Byline Bancorp, Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to Byline Bancorp First Quarter 2023 Earnings Call. My name is Glenn, and I will be your conference operator today. Please note, the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call.

Thank you, Glenn. Good morning, everyone, and thank you for joining us today for the Byline Bancorp First 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 the 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 in its SEC filings. In addition, certain slides contain and we may refer 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. Please note any guidance provided excludes the impact of the Inland Bancorp transaction. With that, I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Thank you, Brooks, and good morning, everyone. Thank you for joining the call this morning to review our first quarter results. We appreciate all of you taking the time to listen in. You can find the deck we will be referencing this morning on our website. And as always, please refer to the disclaimer at the front. Joining me on the call this morning are Chairman and CEO, Roberto Herencia; our CFO and Treasurer, Tom Bell; and our Chief Credit Officer, Mark Fucinato. Before we get into the results for the quarter, I want to pass the call on to Roberto to comment on the recent events that took place in our industry over the past month and a few other items. Roberto?

Thank you, Alberto, and good morning to all. I would first like to start by acknowledging Ed Wehmer, Founder and CEO of Wintrust on his retirement effective May 1. Over the past 30-plus years, under Ed's leadership, Wintrust has grown into a highly renowned institution, and we want to recognize the positive impact that Ed has had in the Chicago banking market during his time leading Wintrust, and is also a genuine and warm-hearted human being who has been very generous with his time and is very active in philanthropy. He has been a friend and a supporter. And on behalf of the Board, we extend our profound appreciation to Ed and wish him well in his retirement. We also wish Tim Crane well in his new assignment. Equally important, I also want to acknowledge the recent senseless act of violence, devastation and tragic loss that our friends at Old National suffered in Louisville, Kentucky, earlier this month. We know Jim Ryan, Mark Sander, and former CEO Mike Scudder well and can only imagine how difficult this has been. We would like to express our sympathy and on behalf of entire Byline team, our thoughts and prayers are with the affected individuals, their families and everyone at Old National. As Alberto said, we appreciate the time you dedicate to us during this quarterly call. Our team spends a good amount of time preparing for this exchange. And we do it lightly because it gives us another touchpoint to discuss results from operations, our outlook and market events. What transpired this past month of March and early April was not business as usual for the industry, and frankly, no bank, whether or not we were experiencing deposit outflows. Hearing some bank executives describe those weeks as a non-event is at best naive. The idiosyncratic risks associated with the two large bank failures and the differences between the two banks and a bank like ours, and most other banks for that matter, have been well documented by now. We run a simple banking model. We are a community and relationship-based bank, serving small- and medium-sized businesses and consumers who live within the areas of our branches in Chicago and Milwaukee. Within that model, we provide sophisticated banking products and services with a well-trained, experienced and talented team of bankers and a very active and engaged Board of Directors. We operate our model within a risk appetite statement approved by our Board of Directors, and we designed guardrails around that statement to measure and track items like cybersecurity, liquidity, loan and deposit concentrations, credit and capital stress testing, and prepared for unusual events such as this one. This is, of course, a team effort at Byline, but it is supported by a robust enterprise risk management process led by our Chief Risk Officer and her vigilant and talented risk management group. The headline of the events that took place put into action our incident response team out of an abundance of caution. And that meant that we met multiple times a day to track social media, customer behaviors, liquidity guidelines, et cetera. It also meant we had the obligation to communicate with our customers proactively to educate them about the situation. All of this was done in a short period of time by a talented group of people we are proud to call Byliners. Since the formation of Byline 10 years ago, we have run a bank by this time with a strong governance by our Board of Directors, one of the most diversified loan books in the industry and a granular and well-diversified deposit base, all anchored by a strong capital base. Our ratio of uninsured deposits to total deposits is well below the median for the industry and our peer group. So rather than say it was business as usual, we opt to give you a view of how we prepare for unexpected events such as this one. Rather than tell you it was a non-event, we prefer to show you actual results. Alberto and I, along with the rest of the team, are proud to share the results of what we believe was a very strong first quarter. Alberto, back to you.

Thank you, Roberto. And now moving on to our results for the quarter. As usual, I'll start by walking you through the highlights for the quarter before passing the call over to Tom, who will provide you with more detail on our results. Moving on to Page 3 of the deck. At last quarter's earnings call, we spoke about being cautiously optimistic about 2023, notwithstanding a more challenging rate environment driven by persistently higher inflation and a more cautious outlook on the economy. We expect it to grow organically, continue to add talent to the organization and complete our merger with Inland Bancorp. As Roberto mentioned in his remarks, the failure of two banks with fairly idiosyncratic business models shook the confidence in the system to its core and gave our industry its own version of March Madness. Putting aside the basketball analogy, we responded accordingly by staying grounded with facts, proactively communicating with customers and employees, and being on the lookout for opportunities arising from the environment. In summary, and notwithstanding the operating environment, we were pleased with our results for the quarter as they reflect the resilience of our business model and approach to the business. For the quarter, we reported net income of $23.9 million and EPS of $0.64 per diluted share. This was a slight decrease compared to the previous quarter, but up 14% year-over-year. Profitability and return metrics were strong across the board. ROA came in at 132 basis points, while ROTCE was 16.2%. Pretax preprovision income was $42.1 million for the quarter, which put our pretax preprovision ROA at a strong 232 basis points, up 27 basis points both on a linked quarter and on a year-over-year basis. Revenues came in at $91 million, a record level for the company and up 3% linked quarter. The increase in revenue was driven by solid interest income reflective of growth in earning assets and a rebound in noninterest income. On to the balance sheet. We saw continued growth in both loans and deposits. Loans increased by $75 million or 5% annualized and stood at $5.5 billion as of quarter end. This was the eighth consecutive quarter of solid loan growth and consistent with our guidance last quarter. The first quarter for us tends to be seasonally slower, and notwithstanding the environment, we continue to see solid levels of business activity. Net of loans sold, we originated approximately $250 million in loans coming primarily from our leasing and commercial businesses. Payoff activity increased this quarter and line utilization remained essentially flat at 55% from the prior quarter. We added some additional detail on line utilization trends going back to 2020 to provide you with context of what we've experienced recently since the outbreak of the pandemic. On a side note, we prepared for, but did not experience any material changes in line utilization or customer draws as a result of the recent market stress. Our government-guaranteed lending business finished the quarter with $71 million in closed loan commitments, which, as expected, was lower than the fourth quarter. As an aside, I want to point you to some additional disclosures that we added to the slide deck, highlighting our deposit portfolio on Slide 7, and our CRE portfolio without particular focus on office on Slides 15 and 16 in the appendix. Moving on to the liability side. First, with respect to deposits. Total deposits grew by $118 million or 8% annualized and stood at $5.8 billion as of quarter end. The behavior of our deposit portfolio during the quarter was, for the most part, typical of what we would normally see during the first quarter of the year. Seasonal outflows, particularly with commercial customers driven by taxes and distributions to business owners are to be expected, and this quarter was no different. What was atypical was the volatility created by the failure of the two banks, coupled with the amplifying effects of media and a competitive environment that changed in a matter of days. Fortunately, our bankers, as usual, were up to the task. In the days after March 8, we spent a great deal of time, as Roberto noted, reaching out to customers to explain what was happening, point out the material differences between our bank and those in the middle of the crisis, and to reinforce the fact that we stood ready to support them as we normally do on a day-to-day basis. We also received inquiries from both existing customers and prospects wanting to expand relationships or open new accounts. Some of these resulted or will result in new accounts and relationships, while on others, we passed. During the quarter, in addition to seasonality and market-related stress, we saw a shift in our deposit mix, which Tom will discuss in more detail, but which is consistent with the rising rate environment. Total deposit costs for the quarter came in at 115 basis points, an increase of 42 basis points from the prior quarter. On a cycle-to-date basis, deposit betas for total deposits and interest-bearing deposits stood at 23% and 35%, respectively. Turning to profitability. Our margin continues to remain strong, both in absolute terms and relative to peers, and stood at 438 basis points as of quarter end, reflecting a nominal decline of a single basis point from the prior quarter. Noninterest income came in at $15.1 million, up 31% from last quarter, which, as we previously reported, had been impacted by a negative fair value mark on our servicing asset. On an operating basis, meaning if you strip out the impact of fair value marks in our servicing asset, noninterest income remained consistent between quarters. Expenses were well managed despite cost pressures stemming from higher inflation and came in at $48.8 million. Our efficiency ratio stood at 52.1%, down both against the previous quarter and on a year-on-year basis. Asset quality remained relatively stable for the quarter, and we continue to be vigilant and proactive with respect to credit given the uncertainty in the environment. Credit costs for the quarters in terms of provision expense came in at $9.8 million and included net charge-offs of $1.2 million or 9 basis points. The resulting net ACL build was driven primarily by three single-name exposures, changes in economic assumptions and growth in the portfolio. NPLs increased 18 basis points to 84 basis points, and the allowance for credit losses ended the quarter at a strong 164 basis points of total loans. Liquidity and capital levels remained strong, with a CET ratio of 10.3%, total capital of 13.2% and TCE of 8.7% as of quarter end, consistent with our targeted TCE range of 8% to 9%. In summary, we remain focused on growing our capital base, maintaining a strong liquidity profile and executing our core strategy. 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 begin by providing some additional insights into our loan and lease portfolio as outlined on Slide 4. In the first quarter, we experienced solid loan growth, with total loans and leases reaching $5.5 billion as of March 31, marking an increase of $75 million from the previous quarter. Payoffs were notably high in the first quarter, totaling $231 million compared to $174 million in the fourth quarter. Looking forward, we project mid-single-digit loan growth for the year. On Slide 5, regarding our government-guaranteed lending business, our on-balance sheet SBA 7(a) exposure was $476 million as of March 31, a slight decrease of $3 million from the prior quarter, with around $100 million guaranteed by the SBA. The U.S. on-balance sheet exposure was $62 million, down about $1 million since the previous quarter, with $22 million guaranteed. The allowance for credit losses relative to unguaranteed loan balances rose to 9.3%, up from 8.9%, primarily due to specific reserves for individually assessed loans. Moving to Slide 6, total deposits were at $5.8 billion, reflecting a 2% increase from the previous quarter. Noninterest-bearing deposits accounted for a robust 34% of total deposits. Commercial deposits made up 47% of total deposits and 76% of all noninterest-earning deposits. We observed positive deposit trends prior to the recent bank failures. During the quarter, we experienced seasonal outflows related to tax payments and distributions by business owners, along with some outflows from a few customers with elevated balances before the liquidity event. Given our diverse deposit base and a lower uninsured deposit ratio of 28%, compared to industry averages, we are confident that our liquidity and borrowing capacity can comfortably support our uninsured deposits. Our average balance stands at $24,000 for retail customers and around $115,000 for commercial clients. As projected, we saw shifts in our deposit mix during the quarter in response to prevailing market rates, competition, and higher-yielding alternatives. Total deposit betas increased as expected, currently at 23%, which is below the 31% during the last cycle. As previously mentioned in our earnings calls, rising rate environments lead to changing customer behavior and increased competition for deposits, prompting shifts in our deposit mix. We remain committed to defending and expanding our deposits portfolio. Slide 7 presents a detailed breakdown of our deposit franchise into consumer and commercial categories. A significant 92% of consumer deposits and 50% of commercial deposits are insured by the FDIC, contributing to a total of 72% of deposits being insured. Moving to Slide 8, our net interest income for Q1 was $76 million, a decrease of 1% from the previous quarter, influenced by several factors including day count, floating-rate index average resets, and changes in deposit mix. With market expectations for lower rates moving forward and our asset-sensitive profile, we initiated a program to mitigate interest rate risk sensitivity. We terminated $100 million of forward-starting pay-fixed swaps at a pretax gain of $5.7 million, to be recognized in our P&L starting in Q2. Additionally, we executed $100 million in received fixed swaps effective April 1. On a GAAP basis, our net interest margin stood at 4.38%, dipping 1 basis point from the last quarter. Earning asset yields rose by a healthy 41 basis points, largely due to a 52 basis point increase in loan yields at 6.83%. Excluding the impact of the Inland transaction, we expect our net interest income for Q2 to remain flat year-over-year. Turning to noninterest income on Slide 9, we saw a $3.7 million increase, or 32%, linked to growth across most fee income categories, alongside a $656,000 improvement in our loan servicing asset valuation. We sold $72 million in government-guaranteed loans during the first quarter, down from $86 million in the previous quarter, with a net average premium of 8.4% for Q1, higher than the last quarter. Our pipeline and fully funded government-guaranteed loans are projected to align with the Q1 results. As for noninterest expense trends on Slide 10, our noninterest expenses amounted to $48.8 million in the first quarter, reflecting a 3.4% decline from the prior quarter. This decrease was driven by a $1.4 million reduction in salary and employee benefits, primarily due to lower incentive compensation, as well as a decrease in other noninterest expenses owing to a previous quarter charge. This was partially countered by an increase in occupancy and equipment expenses along with costs related to the Inland Bancorp merger. We achieved positive operating leverage in Q1 despite an inflationary environment and continue to manage expenses rigorously within our guidance of $49 million to $51 million. On Slide 11, the allowance for credit losses at the end of Q1 stood at $90.5 million, increasing by 10% since the previous quarter. We registered a $10 million provision for credit losses in Q1, compared to $6 million in Q4. The reserve build was largely driven by a $6 million rise in the individually assessed portfolio alongside macroeconomic factors in the collectively assessed portfolio, in addition to growth in our loan and lease portfolios. Net charge-offs in Q1 totaled $1.2 million, down from $3.2 million in the previous quarter. Our nonperforming assets increased to 67 basis points in Q1 from 55 basis points in Q4, with total delinquencies at $14.4 million as of March 31, representing a $1 million decrease linked quarter. On Slide 12, we believe our liquidity remains robust. We closed the quarter with approximately $285 million in cash and cash equivalents, and our borrowing capacity was $1.8 billion. Our uninsured deposit ratio of 28% is well below peer bank averages, with 120% coverage on our uninsured deposits. As a precaution, we added $235 million in brokered CDs in mid-March to enhance our liquidity and prefund upcoming 2023 maturities. In addition, we proactively tested our funding lines and conducted a discount window test borrowing of $1,000 over a single day. We made $222 million of securities available to the new Bank Term Funding Program as part of our liquidity strategy. Finally, on Slide 13, our capital position remains strong. For the first quarter, our capital ratios improved from the previous quarter, with our CET1 at 10.3% and TCE at 8.66%. Even if we liquidated our entire investment portfolio, the bank would still be classified as well capitalized by all regulatory standards. Our capital levels are solid, generally above regulatory requirements. As we look toward the rest of the year, we believe we are well positioned to build new customer relationships and support our existing clients. With that, back to you, Alberto.

Thank you, Tom. Moving on to Slide 14. As you can see, our strategy does not change much, and we remain centered on executing it. Moments of market disruption present opportunities to take share, to get new relationships and hire grade talent. On the last point, we recently added several bankers to one of our lending businesses. With respect to the Inland transaction, we have received all the requisite regulatory approvals to complete the merger and expect to close the transaction at the beginning of June. Completing the integration and ensuring a smooth transition for customers and colleagues is a top priority for the remainder of the year. In closing, I want to take a moment to thank our employees for all they do and for stepping up on a daily basis to support our customers and our business. With that, operator, let's open the call up for questions.

Our first question comes from Ben Gerlinger from Hovde Group.

First, compliments to Brooks and the team for the slide deck; it adds a lot of great information, so it's really helpful. I just have one quick question before discussing the bigger picture. Was the guidance for roughly flat linked quarter fee income from a GAAP perspective, meaning it includes the asset revaluation and the fee on spreads?

So good question, Ben, and glad that you brought this issue up. So we tend to run the business looking at the fair value mark on the servicing asset. I mean that servicing asset is not a very large component, but it does, as you know, prepayments change, discount rates change, we tend to really ignore the volatility associated with that. I know some people tend to include it. And as part of operating results, we do not. So we kind of look at the business excluding that volatility. As you know, in the fourth quarter of '22, we had a pretty negative fair value mark. It was about a negative $3.5 million, which depressed GAAP noninterest income figures. This quarter, we had a fairly benign mark; it was positive by about $656,000. So when we run the business, we tend to ignore that. So if you strip that out on an operating basis, ignoring that fair value mark, that noninterest income number for the last two quarters has remained pretty steady. So I think when we talk about it, it's more around looking at that fair value mark as, look, we're going to have to mark-to-market this on a quarterly basis. Discount rates change, prepayment speeds change. And like you would if you had a large residential MSR portfolio, you kind of strip that noise out of the results. So hopefully, that answers your question.

Got it. Yes, it does. When considering the margin going forward, I believe you can take the right actions to manage against volatility, whether it goes up or down. I'm curious if you have a spot rate or any guidance for the end of the quarter. I understand you are somewhat sensitive to assets, but that's based on a static balance sheet. Any clarity for the next 90 days would be helpful, as we are in a unique environment.

Ben, it's Tom. Normally, we don't give guidance on NIM, but we do give guidance on net interest income, and we're always trying to grow our net interest income, and we've given guidance to being flat. Obviously, there's a lot to forecast the net interest income given what is the Fed going to do, for example; there's a lot of volatility in interest rates depending on new production coming into the bank. But continuing to grow our net interest income is our focus. And right now, just given where rates are, we think that we're going to be flat for the quarter.

Yes, Ben, I would like to add to that. When we examine our margin, it's evident that, both in absolute terms and relatively, we have a healthy margin level. As Tom mentioned, it’s quite challenging to assess the differences between market expectations and the Fed's guidance as we look towards the later part of the year. You articulated it well; there is significant volatility and uncertainty, and we are feeling it as well. Therefore, we are proceeding with caution. As Tom highlighted in his remarks, we are preparing for a potential decrease in rates and have taken actions similar to those we took in anticipation of rates rising, to safeguard ourselves. Overall, I believe Tom's comments regarding net interest income are accurate.

If I could just add one more question. In the press release, it mentioned that the provision was for a couple of individual loans growth and also the CECL economic outlook. The latter two make sense to me. When I look at credit, it seems like a loan or two are coming through the pipeline. When you consider the provision going forward, do you believe you are fully reserved for those? Is it mostly about growth in the economic outlook, or can you provide any clarity on loan types that might warrant a more cautious approach?

Yes. First of all, our reserves will always be adequate. Regarding the three single-name exposures I mentioned, we have been proactive as we have stated over the years. These names were all making payments, but we anticipated potential issues at maturity, so we are taking a decisive approach by classifying them as nonperformers and working to resolve them in the regular course of business. One of the credits has already been resolved, leaving two to address. These situations are not related; they are distinct credit events linked to specific cases. Importantly, we remain vigilant, especially in the current environment, where there is still concern about a possible economic slowdown or recession. We regularly survey our portfolio and aim to anticipate any declines, and we will consistently take proactive measures. This is part of our normal operations. Regarding your second point about portfolio areas, we've provided some details and additional disclosures around our commercial real estate exposure and our office categories within that space, which I hope you find useful. We consistently conduct internal reviews of our portfolio, and our Chief Credit Officer is actively managing these assessments. Currently, we feel confident about the state of credit as we close out the quarter. Mark can provide further insights on this.

I mean, we spend a lot of time looking at our loan inventory, as I refer to it. We do targeted portfolio reviews and specific asset classes. We are literally, every day, looking at information from our loan book, whether it's payment schedules, delinquencies, upcoming maturities. And it is something we have as a practice, and we'll continue to do that. Are we going to be more cautious on certain things? Absolutely, given what's going on. But at the same time, we're not seeing any trends or any specific classes of assets that are moving downward at this time. These are very unique singular types of situations that arose during the first quarter that we decided to move to nonperforming and set up the appropriate reserves.

We remain open for business and are exploring opportunities, especially in challenging times like these, which often lead to better structures, improved pricing, and higher quality sponsors. I hope that answers your question.

Our next question comes from Damon DelMonte from KBW.

Just wanted to start off with the outlook on loan growth. I think you commented mid-single digit. And I was just kind of wondering, after this quarter's payoff activity, how that factors into the mid-single-digit growth? Do you expect that to slow and originations are going to be a little bit slower, so net-net, you get there? Or do you expect origination activity to be strong and payoffs to remain elevated, and net-net you still get to that like the mid-single-digit growth?

Certainly. So let me address your question in two parts. Firstly, our guidance excludes the Inland transaction, which we anticipate closing at the start of June. You'll see that reflected in our results at the end of the second quarter, and we'll discuss it further in our next call. Regarding our pipelines, they are still fairly robust, although not at the same levels as last year. Overall, we're observing solid business activity, which gives us confidence in the general level of originations. However, some areas are slower, particularly real estate, where both new origination and payoff activities are lagging. This is likely due to sponsors adjusting to higher rates and cap rates, impacting payoffs as expected. In terms of guidance, we traditionally anticipated mid- to high single-digit growth, but we now believe it will likely be closer to the lower end of that range. While it's challenging to predict the exact mix due to payoffs, we are comfortable estimating around 5% growth moving forward.

Got it. Okay. That's helpful. And then with respect to the Inland deal, when it closes, just kind of given the frenzy in the market, one of the attractive qualities of this transaction was the depositor base. Is there any concern that you might have some accelerated attrition on that side when those customers come over? Or do you guys still feel good about kind of what you're bringing over?

We feel positive about the transaction and the customer base. Inland is currently a private company, so we prefer not to discuss specific details at this time, but we will provide more information after the transaction is completed in the upcoming quarter.

Our next question comes from Nate Race from Piper Sandler.

I would like to take a broader view of the margin outlook. If we experience a Fed rate hike in May and enter a higher-for-longer rate environment, do you think it is feasible to sustain the margin above 4% over the next few quarters?

I don't think we're going to provide a specific answer to that question. You're asking a theoretical question that involves several assumptions about rates. It’s challenging, as you mentioned. In a higher-for-longer environment, we will eventually reach a point similar to previous interest rate cycles. Once we approach the peak of the tightening cycle, the Federal Reserve will likely slow down or make smaller hikes than those we've seen so far. There will be a lag in how this affects pricing, especially with liabilities and CDs repricing over time. This lag will eventually impact margins, and it would be unrealistic to believe we would be exempt from this trend. At the same time, we are seeing today that there is a notable discrepancy between market-implied rates and those projected by the Fed. While some institutions suggest that rates might decline later this year, which could ease funding pressures, we are not in a position to comment on that. However, we believe we are well positioned regardless of the environment. As Tom mentioned, the cycle will eventually turn, and we are taking steps to prepare for it.

I think that was well said, Alberto. We've implemented a few balance sheet hedges to guard against declining rates. We may consider doing more in the future, but it depends on our assessment of Inland and the associated risk profile. Our margin remains very strong, and it's important to keep reminding ourselves of how robust it truly is. We're in the top quartile, and we will do everything we can to protect that margin. However, our primary focus is on growing or stabilizing net interest income.

Understood. That's helpful. And just kind of thinking about the deposit growth outlook from here. Obviously, you guys had some outflows in noninterest in the quarter. I guess how much more of that do you think is yet to come? And how much more of a mix shift change in deposits can we expect as you guys continue at least from what it seems, be willing to grow CDs at this point to support kind of that unchanged loan growth outlook?

I believe so, Nate. It's a higher interest rate environment. In previous quarters, we mentioned that many banks in the industry were focused on keeping costs low due to excess liquidity in the system. As liquidity began to decrease due to quantitative tightening and various reserve facilities, the situation tightened. The events of March highlighted that it’s becoming increasingly difficult for banks to offer interest rates to customers that are significantly lower than market alternatives. Depositors have recognized this fact, prompting the industry to become more responsive in order to retain their deposit base and maintain customer relationships. Banks will need to consider products that provide higher rates of return, or else funds may flow to other banks or higher-yielding options. If we look back before the great financial crisis, we can see that deposit compositions for banks during periods of high interest rates tend to change. The current deposit mix is likely to be different. The duration of elevated rates and the future outlook for those rates will influence changes in deposit composition. We need to be realistic about the fact that adjustments in deposit portfolios are likely to occur.

Understood. That makes sense. Referring back to credit, I appreciate the earlier comments that seemed focused on the conventional portfolio. However, as we examine the credit metrics across the SBA book, it appears that this portfolio contributed significantly to the charge-offs in the first quarter. What broader trends are you observing regarding criticized and classified categories within that specific portfolio? We noticed that another major SBA lender faced some credit issues earlier in the earnings season. Are you seeing any significant increases in delinquencies or negative trends in that area?

We have not seen any significant changes in the SBA book. There have been no major increases in delinquencies. The team is actively monitoring the situation on a weekly basis, and I attend those meetings as well. There were some new deals that emerged during the quarter, but there were also some deals that were resolved that had previously been charged-off loans. I expect this trend to continue. I am not observing any specific trend or asset class in their book that is causing issues.

Great. If I could just ask one last one on expenses. I appreciate you guys are maintaining the guidance that was provided last quarter. I guess in terms of the drivers for that, I mean, are you guys anticipating some additional opportunities in commercial RM hires over the course of this year? Or do you have some new projects planned that would drive the run rate up from what appeared to be a pretty strong cost quarter here in 1Q?

We recently added several bankers to our team, which was an opportunistic decision like we've made before. This will have some impact, but we expect to manage it within the guidance we've provided. Looking ahead, once we are consolidated with Inland, Tom will likely provide you with a clearer picture of what the guidance will look like on a consolidated basis.

Our next question comes from Terry McEvoy from Stephens.

I guess first off, Roberto, I really appreciate your comments on our friends in the Chicago banking circle. It's a small world, and it's nice to step back every now and then out of our spreadsheets and ticker symbols and make this personal. So I appreciate that. And moving on to a question, I'll ask going into an analyst question. Maybe, Tom, the cash from the securities portfolio, that $130 million, do you think that will fund loan growth over the next three quarters? If not, what are new loan yields that you see in the marketplace because I think they did fall quarter-over-quarter?

Yes, that's a good question. Currently, we are using cash flows to support loan growth. The risk-adjusted returns on loans are significantly higher than those from security purchases. That is still the plan, and as select cash flows run off and with the acquisition of Inland Bancorp, the balance sheet will expand and change somewhat. However, the plan remains to use those cash flows to finance loan growth. We are still observing strong pricing on loan yields, and the yields depend on which loans are maturing during the quarter, which has shifted those yields into a different category.

Terry, also to add, Tom, and maybe you can comment a little bit. Still, you have the effect of the lag on the quarterly reset.

Yes. That's right.

Okay. And then maybe on the deposit side, are you seeing any cooling down from March in terms of promotional deposit activity and overall competitive pricing in your markets?

No.

Yes. It’s very competitive.

Very competitive.

We have our next question from Brian Martin from Janney.

I have a question for Mark regarding the recent disclosures about the office sector. Could you provide an update on Inland's overall exposure to that office sector, specifically in relation to real estate?

Yes. We're not allowed to kind of discuss the Inland asset classes at this point in time. As you know, they're private, and we've been working closely with them, but I can't tell you anything at this point.

Yes. We'll be happy to provide you with that information at the end of the second quarter once we have them consolidated into our results.

Okay. Mark, regarding the criticized trends, there was a question about the SBA, but can you provide a general overview of how the criticized trends for the entire portfolio have performed this quarter compared to previous periods?

Criticized actually dropped this quarter from year-end. Again, we had some resolutions of some criticized assets that occurred during the quarter. The NPL uptick was, as we mentioned before, those three specific singular deals that impacted the NPLs. But overall, the criticized ratio went down quarter-over-quarter.

In your assessment today, what do you consider the biggest area of risk? The office exposure seems relatively small and diversified, but where do you see the most significant risks in the portfolio given the current market conditions?

Yes. I don't see a particular asset class that raises concerns. In commercial real estate, like everyone else in the market, we're being cautious about our observations and actions. We're aware of upcoming maturities and are focused on collateral values. More than ever, we are concerned about who we are doing business with, including the capability of the sponsors, whether in commercial real estate or any of our loans. We are assessing their ability to manage issues related to their business or property. This focus is important; we are fortunate to have strong underwriting and credit metrics, along with excellent relationships with our customers. This allows us to communicate early about potential issues that may arise in the near future or down the line, which is a key factor in our success.

Okay. And just the last two questions. Regarding the SBA business, it seems that the margins have increased slightly this quarter. The volume appears to be a bit lower. Generally speaking, is there anything we should consider over the next few quarters that could significantly impact those numbers in either direction?

No, Brian. I think we expect flat performance quarter-over-quarter here. We'll need to see what happens with the Fed. There's a lag in the repricing, and interest rates are likely to be higher, potentially reaching around 11%. However, we're still trending at the current pace, which is probably lower than our usual trend. For now, it's stable.

Okay. And then the last one was just on the buyback. I guess can you comment about just how you're thinking about capital here and just the buyback perspective?

Yes. So as you know, we have a transaction with Inland, so we haven't really been in the market. We're obviously going to issue shares as a result of that, Brian. So I think in terms of capital priorities, still, it's really, first and foremost, continue to support the growth in the franchise, the dividend. M&A., obviously, we're doing a transaction. We still think that there will be opportunities there. And then as we've stated in the past, we kind of used the buyback as a kind of like that valve that we can tune up or down, depending on if we have immediate uses of capital or have excess capital and there are ways that we can kind of return it back to shareholders. So no change really in that regard.

We have a follow-up question from Ben Gerlinger from Hovde Group.

A quick follow-up. Just kind of strategy oriented with Inland now basically a month away or so from closing. When you think about the integration, I think at least in my notes you remarked that the cost savings kind of fall to the bottom line. With that said, when you think about Byline pro forma, and you guys have always kind of been a tech focus, but also opportunistic hire and leading rather than playing defense, is there any opportunities that we could see like a reinvestment of both savings? Or should we still expect them to fall to the bottom line?

I still believe we are aligned with what we previously stated. I don't see any change in that. The only thing I would mention is that if there were to be a change, we would address it at the appropriate time in the future. For now, we are viewing the transaction in the same way as we did at the time of the announcement.

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

Okay. Great. Thank you, operator. So thank you for joining the call today and for your interest in Byline. I'm going to pass the call over to my colleague here, Brooks, because he's got some reminders for all of you. But from all of us, again, thank you for your time this morning, and we look forward to speaking to you again next quarter. Brooks?

Yes. Thank you, Alberto. For investors, this quarter, we plan on attending the Stephens Chicago Bank Conference on May 11, located here in Chicago. And then in addition, earlier this week, we released our inaugural ESG report. This report provides information on how we operate our business, which we believe is as important as what we do. As we look into the future, I am excited to see how our ESG efforts evolve. Byline's leadership looks forward to engaging with each of you and to seeing the values and the priorities detailed in this report continue to be a guiding light and a valuable part of Byline's customer and employee-centric culture. Byline's ESG report can be found on our ESG website at bylinebancorp.com in our Investor Relations section. And with that, that concludes our call today. We'll talk to you next quarter. Thank you.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.