Byline Bancorp, Inc. Q2 FY2023 Earnings Call

Good morning, and welcome to the Byline Bancorp Second Quarter 2023 Earnings Call. My name is Glenn and I'll be your commerce 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 second quarter 2023 earnings call. In accordance with regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and 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. I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Thank you, Brooks, and good morning, everyone. We appreciate you taking the time to join the call this morning to review our second quarter results. The deck we will be referencing can be found on our website. Please refer to the disclaimer at the front. Joining me on the call this morning, our 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 for a few items. Roberto?

Thank you, Alberto, and good morning, everyone. Before Alberto and the team go over the strong results for the second quarter and answer your questions, I wanted to highlight an important milestone in our story. At the end of June, we marked the 10-year anniversary of the recapitalization of the Metropolitan Bank Group, which, as you know, we renamed shortly thereafter, Byline. At the time, the $200 million-plus recapitalization was the largest recap of a bank in Chicago in over 25 years. What has been accomplished in our 10 years is remarkable and a true story of transformation. Looking back to March of 2013, the quarter before we closed the recap, we had 12 bank charters, 88 branches, and total assets of $2.4 billion. Byline, of course, has only one charter. And at the end of June, not including Inland, which, as you know, closed effective July 1 with 38 branches, we had 50% fewer branches and total assets of $7.6 billion, more than 3x. We had total deposits per branch of $25 million and non-interest-bearing deposits represented 26% of total deposits. Today, Byline has $153 million per branch and non-interest-bearing deposits to total deposits of over 30%. We have a top quartile margin and better than median profitability in our peer group. Five acquisitions later, again, excluding Inland, but including the recap, our Board and management have shown their expertise in integrating and adding value post acquisitions. Growth has been evenly distributed between well-executed acquisitions and organic growth driven by talented bankers who have joined Byline amid disruption by larger bank mergers in our area. We expect this to continue over the next five years. There are a few critical factors that have supported our success, and while this is not the forum for a deep discussion, I firmly believe that the main driver is our people. Our investment in people, our colleagues and collaborators is palpable at this organization. It shows up in our engagement surveys and in our ability to continue to attract, retain, and inspire talent. I cannot emphasize enough how nuanced this topic is at Byline. Being home to the best commercial bank in Chicago within the line of business we operate is hard to replicate by others, especially larger players. This has been and will continue to be the key. Byline was recognized a few days ago as one of Forbes America's Best Small Employers. We were the only Illinois bank and one of only six Illinois companies to be recognized. This is thanks to our team members who support our customers, serve and work in our communities, and continually look for ways to do better today than yesterday, along with our dedication and commitment to the well-being of our people. I am as confident as ever in Byline's positioning as Chicago's largest community bank, our ability to outperform through the cycle, and our capacity to deliver products and service offerings that improve lives for all our stakeholders. As you can tell, we are optimistic about Byline, and frankly, I'm just thankful to be part of the team that will steward the bank into the future. With that, I'll pass the call back to Alberto.

Great. Thank you, Roberto. And now in terms of the agenda, I'll start by providing highlights for the quarter, followed by Tom, who will walk you through our results in more detail. After that, I'll provide some closing comments before we open the call up for questions. At the time of our call last quarter, we were coming off a challenging period for the industry that ultimately saw the failure of three institutions and was characterized by a degree of uncertainty that shook the confidence in our system. Our priorities at the time were to remain focused on executing our strategy, capitalize on opportunities to grow relationships and hire talent. We also wanted to remain vigilant on credit and manage our capital and liquidity conservatively. Lastly, we wanted to complete the Inland transaction. Our performance and results this past quarter show meaningful progress against those priorities. Before we jump to the highlights, let me first give you an update on the Inland transaction. As previously announced, the transaction closed effective July 1, and key milestones in the integration have been completed as planned. The bank's subsidiaries have merged, and former Inland employees were successfully onboarded into our systems. Our focus is now centered on integrating them into the company, our culture, and their respective teams so they can get back out into the market. Up next comes the rebranding under the Byline brand and the product and systems conversion, which remain on track for completion later this quarter. Due to the timing of the closing, the impact of the transaction on the second quarter was minor, aside from some merger-related expenses. Next quarter, aside from the usual noise from one-time charges, you will see a full quarter of consolidated results. As we disclosed in our earnings release, pro forma for the acquisition, Byline now has approximately $8.8 billion in assets, $6.4 billion in loans, and $6.9 billion in deposits with 48 branch locations. Moving on to Page 3 of the deck. For the second quarter, we reported net income of $26.1 million and EPS of $0.70 per diluted share. If we adjust for merger-related charges, net income was $27.3 million or $0.73 per diluted share, both figures representing record levels for the company since going public and up 9% and 20% on a quarter-on-quarter and year-over-year basis, respectively. Profitability and return metrics continue to remain strong across the board. ROA came in at 141 basis points, while ROTCE was 16.8%. On an adjusted basis, ROA was 148 basis points and ROTCE came in at a strong 17.5%. Adjusted pre-tax pre-provision income was $42.5 million for the quarter, which put our adjusted pre-tax pre-provision ROA at 230 basis points, down 5 basis points linked quarter but up 43 basis points year-over-year. Total revenue was flat quarter-over-quarter at $90 million, but up $14.5 million or 19% over the prior year, driven by higher net interest income stemming from loan growth and higher rates. Non-interest income came in at $14.3 million, lower than last quarter as expected, but in line with the prior year. Adjusting for the impact of fair value marks on our servicing asset, non-interest income remained consistent between the quarters. Expenses came in at $49 million, inclusive of merger-related charges. If we exclude those, expenses were well managed at $48 million. Netting these two figures translated into positive operating leverage on a year-over-year basis. Moving on to profitability. The margin remained solid at 4.32%, declining only 6 basis points from the prior quarter, notwithstanding higher funding costs. Our adjusted efficiency ratio came in at 51%, down both against the previous quarter and lower by over 350 basis points on a year-over-year basis. Moving on to the balance sheet. Loan growth moderated consistent with guidance and the portfolio stood at $5.6 billion as of quarter end. Notwithstanding the environment, this was the ninth consecutive quarter of growth in loans, and we continue to see solid levels of business activity. Originations were solid, and we saw an uptick in payoff activity during the quarter. Results were driven largely by our commercial banking sponsors and leasing businesses. Our government-guaranteed lending business had a solid quarter with $141 million in closed loans, up from the prior quarter and 12% year-over-year. I'd like to acknowledge and give a shout out to our team who earlier this month was recognized by the SBA as the top 7(a) lender for the 14th consecutive year. We were also recognized as the top 504 and export lender in the State of Illinois for the fiscal year 2022. In terms of liabilities, total deposits at the end of the quarter stood at $5.9 billion, up $104 million from the first quarter. Average deposits were also up 1.7% quarter-on-quarter, driven by flows related to new customers. As we anticipated, this quarter, we continued to see a shift in mix, that Tom will cover in more detail shortly, towards higher-yielding products consistent with a higher rate environment. Asset quality improved with NPLs decreasing 15 basis points to 69 basis points at the end of the quarter. Credit costs were $6.5 million, inclusive of net charge-offs, which were $4.3 million or 31 basis points, and we had a net reserve build of $2.2 million. This quarter, we took advantage of opportunities to accelerate some NPL resolutions, which drove the uptick in charge-offs. The allowance for credit losses ended the quarter at a strong 1.66% of total loans. Capital and liquidity were further bolstered this past quarter with our CET1 ratio increasing by 37 basis points to 10.6%, and our total capital and TCE ratio ending the quarter at 13.5% and just under 9%, respectively. With that, I'd like to turn over the call to Tom, who will provide you with more detail on our results.

Thank you, Alberto, and good morning, everyone. I will start with some additional information on our loan and lease portfolio on Slide 4. Total loans and leases were $5.6 billion at June 30, an increase of $53 million from the end of the prior quarter. Net of loans sold, we originated $312 million during the quarter, an increase of 25% quarter-over-quarter. We saw increases across all our major lending areas with the strongest growth coming from commercial and leasing groups. Payoffs increased in the second quarter to $256 million compared to $231 million in the first quarter, and line utilization remained flat at 54%. Looking ahead, we continue to expect loan and lease growth to be in the mid-single digits for the remainder of this year. Turning to Slide 5. Our government-guaranteed lending business finished the quarter with $141 million in closed loan commitments, which was higher than the first quarter and better than expectations. At June 30, the on-balance sheet SBA 7(a) exposure and USDA exposure was relatively unchanged quarter-over-quarter. Our allowance for credit losses as a percentage of the unguaranteed loan balances was 9.1% as of quarter end. Turning to Slide 6. Total deposits stood at $5.9 billion, increasing 2% from the end of the prior quarter. Non-interest-bearing DDA was down $158 million quarter-over-quarter, driven by customers seeking higher rate options, seasonality and other business activity. DDAs continue to represent a healthy 30% of total deposits. Commercial deposits accounted for 48% of total deposits and represent 75% of all non-interest-bearing deposits. As anticipated, we saw continued changes in mix during the quarter due to prevailing market rates, competition and higher-yielding alternatives. Deposit costs for the quarter came in at 170 basis points, an increase of 55 basis points from the prior quarter. On a cycle-to-date basis, deposit betas for total deposits and interest-bearing deposits stood at 32% and 47%, respectively. We continue to remain focused on funding loan growth with our core deposits. In addition, the Inland Bank transaction brings approximately $705 million in core deposits to our balance sheet. Turning to Slide 7. Our net interest income was $76 million in Q2, up 1% from the prior quarter, primarily due to loan and lease growth and higher yields offsetting higher interest expense on deposits. On a GAAP basis, our net interest margin was 4.32%, down 6 basis points from the prior quarter. Earning asset yields increased a healthy 30 basis points, driven by an increase of 35 basis points in loan yields to 7.18%. Going forward, on a standalone basis, we expect our net interest income to be flat quarter-over-quarter. And with Inland on a preliminary basis, we estimate net interest income will grow by $12 million to $14 million in Q3. Turning to Slide 8. Non-interest income stood at $14.3 million in the second quarter, down 5.6% linked quarter, primarily driven by a $865,000 negative fair market value on loan servicing assets due to an increase in prepayments, which was partially offset by an increase of $556,000 in net gain on sale of loans due to higher volumes and higher net premiums. Sales of government-guaranteed loans picked up in the second quarter by $14 million compared to the first quarter. The net average premium was 8.6% for Q2, higher than the first quarter. Our pipeline and fully funded government-guaranteed loan is forecasted to be consistent with Q2 results. We expect gain on sale income in Q3 to remain consistent with what we experienced in Q2. Turning to Slide 9. Our non-interest expense was well managed and came in at $49 million in the second quarter, and on an adjusted basis, $1 million below our Q2 guidance of $49 million to $51 million. The increase was attributed to merger-related expenses and higher marketing costs due to deposit gathering initiatives. We continue to remain disciplined on expense management and are updating our guidance related to the Inland acquisition. Going forward with Inland, we believe quarterly non-interest expense run rate will trend between $53 million and $55 million. Turning to Slide 10. The allowance for credit losses at the end of Q2 was $92.7 million, up 2% from the end of the prior quarter. In the second quarter, we recorded a $6 million provision for credit losses compared to $10 million in the first quarter. The reserve build was largely driven by loan and lease growth and a $6.5 million increase in the individually assessed portfolio. Net charge-offs were $4.3 million in the second quarter compared to $1.2 million in the previous quarter. Our NPLs to total loans and leases decreased to 69 basis points in Q2 from 84 basis points in Q1. Our NPAs to total assets decreased to 54 basis points in Q2 from 67 basis points in Q1. And total delinquencies were $9.6 million on June 30, a $5 million decrease from the prior quarter. Turning to Slide 11. Our liquidity remains robust. We ended the quarter with approximately $320 million of cash and cash equivalents, and our available borrowing capacity stood at $1.7 billion. Our uninsured deposit ratio fell to 25.9% and remains below all peer bank averages. In addition, the uninsured deposit coverage ratio stood at 132%. Turning to Slide 12. Our capital position remains strong. For the second quarter, we grew capital, and as a result, our capital ratios improved quarter-over-quarter. Our CET1 grew to 10.6%, up 31 basis points and our TCE ratio increased to 8.9%, up 21 basis points and is well within our targeted TCE range. Going forward, we are focused on growing capital, maintaining our strong liquidity position and executing on our strategy. With that, Alberto, back to you.

Thank you, Tom. Slide 13 summarizes our strategy, and we remain focused on its execution. We are proud of the strong operating performance the company delivered this past quarter. Notwithstanding the uncertainties present and the potential headwinds that may emerge, we remain optimistic about our ability to deliver solid results. In closing, I would like to welcome all of our new colleagues that recently joined the company from Inland and thank our employees for their hard work and dedication on a daily basis. With that, operator, let's open the call up for questions.

Your first call comes from Nathan Race from Piper Sandler. Nathan, your line is now open.

Just in thinking about future deposit growth expectations, it's nice to see the pace of increase in deposit costs low versus the first quarter. And we also saw the pace of core deposit outflows decline versus Q1. So just curious how we should be thinking about kind of core deposit growth and overall balances into the back half of the year on an organic basis and kind of what you're seeing from a deposit pricing perspective in the Chicago area these days?

Sure. So let's just break that question into three parts in terms of kind of the outlook for core deposit growth going forward, what we're seeing in terms of the mix, and lastly, the competitive dynamics that we're observing. On the first part, our intention is to continue to fund loan growth with core deposits, which has served us well over the years, and we will continue to do that through the cycle. The guidance we give is that generally speaking, as loan growth occurs, we want to fund that growth with core deposits. In any given quarter, to the degree that we have slightly faster loan growth than in another quarter, there will be some fluctuations. But, generally, as you see growth in the portfolio, know that we're trying to fund that with core deposits. Regarding the mix, I believe it's rate dependent. I think Tom can elaborate in a moment, but we are seeing some stabilization in the mix of deposits. It doesn’t mean that changes won’t continue going forward, especially as rates remain high, but I feel the pace of change has stabilized a bit. Lastly, on dynamics of competition, it's a competitive environment. Some banks sitting on excess liquidity are facing the need to retain and grow deposits by raising rates. We're also noticing the competitive environment is stabilizing compared to the post-March period when many institutions aggressively re-priced their products.

Yes. I think that's well said, Alberto. Our objective with the transaction accounts and relationships we are growing on a DDA basis remains focused, as indicated. Given the current interest rate environment, we anticipate that money markets and CDs will experience additional growth. However, we’ll also keep our focus on core deposits, particularly from our commercial clients. As for competition, the Fed recently raised rates, and I echo Alberto's sentiment that competition is stabilizing, and liquidity challenges seem to be behind us.

And I appreciate that you guys don't give specific guidance on the margin going forward. I guess just directionally thinking about the pace of compression in the back half of the year, is it fair to assume it kind of increases relative to the second quarter level, excluding accretion? Obviously, you got Inland coming in with their margins below your guidance, but I imagine there's also an opportunity to maybe de-leverage the balance sheet to some degree.

Yes. That's a good question. We indicated NII guidance of flat. You would expect the same margin analysis on a standalone basis. However, with Inland, we would expect the margin to expand.

And that's excluding accretion, Tom?

That includes accretion.

So if you want to think, and this is all hypothetical now, obviously, because this quarter in September, when we have this call in October, we will be reporting on a consolidated basis. We just had a rate increase on Wednesday, which will add some noise because we will re-price the portfolio, helping overall. But, if you consider the margin in terms of where we are today, it’s fair to say that we would see some pressure on it with stabilization likely occurring by the fourth quarter. So think of it in the context of 4.32% today, consider it in the range of 4.10% to 4.15%. Pro forma for the acquisition, we anticipate that margin, including accretion, will return to around 4.30% to 4.35%. Hopefully, that provides enough guidance. We will have much more clarity on this in the upcoming quarter with detailed breakdown of the components between the gross margin and the accretion.

And if I could just ask a couple more around credit. Charge-offs were up a little bit this quarter. It seems like it was more driven outside the SBA portfolio. So I would just be curious to get some color on what drove the charge-offs in the second quarter? And obviously, with Inland coming on, you'll have the CECL impacts in the third quarter from a provisioning perspective. So just curious how you guys are thinking about maybe the reserve trajectory into the fourth quarter into next year in light of the current environment?

In regard to charge-offs, we welcomed the chance to resolve a few loans this past quarter. We believed accelerating these resolutions would benefit the company, so we seized the opportunity to address these assets rather than dragging them out for extended periods. This resulted in an uptick in charge-offs. Historically, our charge-offs have been within the 30 to 40 basis points range, and even with last quarter's uptick, we’re still only slightly above that target, given the resolution strategy we chose to pursue. Regarding reserve trajectory and the upcoming quarter, we think our reserves remain strong and adequate as of the end of Q2. Changes in reserves quarter-over-quarter mostly stem from portfolio growth and additional reserves assigned to individual loans assessed for impairment. Therefore, if we see continued loan growth, you could anticipate the reserve to inch up in accordance with that.

And then just one last one, maybe for Mark. Just on the office commercial real estate portfolio as detailed on Slide 16. Have you guys seen any negative credit migration within that portfolio recently?

We haven't seen any negative migration. We're looking very carefully at certain situations. We don't have a lot, but we have a few that we're watching closely. The key factor will be whether the cash flow from these office properties remains viable. We may need to size down deals depending on what new appraisals indicate when they come in. So I expect that to be a focus area for us in the coming months, although we do not have many such properties.

Congrats on the great quarter, all the successes over the last 10 years, and the 10-year anniversary as well.

Excellent. Thank you, Nate.

Thank you, Nathan. Your second question comes from the line of Ben Gerlinger from Hovde Group. Ben, your line is now open.

Congrats on 10 years; it seems like you capped off a decade well this quarter. I was curious now that the Inland deal is closed, as is often the case with M&A, it’s symbiotic. While Byline (the larger bank) typically gains more deposits and branch footprint, the smaller bank can take advantage of the larger balance sheet and lending opportunities. Is there anything else that legacy Byline can gain from this transaction now that it is closed? I'd love to hear about your thoughts on the synergistic nature outside of footprint extensions and the strong relationships behind the deposits. Could you share some insights into this?

The opportunity to improve efficiency is one key aspect to highlight, Ben. If you think about our trajectory originally ten years ago to our current state, we have been able to profitably deliver scale over the years through both organic growth and completed acquisitions. We don’t envision this transaction being any different. Besides that, we have certain capabilities that the previous bank did not. For instance, our treasury management suite is more sophisticated than theirs. This will open opportunities to improve and do more business with their customers. Additionally, we have a wealth management capability that they lacked. We also recognize that they had primary shareholders with significant real estate businesses in the Chicago area, and there will be chances to collaborate with them. However, we’re not directly factoring that into our transaction model. So, while we are a larger bank, there will be reputable business opportunities within that context.

I was curious about the guidance for fees. I understand the expenses you covered; however, what are your expectations regarding fees? I'm particularly interested in potential growth areas.

I think fees are expected to be consistent, with a slight increase. The previous fee income run rate for Inland should be comparable, as mentioned. However, there’s also a potential for fees to grow due to the enhanced treasury management and wealth management services that we can now offer.

So the balance sheet improvement is clear, but regarding potential cross-selling opportunities, it's evident that it won't be immediate within the first 60 or 90 days, even within the first year after combining entities. Do you anticipate an inflection point for fee income growth in this area sometime in 2024, or will some additional staffing or hiring be required?

I believe that there will be opportunities in the future. However, due to the traditional nature of their previous banking institution, a lot of their fee sources were associated with a mortgage business we decided not to continue. While mortgage fee income was historically significant, we won’t be capturing that moving forward. Instead, the fee income will revolve around service charges for deposits and interchange revenue. We anticipate more business in treasury management as we can provide certain capabilities they couldn’t.

Lastly, big picture, it seems your balance sheet is approaching $9 billion. Could you discuss any staffing or back-office enhancements needed to surpass the $10 billion threshold? Typically, surpassing that point involves hiring as you're expected to grow organically or through acquisition, and I wondered if you're prepared for that.

We have always operated with the understanding that we shouldn't wait until we hit a certain threshold before hiring to bolster key areas. We build with the expectation of continued growth over time. Our staffing has always been aligned with our growth trajectory, specifically on the risk management side to meet regulatory expectations. To that end, we will need to hire to some extent as we approach $10 billion, but we've strategically built our risk and control functions steadily over time, so we won't be starting from scratch.

If I can quickly add, our team members and directors possess experience with entities exceeding $10 billion. The threshold is nothing new to our management or governance team. We are well-prepared, as we've consistently communicated with regulators regarding our plans. We’re confident that we’re well-positioned for growth.

That's helpful context; I appreciate it. Great quarter and impressive past decade. It's been inspiring to watch.

Thanks, Ben.

Thank you, Ben. Your third question comes from the line of Terry McEvoy from Stephens. Terry, your line is now open.

Thanks. Good morning. Congratulations on what you all have accomplished over the last decade. It's safe to say everyone in town knows the Byline name by now. Tom, thanks for all the forward-looking commentary considering the various moving parts. I wanted to ask a broader question. Several of the larger banks in Chicago are reducing their balance sheets and are highly focused on optimizing risk-weighted assets after recent capital regulations. Are you seeing this trend? How can Byline take advantage of what some of the larger banks are doing in your markets?

That's a fantastic question, Terry. I believe we've consistently stated that any disruption in the market presents opportunities, and the scenario you described fits that definition. As larger institutions focus on reducing risk-weighted assets in anticipation of heightened capital requirements, we’re certainly witnessing signs of this and believe we can capitalize on some of the market disruptions arising from it. That said, we are prudent and disciplined, as just because some institutions are passing on business doesn't mean we want to hastily engage in that volume if it's not favorable. We’ve seen interest in clients looking to switch banks, especially from bigger out-of-state players due to their management of risk.

I also had a couple of questions regarding Inland. Have you selected a conversion date for the systems? I remember you mentioned it would be later this year. Do you maintain your expectations of 30% cost savings and 8% earnings accretion in 2023 that you discussed during the announcement of the transaction?

Yes. To answer your first question, we expect to be fully converted by the time we hold our next call in the upcoming quarter. Regarding your second question, we are refining marks as we go through the process, and the largest mark, as indicated during our announcement, lies with the interest rate adjustments. We’re currently estimating that accretion may come in slightly higher than previously projected.

I read recently about proposals to tripling the transfer tax on real estate in Chicago. Is there any risk to the real estate market in Chicago and for Byline in particular?

It's probably premature to gauge any potential impact effectively. Over the years, we’ve witnessed numerous proposals affecting the market, some of which we've misjudged in terms of their impact. The market has demonstrated resilience in the past. Typically, we go through a reset phase and then continue forward, so it’s too early to provide a definitive assessment.

Thanks for the insights. Enjoy your weekend.

Great. Thank you. Likewise.

Thank you. Your fourth question comes from the line of Brian Martin from Janney Montgomery Scott. Brian, your line is now open.

Hi. Good morning, everyone. Just one follow-up. Tom, regarding fee income from Inland, could you remind me how significant that revenue stream is as we size everything looking forward?

Specifically regarding Inland's fee income? I'm afraid I don’t have that on hand right now.

I understand the discussion on fee income has been rather consistent lately after excluding the fair value mark. What are your expectations for accelerating growth in that area?

On the fee income side, we anticipate improvements in our treasury management efforts. Back-to-back customer swaps are showing some signs of growth, and our wealth management business is on the rise as well, contributing positively.

Regarding the pipeline and expectations for government-guaranteed loans, do those forecasts appear stable compared to the prior quarter?

Correct; our pipeline and expectations for government-guaranteed loans are consistent with the previous quarter.

I have two final questions, one for Mark regarding trends in criticized loans and classifications. Could you provide any updates on the quarterly numbers when the 10-Q will be released?

We made some good progress in those areas. We’re still seeing opportunities to address any criticized or classified loans. Given the capital available, opportunities abound for resolving these situations. We’re diligently working on business strategies with these clients. We’ve seen a bit of interest in REOs, which is manageable, as we have limited exposure.

To enhance on what Mark indicated, our process involves assessing each asset individually, determining the strategy tailored for it, and evaluating the present value. Whenever quicker resolutions provide additional advantages, we'll opt for them. That’s our approach.

For our net fee income, it was about $337,000 for the quarter, Q2.

Lastly, concerning the margin, can you elaborate on the sustainable margin level for your operation? Given the ongoing mix in your business, where do you foresee stability over the longer term?

We're asset sensitive, so generally, any Fed increase will benefit us. However, if rates decline as anticipated next year, our asset sensitivity means we could face some income declines. To counteract this, we’re actively implementing balance sheet hedges.

Overall, is your plan to organically grow across the $10 billion threshold or pursue M&A? How do you view the next steps?

We aim for growth to surpass $10 billion without hindering our operations for that growth. Ideally, we're looking for sustainable organic growth, but if meaningful M&A opportunities arise, we will explore those. Consistent with our historical approach, there's value in both strategies in the long term.

Understood. I appreciate you accommodating my questions; it’s been a pleasure to learn about your success this quarter. Thank you.

Thank you, Brian.

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

Thank you, operator. Thank you to all for joining today and expressing interest in Byline. Brooks, do you have anything you'd like to add?

Yes. For investors this quarter, we plan on attending the Raymond James conference as well as the Stephens Bank conference. That concludes our call, and we hope to see you next quarter. Thank you.

Thank you.

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