial measures disclosures in the earnings release.
I would now like to turn the conference call over to Alberto <unk> President of <unk> Bank.
Thank you Brooks and good morning, everyone. We appreciate you taking the time to join the call. This morning to review our second quarter results that we will be referencing can be found on our website. Please refer to the disclaimer at the front joining me on the call. This morning are chairman and CEO , Roberto our NCR, CFO and Treasurer, Tom <unk>, our Chief Credit Officer.
Mark Who's Sainato before we got into the results for the quarter I want to pass the call onto Roberto for a few items Roberto.
Thank you Alberto and good morning, everyone before Alberto the team go over the strong results for the second quarter.
Answer to your questions.
I wanted to highlight an important milestone in our story.
At the end of June we marked the 10 year anniversary of the recapitalization of the Metropolitan Bank Group, NPG, which as you know we've.
We renamed shortly thereafter highlights.
At the time, the 200 million plus recapitalization was the largest recap of our banking Chicago and over 25 years.
What has been accomplished in our 10 years is remarkable.
<unk> story of transformation.
Looking back to March of 2013, the quarter before we close the recap NBA.
<unk> had 12 bank charters.
88 branches and total assets of $2 4 billion.
Boeing of course, that's the only one charter.
At the end of June not including inland, which as you know close effective July one.
At 38 branches, 60% fewer and total assets of $7 6 billion more than three times.
NPG had total deposits per branch of $25 million and noninterest bearing deposits to total deposits of 26%.
Today, <unk> has $153 million per branch.
Noninterest bearing deposits to total deposits.
30% plus.
We have a top quartile margin.
And better than median profitability in our peer group.
Five acquisitions later.
Excluding inland, but including the <unk> recap.
Our board and management team have shown.
Their expertise in integrating and adding value post acquisition.
Growth has been evenly distributed between well executed acquisitions.
Organic growth driven by talented bankers, who have joined borrowing.
Amid disruption by larger bank mergers in our area.
We expect this to continue.
Over the next five years.
There are a few critical factors that have supported our success.
And this isn't this is not the forum to discuss those but the one which I firmly believe is the main driver people.
Our investment in people.
Our colleagues and collaborators is palpable.
Organizationally.
It shows up in our engagement surveys.
Our ability to continue to attract.
<unk> and.
And inspired talent.
I cannot emphasize enough how new ones this topic because the bottom line.
In home to the best commercial banking talent in Chicago and <unk>.
The line of business.
We operate is hard to replicate by others, especially larger players.
Has been and will continue to be.
Key.
To wit filing was record makes a few days ago as one of Forbes' America's best small employers, we're the only Illinois bank and one of only six Illinois companies could be recognized.
This is thanks to our team members, who support our customers serve and work in our communities and continually look for ways to do better today than yesterday and of course, our dedication and commitment to the wellbeing of our people.
I am as confident as ever in violence positioning as Chicago's largest community bank.
Our ability to outperform through the cycle and to deliver products and service offerings.
Improve lives.
All our stakeholders.
As you can tell we are optimistic about <unk> and.
And frankly, I'm, just thankful to be part of a team that will store the bank into the future.
With that I'll pass the call back to Alberta.
Great. Thank you Roberto and now in terms of the agenda I will start by providing highlights for the quarter, followed by Tom who will walk you through our results in more detail after that I'll provide some closing comments before we open the call up for questions at.
At the time of our last call last quarter, we were coming off a challenging period for the industry that ultimately saw the failure of three institutions and was characterized by a degree of uncertainty that shook the confidence in our system. Our priorities at the time were to remain focus on executing our strategy.
Capitalize on opportunities to grow relationships and hire talent. We also wanted to remain vigilant on credit and manage our capital and liquidity conservatively Lastly, we wanted to complete the inland transaction.
Our performance and results this past quarter show meaningful progress against those priorities before we jump to the highlights let me first give you an update on the inland transaction as previously announced the transaction close to effective July 1st and key milestones in the integration have been completed.
The bank's ups have merged and former inland employees were successfully onboard it into our systems. Our focus is now centered on integrating them into the company our culture and their respective teams. So they can get back out into the market.
Next comes through a rebranding under the <unk> brand and the product and systems conversion, which remain untapped on track for completion later this quarter due.
Due to the timing of the closing the impact of the transaction in the second quarter was minor safer some merger related expenses next quarter aside from the usual noise from one time charges, you will see a full quarter of consolidated results.
We disclosed in our earnings release pro forma for the acquisition by line now has approximately $8 8 billion in assets $6 4 billion in loans and $6 9 billion in deposits, what 48 branch locations.
Moving onto page three of the deck for the second quarter, we reported net income of $26 1 million and EPS of <unk> 70 per diluted share. If we adjust for merger related charges net income was $27 3 million or <unk> 73 per diluted share both figures representing record.
<unk> for the company since going public and up 9% and 20% on a quarter on quarter and year over year basis, respectively.
Profitability and return metrics continue to remain strong across the board ROA came in at 141 basis points, while our OTC was 16, 8% on an adjusted basis ROA was 148 basis points and our OTC came in at a strong 17 five.
<unk> adjusted.
Adjusted pre tax pre provision income was $42 5 million for the quarter, which put our adjusted pre tax preparation on ROA at 230 basis points down five basis points linked quarter, but up 43 basis points year over year.
Total revenue was flat quarter over quarter at 90 million, but up $14 5 million or 19% over the prior year driven by higher net interest income stemming from loan growth and higher rates noninterest income came in at $14 3 million lower than last quarter as expected.
But in line with the prior year adjusting for the impact of fair value marks on our servicing asset noninterest income remained consistent between the quarters.
Expenses came in at $49 million inclusive of merger related charges. If we exclude those expenses were well managed at $48 million.
Netting these two figures translated into positive operating leverage on a year over year basis.
Moving onto profitability the margin remains solid at 432% declining only six basis points from the prior quarter notwithstanding higher funding costs, our adjusted efficiency ratio came in at 51% down both against the previous quarter and lower by over 300.
Third 50 basis points on a year over year basis.
Moving onto the balance sheet loan growth moderated consistent with guidance on the portfolio stood at $5 6 billion as of quarter end notwithstanding the environment. This was the ninth consecutive quarter of growth in loans and we continue to see solid levels of business activity.
<unk> were solid and we saw an uptick in payoff activity during the quarter.
Results were driven largely by our commercial banking sponsor and leasing businesses.
Our government guaranteed lending business had a solid quarter with $141 million in closed loans up from the prior quarter and 12% year over year I'd like to acknowledge and gave a shout out to our team who earlier. This month was recognized by the SBA as the top seven lender.
For the 14th consecutive year, we were also recognized as the top 504 and export lender in the state of Illinois for fiscal year 2022, and.
In terms of liabilities total deposits ended the quarter at $5 9 billion up $104 million from the first quarter.
Average deposits were also up one 7% quarter on quarter, driven by flows related to new customers.
We anticipated this quarter, we continue to see a shift in mix that Tom will cover in more detail shortly towards higher yielding products consistent with a higher rate environment asset quality improved with npls decreasing 15 basis points to 69 basis points at the end of the quarter.
<unk> credit costs were $6 $5 million inclusive of net charge offs, which were $4 3 million or 31 basis points and we had a net reserve build up to $2 million. This.
This quarter, we took advantage of opportunities to accelerate some NPL resolutions, which drove the uptick in charge offs. The allowance for credit losses ended the quarter at a strong 166% of total loans capital and liquidity were further bolstered this past quarter with CET one.
Ratio, increasing by 37 basis points to 10, 6% and our total capital and TCE ratio ending the quarter at 13, 5% and just under 9% respectively with that I'd like to turn over the call to Tom who will provide you with more detail on our results.
Thank you Alberto and good morning, everyone I will start with some additional information on our loan and lease portfolio on slide four.
Total loans and leases were $5 6 billion at June 30, an increase of $53 million from the end of the prior quarter.
Net of loan sold we originated $312 million during the quarter, an increase of 25% quarter over quarter.
We saw increases across all our major lending areas with the strongest growth coming from commercial and leasing groups.
Payoffs increased in the second quarter to $256 million compared to $231 million in the first quarter and line utilization remained flat at 54%.
Looking ahead, we continue to expect loan and lease growth to be in the mid single digits for the remainder of this year.
Turning to slide five our government guaranteed lending business finished the quarter with $141 million in closed loan commitments, which was higher than the first quarter and better than expectations at.
At June 30, the on balance sheet, SBA, 700 exposure and USDA exposure was relatively unchanged quarter over quarter.
Our allowance for credit losses, as a percentage of the UN guaranteed loan balances was nine 1% as of quarter end.
Turning to slide six.
Total deposits stood at $5 9 billion, increasing 2% from the end of the prior quarter noninterest bearing DDA was down $159 million.
Excuse me 158 quarter over quarter, driven by customers seeking higher rate options seasonality and other business activity.
DDA has continued to represent a healthy 30% of total deposits.
Commercial deposits accounted for 48% of total deposits and represents 75% of all noninterest bearing deposits.
As anticipated we saw continued changes in mix during the quarter due to the prevailing market rates competition and higher yielding alternatives.
Deposit costs for the quarter came in at 170 basis points, an increase of 55 basis points from the prior quarter.
On our cycle to date basis deposit betas, both for total deposits and interest bearing deposits stood at 32% and 47% respectively.
We continue to remain focused on funding loan growth with our core deposits. In addition, the inland bank transaction brings approximately $705 million in core deposits to our balance sheet.
Turning to slide seven.
Our net interest income was $76 million in Q2 up 1% from the prior quarter, primarily due to loan and lease growth and higher yields offsetting higher interest expense on deposits.
On a GAAP basis, our net interest margin was 432% down six basis points from the prior quarter.
Earning asset yields increased a healthy 30 basis points, driven by an increase of 35 basis points and loan yields to seven 8%.
Going forward on a standalone basis, we expect our net interest income to be flat quarter over quarter and with inland on a preliminary basis. We estimate net interest income will grow by 12% to $14 million in Q3.
Turning to slide eight.
Noninterest income stood at $14 3 million in the second quarter down five 6% linked quarter, primarily driven by a $865000 negative fair market value on loan servicing asset due to an increase in prepayments, which was partially offset by an increase of 556.
And net gain on sale of loans due to higher volumes and higher net premiums.
Sales of government guaranteed loans picked up in the second quarter by $14 million compared to the first quarter. The net average premium was eight 6% for Q2 higher than the first quarter.
Our pipeline and fully funded government guaranteed loans is forecasted to be consistent with Q2 results.
We expect gain on sale income in Q3 to remain consistent with what we experienced in Q2.
Turning to slide nine.
Our non interest expense was well managed and came in at $49 million in the second quarter and on an adjusted basis $1 million below our Q2 guidance of <unk> $49 million to $51 million.
The increase was attributed to merger related expenses and higher marketing costs due to deposit gathering initiatives.
We continue to remain disciplined on expense management and are updating our guidance related to the inland acquisition.
Forward with England, we believe quarterly noninterest expense run rate will trend between 53% and $55 million.
Turning to slide 10 the.
The allowance for credit losses at the end of Q2 was $92 $7 million up 2% from the end of the prior quarter.
In the second quarter, we recorded a $6 million provision for credit losses compared to $10 million in the first quarter.
The reserve build was largely driven by loan and lease growth and a $6 $5 million increase in the individually assessed portfolio.
Net charge offs were $4 3 million in the second quarter compared to $1 2 million in the previous quarter, our npls to total loans and leases decreased to 69 basis points in Q2 from 84 basis points in Q1 or.
Our NPA to total assets decreased to 54 basis points in Q2 from 67 basis points in Q1.
And total delinquencies were $9 6 million on June 30, a $5 million decreased linked quarter.
Turning to slide 11, our liquidity remains robust we ended the quarter with approximately $320 million of cash and cash equivalents and our available borrowing capacity stood at $1 7 billion.
Our uninsured deposit ratio fell to 25, 9% and remains below all peer bank averages. In addition, the uninsured deposit coverage ratio stood at 132%.
Turning to slide 12.
Our capital position remains strong for the second quarter, we grew capital and as a result, our capital ratios improved quarter over quarter. Our CET. One grew to 10, 6% up 31 basis points and our TCE ratio increased to eight 9% up 21 basis points and is well within our targeted TCE range.
Going forward, we are focused on growing capital, maintaining our strong liquidity position and executing on our strategy with that Alberto back to you.
Thank you Tom.
Slide 13 summarizes our strategy and we remain focused on its execution. We are proud of the strong operating performance. The company delivered this past quarter.
Notwithstanding the uncertainties present and the potential headwinds that may emerge, we remain optimistic about our ability to deliver solid results in closing I would like to welcome all of our new colleagues that recently joined the company from inland and thank our employees for their hard work and dedication on a daily basis.
With that operator, let's open the call up for questions.
Thank you.
Ladies and gentlemen, if you'd like to ask a question. Please press star followed by one on telephone keypad now.
Did you change your mind piece.
Follow up on <unk>.
Let me point to ask your question. Please ensure your phone is on mute locally.
Your first call comes from the line of Nathan race from Piper Sandler.
Your line is now open.
Two questions.
Just thinking about the future deposit growth expectations.
It's nice to see the pace of increase in deposit costs low versus the first quarter and we also saw the pace of core deposit outflows also declined versus <unk>. So just curious how we should be thinking about kind of core deposit growth and overall balances into the back half of the year.
Panic basis, and kind of what youre seeing from a deposit pricing perspective in the Chicago area. These days.
Sure.
So good morning Nate.
So let me break that question into into three parts in terms of kind of like the outlook in terms of kind of core deposit growth going forward.
What we're seeing in terms of the mix and lastly, kind of the competitive dynamics that we're seeing so on the first part.
Look I think our intention is to continue to fund loan growth with core deposits.
That's our that's been our strategy that has served us well over the years.
And we will continue to to try to do that.
Through the cycle so in terms of growth.
The guidance that we'll give you is.
As as goes the loan growth.
Sure.
Long term, what we want to do is fund that growth with core deposits.
Any given quarter or to the degree that we have slightly faster loan growth in one quarter recently, another there's going to be some ebbs and flows on that but but generally speaking.
As you see growth in the portfolio just know that what we're trying to do is fund that growth with.
With core deposits.
The second question regarding the the mix I think.
Look I think it's going to be rate dependent I think Tom can jump in here in a second.
But I think we're seeing some stable a stabilization in terms of.
And kind of the mix change is not to say that we're not and we will continue to see mix change going forward, particularly as <unk>.
Rates continue to be high.
But certainly the pace of the mix change seems to have slowed down a bit and.
And we feel is it stabilizing lastly, the third question in terms of the dynamics.
Look it's a competitive environment I think.
The banks that we're sitting in a position where they had some excess liquidity.
I think they are getting to a point, where they're seeing that liquidity leave the bank and theyre being forced or they have an input those two to raise rates to retain and more importantly to grow in order to continue to fund.
There are business that being said.
Think also we are seeing kind of the competitive environment, probably stabilizing as opposed to what we saw right. After call. It the events of March where it seemed like a lot of institutions in mass.
We're.
Felt like they had a need to have to reprice pretty aggressively in a short period of time, Tom do you want to add yes, I think thats well said Alberto.
I think first and foremost we're going to go with the transaction counts and our relationships that we are growing on the DDA perspective, but you can see that the money market and savings account is about 36% and you could expect that given where rates are in the shape of the flat curve so to speak an inverted curve further out.
That money market and Cds will be kind of the the areas in which we have additional deposit growth, but again those rates are right on top of each other just given the shape of what the fed has done recently and so.
But we will continue to focus on core deposits and core transaction accounts from our commercial clients first.
First and foremost.
And the <unk>.
Additive side, obviously, the fed raised rates the other day and we Havent as Alberto said it seems to have stabilized that's what we're seeing now I guess, we'll have to wait and see next week, but.
The liquidity events are way behind us now and I think that the.
The market's adjusting and they're adjusting prudently on pricing.
Got it.
Paul and I appreciate that you guys don't give specific guidance on the.
Margin going forward.
I guess, just directionally thinking about kind of the.
The pace of potential compression in the back half of the year.
Fair to assume that kind of increases relative to the second quarter level ex accretion, obviously got inland coming on in their margins.
Below year, guys, but I imagine there is also an opportunity to maybe delever the balance sheet to some degree.
Yes, that's a good question I think we gave NII guidance of flat and I think that you would expect probably the same type of margin analysis on a standalone basis, Nate, but with inland you would expect the margin to expand.
And that's excluding accretion Tom.
That would include Incretion.
That includes accretion so.
It is.
If you want to think and this is all hypothetical now obviously because.
But this quarter in September when we have this call in the month of October will be reporting on a consolidated basis, but but on a hypothetical basis, we just had a rate increase.
On Wednesday.
So just I know thats going to add a little bit of noise, because we're going to reprice, our portfolio and that'll that'll certainly help but.
Putting that aside if you thought about the margin in terms of where we are I think it's fair to say that we would see some some pressure on the margin with stabilization of it coming probably in the by the fourth quarter. So think of it in the context of $4 32 today think of it in.
The context of 410 to $4 15, and then.
<unk> kind of pro forma for the acquisition, you would see that margin, including accretion coming right back up to around $434 35 ish.
So hopefully that's enough guidance, obviously this coming quarter, we will be able to give you a lot more clarity to that and breakdown the components between.
The gross margin and the accretion component as well.
Got it that's very helpful.
I could just add a couple more around credit charge offs were up a little bit this quarter. It seemed like it was more driven outside the SBA portfolio. So it would just be curious to get some color on what drove the charge offs in the second quarter, and obviously with inland coming on soon.
Seasonal impacts in the third quarter from a provisioning perspective.
So I'm just curious how you guys are thinking about maybe the reserve trajectory into the fourth quarter and to next year.
In light of the current environment.
So.
Just to comment on charge offs, so we had an opportunity.
<unk> two <unk>.
Accelerate.
The resolution of.
A few loans this past quarter.
And we took advantage of it meaning we felt that.
Resolved these assets.
As some of our competitors is that just cleaning up the runway so to speak.
Quickly as opposed to having planes taxiing on the runway for a period of time as you work through the asset that was advantageous and that essentially drove.
The uptick in charge offs mine you charge offs, where we usually historically have been in the kind of the 30 to 40 range.
No more recently, we've been a lot lower than that.
So, but let's say if you. If you took that that 30 basis point kind of target or 25% to 30 basis point kind of target and were up one basis point above that so we don't we kind of just didn't really think too much we had an opportunity to lower npls.
Nicely, which you saw the 15 basis point reduction in NPL levels. We also saw a reduction in npa's.
And.
We just decided that that was.
In the best interest of the company to do that as opposed to two kind of just have those reductions come through over time. So that's that's really the story there Nate.
Understood.
Sorry, and then you asked you asked the question on the reserve trajectory.
So putting aside.
Inland.
I think obviously, we feel that our reserves are strong and adequate as of the end of the quarter.
<unk>.
The changes in the reserve quarter over quarter really stem from largely growth in the portfolio.
As well as some.
Additional reserves that we assigned two individual loans that are evaluated individually for impairment.
So aside from that I think it's fair to say.
We continue to see loan growth as Tom said, given the guidance I think you could expect the reserve to continue to inch along.
Supported by that.
Okay, Great and then just one last one maybe for Mark just on the office commercial real estate portfolio as detailed on slide 16, if you're going to see.
Negative credit migration within the portfolio recently.
We haven't seen any negative migration.
Looking very carefully at certain <unk>.
Situations.
We don't have a lot, but we have a few that we're watching very carefully.
Again, the test is going to be for these customers we.
We have office, especially in certain locations as that cash flow going to be there we have to resize. The deal what we'll do appraisals have to say when they come in.
So I expect that to be at the top of our kind of our list of things to keep an eye on we just don't have a lot of them.
But we are focused on the ones that we are examining and pretty much regularly every month in terms of what's going to happen next with them.
Good morning, guys.
Hey, congrats on a good about okay alright.
<unk> got about 10 deals that are.
Maturing over the next year and office five this year five next year that we're watching.
Staying focused on with those customers.
Got it.
And all the color and congrats on a great quarter all those successes.
Last 10 years.
The 10 year anniversary as well.
Excellent. Thank you.
Thank you Nathan.
Your second question comes from the line of Jeremy on the whole group.
Your line is now open.
Good morning, everyone.
Good morning, Ben.
Congrats on the 10 year or something like it capped off a decade wells. This quarter I was curious now that the inland deal it's close usually when there's M&A.
Biotic, obviously, the bigger bank I E.
A little bit more deposits in French footprint.
And then the smaller bank and to solve a bigger balance sheet and lending opportunity.
Awesome.
So.
Our holistic see revenue generation to legacy clients. So.
When you think about just the synergistic nature.
Side of the extension in footprint and.
Currently healthy relationships that come with.
Deposits.
Or anything else that legacy by align can get from this outlook with deals closed just curious.
Show some ingredients to the special sauce.
Well certainly the opportunity to become more efficient.
As an organization is one thing to highlight there Ben.
I mean, I think Roberto said it well if you think about <unk>.
Like our trajectory originally.
10 years ago to kind of where we are today pro forma for that acquisition.
Certainly I think over time I think we have shown that we've been able to.
To the liver.
And gain scale profitably gain scale over the course of those years.
Taken taken into account organic growth and obviously the deals that we've done. So we don't think this transaction would be any different.
In terms of.
What other things.
I mean, we have certain capabilities that they did not so.
So for example, our Treasury management suite is a more sophisticated product suite than what they had as a standalone entity. So certainly there'll be some opportunities with customers too.
To improve.
And do more business with those clients I'd say wealth management is also a capability that we have that data not so hopefully there'll be some some opportunities there.
Lastly, as.
As you know they had.
A very successful primary shareholder that that is.
Significant.
Is it a significant real estate.
Business here in the in the Chicago area that is broad in terms of their scope of their activities I think over time there'll be opportunities to do some business.
With them.
Not really factoring that in we're not modeling that and what we.
What we're assuming for the transaction, but certainly a larger bank.
It's a well known very reputable real estate business. So we look forward to being able to do some business with them, but aside from that I think you've covered the other items pretty well.
Gotcha, and then kind of dovetailing off of that can you.
Just to say the guidance for fees I understand the expense so I just.
I can't read my own handwriting. It took all of those notes.
I think fees would be consistent maybe up a little bit, but if you look at what their fee income has been.
As Alberto mentioned, there is some fee services Treasury management and <unk>.
Well that would add to the fee income line, but if you look at their running rate on fee income to be probably consistent.
Got it okay. So that's kind of I was getting at here is like yes, the balance sheet improvement makes sense, but when you think about just potential cross selling it's clearly not going to happen in the first 60 to 90, even in the first year of the <unk>.
Combined entity, but.
When you think about just the fees outside of the normal kind of gains on.
That revenue.
Service fees ATM interchange wealth management.
Do we do we seen an inflection point on Knowles sometime in 'twenty four or.
They're hiring and staffing that's needed as well I was just kind of curious just fee income growth in those areas now that it includes inland it should have some cross selling potential, but just trying to think about the bigger picture here.
Yes.
I think Ben and like we commented on.
I think over time they will.
Some opportunities there, but remember this was.
A very traditional banking institution.
They historically had had a mortgage business that is not something that we opted to continue so that's not going to be part of the business going forward. Obviously that was a source of fee income for them.
It was also a source of expenses for them that will no longer be there, but aside from that youre, taking we're consolidating a brief traditional institution. So your your sources of fee income are going to be service charges on deposits. Some interchange revenue et cetera, but there's nothing really to Exxon.
Got it.
We think we can do.
We could probably do more business under Treasury management side, because we have certain capabilities that they did not.
That will be normal normal course, so I don't know that theres anything extraordinary beyond that.
Okay, and then finally glass loans, obviously big picture and I guess, just dried earlier this month on deal, but your balance sheet is approaching nine is there any staffing or anything else that's needed from a back office perspective to cross 10.
Like 10, you have the potential to the organic is a good growth engine or you could do a deal either way youre still going to hire some staff.
Or is it already in place today.
Yes, there will be.
We've always operated the company with the notion that.
We don't kind of do things on a step function that okay, we get to a certain point and then we need to hire.
Two strengthening certain areas, we need to hire at that point I think we've always built the company on the idea that the company will grow over time consistently and we want particularly on the risk management side, we want to stay ahead of what the.
The regulatory expectations are of the company. So I think we've always built the company.
With that in mind.
Do I think is the question that you're asking is do I think.
We're going to go through a period, where we're going to have to hire as we approached $10 million $10 billion in order to prepare to cross we will have to hire to a degree but I think I'll go back to my earlier comment I think we have built gradually staffing and we have been.
Phil.
Our risk and control functions.
Pretty steadily over time, so we will have to do some hiring certainly as as certain expectations.
We have to meet higher expectations, but but it's not something we're we haven't built those functions and we are starting from scratch and now we have to run to accelerate in order to be prepared.
For for that when the time comes so hopefully that gives you some some perspective on that.
Yes, that's great.
If I can add.
Just quickly.
If you look at the team.
And the directors.
We are.
We have certainly been exposed and cover and worked and entities that are larger than $10 billion right. So the $10 billion threshold is.
It's not new to this management team.
And the experience of the team has had over the years.
Other institutions.
And neither it is too to the directors so.
We're preparing purchase said it well.
We are we're bringing in new talent with the inland acquisition as well.
Strengthening that area for us.
And the risk management area.
And help us to prepare for.
For that jump right as you know the regulators do expect.
Different level of sophistication.
And you've got a different set of regulators as well.
On a different exam process.
Once you go over the $10 billion and we've been in constant communication with them about it and I think we're in a really good place.
Gotcha. That's helpful color appreciate the time, great great quarter, and great past decade, it's been impressive to watch.
Thanks Brent.
Thank you Pat.
Your first question comes from the line of Tammy <unk> from <unk>.
Steven <unk>. Your line is now open.
Hi, Thanks, Good morning, and congrats on what you all have accomplished over the last 10 years is it safe to say everyone in town noticed the byline named by now.
So maybe.
Tom Thanks for all the forward looking commentary given some of the moving parts I appreciate that so maybe just a bigger picture question a number of the banks in Chicago that are larger in market share them buy online they are shrinking their balance sheets, and really focusing more on risk weighted asset optimization.
After yesterday's capitals kind of rules came out so I guess my question is are you seeing it and how can you benefit.
From what some of the larger banks may be doing in your markets.
Really good question Terry.
Sure.
As I think we've always said anytime that there is any type of disruption in the market here and I would I would categorize what you just described as the.
The equivalent of that because I think some of the larger institutions are very very focused right now on reducing risk weighted assets anticipating higher capital requirements. So to answer that question directly yes, we are seeing that.
And I think that.
We will benefit from some of that.
Disruption in the market.
That being said, we are being careful and disciplined just because.
You have institutions that are passing on business or trying to shed business.
It doesn't mean that necessarily.
Want to do that business, where its price we want to do that business.
Without taking over a full relationship.
But I think some other institutions some of the larger particularly out of state institutions in town. I think we are we are certainly hearing from from customers that.
That they feel like.
They should look outside of that company given what the focus is on on balance sheet management today. So I think we will.
We will benefit Terry and I think were were.
Optimistic about our ability to capitalize on that.
Thanks for that and then a couple of questions on inland do you have the conversion date selected I think you mentioned later in this year and are you still comfortable with 30% cost savings and the 8% earnings accretion in 2023 that you talked about when you announced the transaction.
Action.
Yes, we will.
So two questions there so on the conversion, yes, we will be by the time, we have this call.
Next quarter, we will be fully convert it so thats on schedule and progressing along nicely.
And in terms of the accretion.
Terry we're finalizing marks.
I think the biggest.
Fiber of the March like it was when we announced and obviously you could you could look at the rate movements, but.
The interest rate marks are.
Are going to add.
Obviously significant and will add.
Probably I would say at this point, probably a bit more.
Accretion, but we'll be we'll be better prepared to cover that in detail.
At our next call.
Quarter.
Thanks.
And then just one last question I read a couple of days ago about this proposal to triple the transfer tax of real estate in Chicago, I don't know, if thats residential as well as multifamily but.
Is there anything there or are there any risks to the real estate market in Chicago and <unk> in particular.
Sure.
I think it's probably too early to judge.
Any type of impact I mean, I think over the years.
Vince anytime that there is a change and we've been wrong Terry So many times like there has been a new proposed change and we think it's going to have.
X or y positive or negative impact on the market. We think that may be transactions theyre going to slow down that prices are going to be impacted and I think what we've learned is that we have were more often very wrong. When we tried to guess what the what the ultimate outcome is.
Is going to be.
So.
Put it differently the market is pretty resilient.
Our sense is our best guess is the market will adjust accordingly.
There is usually kind of like a reset period and then you.
Proceed you proceed along from there so too early to judge on that at this point Terry.
Again, thanks for taking my questions and I Hope you have a nice weekend.
Great. Thank you likewise, thanks Terry.
Thank you Tammy.
Your first question comes from the line of Brian Martin from Janney Montgomery Scott.
Brian Your line is now open.
Hey, good morning, everyone.
Good morning, Brian Good morning, Brian .
Hey, Justin.
One follow up Tom just on the on the fee income components from from England.
And me what how big that piece was just as we kind of size.
How are things looking forward.
Specifically for inland fee income.
Yes, what do we adding.
Yes, just kind of adding on an annual basis with the acquisition.
I know there was some noise in there with the mortgage unit going away. So I'm just trying to understand how to think about that along with kind of your standalone.
Operation.
I'm going to have to get back to you on that sorry.
Don't have that I don't have in Novato me right now.
Okay, Alright, and then I guess, just I think the commentary on the fee income outside of the fair value Mark Standalone for <unk>, that's been pretty stable here in the last couple of quarters any any areas. You guys are focused on as far as driving growth there prospectively.
I guess, we should be thinking about.
Related to fee income.
Yes, just kind of a standalone <unk> unit I mean, it looks like the last three quarters, it's been pretty consistent when you strip out that mark.
Yes, I think on the fee income side I think we were continuing to improve our treasury management opportunities. We do back to back customer swaps those are starting to pick up a little bit as well and then our wealth management business is growing so that's helping too.
Okay.
It sounded like the pipeline in the government guaranteed expectations next quarter seem pretty pretty consistent with this quarters for premiums in <unk>.
Production correct correct okay.
Okay.
Maybe just two last ones just on maybe for Mark just on the on the trends in criticized and classifieds can you give any update on on the quarterly numbers when we see the 10-Q come out.
Yes, we made some good progress in those areas.
We're still seeing opportunities to resolve.
Hey criticized classified loans that we have as you know there's a lot of capital out there.
Alright, well if people are looking at the opportunities we're taking advantage of those what we're looking for business solutions.
<unk>.
With the customers and we will execute on those very well in the second quarter in both our conventional SBC portfolios.
Will that continue the capitals out there.
We have to make good judgments and strategies with these customers.
In effort to manage those numbers, but even <unk>, which we don't have a lot of there's a hunger for our REO you would want to buy anything that we had this real estate oriented.
And we were able to take advantage of some of that in the second quarter also.
Yes, if I could.
Brian just to add to what Mark said I think for each asset.
Our approach is we have.
We go asset by asset we have a strategy on each and every single asset.
And then you look at alternatives relative to the value ultimate the present value of what that strategy is likely to yield you and to the degree that that you can accelerate and you can be quicker by disposing assets vis vis where you are.
Where your strategy was.
Then we opt to perhaps take advantage of that but it's really just a function of.
Asset by asset what's the strategy, what's what maximizes here the recovery on this.
Particular situation and then comparing that against the opportunities that the market kind of brings to you.
So that's.
Just a bit of color on the.
The philosophy and strategy.
Ryan just to follow up on the fee income.
Roughly 337000 for the quarter.
Q2, Okay. Okay. Yeah Q2, okay I appreciate that.
And then just maybe the last one maybe for Ofer just.
We think about the margin I know, there's a lot of moving parts here. The next couple of quarters, but just over time as far as the margin.
Your model should be able to support I mean, if you are in and the 4% range.
Drift down a little bit legacy and then adding.
The inland transaction and you kind of get back to where we are today.
Is it a margin can you talk about what level of margin sustainability is overtime over the longer term for the operation based on kind of a business mix you guys have.
Yes, Hi, Brian I'll take that one at least to start.
Again, we're asset sensitive so we expect to make a little more money here given the fed increase.
But the market is now anticipating the fed kind of on hold through the end of the year I guess data dependent so we'll have to see.
And so if rates do decline as the market is expecting next year on the short end, we would stand to give up some income here because of our asset sensitivity.
But as you know we continue to work on balance sheet hedges to protect for rates down and primarily working on organic strategies on balance sheet to prepare for the rates down scenario.
Got you.
Okay.
That's helpful.
Maybe last one for me just more big picture as you guys you talked about the $10 billion level I mean, just trying to understand how you guys are viewing that.
Just organically to keep growing and go over it or is there something.
Having to do something from an M&A perspective to get over them in a more significant way.
Hey, you guys are all familiar with it certainly as you outlined but just trying to understand how you're thinking about it as you approach it.
Yes, I think.
Brian So I think we'll say this we certainly don't want to be 10 $1 billion and be their.
Park.
That level.
That said we are also not.
We don't view crossing the $10 billion, mark as necessarily meaning that you absolutely have to.
Do something in order to cross eight I think we've had.
Good organic growth.
If it happens organically great.
I think if you look back at our track record over time, we've been able to do both and be able to do both well. So I think that strategy overall has served us well.
So.
I think it's not something that we think about I think Roberto said it well when he said, it's not something that.
It will be a milestone when we get there but.
We certainly don't want to alter our business are what we're doing is we.
Approach $10 billion, if we have to cross sell and we cross it organically and we will continue to.
To grow our business that way, if we have the opportunity to do M&A like we have in the past then.
We will try to execute on that as well so it'll be a mix of I think it will be a bit of both consistent with what we've done in the past.
Okay understood. Okay I appreciate the commentary and thanks for taking the questions and a great decade.
Super Thank you Brian .
Thank you Brian .
As a reminder, ladies and gentlemen, if you would like to ask any further question. Please press star one on tantalum keypad.
Your next question comes from Damon Delmonte from <unk> W. Denman.
Kevin Your line is now open.
Hey, good morning, everybody congrats on a 10 year milestone and a nice quarter.
So a lot of good questions have been asked and answered, but just kind of like a little bit more color commentary on the loan pipelines I'm just wondering if youre seeing.
Any.
Kind of pullback from customer demand, just given the higher rates, especially in your commercial real estate lending.
Lenny area or are you guys can comment a little bit more selective maybe with some of the credits that youre, adding just given.
More macro concerns.
Good question Damian so.
I think we would say this I think on the real estate side.
It's consistent with what we've said over the last several quarters and that's been the area where you've seen.
More of a more of a material.
Slowdown in activity.
We are still seeing deals we are still seeing opportunities.
It's just the volume of opportunities that we're seeing there is not what it was let's say a year and a half ago.
Or so.
So that area certainly has has seen.
I've seen kind of the brunt of it.
As I think the real estate market is adjusting to higher cap rates are much higher interest rates in terms of that.
Higher costs, if youre looking at construction projects.
So.
I think all of that I think plays place apart, but that being said as I as I just mentioned, we're still seeing activity there we're still seeing.
Strong sponsors that can take advantage of situations.
Our doing that so we're seeing that in the on the real estate side.
As far as the other businesses.
The overall level of activity is pretty good.
It's pretty good I think.
By and large I think businesses have been able to absorb so far higher rates higher the higher cost of capital.
Higher inflation, let's not forget that I think that also helps so to the degree that that they are able to pass along and see revenue increase is coming from price increases.
That certainly has.
Has helped them absorb higher financing costs, but overall our pipelines are are pretty healthy here as we as we start the third quarter and the level of activity has been pretty good so.
So far so good statement in that regard.
Great.
Any areas of any industries or areas of your footprint that are experiencing.
Early stress versus other areas.
Mark do you want to take that one.
Early stress I mean.
Everyone knows that if you say the word office building.
Across the country.
Someone's going to wins.
But I haven't seen an industry type of situation.
Trends in our portfolio are in the market.
I just haven't seen that yet I mean again, its el Burro said.
People are coping with increased rates, our SBA customers, obviously feel the brunt of that the most.
Changes there, but even they have managed very well so far this year.
I anticipate that to continue.
<unk> seen a theme as to what's going on.
And the portfolio, we have or the deals we're seeing not seen it yet.
Got it okay, great, Okay, well like I said a lot of good questions have been asked and you guys provided good answers. So I'm all set thank you very much.
Super. Thank you. Thank you David.
Yeah.
Thank you.
Thank you all for your questions today, I will now turn the call back over to Mr. Alberto Keenan for any closing remarks.
Okay. Thank you operator so.
Thank you all for joining the call today and for your interest in byline.
Brooks do you have something that you wanted to comment on yes, just for investors. This quarter. We plan on attending the Raymond James Conference as long as well as the Stephens Bank covenants.
That concludes our call and we'll see you next quarter. Thank you.
Thank you, ladies and gentlemen, if you would like.
This concludes today's call. Thank you for joining you may now disconnect your lines.
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