Q4 2023 Byline Bancorp Inc Earnings Call

Participants

Brooks Rennie; Vice President, Investor Relations Director; Byline Bancorp Inc

Mark Fucinato; Executive Vice President, Chief Credit Officer; Byline Bancorp Inc

Presentation

Operator

Good morning, and welcome to Byline Bancorp fourth-quarter 2023 earnings call. My name is Carla, and I will be your conference operator today. (Operator Instructions) Please note that the conference call is being recorded.
At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp, to begin the conference call.

Brooks Rennie

Thank you, Carla. Good morning, everyone, and thank you for joining us today for the Byline Bancorp fourth-quarter and full-year 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.
During the course of the call today, management may make certain statements that constitute 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, our remarks may reference 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 statements and non-GAAP financial measures disclosure in the earnings release.
I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Thank you, Brooks. Happy new year, and thank you all for joining us this morning to review our fourth-quarter and full-year 2023 results. As always, joining me this morning are our Chairman and CEO, Roberto Herencia; Tom Bell, our CFO and Treasurer; and Mark Fucinato, our Chief Credit Officer.
Before we get into the results for the quarter, I want to pass the call on to Roberto to comment on a few items. Roberto?

Thank you, Alberto. Good morning and best wishes for a healthy and happy New Year to all I start my remarks by acknowledging byline shareholder and friend Dan Goodwin, who passed away in Chicago last weekend and story as a human being and business leader is simply remarkable. I met them almost 14 years ago and most recently interactive retained prior. And after the merger between buying an inland bank, it was important to him that we referred to our coming together as a merger, not an acquisition. That alone tells you much about him and his value system. He was pleased with how we negotiated the key points of the merger and he was happy to have become a shareholder of filing. I think he was the happiest when he learned, we had selected Pam Stewart as its representative on our Board. And if you have met, Pam, you would know why that is the case. Our sympathy and heartfelt prayers go through his wife and family as well as his extended inland bank and Real Estate Group family. We have lost the Chicago Titan.
No doubt.
Importantly, we have gained so much more for his actions and legacy a few seconds of silence to honor his memory are appropriate.
Thank you, Dan would have been as pleased as I am with the results for the quarter and the full year 2023 was a breakout year for vinyl and our performance, which Alberto and Tom will cover shortly, was excellent and several important profitability metrics now rank in the top quartile of our peer group results and budgets for most banks in 2023 were derailed by the March April events with earnings deviating materially from plans and boards and management teams grasping for ways to justify weaker results on a relative basis. We are proud to be part of that group and to be able to have delivered within estimates and plan. It took hard work. We believe the Chicago banking market will continue to be disrupted by events ranging from smaller banks, getting weaker mergers between larger banks with headquarters and decision making moving outside of state as well as management changes and turnover that disruption fuels our organic growth and our strategy simply put being home to the best commercial banking talent continues to shine under those conditions. This is easier said than done when done well. However, from having the right credit and risk processes using the right technology focus and key people practices and nurturing the team that can finish each other's sentences, the strategy is hard to replicate. We are optimistic about the future and the value our franchise can deliver to our shareholders with that set.
Alberto, back to you.

Excellent. Thank you, Roberto. For our practice. I will start by walking you through the highlights for the full year and quarter. I will then pass the call over to Tom, who will provide you with more detail on our results. Following that, I'll come back to wrap up with some closing remarks before opening the call up for questions.
Moving on to slide 3 of the deck and to start.
Before I turn to the highlights, I would first like to thank our employees for their hard work and contributions this past year 2023 was another solid year for the Company. We navigated through a challenging rate environment. The market disruptions stemming from the failure of cellular institutions earlier in the year and an economy that continued to surprise to the upside in terms of growth against that backdrop, our diversified business model and continued focus on executing our strategy served us well. In addition, we successfully closed the $1.2 billion merger with Inland converted systems and fully integrated the operation into byline within the calendar year. All in all 2023 was certainly a busy year for the year. Net income was $108 million or $2.67 per diluted share on revenue of just under $387 million. Adjusted for the effects of the merger. Our return and profitability metrics were very strong with pretax pre-provision ROA of 235 basis points, ROA of 145 basis points and ROTC of just under 18% year on year. Loan growth, inclusive of inland was strong at 23% and better yet all the growth was funded by deposits, which grew 26%. Our efficiency ratio improved by over two percentage points to 52.6% and five percentage points to under 50% on an adjusted basis.
Lastly, capital remained strong with TC ending the year at 9%, CET. one at 10.35% and total capital at 13.4% all of these ratios reflect increases on a year-over-year basis, notwithstanding the impact of the Inland transaction in the third quarter.
Turning to Slide 4. Results were also strong for the quarter with net income of $29.6 million or $0.68 per diluted share on revenue of 101 million. Adjusted for merger related charges, net income was $31.8 million or $0.73 per diluted share. Profitability and return metrics were also solid, with record adjusted pretax pre-provision income of 50.2 million pretax pre-provision ROA of 227 basis points, ROA of 144 basis points and ROTC at 18%. Revenue was slightly down from the previous quarter, but up 20% year on year. The revenue decline was driven by lower net interest income due to a lower margin as expected, offset by higher noninterest income stemming from higher servicing income.
From a balance sheet standpoint, we saw continued growth in both loans and deposits during the quarter. Loans increased by 81.7 million or 5% linked quarter annualized and stood at $6.7 billion as of quarter end. Net of loan sales. Origination activity moderated from the previous two quarters, but remained healthy at $241 million, with the increase coming primarily from our C&I and leasing businesses. Payoff activity increased as anticipated and line utilization remained stable at around 55%. Our government guaranteed lending business continued to originate at a healthy level with 135 million and close loans, which as expected was higher than the previous quarter.
Moving on to the liability side, deposits grew by $223 million or 12.8% annualized and stood at $7.2 billion as of quarter end non-interest bearing deposits account for 27% of our deposit base and overall deposit cost increases are starting to moderate. Tom will certainly provide you with additional color on the margin and our outlook. Given the market expectations for lower rates this year, expenses remain a focus and were well-managed for the quarter coming in at $53.6 million more broadly, we were able to drive down our efficiency ratio and bring our adjusted cost to asset ratio to 228 basis points. This represents a decline of seven basis points linked quarter and importantly 43 basis points on a year on year basis.
Turning to asset quality. Provision expense came in at $7.2 million lower than the prior quarter. Charge-offs were elevated at $12.2 million compared to last quarter, reflecting charge-offs taken against loans with previously established reserves as they near resolution and a charge on a purchase credit deteriorated loans subject to credit marks. The allowance for credit losses stood at 152 basis points. Npls increased 17 basis points to 96 basis points. We added additional detail to the NPL chart on page 11 of the deck, so you can distinguish between the PCD and non-PCD trends in NPLs.
Lastly, front end delinquencies remained flat, notwithstanding the impact of a mortgage servicing transfer completed at the end of the year. We also added additional disclosure on risk ratings numbers of loans and a balanced stratification for our office portfolio. You can find that on page 17 of the deck in the appendix, we did not repurchase any shares during the quarter. However, our Board approved a new stock repurchase program that authorizes the Company to repurchase up to 1.4 million shares of the company's outstanding common stock. The program is an important component of our overall capital management strategy, which includes investments in the business, M&A, share repurchases as well as our regular quarterly dividend.
And with that, I'd like to turn over the call to Tom, who will provide you with more detail on our results. Some.

Thank you, Alberto, and good morning, everyone. Starting with our loan and lease portfolio on slide 5, total loans and leases were $6.7 billion on December 31st. The increase was across all lending categories with the strongest growth coming from our commercial and leasing teams. Average loan balances increased linked quarter and were higher by 23% on a year-over-year basis, driven by organic growth and the inland merger. We expect loan growth over the course of 2024 to be in the low mid single digits.
Turning to slide 6, our government guaranteed lending business finished the quarter with 135 million in closed loan commitments, which is up 19% and 12% on a linked quarter and a year over year basis. At December 31st, the on-balance sheet SBA seven exposure was relatively unchanged at 453 million. Our allowance for credit losses as a percentage of the unguaranteed loan balances was 7.8% as of quarter end, lower as a result of loan upgrades payoffs and charge-offs related to fully reserve loans, as Alberto mentioned.
Turning to slide 7, we continue to focus on deposit gathering. In the fourth quarter. Total deposits increased to 7.2 billion, up 13% annualized from the end of the prior quarter. We saw robust organic deposit growth of 223 million in the quarter, which was net of a 69 million reduction in brokered CDs. Average deposit balances increased quarter over quarter and were slightly higher by 24% on a year-over-year basis, inclusive of Inland transaction excluding the transaction, deposit growth was a healthy 9.1% for the full year. Our deposit mix continues to moderate moderate as expected, with the decelerating pace linked quarter DDAs as a percentage of total deposits was 27% compared to 28% from the prior quarter. And we expect the shift in mix to continue to moderate and stabilize during 2024. On a cycle to date basis, deposit betas for total deposits was 45% and interest bearing deposits was 61%, driven in part by the repricing of our CD portfolio in 2023, the CD average maturity rate was 2.32%. For 2024. We expect that CD repricing will have less of an impact given the average rate of the maturing CD book of 4.67%.
Turning to Slide 8. Net interest income was $86.3 million for Q4, down 6.7% from the prior quarter. The decrease in NII was primarily due to higher interest expense on deposits and lower accretion income on acquired loans of $5.2 million, offset by loan growth. Our net interest margin remained strong at 4.08% on a reported basis, which was in line with our NII guidance. Accretion income on acquired loans contributed 24 basis points to the margin in the fourth quarter compared to 50 basis points for the prior quarter. Earning asset yields decreased 26 basis points linked quarter, driven by lower accretion and an increase in fixed rate loans during the quarter. For 2023, net interest income was up 65 million or 25%, which translates to the NIM., increasing by 31 basis points year over year and ending the full year at a strong 4.31% looking forward, given the forward rate curve forecast, we continue to make steps to reduce our asset sensitivity as highlighted in the IR section. Based on the factors previously discussed, our estimate for net interest income for Q1 is in the range of 83 to 85 million.
Turning to slide 9, non-interest income stood at 14.5 million in the fourth quarter, up 17% linked quarter, primarily driven by a 2.4 million improvement in our loan servicing asset valuation, reflecting lower discount rates and a $1.2 million gain in the change in fair value of equity securities.
Sales of government guaranteed loans decreased $13 million in the fourth quarter compared to Q. three. The net average premium was 8.5% for Q4, slightly higher than prior quarter, primarily due to more favorable market conditions and mix of loans sold. Our gain on sale income for Q1 is forecasted to be in the 4.5 million to 5 million range, in line with our historical trends of lower loan production in the first quarter.
Turning to slide 10, our noninterest expense came in at 53.6 million for the fourth quarter, down 4.3 million from the prior quarter, primarily driven by merger-related expenses taken in Q3 on an adjusted basis, our noninterest expense stood at 50.6 million, 3 million below our Q4 guidance of 53 to 55 million. We continue to manage our expenses tightly and prioritize investments that are more critical to achieving our strategic objectives. Looking forward, our noninterest expense full year guidance is unchanged at 53 to 55 million per quarter.
Turning to Slide 11. The allowance for credit losses at the end of Q4 was of 101.7 million, down 4% from the prior quarter. In Q4, we recorded a 7 million provision for credit losses compared to a 9 million in Q three. Net charge-offs were 12.2 million in the fourth quarter compared to 5.4 million in the previous quarter. Npls to total loans and leases increased to 96 basis points in Q4 from 79 basis points in Q3. Npas to total assets increased to 74 basis points in Q4 from 60 basis points in Q3, and total delinquencies were $36.1 million on December 31st, essentially flat linked quarter.
Turning to Slide 12, which recaps our strong liquidity and securities portfolio. Our loan to deposit ratio decreased 182 basis points linked quarter to 93.4%. We are pleased with this progress and continue to work towards bringing down this ratio over time. Our available borrowing capacity grew to 2.3 billion and our uninsured deposit ratio stood at 26.7%, which remains below all peer bank averages. Notably, we have the highest insured deposits among the proxy peer group as a result of our very granular deposit base.
Moving on to capital on Slide 13. Our capital levels at quarter end improved with our TCE ratio at 9.1% and our CET ratio at 10.35%. Both ratios improved nicely over the quarter. We grew capital by 29% on a year-over-year basis, and our tangible book value per share increased nicely by 11% in 2023 to $17.98, driven by our positive earnings. Given our strong balance sheet, liquidity and capital position, we believe we are well positioned to grow the business and capitalize on market opportunities throughout 2024.
With that, Alberto, back to you.

Thank you, Tom. Moving on to slide 14, I'd like to wrap up today with a few comments about the outlook and our strategic priorities. For 2024. We entered 2024 on solid footing and with great momentum in terms of our strategy and priorities. They don't change Munch and remain consistent from year to year. We believe we can grow our franchise and continue to create value for shareholders. We do this by growing and expanding customer relationships, pursuing disciplined loan growth, improving the efficiencies of the business to allow for continued reinvestment, maintain credit and capitalizing on market opportunities to bolt that talent and pursue M&A again, we believe we are well positioned to capitalize on opportunities to continue to grow the value of our franchise.
And with that, operator, let's open the call up for questions.

Question and Answer Session

Operator

(Operator Instructions) Nathan Race, Piper Sandler.

Yes.
So everyone, good morning for everyone.
So why don't I answer a question?
I was hoping to just start off on the charge-offs this quarter. I'm looking through the slide deck. It looks like on office commercial real estate property contributed to some of those charge-offs. So would be curious to get some additional color from mark in terms of the outlook for the remaining portfolio and kind of what you're seeing in terms of potential maturities and how those maturities some kind of stack up with cap rates going up and so forth and just the overall asset quality outlook within that portfolio.
But we have a good handle on the office maturities going out the next two years. And we've been in discussing it a lot right now, what's coming up the first two quarters of the year, we're in very good shape. We're actually seeing some opportunities for some of these customers to refinance their office buildings, which is little bit of a surprise to me, but we're in good shape overall on the office book in terms of a percentage of our overall portfolio. So there are going to be situations where some of them are going to be criticized assets. But as you know, they're unique and we're going to approach them with a tailored kind of strategy with the customer to see what the outcomes are going to be with of any credit issues that we see on the charge-offs?

Yes, we had a charge-off on an office asset side. But again, that's part of our strategy that we're using to resolve that particular asset. And we're hoping to achieve those results here during the course of 2024.

Okay, very helpful. Thank you. Maybe changing gears, thinking about the NIM for this year. I apologize if you touched on it in your prepared remarks, Tom and I didn't catch it, but just in terms of kind of the outlook for kind of core NIX. accretion over the next couple of quarters, assuming that Fed remains on pause and then forget a couple of rate hikes in the back of the year in the back half of the year, how do you kind of see and I am trending over the course of 2024.

Yes, hi. Good morning, Nate. On the prepared remarks, I basically we're using the forward curves as our estimate for interest rates and the market is anticipating 150 basis points in Fed fund reduction over the year. So given that on what I think the first of these happening in March, we've given guidance of 83 to 85 million for NI. And in the supplemental stuff we have the accretion forecast. In fact, for your reference, just kind of split that out.

Okay.
So if we do get that degree of rate cuts this year, but it's fair to expect would contract. But if we just get maybe a couple in the back half of the year, it's fair to assume maybe a little bit of growth year over year.

Yes, that could be possible again, subject to what happens with the Fed and market expectations on the net interest income page of the deck on Page 8, we provided some information on our interest rate risk sensitivity over one year, and we've been able to reduce our sensitivity by 1.8% year over year, but we still are asset sensitive. So you can see both in a ramp scenario and a static scenario, what the give up in NI is to the bank's net interest income number. So we provided in 100 basis point down where that's about 3.3% in a ramp and it's 2.5% I'm sorry, that's 3.5% on a static and ramp this 2.5% decline. And we provided you the quarterly cuts as well on an annualized basis.

I think, Nate, to add to add to what Tom is saying there just more broadly. So I think if you look at kind of what the market has priced in in terms of rate cuts for 2024, as you can see from the materials?
We remain asset-sensitive, certainly, as Tom covered. You know, in the prepared remarks, you know, we're seeing moderation in terms of deposit pricing as well as moderation in kind of mix changes. Rate declines certainly will help in that regard. But that being said, we remain asset sensitive. So, you know, rate declines are going to impact, you know, the asset side negatively in the sense that you're going to be repricing assets, you know, and that's going to have an impact that's going to be faster than the repricing liabilities. That being said, that assumes, you know, kind of the market view in terms of interest rates to the degree that rates move lower faster or come earlier in the year faster. That obviously impacts, you know, the margin negatively to the degree that there are slower it impacts the margin positively. But all in all, we still feel pretty good about our our ability to grow, so grow assets and continue to expand net interest income.

Got it. And just within that kind of outlook, you know if the Fed remains on pause for the first half of August of this year and just kind of thinking about the cadence in loan yields from here. I imagine you guys have put in new look new loans on the portfolio above on kind of the rate that we saw or the yield that we saw in the fourth quarter? And would just also be curious to hear in terms of those 40% of loans that are fixed, what amount of maturities do you have over the next 12 months that could reprice higher?

Well, I mean, you have to remember if you're doing fixed rate loans, the market's already kind of priced in the Fed easing so you know, we price we're market takers, so to speak. So we price to a spread to the curves. And so in some cases, right, the punitive thing to that interest income right now is fixed rate loans because you tend you tend to lose spread on a marginal cost basis like you are going to the Home Loan Bank. So I think that you have to be mindful that whether you do balance sheet hedges or other things to protect the earnings, you're technically layering on some fixed rate loans that are in the 7.5 range that it may be on a floating rate basis would be higher just given that spread on silver.

Got you. If I could just ask one last one on just kind of the outlook for deposit growth. Looks like you had some nice core deposit generation in the fourth quarter. Is the expectation that core deposit growth will largely follow that kind of low to mid-single digit outlook for loans and this year?

I don't know that we've ever given guidance in terms of deposits, Nate, but as you've been covering us for a long time. And I think you know how important we feel deposits are and the ability for us to continue to grow deposits. And I think the plans are to continue to do that. Obviously, you know that subject to client preferences, that's subject to doing the right thing for customers. And obviously our competitors who are trying to do the same thing. But I think broadly, I would say, look, we continue to want to have strategies in place to continue to grow deposits. I think this quarter, as Tom mentioned, we saw a nice decline on our loan-to-deposit ratio. We want to continue to drive that. And over time we're operating. You know, we were if you recall, we were operating closer to 95%. We gave guidance that said that we wanted to bring that ratio down over time and we are very much wanting to continue to do that. So I think you know you should think in the context of continuing to see that ratio come down closer to 90%, even below 90% over time.

But was there any seasonality in the core deposit growth in the fourth quarter? Or was it more just kind of blocking and tackling and ongoing, how high-growing market share gains blocking and tackling?

Yes.
I think the latter as you know, we tend to see seasonality. We have a we have obviously a commercial focus in our business, inclusive in the liability side. So you have tax payments. You have all those things that have to happen right around the first quarter. So we'll see some seasonality there, but that was not the case at the end of the year.

Okay, great. I appreciate the color. Thanks, guys.

Great. Thank you, Nate.

Operator

Terry McEvoy, Stephens.

Good morning, everybody. And Derek, if I may start with a question on expenses. If you grow organically, let's say, 10% a year, you're going to cross 10 billion in less than two years. So I guess my question is how much of the incremental expenses from crossing $10 billion are in that current run rate of 53 to 55. Should I have a should I be worried about a step-up in 2025?

I think let me answer the question maybe two two ways. First off is And Terry, we've always kind of run the business on the expectation that you know we want the company to be able to from a risk management from a kind of reporting from a control perspective, not get behind to the growth of the business and what I mean by that is over time, we've always consistently invested to make sure that we have the requisite level of controls, the requisite level of investment to keep in conjunction to the growth of the business. So to answer your question, just by the mere fact that at some point we will cross that $10 billion mark doesn't necessarily mean that you're going to see a step function of an increase in expenses that would be call it very significant. That being said, along with growth in assets, along with growth in revenues and the growth in expenses that would correspond with that. I think you can anticipate expenses to increase to continue for us to continue to make sure that we're making the right investments to meet the higher expectations that come with crossing that 10 billion mark. So proportionately, I think we want to continue to operate along the lines of what we've mentioned during our calls, you know, we have always been, you know, keeping an eye on expenses, maintaining discipline around expenses. As you saw this quarter, we saw a nice decline on the cost to asset ratio, we talked that through on an adjusted basis to 228 basis points. That's a material decrease from where we were operating last year. So we want to make sure that we continue to proportionately gain scale irrespective of if we cross the 10 billion mark or not. So hopefully that that gives you some color in terms of how we think about that.

Yes, thanks for the color there and helpful. And then just kind of getting out of the earnings model, what's it going to take to get utilization rates back to pre-COVID levels, which kind of what 60 to 63? And if we get back there, what does that mean to non-interest bearing deposit balances? And is it that case, we got to watch what you wish for.

So that's a really good question. The short answer is And Terry, we really don't have a we really don't know. You would have expected that you would have seen utilization revert back from by now post COVID?
I think there's a couple of things that are probably coming into play. We're a larger bank now we're a little different than we were right before COVID. So maybe you know that the mix that we have today is slightly different, which could be impacting kind of overall line utilization or call it the line utilization percentage that that we report.
The second piece is, you know, I'm a little skeptical of a mean reversion going back to call it kind of 2019 levels up from the fact that given that discrepancy from borrowers with much higher interest rates today, if you were sitting on cash and you had the flexibility you would probably just pay down the line or you would frankly move the money to a higher yielding old alternative?
We've seen some of it, but we haven't seen that in mass in our in our book. So I guess what you're hearing is we're probably a little skeptical of that utilization rate fully mean reverting back to what it was in 2019.

Thanks for taking my questions. And Joe, the weekend.

Right. Thank you, likewise.

Operator

David Long, Raymond James.

Thank you. Good morning, everyone. Good morning, David, and wanted to follow up on the deposit discussion. And as you look out for the rest of the year on if we do get some rate cuts. What do you expect out of the deposit beta on the downside at this point?

That's a good.
That's a good question. And I think, again, subject to the Fed on short term rates are certainly higher today. We're actually inverted right on overnight to one year, which we were flat before. So we're already seeing some benefits to repricing. Some of our I'll call it book of CDs that you know, are on the shorter end of the curve. But we have our CD book is about 8.5 once. So it's relatively short. And we've been positioning the bank to train, adjust betas down. Obviously, the CD book will reprice more on at 89, 85% to 90% of reduction and then the core accounts will continue to operate as we have in our model. As you know, in that call it up against some of our products, the rack rates haven't really moved. So you can't really lower those rates. What's your high-yield money market accounts?
Certainly we expect the betas to be up pretty substantial on the way down.

Got it. Thank you.

I think and then, David, just to add one to add two things to what Tom said. I think in Tom's remarks earlier, when you think about that CD book, the average rate on the maturities that we're seeing for 2024 was like 4.67%, I think. So just keep that in mind relative to kind of, as Tom said, the duration of that portfolio is 8.5 months and you have a rate at 4.67. You kind of can see where market rates are. So that gives you a sense in terms of kind of what the reprice would be. All else being equal, if you have declines in rates, obviously that's going to come into play, obviously subject to competitive dynamics in the market and so forth. But I think to Tom's comments and the comments earlier in the call, I think the deposit pricing is starting to moderate. I think it will be rate dependent. If we get rates declining faster, obviously, that's going to that's going to impact that more in a quicker fashion. If rates lag for a little bit that's going to be slower. But in that in that, on that end, you know, to a degree that it's lower than what the market repricing given our interest rate positioning at this point, that's probably to our benefit as opposed to our detriment. So just keep that in mind.

The only other thing I would add to David is, you know, this quarter, right? We had a significant reduction in our FHLB borrowings and we had a brokered CDs mature. So that's 384 million of wholesale type pricing and that which then ultimately gave us less cash at the Fed, so to speak. So liquidity is still really strong even improving. So that's going to help just the NI numbers as well.

Got it. Okay, thanks. And then wanted to talk M&A just for a second here. The inland deal seems to have gone pretty well integration, mostly done with that first question is, are you seeing a pickup in discussions or serious discussions? And then secondly, what is byline is appetite to do something else at this point?

I think let me take the latter question first. I think our appetite is high. I think we are certainly open to entertaining M&A to the to the prior question to the first part of the question in terms of kind of what's the environment for M&A, I think look, I think it's clearly with the rally in rates towards the end of the year. I think a lot of the friction that was causing M&A to be very difficult for a lot of institutions, meaning the impact of AOCI., the impact on interest rate marks on portfolios, and that's gotten better. It's not to say that we've reverted back to where it was maybe 18 months ago, but it's certainly gotten better, which I think given the recent announcements that you've seen, I think it's indicative of the fact that M&A and the M&A math, so-to-speak is getting a little bit easier for four people or so as far as we're concerned. You know, look, we remain we have our kind of our framework for evaluating M&A. We continue to think that there's going to be consolidation. We think we are a terrific partner for institutions that are looking for a long-term partner, and we're hopeful that that there will be some activity and 2024.

Great. Thank you, guys for taking my questions. Welcome.

Thank you. Thank you.

Operator

Damon DelMonte, KBW.

Hey, good morning, everyone. And most of my questions have been asked and answered but just a couple a couple of little ones here regarding the outlook for expenses here in the in the first quarter, I think the guide was 53 to $55 million of Tom, can you just kind of help walk us from kind of like the operating number, sub 51 up to that to that level? Is that come in through salaries and benefits? Or is it data processing? Just kind of looking for some guidance there?

Yes. Some of it is definitely salaries and benefits. We've had some delays and some hires that we're still looking to seek out as well as some new teams to bring into the organization from a business perspective on the real estate numbers that came in were actually a little bit lower than what we originally accrued for. And so that won't materialize in the far in 2024. So we're trying to give full year guidance there I think we would expect to be a little bit on the lower side on the guidance side of 53, maybe for Q1. But absent that, we think just given the spend that we want to make to invest in the business and bring on teams. We're going to have to increase costs do that.

Got it. Okay. All right. That's helpful. Thank you. And then as we think about the provision expense going forward and kind of like a normalized net charge-off level? Yes, I think you had like 38 basis points last quarter and that's on the rise from the last two years, understandably. But do you think that high 30s, 40 basis point level is reasonable going forward?

I think we've always said Damon, somewhere in the kind of a 30 to 40 basis point range historically. And I still think we're comfortable with that. Keep in mind a couple of things that maybe are a little different today than that. Historically, we added some additional disclosure for PCD loans. I mean those are loans that over time you can expect us to drive to move those out of the bank relatively quickly will add to the degree that we take charges related to those. As you know, those are obviously subject to a credit mark. So we'll disclose and give you color around that. But if I go back to the first part of your question in terms of kind of like the underlying rate, I still think that that 30 to 40 basis point is reasonable.

Got it. Okay. And then just lastly, looking at the deposit base, do you have any any deposits that are tied specifically to Asia? So our index rate. So that is if and when the Fed does cut rates, you'll get some relief. And that portion of the portfolio?

Yes, I mean, we have some from some of the deposits we have that are like brokered money market accounts. They're tied to Fed funds and they're on for our balance sheet hedge purposes. So we'll see an immediate benefits from that. And then there's a few clients that are more in the public entity space where we're tied more to an index there. So we'll get definite relief immediately 100%.

Okay, great. That's all that I had. Thank you very much.

You're welcome.

Thank you.

Operator

Brian Martin, Janney Montgomery Scott.

Hey, good morning. I ran over 40. Just to see just a follow-up. Tom, I was going to ask you to Damon's question. Can you walk through what and a rate cut what reprices on the asset side and immediate or lag. And then on the deposit side, if you can just quantify some of that, can you give some color on what what moves immediately versus it being a lag and just how much of it?

Well, again, I would point you to slide 8 where we have our interest rate risk profile. We give you the scenarios of how we reduced our asset sensitivity on a year over year basis. And then what happens in a static 100 basis point decline and a ramp decline of 100 and that would include our assumptions around repricing of both assets and liabilities. So we are asset sensitive and we have a in a static 100 basis points. It's $3 million per 25 basis points. So that would be the earnings that would be DNA give up on an annualized and annualized basis. So again, subject to the timing, it's challenging because the Fed, as you know, if the Fed eases in March will the SBA book gets repriced immediately in April. And if the ease in May, then that actually takes place in July. So timing matters both on the asset side and the liability side. And based on our the forward curves which we're using for our rate forecast, all the expectation is the numbers I quoted you on that and I based.

Okay, but the book and how much of the loan book is variable because go ahead? I'm sorry. I know it's under 50%, we have 48% in fixed rate. And then, you know, the combination of prime and so for the other parts. So it's kind of 50 50 ish, but again, you have in the aggregate portfolio as straight as well. So it's a little bit skewed 60 JPY40.

And if you even when you think about and I think Brian I think this is an important point. So even when you think about the fixed rate component, which let's say it's roughly around 48%, remember, a lot of those are really commercial loans, which are going to be shorter in tenor than, for example, a fixed rate mortgage loan. So those are going to be, you know, typically it's know, let's assume it's like a three year, 3.5 year duration on those assets. So every year you have about a third of that component, roughly speaking that that is going to be repricing as well. So just keep that in mind.

Yes. Yes, we could see our loan betas above 80%.
Yes.

Okay. I'm just I guess a couple others. I wanted to others. Just on the on the capital, you talked about M&A, just as far as the buyback, can you talk about your appetite there versus the M&A? It sounds as though your M&A might be more, I'm more of interest in the short term than the buyback and having a buyback in place if something doesn't pass through on that. But so that was one.
And then just secondly, a follow-up on your M&A outlook. Just remind us what if you talk about what are the characteristics of a target that's our value to you today so in terms of the first part of your question, I think, Brian, it's just we are very, very consistent in how we think about capital allocation. First and foremost, when you think in terms of priorities, it's to support support the growth of the business. So we want to make sure that we have and more than enough capital to continue to grow our business, continue to invest in the business, talent, infrastructure, et cetera.

On as it pertains to the next, you know, several categories of dividend, M&A or ultimately the buybacks. Obviously, we want to we're endeavoring to continue to make sure that we are paying our dividend and M&A is really a function of you need, obviously, a counterparty that that has to be like-minded, you need to strike a transaction. And that transaction from a return perspective from an earn back perspective from a strategic deal and also culturally for for the business has to make sense. So if all of those categories check that we can check the box on those categories, then that's basically telling you that we feel like M&A M&A is superior to we have excess capital, we have no better use for it and therefore, we can look to the buyback and you know, to return that capital back to shareholders. So I would think about that and that priority.
And then you asked a question about targets. I think when you when we think about targets today, obviously were a slightly larger company. We've grown as a company over time. But we still think that, you know, kind of the target market is somewhere between 250, $300 million to up to about 4 billion in the greater Chicago metropolitan market. That comes about two around 50 targets in that category today. And that, I would say would be kind of continues to be our target market.

Got to. Okay. That's helpful. And then maybe just one for Mark on the credit side, just with the can you kind of mark just on the change, if there was any and if you put this in the deck, I missed that, I apologize. The special mention credits kind of how they trended from third, the fourth quarter and then just the areas that I guess you're paying closer attention to today, given some of the dynamics there's less last 90 days or so in the market, special mention credits, you said, okay, well special mention credits in all of the just there was an increase, but we also had good resolutions in that area.

Mark Fucinato

Also, we continue to see good resolutions, but at the same time, we're dealing with a lot of our PCD. credits that have moved in terms of rating. And I expect that to be a lot of the same activity we're going to see this year, there'll be ends will be out. But some of the moves we're making strategically on these credits that we want to either exit or look to upgrade. That's going to be the key. Can we execute those strategies, which are unique, each particular deal. And I think we can there's no there's no trend in terms of what particular asset class is in the criticized book. We're not seeing one area where we're seeing a big increase. It's just been there's been things in the commercial book. There's been things in the SBA book. There's been things that have popped up in different asset classes, but no trend.

Okay. My survey cycles, right or not?
Yes, broadly, just the trend is what I'm looking at was trying to get my arms around the head and the ins and outs helps in just in terms of what areas you're maybe watching more closely this year or at least in the near term. Can you give any commentary on that?

Mark Fucinato

I'm watching obviously, like everybody else in this country office carefully, even though that's not a big part of our portfolio. We spent a lot of time looking at it, upcoming maturities, appraisal values and what our sponsors are saying about those assets. And then the SBA book is still dealing with the higher rates that impacts their customers and that it's not going to ease up too quickly. So we have to keep an eye on that portfolio also to see if these companies can continue to sustain their payments at those rates that they've had to deal with for the last 18 months.

Okay. Got it. That's helpful. And maybe just last big picture question for Alberto. Just Alberto, if you look at you're talking about last year being a breakout year for byline, if you look at where you feel like the greatest opportunity for byline is this year kind of given the market conditions today? Can you just speak broadly to that? Are you where you feel like you guys and your business model can really excel today? Is there any certain areas that are more or are you going to be more opportunistic this year?

I think the short answer, Brian, is yes. And I would say we remain very optimistic about the current market position that we have here in Chicago to give you an example. So and I think we might have touched on this at some point towards the latter, maybe the second quarter call or the third quarter call, were there seem to be a lot of you were you were hearing the word risk weighted asset diets, primarily coming from larger super regionals or larger regional banks in anticipation of potentially kind of the Basal three endgame, where we saw a lot of people in the market simply close their doors to new opportunities. And you know, we are a relationship oriented bank. We want to be able to be there for clients and lend through the cycle and we certainly saw opportunities to do that over the course, particularly the latter part of 2023. I think some of that will continue into 2020 for some I also think, as you well know, we benefit from any type of disruption in the market when it comes to customers. And also importantly for us, when it comes to our ability to pick to pick up high-quality banking talent. We anticipate that we will see opportunities to do that, and we expect to do that in 2024. So we're optimistic about our ability to grow going forward and our ability to continue to add talent and customers in the market.

Got you. Okay. Thank you for taking all the questions in Great year.

Thank you, Brian.

Mark Fucinato

Thanks, Brian.

Operator

(Operator Instructions) Thank you for your questions today. I will now turn the call back over to Mr. Alba tape, our Genie for any closing remarks.

Great. Thank you, Carla, and thank you all for joining the call today and for your interest in Byline. We look forward to speaking to you again next quarter. And before we leave, I just want to Brooks, want to give you give you a heads up on our conference schedule for the first half of the year.

Brooks Rennie

Thanks, Alberto. Yes, for investors this quarter, we plan on attending the KBW conference along with the Piper Sandler West Coast conference. With that, that concludes our call this morning. I hope everyone has a nice weekend. Goodbye.

Operator

Concludes today's call. Thank you for your participation. You may now disconnect. Your line.