Byline Bancorp, Inc. (BY) Earnings Call Transcript & Summary

Good morning, and welcome to Byline Bancorp's Third Quarter 2026 Earnings Call. My name is Ben, and I will be your conference operator today. [Operator Instructions] Please note, the conference call is being recorded. At this time, I would like to introduce Brooks Rennie, Head of Investor Relations for Byline Bancorp to begin the conference call.

Thank you, Ben. Good morning, everyone, and thank you for joining us today for the Byline Bancorp's Third Quarter 2026 Earnings Call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website, along with our earnings release and the corresponding presentation slides. As part of today's call, management may make certain statements that constitute projections, beliefs or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed in its SEC filings. In addition, our remarks and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. Reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release. As a reminder for investors, we plan to participate in 2 investor conferences during the quarter, the Hovde Group Financial Services Conference in Orlando and the Piper Sandler Financial Services Conference in Miami, both in November. With that, I will now turn the conference call over to Alberto Paracchini, President of Byline Bancorp.

Thank you, Brooks. Good morning, everyone, and thank you for joining us to review our third quarter results. With me today are our Chairman and CEO, Roberto Herencia; our CFO, Tom Bell; and our Chief Credit Officer, Mark Fucinato. In terms of the agenda for today, I'll kick us off with the highlights for the quarter, followed by Tom, who will walk you through the financials. I'll come back before wrapping up the call for questions. As always, you can find the deck for this morning on the IR section of our website, and please refer to the disclaimer at the front. Before we get started, I'd like to pass the call over to Roberto for his comments. Roberto?

Thank you, Alberto, and good morning to all. Thank you for spending a few minutes with us this morning. Another excellent quarter with notable positive developments. Financial results were solid and consistent, quite a few records achieved this quarter. Key metrics were once again top quartile or top decile among our peer group. We increased our dividend during the quarter and continue to repurchase shares opportunistically. We also announced the acquisition of Illinois State Bancorp. And with that, the analyst community gets the certainty they've been so eager to obtain as to when we will cross that $10 billion threshold. Before passing the call back to Alberto and the team, I'd like to talk about these details, I want to spend a few minutes as I usually do, talking about our people and leadership, which is, of course, what makes these results possible. Sadly, I first want to take a moment to remember our colleague, Matt Robertson, who passed away in September. Matt was part of the Byline family for more than 7 years and led one of our commercial real estate teams. He was an accomplished banker and a respected leader in the Chicago commercial real estate community. What stands out the most about Matt is the impact he had on the people around him. Matt was a mentor to many of our younger bankers and credit professionals. He was known for his positive attitude, his commitment to his colleagues and customers and the energy he brought to Byline every day. I talk often about the importance of our people and the culture we're building at Byline. Matt represented so much of what we value, relationships, mentorship, teamwork and genuinely caring about the people around you. We miss Matt greatly, and our thoughts remain with his wife, his children and all of Matt's family, friends and colleagues. We are grateful for the time we had with Matt and for the lasting impact he made at Byline and on so many of us personally. More broadly, I'm especially proud that Byline was recently named one of American Bankers 2026 Best Banks to Work For. This recognition is particularly meaningful because employee feedback is a central part of this evaluation. We work hard to build a culture where people feel connected to the organization, have opportunities to develop and build meaningful careers and understand the important role they play in our success. We remain focused on developing our people, creating opportunities from within and making sure we have the leadership depth necessary for $10 billion and beyond, and we actually do. This leads directly to the leadership transitions and organizational changes we announced earlier this month, effective January 1, 2027. Brogan Ptacin, Head of Commercial Banking; and Mark Fucinato, our Chief Credit Officer, will retire at the end of this year after a combined 25 years of service to Byline. Brogan has been instrumental in building our commercial banking franchise and strengthening our position in the Chicago market. While Mark has played an equally important role in strengthening our credit infrastructure and building the disciplined credit culture that is fundamental to how we operate. Both have also invested considerable time in developing the people around them, a condition to their retirement. I'm being playful with that last comment, of course, just a bit. We are incredibly grateful for their leadership and the lasting positive impact they have had here at Byline. We're delighted that Brogan and Mark will remain involved in advisory capacities for the foreseeable future with us. If we had an official Chicago Bankers Hall of Fame, these 2 individuals would be inducted without a wait period. As part of these planned transitions, we shared in an 8-K earlier this month the names of the named executive officers that will lead the reorganized commercial bank and credit functions. There are also many other promotions that cascade from these changes beyond the NEOs, including expanded responsibilities and even a swap or exchange of roles into C-suite leaders as part of our commitment to developing leadership. Singling out all of them would not be appropriate in an earnings call. The overarching message, however, is that these moves are intentional, giving talented leaders opportunities to lead different parts of the organization, building broader experience and strengthening our executive bench as we cross the $10 billion threshold. We have known for some time that these transitions were approaching, and we've been deliberate in preparing for them. To me, that is what good succession planning looks like. We are confident in the team we have in place and excited about what this next generation of leadership will bring to Byline. I am proud of the organization we're building together. These changes demonstrate the depth of leadership we have developed across the company and reinforce something I have said many times, our people and our culture are fundamental to our success. This team, our people in general anchors the optimism and excitement I feel about Byline's growth prospects and our progress towards becoming the premier commercial bank in Chicago. With that, Alberto, I'll turn it back to you.

Great. Thank you, Roberto. Moving on to Slide 4 on the deck. The third quarter combined strong financial results with several important milestones. We delivered record net income and revenue, expanded our net interest margin and grew deposits while maintaining strong capital levels. We also announced a definitive agreement to acquire Illinois State Bancorp and returned capital to shareholders through a higher dividend as well as share repurchases. All in all, a very productive quarter for Byline. Net income came in at $41.8 million or $0.94 per diluted share, up from $40.2 million and $0.90 last quarter. EPS was up 4% linked quarter and up approximately 15% from a year ago. Revenue reached a record $121 million, up 3% from the second quarter with growth in both net interest income and noninterest income. These results translated into an ROA of 167 basis points, ROTCE of just under 15% and pretax pre-provision ROA of 245 basis points. Expenses totaled $59.8 million, and our efficiency ratio was 48.4%. While the ratio increased from the second quarter, it improved by 260 basis points on a year-on-year basis. Turning to the balance sheet. Deposits grew $168 million or 8.5% annualized to $8 billion. Our loan-to-deposit ratio declined to 93.2% from 96.1% last quarter, and we used excess cash to reduce wholesale funding and manage the size of the balance sheet. Loans and leases declined roughly 1% to $7.5 billion as elevated payoffs more than offset strong origination activity. We ended the quarter with assets just below $10 billion and have flexibility to manage the balance sheet through year-end. We expect to cross the $10 billion threshold in 2027, which would defer the impact of Durbin until the second half of 2028. Moving to asset quality. Credit costs for the quarter were $6.7 million, reflecting net charge-offs of $5.8 million and a small reserve build. Net charge-offs came in at 31 basis points, consistent with prior guidance. Nonperforming loans increased 22 basis points for the quarter, driven by 2 relationships, 1 government-guaranteed and commercial that moved to nonaccrual status during the quarter. Our allowance increased 3 basis points to just over 1.5% of total loans. Criticized and classified loans declined to 3.1% from 3.9% last quarter, marking the third consecutive quarterly decline. Capital levels continue to remain strong. During the quarter, we repurchased approximately 522,000 shares totaling $20.2 million. Importantly, we executed across all 4 of our capital priorities during the quarter, supporting organic growth, increasing our dividend, deploying capital towards M&A and returning capital through share repurchases. With that, I'll turn the call over to Tom, who will walk you through the financials.

Thank you, Alberto, and good morning, everyone. Starting with our loans on Slide 5. Total loans ended the quarter at $7.5 billion, down 1% from the second quarter. Origination activity was strong with $362 million in new loans, up $129 million or 55% linked quarter. However, payoff activity continued and remained elevated at $396 million, up 17% linked quarter. Line utilization decreased to 57% from 61% last quarter, reflecting higher net repayment activity and the impact of $112 million of new line commitments added during the quarter. Looking ahead, we currently expect fourth quarter loan balances to remain flat as payoff activity and new business production are expected to largely offset. Turning to Slide 6. Total deposits were $8 billion for the quarter, up 2.1% or 8.5% annualized linked quarter. From a mix perspective, growth was driven by interest checking balances and DDAs, partially offset by lower money market and saving balances. The solid deposit growth for the quarter allowed us to reduce our reliance on wholesale funding and improve our loan-to-deposit ratio to 93.2% from 96.1%. Deposit costs increased modestly for the quarter, up 3 basis points to 1.95%, while the cost of interest-bearing deposits increased 5 basis points to 2.54%. Turning to Slide 7. We had record high net interest income of $103.7 million, up 3% from the prior quarter, primarily due to higher income from investment securities, reduced wholesale funding costs and the additional day in the quarter. This was partially offset by higher deposit costs. The net interest margin increased 5 basis points to 4.33%. The improvement reflected higher yields on cash and securities and lowering borrowing costs, partially offset by higher deposit costs. Excluding accretion, the NIM increased 10 basis points linked quarter. Given our asset-sensitive position, we are well positioned to grow our net interest income in a rising rate environment. That said, given the rate outlook and the management of the balance sheet to stay under $10 billion for year-end, we expect net interest income to be in the $103 million to $105 million range for the fourth quarter. Turning to Slide 8. Noninterest income totaled $17.3 million in Q3, an increase of 3% compared to the second quarter. The increase was primarily driven by higher BOLI income. We also had higher swap income and wealth management income, partially offset by lower servicing asset valuation. Our guidance for Q4 remains unchanged with gain on sale revenues at $5.5 million, with total noninterest income to be in the $14 million to $15 million range. Turning to Slide 9. Expenses came in at $59.8 million, up 6% from the prior quarter, primarily due to higher incentive compensation, partially offset by lower marketing expenses. Noninterest expense to average assets continued to move lower at 2.39%, an improvement of 8 basis points year-over-year. Looking ahead to Q4, our noninterest expense guidance will be higher at $62 million to $64 million, which reflects higher incentive compensation, benefit costs and marketing expense. Notwithstanding the higher expense guidance for the fourth quarter, we still believe that our full year efficiency ratio will be at or below 50%. Before moving to credit, I want to briefly touch on taxes. During the third quarter, we purchased tax credits, which reduced our effective tax rate to 23.3% from 25.7% last quarter. Looking ahead to 2027, we currently estimate our annual effective tax rate to be in the 25.5% range. Turning to Slide 10. Net charge-offs were $5.8 million or 31 basis points annualized compared to $4.4 million or 24 basis points last quarter. Criticized and classified loans declined to 3.1% of total loans from 3.9% last quarter. And our allowance for credit losses was $113 million or 1.51% of total loans, up 3 basis points from last quarter, driven by an increase in the individually assessed category. Moving on to capital on Slide 11. Capital ratios increased during the quarter and remain well above regulatory requirements. CET1 increased 37 basis points to 13.29%. Our TCE ratio was 11.12% at September 30, down 24 basis points linked quarter due to higher AOCI and the impact of share repurchases, but up 34 basis points year-over-year. As a result of our strong capital position, we continue to return capital to stockholders. During the quarter, we repurchased roughly 522,000 shares of common stock and increased our quarterly cash dividend by 16.7% to $0.14 per share. Our capital position is a source of strength and continues to provide flexibility to fund organic growth, return capital to stockholders and pursue strategic opportunities. With that, Alberto, back to you.

Thank you, Tom. So to wrap up, we're pleased with this quarter's results and remain focused on executing our strategy. Our priorities are straightforward: grow customer relationships, deliver profitable growth and invest in the business while preserving a strong balance sheet. We do all of that while maintaining credit discipline, close portfolio monitoring and balancing risk with reward. Looking ahead to the fourth quarter, our pipelines remain healthy, and we're confident in our ability to serve customers and compete effectively in the market. Our capital position gives us flexibility to support growth, invest back into the business and return capital to shareholders. Looking ahead, we're prepared to operate above $10 billion in assets and welcome Illinois State Bancorp's customers, employees and shareholders to Byline in 2027. We believe the combination will strengthen our deposit base, expand our market presence and add new customer relationships. We remain optimistic about the opportunities ahead and focused on delivering long-term value to our shareholders. Before we open the call for questions, I'd like to recognize Mark Fucinato, who is here today participating in his 25th and final quarterly earnings call before retiring. Mark joined Byline in 2019 and has served as Chief Credit Officer since 2020. During his tenure, Mark has made significant contributions to our company. Our processes and practices are stronger. Our credit culture has matured and the relationship between our lines of business and credit has become a competitive advantage. I am fortunate to work with Mark and grateful for his friendship and support over the last 7 years. On behalf of Byline, our Board and all of us here, thank you for your contribution and years of service. We wish you well in retirement. I'd also like to take a moment to introduce Scott Hawthorne, who will succeed Mark as Chief Credit Officer at the beginning of 2027. Scott joined Byline 3.5 years ago and is currently Deputy Chief Credit Officer. He brings more than 20 years of banking and credit experience, having worked prior to Byline at MB Financial and Fifth Third. Finally, thank you to all of our employees for their commitment to customers and their contributions to another strong quarter. And with that, operator, we can open the call up for questions.

[Operator Instructions] Your first call from the line of Nathan Race with Piper Sandler.

Congratulations on your upcoming retirement, Mark. Wishing you all the best, your next chapter.

Appreciate it.

I wanted to start on just the strong core deposit growth in the quarter. Obviously, it helped you kind of pay down some wholesale funding in the quarter. And just maybe curious, Alberto, if you can just unpack some of the drivers. Is it just some typical blocking and tackling, pulling market share? And to what extent do you have kind of visibility into kind of additional kind of core deposit gathering at this clip just to maybe continue to work down some wholesale funding sources and to drive and support the NIM.

Yes. Good question, Nate. So obviously, it's -- when you annualize the growth this quarter, it looks super solid at 8.5%. The growth was actually a bit higher because we also repaid, Tom, roughly around $80 million in broker deposits. So net, it was really double-digit growth. Joking, putting -- trying to put a joke aside, but I wish we can continue to grow at that type of rate going forward. But in all reality, I think the growth this quarter was just simply blocking and tackling. As you know, we are more commercially focused. So as we bring in new banking relationships, they can be lumpier coming in. And I think that's the short answer to your question. It's just we added -- we continue to add banking relationships. We had a good quarter of that. If you look at the changes in the balances, it was driven by interest checking, noninterest-bearing obviously moved higher also, which certainly helps. So the mix remained attractive. But in terms of going forward, Nate, listen, it's -- as you know, we've always been very focused on the right-hand side of the balance sheet. We believe that fundamentally, that's really where the value of a financial institution lies. And we'll continue to always be prioritizing deposit growth going forward. And again, in terms of -- what's driving it is, again, just the focus on the strategy, customer by customer, the segments and certainly the commercial banking orientation. So hopefully, I gave you some color there. Hopefully, that answers your question.

Yes, that helps. And maybe a question for Tom. I know you don't really guide to margin, but if we do get a couple more Fed rate hikes as the forward curve implies, just any thoughts on betas between both loans and deposit costs as we move into 4Q into the first part of next year?

Sure. Nate, on the loan side, just hit that first. I mean, we continue to have cash flows and runoff in the, I'll call it, $350 million in fixed rate loans that would reprice. Obviously, the book is over -- a little bit over 50% floating rate. So that should give you some guidance on the betas there. On the liability side, we haven't seen much to date for interest-bearing deposits and total deposits, but generally, probably in that 30% to 40% range is the beta. And if you include CDs, I think about it more like 40% to 50%.

Okay. Got it. And just one last one for me. Just -- I appreciate the guide on kind of flat loans for the fourth quarter, just given some of the payoff headwinds. But as you look out to next year and just given that we're perhaps kind of in the latter innings of some of the recycling of acquired loans that we discussed last quarter and maybe also the latter innings of some of the kind of the COVID era CRE loans paying off to some degree. Just is there anything that you see on the horizon, Alberto, that would cause you guys to not achieve kind of mid-single-digit growth in loans next year, notwithstanding the acquisition impact?

Really good question, Nate, and thanks for asking it. And I know you were the one that asked the same question last quarter. And I think, look, we probably underestimated a little bit how strong the payoff activity was going to be this quarter relative to what we told you in 2Q. That being said, there -- I mean, it's always hard to forecast that variable perfectly. Sometimes we get it right, sometimes we don't. And certainly, this quarter was one of those. That being said, if you look at the origination activity, the origination activity remains really good. We're seeing plenty of opportunities. Credit demand looks okay broadly in the market. So we still -- when we look at that and when you normalize a bit for the elevated payoff activity heading into next year, I think that kind of mid-single-digit range, obviously, adjusting the base to reality and also to the reality that we'll be managing the balance sheet here over the last quarter of this year to make sure that we stay under $10 billion through 2026. We still feel good about that mid-single-digit range into 2027. That being said, we're in a rising rate environment. You've heard me comment in the past about real estate transaction volume being lower, the market being competitive. That's likely to be the case in 2027 with higher rates. Also, you have to factor in, it's not just prime or SOFR, it's really the backup in treasury rates, which will have an impact to some degree on cap rates and valuations, and that's likely going to have an impact on transaction activity going into next year. So with that caveat and all the other uncertainties that you well know that are -- that exist in the environment today, I still think that for us, that single mid-digit kind of growth rate in terms of loans is probably the right place.

Your next call comes from the line of Brendan Nosal of Hovde Group.

Maybe just starting off here on kind of your recent M&A announcement. I know it's a little stale at this point, but could you just give us a little bit of background on how the Illinois State deal came to be and just kind of one or 2 things that you're most excited about for that transaction?

So it came to be through a meeting and getting to know the owners and the leadership of that institution earlier in the year. We certainly knew of them. We knew who they were. We -- I personally didn't know them personally, but we had been tracking that institution for some time. And we had the opportunity to meet, and it was a situation where you had the leadership team there had built that organization over roughly a 40-year period, and we're looking to find a good home for the franchise, the customers, the employees, the relationships that they had built over that period of time. And Brendan, as we've conveyed and talked about in the past, we think we are a really good home for those types of situations. And this is just one example, very similar to some of the transactions that we've done here in the past. So that was the gist of it. I can tell you that it was relationship-driven. This was not a competitive situation. We had a meeting of the minds. We felt we were a good fit for each other, and we worked on trying to get to an outcome that certainly was good for both parties, and we think we were able to do that. So that's in context the background on the transaction. In terms of what it adds, it adds -- it solidifies our market presence in certain parts of the city where we are just not there. It adds customer relationships. And as always, it's a source of core deposits and funding to the bank.

Yes. That's super helpful. Second one for me, just kind of sticking on this theme. It's just been a really active period for M&A kind of in and around the state of Illinois over the past couple of months. You obviously got kind of your bite at that with the deal that we just discussed. But as you look at the M&A landscape, are there still potential partners that you think could come to market in the near to medium term? Or has the pipeline for potential partners kind of in your markets depleted somewhat?

No, I think we're still -- there's still opportunities there, Brendan. I think as the usual wording that people use to describe kind of the M&A environment. I mean, I think there's active chatter. I think for us, it's just sticking to our knitting, looking to do transactions that make sense that are accretive to the franchise that hopefully, with partners that we like and that -- where they're looking to partner and put their institution with a partner that can provide them with just better capabilities and a home for the business that they've built. So I think, look, the chatter in the marketplace continues, and I think -- I would say I think the environment is constructive.

Your next call comes from the line of Damon DelMonte of KBW.

Just wanted to ask on the outlook for noninterest income, Tom. Could you just kind of help us connect the dots for the range that you gave of $14 million to $15 million off of this quarter? I'm guessing there was some -- I think you called out a couple of onetime items maybe this quarter that kind of would get us down to that lower level?

That's correct, Damon. The BOLI income was a onetime event. So that kind of brings us back to normal operating levels.

Yes. So that was like a couple of million maybe?

Little over $1 million, yes.

A little over $1 million. Okay. All right. Great. And then on the expense side, the lift from this quarter, is that just kind of like year-end accruals and anything else particularly driving that?

That's correct. Year-end accruals and then some of the marketing campaigns that we maybe didn't do in the third quarter that we anticipate in the fourth quarter, the timing of those expenses. So the marketing expense could be a little bit higher in the fourth quarter.

Got it. Okay. And then...

Yes. Damon, I was going to add maybe to what Tom said. I think when you look at our performance, obviously, performance this year has been super solid. So what you're seeing in terms of the fourth quarter is aligned with that in terms of the higher incentive compensation.

Got it. That makes sense. A good year. And then just one more quick one on credit. I think you called out a couple of loans that drove the NPA increase this quarter. Any color on those, maybe size or industry or anything like that?

Damon, Mark Fucinato. So one of them was in the solar industry, and we expect that one to hopefully be resolved sometime early next year. We're well reserved against that one. And the other one was a C&I credit that involved a company that does purchase of distressed credit card consumer debt. And these are both long-term customers at the bank. So these things occur once in a while. We've been tracking them for a long time, and we're properly reserved against both of those situations at the present time.

Your next call comes from the line of Daniel Tamayo of Raymond James.

Maybe first, just curious kind of as we think about the crossing of the $10 billion and the actions that you're taking to stay below in 2026, is there any kind of reversal of those actions in '27 and the beginning of the year that would kind of create an increase in the balance sheet abnormal growth kind of early on, maybe having to do with liquidity or something like that, that we should be thinking about as we model out next year?

I think so, Danny. We've been kind of conservative on any bond purchases right now just because we don't want to go over. So that's certainly an area where we're a little light on a percentage basis, and you would expect in the first quarter that, that would change.

Okay. And then can you give a little bit of color around the loan sales in the third quarter? I mean, just looking at the line items, it looks like it came from construction and maybe C&I, but just curious where you were selling and then just thoughts if that -- it was a onetime event or there's some potential for that to continue?

Sure. So the bulk of those sales are the government-guaranteed loans that we sell every quarter. That's something we disclosed in the loan side this time because there were some SAG assets that were sold and some other loans that other banks took a participation in, so to speak. So that -- those are small pieces in C&I, but the bulk of the sales are the SBA sales.

Okay. So that's kind of regular way stuff, but it was just elevated in the quarter is the way to think about it?

Yes.

Yes. I think we highlight, Danny, I think I would emphasize just the one that ultimately matters a lot is really the government guaranteed kind of -- recurring government-guaranteed loan sales. You can think of the other ones as really not having very material economic impact in terms of the P&L.

And how much were those, Alberto?

You remember, it's just the -- I'm sorry, what's the question?

The delta between the...

Well, we sold like $70 million -- $77 million of SBA loans residual as SAG assets and a couple of loans we sold to participations.