Operator: Good morning, and welcome to Byline Bancorp’s Q3 2026 Earnings Call. My name is Ben, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question, simply press the star followed by the number 1 on your telephone.
Operator: If you would like to withdraw your question, press star and two. If you are listening via speakerphone, please lift your handset prior to asking your question. If you require operator assistance, please press star, then zero. Please note the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call.
Brooks Rennie: Thank you, Ben. Good morning, everyone, and thank you for joining us today for the Byline Bancorp Q3 2026 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. As part of today's call, management may make certain statements that constitute projections, beliefs, or other forward-looking statements regarding future events or the future financial performance of the company.
Brooks Rennie: We caution that such statements are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed in its SEC filings. In addition, our remarks and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures.
Brooks Rennie: Reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release.
Brooks Rennie: As a reminder for investors, we plan to participate in 2 investor conferences during the quarter, the Hovde Group Financial Services Conference in Orlando and the Piper Sandler Financial Services Conference in Miami, both in November. With that, I will now turn the conference call over to Alberto Paracchini, President of Byline Bancorp.
Alberto Paracchini: Thank you, Brooks. Good morning, everyone, and thank you for joining us to review our Q3 results. With me today are Chairman and CEO, Roberto Herencia, our CFO, Tom Bell, and our Chief Credit Officer, Mark Cucinotto. In terms of the agenda for today, I'll kick us off with the highlights for the quarter, followed by Tom, who will walk you through the financials.
Alberto Paracchini: I'll come back before wrapping up the call for questions. As always, you can find the deck for this morning on the IR section of our website, and please refer to the disclaimer at the front. Before we get started, I'd like to pass the call over to Roberto for his comments. Roberto?
Roberto Herencia: Thank you, Alberto, and good morning to all. Thank you for spending a few minutes with us this morning. Another excellent quarter with notable positive developments. Financial results were solid and consistent. Quite a few records achieved this quarter. Key metrics were once again top quartile or top decile among our peer group. We increased our dividend during the quarter and continue to repurchase shares opportunistically.
Roberto Herencia: We also announced the acquisition of Illinois State Bancorp, and with that, the analyst community gets the certainty they've been so eager to obtain as to when we will cross the $10 billion threshold. Before passing the call back to Alberto and the team, I would like to talk about these details. I want to spend a few minutes, as I usually do, talking about our people and leadership, which is, of course, what makes these results possible.
Roberto Herencia: Sadly, I first want to take a moment to remember our colleague, Matt Robertson, who passed away in September. Matt was part of the Byline family for more than seven years and led one of our commercial real estate teams. He was an accomplished banker and a respected leader in the Chicago commercial real estate community. What stands out the most about Matt is the impact he had on the people around him.
Roberto Herencia: Matt was a mentor to many of our younger bankers and credit professionals. He was known for his positive attitude, his commitment to his colleagues and customers, and the energy he brought to Byline every day. I talk often about the importance of our people and the culture we are building at Byline. Matt represented so much of what we value: relationships, mentorship, teamwork, and genuinely caring about the people around you.
Roberto Herencia: We miss Matt greatly, and our thoughts remain with his wife, his children, and all of Matt's family, friends, and colleagues. We are grateful for the time we had with Matt and for the lasting impact he made at Byline and on so many of us personally. More broadly, I am especially proud that Byline was recently named one of American Banker's 2026 Best Banks to Work For.
Roberto Herencia: This recognition is particularly meaningful because employee feedback is a central part of this evaluation. We work hard to build a culture where people feel connected to the organization, have opportunities to develop and build meaningful careers, and understand the important role they play in our success. We remain focused on developing our people, creating opportunities from within, and making sure we have the leadership staff necessary for $10 billion and beyond. We actually do.
Roberto Herencia: This leads directly to the leadership transitions and organizational changes we announced earlier this month, effective 1 January 2027. Brogan Ptacin, Head of Commercial Banking, and Mark Fucinato, Chief Credit Officer, will retire at the end of this year after a combined 25 years of service to Byline. Brogan has been instrumental in building our commercial banking franchise and strengthening our position in the Chicago market.
Roberto Herencia: Mark has played an equally important role in strengthening our credit infrastructure and building the disciplined credit culture that is fundamental to how we operate. Both have also invested considerable time in developing the people around them. A condition to their retirement. I am being playful with that last comment, of course, just a bit. We are incredibly grateful for their leadership and the lasting positive impact they have had here at Byline.
Roberto Herencia: We're delighted that Brogan and Mark will remain involved in advisory capacities for the foreseeable future with us. If we had an official Chicago Bankers Hall of Fame, these two individuals would be inducted without a wait period. As part of these planned transitions, we shared in an 8-K earlier this month the names of the Named Executive Officers that will lead the reorganized commercial bank and credit functions.
Roberto Herencia: There are also many other promotions that cascade from these changes beyond the NEOs, including expanded responsibilities and even a swap or exchange of roles into C-suite leaders as part of our commitment to developing leadership. Singling out all of them would not be appropriate in an earnings call.
Roberto Herencia: The overarching message, however, is that these moves are intentional, giving talented leaders opportunities to lead different parts of the organization, building broader experience, and strengthening our executive bench as we cross the 10 billion threshold. We have known for some time that these transitions were approaching, and we've been deliberate in preparing for them. To me, that is what good succession planning looks like.
Roberto Herencia: We are confident in the team we have in place and excited about what this next generation of leadership will bring to Byline. I am proud of the organization we're building together. These changes demonstrate the depth of leadership we have developed across the company and reinforce something I have said many times. Our people and our culture are fundamental to our success.
Roberto Herencia: This team, our people in general, anchors the optimism and excitement I feel about Byline's growth prospects and our progress towards becoming the premier commercial bank in Chicago. With that, Alberto, I'll turn it back to you.
Alberto Paracchini: Great. Thank you, Roberto. Moving on to slide 4 on the deck. The Q3 combined strong financial results with several important milestones. We delivered record net income and revenue, expanded our net interest margin, and grew deposits while maintaining strong capital levels. We also announced definitive agreement to acquire Illinois State Bancorp, and return capital to shareholders through a higher dividend as well as share repurchases.
Alberto Paracchini: All in all, a very productive quarter for Byline. Net income came in at $41.8 million or $0.94 per diluted share, up from $40.2 million and $0.90 last quarter. EPS was up 4% linked quarter and up approximately 15% from a year ago. Revenue reached a record $121 million, up 3% from the Q2, with growth in both net interest income and non-interest income.
Alberto Paracchini: These results translated into an ROA of 167 basis points, ROTCE of just under 15%, and pre-tax pre-provision ROA of 245 basis points. Expenses totaled $59.8 million, and our efficiency ratio was 48.4%. While the ratio increased from Q2, it improved by 260 basis points on a year-on-year basis. Turning to the balance sheet, deposits grew $168 million, or 8.5% annualized to $8 billion.
Alberto Paracchini: Our loan to deposit ratio declined to 93.2% from 96.1% last quarter, and we used excess cash to reduce wholesale funding and manage the size of the balance sheet. Loans and leases declined roughly 1% to $7.5 billion as elevated payoffs more than offset strong origination activity. We ended the quarter with assets just below $10 billion and have flexibility to manage the balance sheet through year-end.
Alberto Paracchini: We expect to cross the $10 billion threshold in 2027, which would defer the impact of Durbin until the H2 of 2028. Moving to asset quality, credit costs for the quarter were $6.7 million, reflecting net charge-offs of $5.8 million and a small reserve build. Net charge-offs came in at 31 basis points, consistent with prior guidance. Non-performing loans increased 22 basis points for the quarter, driven by two relationships.
Alberto Paracchini: One government-guaranteed and one commercial that moved to non-accrual status during the quarter. Our allowance increased three basis points to just over 1.5% of total loans. Criticized and classified loans declined to 3.1% from 3.9% last quarter, marking the third consecutive quarterly decline. Capital levels continue to remain strong. During the quarter, we repurchased approximately 522,000 shares totaling $20.2 million.
Alberto Paracchini: Importantly, we executed across all four of our capital priorities during the quarter: supporting organic growth, increasing our dividend, deploying capital towards M&A, and returning capital through share repurchases. With that, I will turn the call over to Tom, who will walk you through the financials.
Tom Bell: Thank you, Alberto, and good morning, everyone. Starting with our loans on slide 5, total loans ended the quarter at $7.5 billion, down 1% from Q2. Origination activity was strong with $362 million in new loans, up $129 million or 55% linked quarter.
Tom Bell: However, payoff activity continued and remained elevated at $396 million, up 17% linked quarter. Line utilization decreased to 57% from 61% last quarter, reflecting higher net repayment activity and the impact of $112 million of new line commitments added during the quarter. Looking ahead, we currently expect Q4 loan balances to remain flat as payoff activity and new business production are expected to largely offset.
Tom Bell: Turning to slide 6, total deposits were $8 billion for the quarter, up 2.1%, or 8.5% annualized linked quarter. From a mix perspective, growth was driven by interest checking balances and DDAs, partially offset by lower money market and saving balances. The solid deposit growth for the quarter allowed us to reduce our reliance on wholesale funding and improve our loan-to-deposit ratio to 93.2% from 96.1%.
Tom Bell: Deposit costs increased modestly for the quarter, up 3 basis points to 1.95%, while the cost of interest-bearing deposits increased 5 basis points to 2.54%. Turning to slide 7, we had record high net interest income of $103.7 million, up 3% from the prior quarter, primarily due to higher income from investment securities, reduced wholesale funding costs, and the additional day in the quarter. This was partially offset by higher deposit costs.
Tom Bell: The net interest margin increased 5 basis points to 4.33%. The improvement reflected higher yields on cash and securities and lowering borrowing costs, partially offset by higher deposit costs. Excluding accretion, the NIM increased 10 basis points linked quarter. Given our asset-sensitive position, we are well-positioned to grow our net interest income in a rising rate environment.
Tom Bell: That said, given the rate outlook and the management of the balance sheet to stay under $10 billion for year-end, we expect net interest income to be in the $103 million to $105 million range for Q4. Turning to slide 8, non-interest income totaled $17.3 million in Q3, an increase of 3% compared to Q2.
Tom Bell: The increase was primarily driven by higher BOLI income. We also had higher swap income and wealth management income, partially offset by lower servicing asset valuation. Our guidance for Q4 remains unchanged with gain on sale revenues at $5.5 million, with total non-interest income to be in the $14 million to $15 million range. Turning to slide 9, expenses came in at $59.8 million, up 6% from the prior quarter, primarily due to higher incentive compensation, partially offset by lower marketing expenses.
Tom Bell: Non-interest expense to average assets continued to move lower at 2.39%, an improvement of 8 basis points year over year. Looking ahead to Q4, our non-interest expense guidance will be higher at $62 million to $64 million, which reflects higher incentive compensation, benefit costs and marketing expense. Notwithstanding the higher expense guidance for Q4, we still believe that our full year efficiency ratio will be at or below 50%. Before moving to credit, I want to briefly touch on taxes.
Tom Bell: During Q3, we purchased tax credits, which reduced our effective tax rate to 23.3% from 25.7% last quarter. Looking ahead to 2027, we currently estimate our annual effective tax rate to be in the 25.5% range. Turning to slide 10, net charge-offs were $5.8 million, or 31 basis points annualized compared to $4.4 million, or 24 basis points last quarter.
Tom Bell: Criticized and classified loans declined to 3.1% of total loans from 3.9% last quarter. Our allowance for credit losses was $113 million, or 1.51% of total loans, up 3 basis points from last quarter, driven by an increase in the individually assessed category. Moving on to capital on slide 11. Capital ratios increased during the quarter and remain well above regulatory requirements. CET1 increased 37 basis points to 13.29%.
Tom Bell: Our TCE ratio was 11.12% at 30 September, down 24 basis points linked quarter due to higher AOCI and the impact of share repurchases, but up 34 basis points year over year. As a result of our strong capital position, we continue to return capital to stockholders. During the quarter, we repurchased roughly 522,000 shares of common stock and increased our quarterly cash dividend by 16.7% to $0.14 per share.
Tom Bell: Our capital position is a source of strength and continues to provide flexibility to fund organic growth, return capital to stockholders and pursue strategic opportunities. With that, Alberto, back to you.
Alberto Paracchini: Thank you, Tom. To wrap up, we are pleased with this quarter's results and remain focused on executing our strategy. Our priorities are straightforward: grow customer relationships, deliver profitable growth, and invest in the business while preserving a strong balance sheet. We do all of that while maintaining credit discipline, close portfolio monitoring, and balancing risk with reward. Looking ahead to Q4, our pipelines remain healthy and we are confident in our ability to serve customers and compete effectively in the market.
Alberto Paracchini: Our capital position gives us flexibility to support growth, invest back into the business, and return capital to shareholders. Looking ahead, we are prepared to operate above 10 billion in assets and welcome Illinois State Bancorp's customers, employees, and shareholders to Byline in 2027. We believe the combination will strengthen our deposit base, expand our market presence, and add new customer relationships.
Alberto Paracchini: We remain optimistic about the opportunities ahead and focused on delivering long-term value to our shareholders. Before we open the call for questions, I would like to recognize Mark Fusinato, who is here today participating in his 25th and final quarterly earnings call before retiring. Mark joined Byline in 2019 and has served as Chief Credit Officer since 2020. During his tenure, Mark has made significant contributions to our company.
Alberto Paracchini: Our processes and practices are stronger, our credit culture has matured, and the relationship between our lines of business and credit has become a competitive advantage. I am fortunate to work with Mark and grateful for his friendship and support over the last seven years. On behalf of Byline, our board, and all of us here, thank you for your contribution and years of service. We wish you well in retirement.
Alberto Paracchini: I would also like to take a moment to introduce Scott Hawthorne, who will succeed Mark as Chief Credit Officer at the beginning of 2027. Scott joined Byline 3 and a half years ago and is currently Deputy Chief Credit Officer.
Alberto Paracchini: He brings more than 20 years of banking and credit experience, having worked prior to Byline at MB Financial and Fifth Third. Finally, thank you to all of our employees for their commitment to customers and their contributions to another strong quarter. With that, operator, we can open the call up for questions.
Operator: We will now begin the question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first call from the line of Nathan Race with Piper Sandler.
Nathan Race: Hey, guys. Good morning. Thanks for taking the questions, and congratulations on your upcoming retirement, Mark. Wishing you all the best in the next chapter.
Mark Fucinato: Appreciate it.
Nathan Race: I wanted to start on just the strong core deposit growth in the quarter. Obviously, it helped you kind of pay down some wholesale funding in the quarter. Just maybe curious, Alberto Paracchini, if you can just unpack some of the drivers. Is it just some typical blocking and tackling, pulling market share?
Nathan Race: To what extent do you have kind of visibility into kind of additional kind of core deposit gathering at this clip, just to maybe continue to work down some wholesale funding sources and drive and support the NIM?
Alberto Paracchini: Yeah, good question, Nate. Good morning. So obviously, when you annualize the growth this quarter, it looks super solid at 8.5%. The growth was actually a bit higher because we also repaid roughly around $80 million in broker deposits. So net, it was really double-digit growth. Trying to put a joke aside, but I wish we can continue to grow at that type of rate going forward.
Alberto Paracchini: But in all reality, I think the growth this quarter was just simply blocking and tackling. As you know, we are more commercially focused, so as we bring in new banking relationships, they can be lumpier coming in. I think that's the short answer to your question. It's just we continue to add banking relationships. We had a good quarter of that. If you look at the changes in the balances, it was driven by interest checking.
Alberto Paracchini: Non-interest bearing obviously moved higher also, which certainly helped. So the mix remained attractive. But in terms of going forward, Nate, listen, as you know, we've always been very focused on the right-hand side of the balance sheet. We believe that fundamentally, that's really where the value of a financial institution lies.
Alberto Paracchini: We'll continue to always be prioritizing deposit growth going forward. Again, in terms of what's driving it's again just the focus on the strategy. Customer by customer, the segments, and certainly the commercial banking orientation. So I gave you some color there. Hopefully, that answers your question.
Nathan Race: Yep, that helps. Maybe a question for Tom Bell. I know you don't really guide a margin, but if we do get a couple more Fed rate hikes as the forward curve implies, just any thoughts on betas between both loans and deposit costs as we move into Q4 into the first part of next year?
Tom Bell: Sure. Hi, Nate. On the loan side, just hit that first. We continue to have cash flows and runoff in the, I will call it
Tom Bell: 300 million to 350 million in fixed rate loans that would reprice. Obviously, the book is a little bit over 50% floating rate. So that should give you some guidance on the betas there. On the liability side, we have not seen much to date for interest-bearing deposits and total deposits. But generally, probably in that 30% to 40% range is the beta. If you include CDs, I think about it more like 40% to 50%.
Nathan Race: Okay. Got it. Just one last one for me. I appreciate the guide on kind of flat loans for Q4, just given some of the pay-off headwinds. As you look out to next year, and just given that we are perhaps kind of in the latter innings of some of the recycling of acquired loans that we discussed last quarter, and maybe also the latter innings of some of the kind of the COVID era CRE loans paying off to some degree.
Nathan Race: Is there anything that you see on the horizon, Alberto, that would cause you guys to not achieve mid-single-digit growth in loans next year, notwithstanding the acquisition impact?
Alberto Paracchini: Really good question, Nate, and thanks for asking it. I know you were the one that asked the same question last quarter. I think, look, we probably underestimated a little bit how strong the payoff activity was going to be this quarter relative to what we told you in Q2. That being said, it is always hard to forecast that variable perfectly.
Alberto Paracchini: Sometimes we get it right, sometimes we do not, and certainly this quarter was one of those. That being said, if you look at the origination activity, the origination activity remains really good. We are seeing plenty of opportunities. Credit demand looks okay broadly in the market.
Alberto Paracchini: When we look at that and when you normalize a bit for the elevated payoff activity heading into next year, I think that mid-single-digit range, obviously adjusting the base to reality and also to the reality that we will be managing the balance sheet here over the last quarter of this year to make sure that we stay under $10 billion through 2026. We still feel good about that mid-single-digit range into 2027.
Alberto Paracchini: That being said, we are in a rising rate environment. You have heard me comment in the past about real estate transaction volume being lower, the market being competitive. That is likely to be the case in 2027 with higher rates. Also, you have to factor in, it is not just prime or SOFR, it is really the backup in Treasury rates, which will have an impact to some degree on cap rates and valuations.
Alberto Paracchini: That is likely going to have an impact on transaction activity going into next year. With that caveat, and all the other uncertainties that you well know that exist in the environment today, I still think that for us, that single mid-digit kind of growth rate in terms of loans is probably the right place.
Nathan Race: Okay, great. I appreciate all the color. Thanks, guys. I will step back.
Operator: Your next call comes from the line of Brendan Nosal of Hovde Group.
Brendan Nosal: Hey, good morning, everybody. Hope you are doing well.
Alberto Paracchini: Hey, Brendan.
Brendan Nosal: Hey. Maybe just starting off here on your recent M&A announcement. I know it is a little stale at this point, but could you just give us a little bit of background on how the Illinois State deal came to be and just one or two things that you are most excited about for that transaction?
Alberto Paracchini: It came to be through a meeting and getting to know the owners and the leadership of that institution earlier in the year. We certainly knew of them. We knew who they were. I personally did not know them personally, but we had been tracking that institution for some time. We had the opportunity to meet.
Alberto Paracchini: It was a situation where you had the leadership team there had built that organization over roughly a 40-year period and were looking to find a good home for the franchise, the customers, the employees, the relationships that they had built over that period of time. Brendan, as we have conveyed and talked about in the past, we think we are a really good home for those types of situations. This is just one example very similar to some of the transactions that we have done here in the past.
Alberto Paracchini: That was the gist of it. I can tell you that it was relationship driven. This was not a competitive situation. We had a meeting of the minds. We felt we were a good fit for each other, and we worked on trying to get to an outcome that certainly was good for both parties, and we think we were able to do that.
Alberto Paracchini: That's in context, the background on the transaction. In terms of what it adds, it solidifies our market presence in certain parts of the city where we are just not there. It adds customer relationships and as always, it's a source of core deposits and funding to the bank.
Brendan Nosal: Yeah. That's super helpful. Second one for me, just kind of sticking on this theme. It's just been a really active period for M&A kind of in and around the state of Illinois over the past couple of months. You obviously got kind of your bite at that with the deal that we just discussed.
Brendan Nosal: But as you look at the M&A landscape, are there still potential partners that you think could come to market in the near to medium term, or has the pipeline for potential partners kind of in your markets depleted somewhat?
Alberto Paracchini: No, I think there's still opportunities there, Brendan. I think as the usual wording that people use to describe kind of the M&A environment, I think there's active chatter.
Alberto Paracchini: I think, for us, it's just sticking to our knitting, looking to do transactions that make sense, that are accretive to the franchise that, hopefully, with partners that we like and where they're looking to partner and put their institution with a partner that can provide them with just better capabilities and a home for the business that they've built. I think the chatter in the marketplace continues, and I would say, I think the environment is constructive.
Brendan Nosal: Okay. Fantastic. Thanks for taking my questions.
Operator: Your next call comes from the line of Damon DelMonte of KBW.
Damon DelMonte: Hey, good morning, guys. Hope everybody's doing well, and thanks for taking my question. Just wanted to ask on the outlook for non-interest income, Tom. Could you just kind of help us connect the dots for the range that you gave of $14 million to $15 million off of this quarter? I'm guessing there are some, I think you called out a couple one-time items maybe this quarter that kind of would get us down to that lower level.
Tom Bell: That's correct, Damon. The BOLI income was a one-time event, so that kind of brings us back to normal operating levels.
Damon DelMonte: Yeah. So that was like a couple million, maybe?
Tom Bell: A little over $1 million, yes.
Damon DelMonte: A little over $1 million. Okay. All right, great. On the expense side, the lift from this quarter, is that just kind of like year-end accruals and anything else particularly driving that?
Tom Bell: That is correct. Year-end accruals and then some of the marketing campaigns that we maybe didn't do in Q3 that we anticipate in Q4, the timing of those expenses. So the marketing expense is going to be a little bit higher in Q4.
Damon DelMonte: Got it. Okay. If I squeeze one more in.
Alberto Paracchini: Yeah, Damon, if I could add.
Damon DelMonte: Oh, sure.
Alberto Paracchini: I was going to add maybe to what Tom Bell said. I think when you look at our performance, obviously performance this year has been super solid. So what you are seeing in terms of the Q4 is aligned with that in terms of the higher incentive compensation.
Damon DelMonte: Got it. That makes sense. Yes, it has been a good year. Then just one more quick one on credit. I think you called out a couple loans that drove the NPA increase this quarter. Any color on those? Maybe size or industry or anything like that?
Mark Fucinato: Hi, Damon. Mark Cusanato.
Damon DelMonte: Hey, Mark.
Mark Fucinato: One of them was in the solar industry, and we expect that one to hopefully be resolved sometime early next year. We are well reserved against that one. And the other one was a C&I credit that involved a company that does purchase of distressed credit card consumer debt. These are both long-term customers at the bank.
Mark Fucinato: These things occur once in a while. We have been tracking them for a long time, and we are properly reserved against both of those situations at the present time.
Damon DelMonte: Okay, great. That is all that I had. Congrats again, Mark, and thanks for taking my questions.
Alberto Paracchini: Great. Thanks, Damon.
Mark Fucinato: Thank you.
Tom Bell: Thanks.
Operator: Your next call comes from the line of Daniel Tamayo of Raymond James.
Daniel Tamayo: Yeah, thank you. Good morning, everybody.
Alberto Paracchini: Morning, Danny.
Daniel Tamayo: Yeah, maybe first, just curious as we think about the crossing of the $10 billion and the actions that you are taking to stay below in 2026, is there any kind of reversal of those actions in 2027, in the beginning of the year that would create an increase in the balance sheet abnormal growth early on, maybe having to do with liquidity or something like that we should be thinking about as we model out next year?
Tom Bell: I think so, Danny. We have been conservative on any bond purchases right now just because we do not want to go over. So that is certainly an area where we are a little light on a percentage basis, and you would expect in the Q1 that that would change.
Daniel Tamayo: Okay. Thanks for that, Tom. Can you give a little bit of color around the loan sales in the Q3? Just looking at the line items, it looks like it came from construction and maybe C&I, but just curious where you were selling, and then just thoughts if it was a one-time event or there is some potential for that to continue.
Tom Bell: Sure. The bulk of those sales are the government-guaranteed loans that we sell every quarter. That is something we disclosed in the loan side this time because there were some SAG assets that were sold and some other loans that other banks took a participation in, so to speak. Those are small pieces in C&I, but the bulk of the sales are the SBA sales.
Daniel Tamayo: Okay. That is kind of regular way stuff, but it was just elevated in the quarter, is the way to think about it?
Tom Bell: Yes.
Alberto Paracchini: Yeah, I think we highlight, Danny. I think I would emphasize just the one that ultimately matters a lot is really the government-guaranteed, kind of recurring government-guaranteed loan sales. You can think of the other ones as really not having very material economic impact in terms of the P&L.
Daniel Tamayo: Yeah. How much were those, Alberto?
Tom Bell: Do you remember? I'm sorry, what is the question?
Alberto Paracchini: The delta between the.
Tom Bell: Well, we sold like $70 million.
Alberto Paracchini: Yeah
Tom Bell: $71 million of SBA loans. The residual is SAG assets and a couple loans we sold as participations.
Alberto Paracchini: It is about $30 million.
Tom Bell: $30 million.
Daniel Tamayo: Okay. Thank you for that.
Tom Bell: But I think that is the point. These are not like asset sales where we are taking a significant loss or a gain that is part of a business structure. It is just operating balance sheet.
Daniel Tamayo: Okay. Lastly, if I am looking at this correctly, the purchase accounting accretion came down quite a bit in the quarter. Just curious if you are expecting a rebound in that level from a scheduled perspective in Q4.
Tom Bell: It is less than $1 million a quarter. I would think it is, we have given guidance in the past, and the numbers are so small now, at least excluding any future transactions, which we have not really disclosed yet. So more to come on that, but it is a couple million dollars currently for 2027 in total.
Daniel Tamayo: Okay. So we are still running off from these levels. There was nothing unusual in Q3 in terms of accelerate, I guess it would be the other way.
Tom Bell: Not really. Maybe.
Operator: Yeah
Tom Bell: no.
Daniel Tamayo: No, I think the
Daniel Tamayo: Little faster.
Alberto Paracchini: I think the point that we tried to highlight, Danny, is if you just look at the margin ex accretion, obviously the growth in the margin for the quarter was more significant than it was with accretion included. I think accretion was roughly 5 basis points.
Alberto Paracchini: Ex accretion was like 10 basis points, which for a quarter, rates increased, but that increase happened very much towards the latter part of the quarter. So that is still not baked in. So we still think to Tom's comments in his remarks, it is a nice tailwind going into Q4 and 2027.
Daniel Tamayo: Understood. Well, thanks for all the color, Alberto and Tom. Appreciate it.
Alberto Paracchini: You bet.
Tom Bell: Thank you.
Alberto Paracchini: Thank you, Danny.
Operator: Your next call comes from the line of Brandon Rudd with Stephens.
Tom Bell: Brandon, hi.
Alberto Paracchini: Morning, Brandon.
Operator: Your next call comes from the line of Brian Martin with Brean Capital. Your line is open. Please go ahead.
Brian Martin: Hey, good morning, guys.
Tom Bell: Hey, Brian.
Alberto Paracchini: Brian.
Tom Bell: Good morning.
Brian Martin: Hey, thanks for all the insight thus far. Just a couple for me. Tom, on the September, do you have a sense for this? Is there a big difference in the September margin exit versus what it was for the quarter? Just trying to gain some perspective on the timing of those wholesale payoffs in the quarter. If it had an impact, or the average for the quarter is a pretty good base?
Tom Bell: Pretty consistent averages over quarters. Some of the payoffs that did happen, happened in the middle part of September. I would say generally, yeah, the margin is pretty much consistent on average versus period end.
Brian Martin: Okay. Thanks for that. On your outlook, Alberto Paracchini, you suggested, as you have in the past on the real estate, if we are in a little bit of a rising rate environment, that may tail off a bit, but your guide or comfort level still seems to be in that mid-single digit outlook in the coming quarters.
Brian Martin: Does C&I make up for that potential slowdown in real estate, and then that is how we should think about where the growth is in the coming quarters, more on the C&I side and maybe a little bit less real estate. That is kind of your outlook today that can overcome it?
Alberto Paracchini: I still think we are. It is not to say that we are deliberately trying to reduce our CRE book. We are not. In fact, if you have tracked our CRE concentration ratio today, we are probably at a pretty low point, which means we have ample capacity to grow that category. I am just cautioning against an environment.
Alberto Paracchini: If you think about the beginning of this year and what market expectations were in terms of rates, it was for lower rates. I think a lot of people on the commercial real estate space were anticipating, given the fact that rates are going to trend lower, properties were going to come to market, transactions were going to come to market, and activity overall in terms of financing that was going to increase.
Alberto Paracchini: I cannot point to anything now other than just look, we have had a significant backup in intermediate and longer-term rates, and that is likely to have some impact on projects and overall activity in real estate next year. That being said, as you well know, the environment can change very quickly.
Alberto Paracchini: There are variables in the environment that if they were to reverse, so the geopolitics, the rise in oil, inflation trending down, then you can obviously see a reversal of that environment in terms of that having an impact then on the business. I am just highlighting that. To answer your question in terms of our business in general, you are going to see it is really more broader than just say C&I. We expect that we will see growth coming from the different business lines that we have that constitute that.
Alberto Paracchini: C&I, so that is our bread and butter commercial banking business, our sponsor business, the SBA business. Unless we get into an environment where we are seeing significantly higher rates that are likely to impact that, originations in that business. I think activity there remains solid. Lastly, our leasing business there as well. Leasing this year has been probably a little slower than in the past.
Alberto Paracchini: As you know, that is a book that tends to repay very quickly because it is just the nature of that business. That is an area also that we anticipate that going into next year, capital spending continues to remain solid. Demand for essential use equipment of the type that we finance continues to be good. That is a business that we anticipate also can grow next year.
Brian Martin: Okay. Thanks, Alberto. Sorry if I wasn't clear. I guess that was your point is what I was suggesting is that if real estate does potentially slow a little bit, it sounds like you've got some pretty good runway in these other areas to kind of offset that if it does happen, and we'll see if it does.
Brian Martin: Thanks for the clarification on that and the bit of color on the other segments that can help out on that. Maybe just the last for me was the efficiency ratio and expense management has been great. Just kind of wondering how you're thinking about operating leverage in 2027 versus 2026 and just how to think about that given certainly the inflationary costs and whatnot, and how to balance that with such a great level where it's at today.
Tom Bell: That's a great question. I think we still, again, want to focus on revenue growth over expense growth, so having operating leverage there. We're still working on the numbers, Brian, so more to come on that. Generally speaking, we want revenue growth to exceed expense growth.
Brian Martin: Got you.
Alberto Paracchini: It's a habit, Brian, in terms of this is not something that we focus on this quarter and then we don't talk about it or focus again. It's constant. We want to continue to drive the efficiency. You have a revenue component there that impacts it, but we want to continue to drive that cost to asset ratio down.
Alberto Paracchini: So we remain very focused on that. Some of that is just scale. As we continue to grow the balance sheet, we want to make sure that that growth translates into better scale. But it's a habit, and it's a constant source of focus for us.
Brian Martin: Got you. Okay. Well, you are doing a great job at it, so we will stay tuned and thanks for taking-
Tom Bell: Thanks, Brian.
Alberto Paracchini: Thanks, Brian.
Operator: Your next call comes from the line of Brandon Rudd with Stephens.
Brandon Rud: Morning. Sorry about earlier. I am not sure what was happening there. Maybe if I could ask two questions. Just the first one, just to clarify, Tom, the $350 million of fixed-rate maturities, is that per quarter? How do those roll-off yields compare to new origination rates?
Tom Bell: Sure. Yes. That is for the quarter. That includes leasing. The rate is, call it 515-ish. So we think about 7%, 7.25% for yields.
Brandon Rud: Okay. Got it.
Tom Bell: Depending on the asset class, but that is on a basis.
Brandon Rud: 200 basis points or so uptake there.
Tom Bell: Yeah.
Brandon Rud: Okay, perfect. Thank you. Then just one on the buyback with the deal announced earlier this month. Are you restricted from repurchasing additional shares until that closes, or are you still open for more buybacks here in Q4? No? Okay, perfect.
Tom Bell: No, we are still there.
Brandon Rud: Got it. Okay. Thanks for taking my questions.
Tom Bell: Thank you.
Alberto Paracchini: Great. Thank you, Brandon.
Operator: If you would like to ask a question, please press star one to raise your hand. Your next call comes from the line of Kenneth James of StoneX Group.
Kenneth James: Good morning, gentlemen. Thanks for taking my question.
Alberto Paracchini: Yeah, Kenneth.
Tom Bell: Morning, Kenneth.
Kenneth James: Yes. I just wanted to circle back to the balance sheet and growth expectations. The main thing I am trying to wrap my head around is the degree of time that you have been managing these elevated payoffs and also around the $10 billion number.
Kenneth James: How long does it take to get back up to a normal growth range? I guess I have a natural inclination that once you get past the end of the year, that the balance sheet could behave like a coiled spring back up to a mid-single-digit growth rate. I am just wondering, is that a fair assumption, or does that need to be tempered?
Tom Bell: Sure. I think we think mid-single digits is appropriate as we move forward, ex any M&A transaction that we are going to close. We have been operating in that level. Again, line utilization was down for the quarter.
Tom Bell: That is not a normal thing that happens. We expect that over time to move up. That would certainly give us positive loan growth if we would have had line utilization unchanged quarter over quarter. I think generally speaking, a mid-single digits is where we are operating.
Kenneth James: Okay. In terms on the deposit side and the rising rate environment, how do you guys manage your deposit cost in terms of how much of the deposit base is centrally managed on a rate sheet versus linked to an index and automated versus negotiated individually? Just generally speaking.
Tom Bell: We have pricing committee meetings that meet weekly. We review the competition, we look at our balance sheet needs, and we set rates based on that. We have standard rack rates, and we offer promotional rates from time to time in the marketplace. There's certainly, depending on the size of the deposit base, there may be some exceptions given, but generally speaking, it's rack rate type pricing.
Tom Bell: There are some index price products, like for example, instead of doing brokered CDs, we do brokered money markets. We did that for balance sheet management purposes, and so that's indexed to a Fed funds rate or a SOFR rate.
Kenneth James: Okay. In terms of betas that we might see now versus last time, and what's kind of assumed in your sensitivity modeling, are they similar? The 40% to 50% total deposit beta number you mentioned.
Kenneth James: I guess I have an inclination that if we just get three hikes at three meetings, that betas could be managed lower than 500 basis points was last time. Is that a fair assumption or in line with your thinking the market would allow you to do that? Or is last time a better assumption?
Tom Bell: We think more to come on that. We'll have to see how they behave. But generally speaking, at least to date, they seem to be reverting back to the normal quotes that we gave on betas. As the Fed was moving in that cycle up, the last 100 basis points really hurt banks, all banks, and I think it was because of the, obviously, the liquidity events that were going on at the time.
Tom Bell: We've been able to bring back our cost of funds from that level, even though the Fed was on hold for some time here, our margin expanded over the year. I think we're planning on the 40% to 50% that we already disclosed, but we'll certainly defend our deposit base and our customers, and if we have to go higher, we will. But to date, we aren't seeing it in the marketplace.
Alberto Paracchini: Yeah. Ken, every cycle is different. I wish we were perfect on this, but there's just a lot of uncertainty on, call it on that topic. History can help you, can certainly give you ranges in terms of how depositors are going to behave. But to Tom's point, we can look back to the last cycle, and early on that hike cycle, betas were barely moving. Then all of a sudden, we got to a certain threshold and customers woke up.
Alberto Paracchini: People became much more sensitive, and you saw how banks reacted to that. The reality of this is, even though we talk about uniformity and betas, people talk about deposit betas, the betas for interest-bearing deposits. The reality is it's just a mix of betas. We have certain pockets of a portfolio that are more rate sensitive, and therefore, the betas are going to be higher.
Alberto Paracchini: They'll react quicker. Then we have some other parts of the deposit book that are not going to be that sensitive and are not going to react very quickly to changes in rates. So how all of that comes out, I think to Tom's point, that's our view today, but obviously that's subject to some degree of uncertainty because this hike, like all other hikes, tend to be a little bit different from the previous one.
Kenneth James: Okay. Thank you very much for the color, gentlemen.
Alberto Paracchini: You bet. Thank you.
Tom Bell: Thank you.
Operator: Your next call comes from the line of Brendan Nosal of Hovde Group.
Brendan Nosal: Hey, guys. Just want to circle back to the cost conversation real quick. I get the guide for Q4. It sounds like some of those things could be transitory or pushed from Q3. I am just asking because I am wondering if the full $62 million to $64 million in Q4 carries through into early 2027, or if there is some kind of transitory cost that could fall out of the run rate at the turn of the calendar.
Tom Bell: Good question. You are right. December is the Q4 estimate. We expect the cost to come down in Q1. Not really ready to give guidance there yet, but the incentive comp is driving the higher expense base for Q4 guidance.
Brendan Nosal: Perfect. Thank you.
Operator: Your next call comes from the line of Nathan Race of Piper Sandler.
Nathan Race: Yeah. Thanks for taking the follow-up. Just going back to buybacks. Pretty strong activity there. I think it is maybe the second highest level of buybacks in a quarter from what we have seen over the last handful of years. That is with the stock trading near all-time highs.
Nathan Race: Just curious if there is anything to read into that in terms of just maybe how consistent buybacks to a pace of the degree we saw this quarter can be a more continuous component to your excess capital management strategy, just given how strong your capital levels are. Which still probably provides flexibility for acquisitions to the extent they materialize going forward.
Alberto Paracchini: I think, Nate, I would put it in the context of the capital priorities that we lay out in terms of supporting organic growth. Whether you measure it from an earn back perspective or you measure it from just roughly a yield perspective, that is probably the top use of capital. So first and foremost, supporting that.
Alberto Paracchini: Second, over time, and this past quarter you saw us do that in terms of being able to do consistently over time dividend increases that are, call it very sustainable. That is an example of something that again, we did this quarter. Thirdly, in this quarter, we had the opportunity to do that is having enough capital and putting that capital to work in M&A transactions. Then you have the safety valve at the end, which is the buyback. When it comes to a buyback, it is not necessarily buyback at all costs.
Alberto Paracchini: We're not in a situation where you can think about some of the largest banks in the country where they have really no other use other than to buy back. We have options in terms of what to do with the capital. So we're going to be sensitive to what that buyback yield is, what the earn back is on a buyback relative to the other uses that we potentially have. So hopefully that frames it and gives you a sense.
Nathan Race: Yeah. That's helpful. Thank you for that, Alberto. And just maybe one more for Tom Bell. You mentioned 50% of the loan book is floating. Do you have the mix between prime and SOFR there?
Alberto Paracchini: It's in the deck.
Tom Bell: It's in the deck, Nate.
Nathan Race: Okay. Sorry, I did not catch that.
Alberto Paracchini: All right. SOFR is 34%, prime is 19%, and other is 4%.
Nathan Race: Okay, great.
Alberto Paracchini: Tom, page 5 of the deck, Nate.
Nathan Race: All right. Got it. Thanks, guys. Appreciate the color.
Alberto Paracchini: You are welcome.
Tom Bell: Absolutely. Thanks, Nate.
Operator: Thank you for your questions today. I will now turn the call back over to Mr. Alberto Paracchini for any closing remarks.
Alberto Paracchini: Great. Thank you, operator. Thank you for joining us this morning. We appreciate your continued interest in Byline. I hope you all have a happy Halloween, happy Thanksgiving, and a happy start to the holiday season, and we look forward to talking to you again in the new year. With that concludes the call. Thank you.
Operator: This concludes today's call. Thank you for attending. You may now disconnect.
Operator: This event has now concluded. Access the Byline Bancorp, Inc. IR website for more information. This line will now disconnect.
