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Edited Transcript of BY.N earnings conference call or presentation 27-Apr-18 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 Byline Bancorp Inc Earnings Call

CHICAGO Apr 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Byline Bancorp Inc earnings conference call or presentation Friday, April 27, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alberto J. Paracchini

Byline Bancorp, Inc. - President, CEO & Director

* Allyson Pooley

Byline Bancorp, Inc. - IR Contact, Financial Profiles, Inc.

* Lindsay Y. Corby

Byline Bancorp, Inc. - Executive VP & CFO

* Timothy C. Hadro

Byline Bancorp, Inc. - Executive VP & Chief Credit Officer

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Conference Call Participants

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* Brian Joseph Martin

FIG Partners, LLC, Research Division - VP & Research Analyst

* Ebrahim Huseini Poonawala

BofA Merrill Lynch, Research Division - Director

* Michael Anthony Perito

Keefe, Bruyette, & Woods, Inc., Research Division - Analyst

* Nathan James Race

Piper Jaffray Companies, Research Division - VP & Senior Research Analyst

* Terence James McEvoy

Stephens Inc., Research Division - MD and Research Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the First Quarter 2018 Byline Bancorp, Inc. Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Allyson Pooley, Financial Profiles. Please go ahead.

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Allyson Pooley, Byline Bancorp, Inc. - IR Contact, Financial Profiles, Inc. [2]

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Thank you, Debbie, Good morning, everyone, and thank you for joining us today for the Byline Bancorp's First Quarter 2018 Earnings Call. Joining us from Byline's management team are: Alberto Paracchini, President and Chief Executive Officer; Lindsay Corby, Chief Financial Officer; and Tim Hadro is -- Byline's Chief Credit Officer is also here and will participate in the Q&A.

We will be using a slide presentation as part of our discussion this morning. If you have not done so already, please visit the Events and Presentations page of Byline's Investor Relations website to download a copy of the presentation. Alberto and Lindsay will discuss the first quarter results and then we'll open up the call for questions.

Before we begin, we'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of the Byline Bancorp that involve risks and uncertainties. Various factors could cause actual results to be materially different from any future results, expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward-looking statements made during the call. Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute, for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures.

And with that, I'd like to turn the call over to Alberto.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [3]

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Thank you, Allyson, and good morning to everyone on the call. As we normally do, I'll start by providing you with the highlights for the quarter and pass the call over to Lindsay for more detail on our financial results.

Now turning over to Slide 3 on the deck. Our first quarter results reflect solid growth in net interest income with our interest margin expanding nicely, both including and excluding the effects of accretion income. This was offset by higher credit costs primarily related to a single isolated commercial relationship that went into nonperforming status during the quarter.

Overall, net income for the quarter came in at $6.8 million or $0.22 per diluted share. This figure includes both approximately $123,000 in merger-related charges, and the higher provision expense related to the commercial credit, I just mentioned. Pre-tax pre-provision ROA came in at 159 basis points in the quarter, which was a bit lower than Q4, but flat on a year-over-year basis.

Loan and lease originations were $87.3 million, which is lower than last quarter, but consistent with softer activity levels we typically experience during the early part of the year.

Our originated portfolio stood at $1.6 billion at the end of the quarter, which represents an increase of $45 million or 11.5% and was primarily due to strong growth in our C&I and construction portfolios. Within the C&I portfolio, we had a particularly strong quarter from our sponsor finance and government-guaranteed lending teams. The growth in our originated book was offset by payoffs coming from our acquired portfolio, which declined by $42 million during the quarter.

We saw approximately half of the payoffs come from the government-guaranteed portfolio, which reflects both refinancing activity as borrowers take advantage of a lower rate conventional financing, and just simply the outright sale of a business or assets.

Moving on to revenues. Spread revenue increased nicely for the quarter stemming from a 19 basis point increase in our net interest margin, driven by both higher yields and a higher level of earning assets.

Deposit funding remains stable, overall, and interest-bearing funding costs remain in track rising by 11 basis points for the quarter. Competition for deposits increased from last quarter, and we anticipate that to continue as customers become more sensitive to rate levels and banks manage to their targeted loan-to-deposit ratios. We expect to see deposit betas move higher depending on the product, along with overall deposit costs consistent with increases in short-term rate.

Noninterest income was down from the prior quarter, primarily due to lower gain on sale of loans reflecting a lower volume of loans sold for the quarter. Loan sale activity and margins fluctuate during the course of the year, with loans sold generally tracking rising origination levels and margins impacted by the mix of loans sold.

That said, production levels in our government-guaranteed business were solid during the quarter, showing strong double-digit growth on a year-over-year basis. As stated earlier, asset quality for the quarter was impacted by a single commercial loan that we downgraded to nonperforming status. We had been closely monitoring the credit, and we're encouraged by the company's ability to raise capital last fall. Notwithstanding during the first quarter of 2018, financial performance deteriorated to the point where the business needed to be substantially restructured.

Based on these developments, we determined the amount of impairment required, provision and charged off accordingly in order to write down the value of the loan to the level we expect to collect.

Due largely to this one credit, we saw an increase in our nonperforming loans charge-offs and provision expense for the quarter. The remaining increase in NPLs was primarily driven by one government-guaranteed loan.

With respect to branch consolidations, as you may recall, we did a major branch consolidation back in 2015 and 2016. And since that time, we continue to actively evaluate the performance of our branches, given changing consumer behavior and preferences in order to make informed decisions about our footprint. Based on our analysis, we identified 6 locations and 2 drive-up facilities that we felt could be consolidated with minimal impact to customer service levels, and overall convenience.

Consolidation is expected to result in approximately $1.4 million in onetime charges, and $2 million in annual cost saves. We anticipate that over time, we will redeploy those savings back into the business in both infrastructure spend and on growth initiatives.

We expect the majority of the charges to occur in the second quarter. Completing the acquisition of First Evanston and ensuring a smooth transition for our customers and colleagues remains a top priority for 2018. To that end, we have received all required regulatory and stockholder approvals and expect the transaction to close by the end of May. Strategically, this is an important transaction for us, with benefits that we've shared previously. And we're very much looking forward to completing the first part shortly.

With that, I'd like to pass on the call to Lindsay to cover the financials in more detail.

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [4]

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Thanks, Alberto. I will start on Slide 4, with a review of our loan and lease portfolio. Our total loans and leases were $2.3 billion at March 31, an increase of $2.9 million from the end of the prior quarter. Our originated loan portfolio increased approximately $45 million, with the strongest growth coming in our C&I and construction portfolios. This was partially offset by a $28 million decline in our originated CRE portfolio. On a year-over-year basis, our originated portfolio increased by $303 million, or 23%. As Alberto discussed, the overall growth in the loan portfolio was impacted by elevated payoff. Total payoff in the quarter were approximately $100 million up from $74 million, we had last quarter.

Moving on to deposits. On Slide 5, our total deposits increased $81 million from the end of the prior quarter, with most of the increase coming in our money market and time deposits. The increase in money market was primarily due to variability and a public deposit relationship, which we've rebuilt -- its balances with us at the end of the last quarter. Our overall cost of deposit increased 6 basis points from the prior quarter. This was driven by an 8 basis point increase in our cost of interest-bearing deposits due to higher promotional rate on CDs and an overall increase in core deposit rate.

Moving to Slide 6, I'll discuss our net interest income and the expansion of our margin. Our net interest income increased by $1.5 million to $33.7 million. The increase was largely driven by higher average loan balances and higher-average loan yields. Our net interest margin increased 19 basis point to 4.45% or 18 basis points when you exclude the accretion income. Although we saw an increase in our deposit costs, the impact of repricing in our loan portfolio and higher average yields on loans and leases drove the expansion in our margin.

Assuming the Fed continues to raise interest rates, we would expect to see a slight continuation of the expansion in loan and lease yields. Although, as previously mentioned, we anticipate seeing continued upward pressure on our funding costs.

Turning to Slide 7, and our noninterest income. Compared to the prior quarter, our noninterest income decreased by $1.2 million, the decrease was due to a number of factors. We had $1.6 million of a decrease in our net gains on loan sales due to a lower volume of loans sold. The average premium on the loan sales, however, held relatively steady quarter-over-quarter.

We had a decrease of $280,000 in ATM and interchange fees, primarily due to the changes in our fee assessment. We also had a decrease of $141,000 in net servicing fees, primarily due to the change in the fair value of the servicing asset as a result of increases in prepayment fees on government-guaranteed loans.

These decreases were partially offset by an increase in other income, primarily due to variations in gains on sales of assets from quarter-to-quarter.

Moving to Slide 8. Let's look at our noninterest expense. Our first quarter noninterest expense included a $123,000 in merger-related expenses for the First Evanston transaction down from the $1.3 million expenses from last quarter. Outside of these items 3 other significant variations drove our higher expense levels during the quarter. Our salaries and employee benefits increased by $1.2 million, due to the seasonal increases as a result of higher payroll taxes, benefit costs, merits and organizational growth. We had $429,000 of the decline and gains on OREO sales and other related expenses due to a decrease in the number of sales during the quarter. And our other noninterest expense increased $387,000, primarily due to an increase of $223,000 in our provision for unfunded commitments.

As Alberto mentioned, we are consolidating 8 locations during the second quarter. We recorded approximately $100,000 of the expenses related to these consolidations during the first quarter, and we'll report approximately $1.3 million of expenses during the second.

Our efficiency ratio bumped up to 69% this quarter, primarily due to the seasonal impact of lower revenue from our gain on sale of SBA loans and higher salaries and benefits expense. Over the longer term, we believe we'll continue to see an improvement in our efficiency ratio particularly, after we realize the synergies from the First Evanston transaction.

Turning to Slide 9. We'll take a look at asset quality. Our nonperforming loans increased to 1.08% of the total loans and leases at the end of the first quarter, primarily due to the one commercial credit we discussed earlier. The remaining inflow into NPLs this quarter, primarily related to one government-guaranteed loan where the guaranteed portion is not sold and represents approximately $3.3 million.

In general, the workout process for problem loans, problem government-guaranteed loans, where the guaranteed portion has not been sold can be elongated, which at times will cause the inflows to NPLs to exceed the rate of outflow as the loans are resolved. And while loss rates on the government-guaranteed loans will generally be higher than the rest of our portfolio. They also carry higher yields, which makes them attractive on a risk-adjusted basis.

Our net charge-offs were $4.2 million or 75 basis points of average loans and leases for the quarter. Charge-offs were primarily related to one commercial relationship in the unguaranteed portion of SBA loan.

Provision expense for the first quarter was $5.1 million. The first quarter provision included allocations of $3.7 million for originated loans and leases, $1 million for acquired non-impaired loans and $451,000 for acquired impaired loans. The largest component of the allocation for originated loans and leases was the addition to the specific reserve held against the commercial relationships discussed earlier.

Our allowance for loan and lease losses to total loans increased to 77 basis points at March 31. In addition to the traditional allowance as a percent of loan and lease metrics, we also analyzed the allowance in conjunction with the acquisition accounting adjustment impacting the acquired portfolio. At March 31, the acquisition accounting adjustment plus the allowance for loan and lease losses represented a 198 basis points of total loans and leases.

With that, I'd like to pass the call back over to Alberto for closing remarks.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [5]

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Thank you, Lindsay. In summary, we've had a busy start for the quarter, but we remain positive on the environment and on our strategy. Pipelines remain solid, and we're looking forward to welcoming new clients and colleagues from the First Evanston transaction. With respect to M&A, we remain constructive on the market, and continue to be interested in completing a transaction that fits our criteria.

With that, operator, I'd like to open the floor or the call up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Michael Perito with KBW.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [2]

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I have 2 questions, I would start on the expense side. So I guess as we -- and obviously, this is, I guess, excluding First Evanston, which will add some to the run rate. But if we think about where you guys are $31.8 million-or-so if we then account $123,000 merger expenses in the quarter. I mean, is this fair, I guess, Lindsay, it sounded like in your prepared remarks since you kind of just shuffled through it all which is maybe like $400,000 or $500,000 of maybe seasonally heavier than normal expenses in that or just $132 million run rate, is that fair? Or is there -- or is that really encompassing of everything that's normalized?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [3]

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No, I think that's pretty fair. I think that the salaries and benefits was the area that was -- that you saw some seasonality. I also think you'll see some seasonality, Mike, in the occupancy line, given the amount of snowfall we had here in Chicago over the first quarter or so. See those are the 2 biggest lines that had some variability in there. And other than that, I think your assessment is pretty fair.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [4]

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Okay. So that brings you kind of down to $231.5 million. And then what's the timing, I guess, 2-prong question. One, what's the timing of the initial cost saves on the branch closures? And then secondly, what's the timing of those perhaps being reinvested over time? I mean is this something where kind of 500,000 comes out of the quarterly run rate and then that kind of slowly drips -- flows away over the next 1 to 2 years or is it longer than that? Just curious, any help you can give there would be helpful.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [5]

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Yes, I'll start, and I'm sure, Lindsay can get much more specific. But I think, Mike, this stuff is, usually it's a little hard in the sense that statically, I think you're absolutely right. So obviously, you have the charge and then you have the cost saves. And in the ideal scenario, we can tell you, okay, gee, on an annual basis, we are going to utilize x and maybe the rest will fall into the bottom line. It's a little hard this year, because obviously, with First Evanston going on, we are really, really focused on that. So the question -- we may see benefits flow, and then over time, we'll reinvest it. So I'm kind of thinking it more as, over time what we'd like to do with that is be able to flow it back into the business. But it's not, we don't have things that immediately we're going to spend on. And so you will see probably a benefit here on the run rate. And then over time, we'd like to utilize that benefit to flow it back into the business. I don't know if you want to add.

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [6]

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Yes, Mike, it lags a little bit. So it's not -- if we close at the end of the quarter, it's not like you're going to start seeing them immediately come July, right? So there is a little bit of a lag. So I'd say, give it about a quarter, and then you'll start seeing it flow through. And then again, we'll continue to reinvest in our infrastructure. And put some of the money back to work. But you'll start seeing some savings come through in the fourth quarter.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [7]

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Okay. Helpful. And then the -- just a quick one on the loan side. The pipeline sounds like it's still fairly strong. I guess, was the pay down activity in the first quarter in line with what you were expecting? Or is there, should we be thinking that maybe pay downs could perhaps be a little accelerated this year, given what you saw on the first quarter and what you see in the pipeline?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [8]

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So they were, I mean, I'm trying to think of the same period last year, they were lower than they...

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [9]

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They are right about the same, a little bit higher.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [10]

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From last year? Okay. I think 2 things, Mike, on that, I think and you can see -- and we're starting to provide, I think, trying to get you guys to see clear in terms of clarity, in terms of where the pay down activity is largely concentrated. And you can see it is coming primarily from the acquired portfolios. Obviously, as those balances come down in terms of -- in dollar terms, pay down activity just simply by math is going to decline as those balances continue to decline. Obviously, we have a portfolio that's growing, at some point, we're going to see higher pay down activity from that portfolio. But I don't know that there is anything, in particular, at this point in time, in terms of visibility that would point to us expecting higher than what we've seen. I mean, if I look to last year, the first 2 quarters were higher than the rest of the year. And -- but I don't know that I could point to anything, right now, that would lead us to think that pay downs are going to be, call it, materially higher than what we've seen so far.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [11]

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Okay. And then lastly, I just want to spend some time on the commercial relationship. I was wondering I guess, first, can you just maybe provide us the overall size of that relationship and what industry it's in?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [12]

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Yes, Mike, one thing, and we'll give you as much detail as we can. One thing that we are sensitive to, it's an active restructuring and we've written down the credit to a level where that reflects the restructuring terms. So we want to be sensitive in terms of names or providing very, very specific information of the credit. What we can share with you it's -- a single loan relationship here in Chicago on our C&I book. In terms of kind of the business segment or the industry, I would categorize it as health and wellness. And this is a situation of the loan, I think, we did early on in 2016, where the company was looking to -- had a growth plan, they were looking to expand the size of their operation. And I think the end result here was the expansion plan was not successful, which necessitated for the company to be restructured, we were encouraged last fall in the sense that the company was able to raise capital, fresh capital. But earlier on this year, we and -- certainly, the company concluded that, that was not going to be enough and, therefore, the business itself needed to be restructured. Tim, I don't know if you want to add to that.

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Timothy C. Hadro, Byline Bancorp, Inc. - Executive VP & Chief Credit Officer [13]

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I'd only add that a new management team is in place, and we are working constructively with the new management team as we try to implement the revised capital plan and restructure program.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [14]

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Okay. And can you give us the size of the credit or...

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [15]

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Yes, the size of the credit, just overall was $6.7 million.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [16]

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And can you remind me on the overall, Tim? What's the average commercial loan size in your C&I book, give or take?

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Timothy C. Hadro, Byline Bancorp, Inc. - Executive VP & Chief Credit Officer [17]

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Well, we look at it 2 ways. The legacy portfolio was consisted of much smaller loans, in general. That median loan size was $400,000 to $500,0000. In our newly originated portfolio in the business we've done since 2013, it is in the approximately $4 million to $6 million range. It varies from line of business. The SBA loans tend to -- the median loan size would be smaller, I'm talking about the conventional commercial loan business.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [18]

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Yes, Mike, and that's what Tim added there. That's ACE, so that's aggregate credit exposure not just individual loan size, right? Because you have facilities that have multiple loans to the same borrower.

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [19]

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Okay. So your average commercial relationship is about $4 million to $6 million on your newly originated loans?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [20]

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I'm sorry, Mike, we couldn't hear you very well, could you repeat?

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Michael Anthony Perito, Keefe, Bruyette, & Woods, Inc., Research Division - Analyst [21]

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So I said -- so is there a way to interpret what you guys just disclosed is the average total commercial relationship in your newly originated commercial book is about $4 million to $6 million, but that could include multiple loans depending on each situation?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [22]

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That's correct.

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Operator [23]

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The next question comes from Ebrahim Poonawala from Bank of America Merrill Lynch.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [24]

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So just a quick question, Alberto, on this loan you mentioned, this was something it was done early 2016. Was the implication there that you've changed how you perceive credits like this today from your underwriting standards and you may not have made this loan? Or I'm just wondering -- if I guess to handicap the risk of more one-off instances like this. Would love any thoughts around whether your underwriting standards today are a little different versus early 2016? Or this was such a big anomaly relative to other stuff that you underwrite on the C&I side?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [25]

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I think, I don't know, yes, EB, I don't know about the -- I don't know that I would say that our standards are -- were looser back then or different from today. I think our standards have remained consistent. I think this is one of those things where it's a single credit with very much company-specific factors impacting it. So when I look across the board, obviously, on C&I it's company-specific. Every company is unique in some way. So I don't know that I would generalize to your comment though there, EB, that I would generalize that this is not a credit. I think we would have underwritten the credit based on the information and based on the plans and the projections that the company made. And I think in this case, this is just a situation where that growth plan just was not successful and just the business could not -- was not able to execute the strategy that they wanted to pursue.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [26]

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Understood. And I just want to clarify that in terms of -- adjusting in terms of the risk of more such one-offs happening, doesn't sound like that you feel that way right now. And in terms of -- thanks for the color on the loan payoffs, I think, if I go back to my notes we expected to sort of mid -- high single-digits to mid-double-digit kind of loan growth, low to mid-double digits, is that still the expectation? Or do you expect loan growth to be lower on an annual basis, given what you're seeing on the payoff side?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [27]

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So, EB, I think, we expected to trend similarly to last year. The stronger production comes as we move throughout the year. So I don't think much has changed in terms of that, that guidance there. But we are obviously focused on the First Evanston transaction the closing, so that's been a big focus for us. But I do think that the trends that we are seeing are consistent with last year, with the stronger part coming into the second half.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [28]

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Understood. But, Lindsay, what does that mean for in terms of just net loan growth. And I know, it could move around, but I'm just trying to understand should we expect 8% to 10%, 12% to 14% just in terms of conservatively how you would think about net loan growth?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [29]

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I think what you said is a reasonable expectation, EB. Very high single-digit to kind of low double-digit. I think that's fair.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [30]

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Understood. And just one last question, like, if we can talk about in terms of deposit growth environment. We've heard some competition from some of the larger banks or foreign banks in that market. So if you could talk to your ability to organically grow deposits and dovetail that with your outlook for the margin relative to the 4.45% you reported for the quarter?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [31]

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Yes. So I'll take the first part of the question, and then Lindsay will jump for the second part. I think we're competing effectively, and I feel pretty good about our ability to raise deposits. I think as you have, as you know, and as we've talked in the past, we had a unique circumstance and that we were coming from having very, very low loan-to-deposit ratios. To now being more within kind of the targeted range that we want to be at. So now we, obviously, in order to continue to grow our balance sheet and do it relying on deposits. Obviously, we need to see deposit growth, consistent deposit growth going forward. I see no reason why that cannot be the case. And in fact, I think we're, what I would say is, we're competing and we're competing well in the market today. Clearly, obviously, it's the competitive environment today is very different than it was, I would say, 1.5 years ago. We started seeing the dynamics in terms of the market changing, very much by, as early as May or June of last year, and certainly, that has continued to be, I think, very evident in terms of the amount of marketing, kind of product promotions, et cetera, that we're seeing here in the market from all players, local, as well as some of the regional banks that have branches here in Chicago. So in terms of the margin and the impact that we see there, Lindsay, do you want to?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [32]

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Sure, I think that with the margin we're going to see increasing pressure on the cost of funds side of the NIM. So I think we really benefit, we've been really happy with what we've seen in terms of the asset yields and the pickup we've been getting with the rising rates. I think we saw some increase this quarter, and I think it's going to continue to put pressure on the NIM going forward here.

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Ebrahim Huseini Poonawala, BofA Merrill Lynch, Research Division - Director [33]

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And so what would be your expectation if you had to quantify in the margin, assuming that we do get a couple of more rate hikes relative to the 4.45% in 1Q? Is it flat given -- considering all the factors? Or do you expect just 1Q to be the high and the margin trends will lower from here?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [34]

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I think, this was a very good margin that we got this quarter. I don't anticipate seeing what we did this quarter, next quarter. I think we had some really nice pick up, but it's hard, EB, on a GAAP NIM basis, remember we are closing the First Evanston transaction here. And so I don't have complete clarity yet, in terms of accretion. So once the purchase accounting marks are completed, then I can give better sense from a GAAP standpoint, but on the core CM point, I'd say that the flat statement is fair.

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Operator [35]

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The next question comes from Terry McEvoy with Stephens.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [36]

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I was wondering if you could just help me understand the process of getting or getting out of a government-guaranteed NPLs. The timing involved with that, and just optically, as we screen for banks it impacts your NPLs, but I'm trying to understand the process for those gradually coming down once they are resolved.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [37]

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So, there's 2, I would say 2 nuances, generally. And, we have Tim here, so he can jump in too and answer as well. But -- so we have essentially loans, the vast majority of our loans are loans that we carry the unguaranteed portion and the guaranteed portion has been sold into the secondary market. So if we have a workout situation, obviously, the balance that we're carrying is, let's say, 25% of the unpaid principal balance from the loan, and the 75% has been sold to an investor in the secondary market. So in that case, loan goes bad, the workout happens, the investor to the SBA will effectively pay on the guarantee. The investor will get paid, and we basically will wait till liquidation of the collateral to essentially work out the loan. Given that our position on the loan is that of the unguaranteed piece. When we have loans, where the guaranteed portion has not been sold, and we own the guaranteed, as well as the unguaranteed portion. We have to wait until the liquidation of the collateral and the final resolution with the borrower. And then we can submit the claim to the SBA, which will process the claim and then eventually pay. So we're carrying the balance even though, we have a guaranteed loan or guaranteed portion of it. For the duration of the workout, and then we make essentially the claim on the guaranty and get repaid. So then, for a period of time, you're showing the elevated NPL as a result of having the -- both the guaranteed and unguaranteed portion on your NPLs.

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Timothy C. Hadro, Byline Bancorp, Inc. - Executive VP & Chief Credit Officer [38]

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I would just add that the reason we carry a government-guaranteed loan as a nonperforming loan is -- that is the principle that is guaranteed not the interest. And therefore, we have to carry it as a nonperforming loan.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [39]

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Okay. And then just shifting gears, could you expand on the changes made last quarter that impacted kind of deposit fees, service charges, and whether any of those charges as you transition First Evanston will impact any of the pro forma results that were mentioned when you announced the deal?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [40]

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Don't think so, Terry. These are just very favorable changes for consumers in terms of the fee changes that we made. But we don't anticipate that, that impacts First Evanston, the differences between the way they assess fees and us is not materially different. So we don't anticipate much of a change there.

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Terence James McEvoy, Stephens Inc., Research Division - MD and Research Analyst [41]

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Just one last question. The areas of reinvestment coming from the branch related cost savings, would you define them as kind of offensive investments or more on the defensive side just given the competitive landscape?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [42]

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I think both. I think, I would say generally, making sure that the -- for example, on the branch network making sure that -- we're investing in the upkeep of our branches and modernizing branches that need to be refreshed, as well as in just capabilities, whether that be feature functionality on existing products or new things that we want to do with a particular customer segment or perhaps even on the marketing front. So I think it's a mix of both, Terry.

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Operator [43]

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The next question is from Nathan Race with Piper Jaffray.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [44]

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Just going back to the loan growth discussion from earlier. Alberto, just curious to get your updated thoughts on kind of what's the appetite and pipeline. It looks like they added additional lenders going forward. Obviously, you guys had an active year, last year. And you have the addition of First Evanston coming on here soon, which I'd imagine would be accretive to your absolute production capabilities. So just curious to get your updated thoughts on where you're seeing opportunities and just the overall level of discussions at this point?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [45]

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Yes, Nate, I think, and I think we touched on this last quarter a bit. I think given the fact that we were anticipating First Evanston, the First Evanston transaction. And obviously that we're adding really fantastic talent there on -- particularly on the commercial banking side. We were not really going to be as active in pursuing, call it, the hiring of new lenders with much more do it, much more so on an opportunistic basis. We have seen folks, we have interviewed folks, but we have not, I would say, activity for so far this quarter has been muted. We're always looking for talented folks to join the company. So in terms of your questions, it relates to appetite. We always have appetite for talented lenders that have a customer following and are known in the marketplace. But we've been more focused on integrating the folks and making sure that we do a good job integrating customers and the folks, which is really -- there is a lot of work still to be done in that end. We're just getting to the first step here of being able to legally close. But I hope that gives you some color. But certainly, in the future as we get past the integration definitely continue, want to find ways to add talented people to the organization. So as far as the appetite is concerned, we certainly -- that appetite is certainly still there.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [46]

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Understood. And then just kind of changing gears a little bit and thinking about the core loan yield expansion in the quarter. Obviously, you had the December rate hike, which helped. But just curious, Lindsay, if maybe there is a material change in kind of the composition of production this quarter? Or if there were perhaps some prepayment fees included that perhaps helped to drive the core loan yield higher this quarter, just given the payoff activity that you guys had?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [47]

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That's a great question, Nate. And as I alluded in my comments that it was a very good quarter in terms of loan yield. And there was a little bit of onetime noise in there that, I'd say, it would probably be still muted by about 10 basis points, call it, from the loan yield standpoint, just given some of that onetime noise in there. We did have some accelerations, and items going through that weren't normally there.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [48]

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But as far as the mix, Nate, the mix was pretty consistent. So no big changes in the mix in terms of the lines. I think as we mentioned earlier, we saw good activity coming from in the conventional C&I book from one of our teams, and certainly, on the government-guaranteed book from that team. So in terms of the other areas, I think, those areas are in some ways maybe that's where the seasonality impacts it a little bit. Rates have backed up here a bit. One thing that we have seen is, customers are much more sensitive now to maybe finally realizing that, hey, maybe it's a good opportunity now to lock in long-term financing. So inquiries as it pertains to interest rates swaps and things of that sort, we've seen an uptick in that. So it's -- but as far as overall kind of the mix of the business, I think, it's been pretty consistent.

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Nathan James Race, Piper Jaffray Companies, Research Division - VP & Senior Research Analyst [49]

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Got it. That's helpful. I appreciate that. And if I could just sneak one last one in on kind of the securities portfolio. Obviously, you guys were able to bring it down on an absolute basis last -- through the back half of last year. And obviously, you had some seasonality in some of your deposit flows this quarter. So just curious, Lindsay, in your expectations in terms of the absolute and relative size of the securities book going forward?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [50]

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Yes, Nate, we want to make sure we have enough liquidity, obviously, to run the institution in a safe and sound manner. But I think we have a little bit of room there to continue down a bit more. So we're about 21% as a percentage of total assets, and we book up to the 20% area, high teens, but not much below that.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [51]

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I think one thing that has changed in that regard, Nate, and I think it goes -- it's tied to the question that we got earlier about our ability to -- in terms of deposit growth and our ability to grow deposits on a go-forward basis. One thing that has changed is the dynamics are a little different. 18 months ago, you were raising deposits, and essentially, let's say, if you had a very, very short-term view of things it wasn't a really attractive transaction just because of the carry. Now that's a bit different with rates being a little higher. So I think I would say, we have a willingness to -- if we have to park money in securities, so that we can continue to be consistent in terms of raising deposits in anticipation of growth. I think we certainly will take advantage of that flexibility.

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Operator [52]

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(Operator Instructions) Our next question comes from Brian Martin with FIG Partners.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [53]

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Maybe, Lindsay, just back to, I think, Nate's question, which kind of I was getting at, but the -- just the core margin expansion this quarter. It sounds as, I guess, it sounds like you're comfortable with, I guess, with deposit costs going up. It kind of felt like it was sustainable, but then kind of your -- which is my real question, but it sounds like maybe it -- that level is not sustainable. There were some one timers in there. So maybe it's a -- like you said -- alluded to, it's more in the 10 basis point range of that is not sustainable. And then, do you keep the baseline type of level, is that big picture, how to be thinking about it?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [54]

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It's hard to give you an exact number. I would say, I can't really predict in terms of payoffs and recoveries and things that flow in and out of there. Perfectly, we always have some noise there, so, but I would say, it's -- we were very happy at that level. It was a good level to be at. As I said going forward, if assuming we continue to see the Fed raising rates we do see an uptick in terms of our loan yields because we do have an asset-sensitive balance sheet. So it's a balancing act. So I think my comments in terms of a flat outlook is pretty consistent, Brian, in terms of modeling. So but again, there is a little bit of noise in there. So you can make your assessment in terms of, I think, throughout a number, and it ebbs and flows every quarter. So...

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [55]

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And just one question. The outlier this quarter, if there were some, can you just kind of tell us what are the outliers we can think of about as we -- if we're going to make a decision that's better or worse in a given quarter? I guess the biggest impact that could change and as far as what that leads to the volatility?

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Lindsay Y. Corby, Byline Bancorp, Inc. - Executive VP & CFO [56]

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I would say, the biggest fact or the unknown right now is accretion, right? So I would say accretion is something that we're not, we don't have visibility until this point in time.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [57]

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Right. I'm just looking at the core numbers. I'm taking out the accretion. So if we're just talking that 4.14% number that was up, like I said the core margin was up a fair amount. I'm just trying to understand where that could be -- the volatility in that number could be? Why it could be down, let's say, the 10 basis points or whatever the number you kind of mentioned earlier on a range so?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [58]

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So, Brian, you have from refinances to payoffs so things of that sort, that causes an acceleration in fees that flow through interest income that fluctuates on a monthly basis, right? And that's dependent on activity. So I think that's primarily it's kind of what you'll see.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [59]

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Yes. Okay. I got you. All right. And then just the last 2 things. Just, Alberto, maybe just the SBA kind of pipeline and where that stands today? Is that still kind of, has anything changed recently with that? Or how is that tracking today?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [60]

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Brian, as you see, as we -- when we talk -- and it's on the deck, if you go to Page 7 on the deck. I think there is a really useful, the really useful table there at the bottom on that chart, where you can kind of know this is close loan commitments, but I like the look at kind of the year-over-year comparison. I think that's pretty good. So pipelines there remain, I think, remain good. And I think, in general, obviously, the SBA business as some of the other banks that have released mentioned during their calls, some time ago there used to be an x number of people that were in the SBA business, now there seems to be a lot more people. But we like what we have. We're focused, we're not doing this as an add-on product or as part of a or, call it, a tool or a feature that some of our lenders can use. I mean, we have a dedicated team of people that manage and run the business on a soups to nuts basis. So we like our chances, and we think that we can compete and compete well in there. So remain positive in that regard.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [61]

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Okay. Perfect. And then just the last 2. On the M&A side. I guess any color you can provide on just the level of discussions today, certainly we know you're interested if the right opportunity came along. But it seems like there has been -- dialogue has been or at least -- what's actually come to the bottom line has been a little bit less this year than last year and now the discussions aren't up. But the level of discussions today versus how they've been in the last couple of quarters, has there been any change on that front?

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [62]

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I think 2 things on that front. Brian, I think, the factors as far as M&A, and I think that goes to my comments during the remarks in terms of remaining constructive. I think the factors are definitely, definitely present. You have the usual factors in terms of folks that are looking, made investments some time ago and are looking potentially to exit those investments. And then the more traditional factors, involving succession planning and institutions that are kind of getting to the point, where -- are looking for where growth perhaps a little more challenging on a go-forward basis. So those factors are -- remain, and I think are very much still present. As far as discussions and activity, I would tell you, I haven't seen discussions and, call it, chatter, I think, remains alive and well. Discussions certainly remain, and this -- sometimes these things are -- take longer, sometimes they are faster. I mean, I can tell you from experience, in First Evanston it was a long, long process. We began talking really to and had a relationship with the team there for a long, long time. And over time, we had discussions, we talked and then finally, we were able to reach an agreement last year. But to your question about activity levels and discussions, et cetera, I think those remain. And it's just a matter of continuing to proceed along in those processes.

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Brian Joseph Martin, FIG Partners, LLC, Research Division - VP & Research Analyst [63]

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No, I appreciate the color there. And just the last thing, because there was a lot of talk about the loan growth and the payoffs this quarter. I mean, I guess, when you think about your outlook for the year, Alberto, I guess, it's fairly the same. That your outlook kind of includes some of these payoffs in the numbers. So if you -- whatever the number if it's 8% to 10% or 10% to 12%, whatever your number is as far as the loan growth outlook. I mean your factor -- when you're kind of talking about your expectations you're assuming that there's going to be some level of payoffs in these numbers. I guess is how to think about. It's not like -- if it's a little bit more, maybe the growth is just a touch less, but there is some element in your forecast regardless.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [64]

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Of course.

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Operator [65]

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This concludes our question-and-answer session. I would like to turn the conference back over to Byline's management for any closing remarks.

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Alberto J. Paracchini, Byline Bancorp, Inc. - President, CEO & Director [66]

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Great. Thank you, operator, and thanks for everyone for participating in the call today. Thank you for your interest in Byline. And we look forward to speaking to you again, next quarter. Thank you.

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Operator [67]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.