Good day, and welcome to the Byline Bancorp, Inc. Second Quarter 2017 Earnings Conference Call. [Operator Instructions] And please note, this event is being recorded. I would now like to turn the conference over to Allyson Pooley of Financial Profiles. Please go ahead.

Thank you, Nicole. Good morning, everyone, and thank you for joining us today for Byline Bancorp's Second Quarter 2017 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, Chief Credit Officer, is also with us and will be available for the Q&A session. We will be using a slide presentation as part of our discussion this morning. If you haven't 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 second quarter results, and then we will open the call for questions. Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of 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 filing, 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 the non-GAAP measures. With that, I'd like to turn the call over to Alberto.

Great. Thank you, Allyson, and welcome to our second quarter earnings call, the first one for us as a public company. Before I get into the slide deck, I'd like to start by thanking you for participating in the call today. We've had the opportunity to meet and get to know many of you during the IPO process, and we look forward to working for you and our stockholders in the quarters and years ahead. I would also like to take a moment to thank our customers for allowing us to earn their business on a daily basis and also thank our employees for their hard work and dedication to the company. We would not be at this point in our journey without their commitment to our company. Now moving on to Page 3 of the deck. Since this is our first call as a public company, I'm going to begin by providing a brief overview of Byline. We are a commercial bank with over a 100-year history. The current management and our board assumed control of the company after recapitalizing it in 2013 in what was at the time the largest recap of a bank in Chicago in over 25 years. With $3.4 billion in assets, today, we are the largest community bank by deposits and branches in the city of Chicago. We're a new public company, having successfully launched and priced our IPO at the end of the second quarter. We have a diversified loan portfolio with a commercial orientation, as you can see in the lower left-hand side of this slide, and have a very attractive deposit base that has a significant proportion of noninterest-bearing deposits, a high concentration of core accounts and an attractive funding cost. Our capital levels are very strong, and our profitability continues…

Thank you, Alberto. Good morning, everyone. We are excited about the progress we have made and the trends we are seeing in our financials, as outlined on Page 7. I'd like to highlight a few metrics in addition to what Alberto has previously covered. The loans and leases as a percent of deposits continues to be an area of focus for us, showing a small increase this quarter to 84.87% versus 74% a year ago. Our tangible common equity ratio was 11.16% as of the second quarter, providing ample capital to support our growth strategies, as outlined by Alberto. We continued to show improvement in our key performance ratios, which we will expand upon in the upcoming pages. Turning to our balance sheet. We'll start with our diversified loan and lease portfolio on Slide 8. Our total loans and leases were $2.15 billion at June 30, an increase of approximately $6 million from the end of the prior quarter. As Alberto mentioned, the new production was largely offset by a higher level of runoff in the portfolio as a result of several commercial real estate construction projects that stabilized and prepaid prior to final maturity, the refinancing of syndicated credits that we opted not to participate in renewing and a single commercial loan. The growth in our originated portfolio and lease portfolio was primarily driven by increases in commercial, government-guaranteed lending and small ticket equipment leases. Looking at our total deposits on Slide 9. They were down during the quarter, although we saw an improvement in our overall mix. Total deposits were $2.5 billion at June 30 compared with $2.6 billion at the end of the prior quarter. We experienced a favorable shift in mix with noninterest-bearing demand deposits increasing by $49.4 million, primarily due to an increase in business…

Thank you, Lindsay. In closing, we believe it's an exciting time for us at Byline. Our franchise is characterized by a strong position in our primary market, a seasoned team and Board of Directors, a high-quality deposit base, a diversified and growing commercial business, a disciplined credit culture and a simple growth strategy. With that, I would like to thank you for your time this morning. And now we'll open up the line for questions.

[Operator Instructions] Our first question comes from Ebrahim Poonawala of Bank of America Merrill Lynch.

Just wanted to first sort of get a better sense of the loan payoffs during the quarter, one, in terms of what drove these payoffs. Obviously, it feels like a little bit of a surprise in terms of the magnitude of the payoffs. So would love to get your thoughts around what drove this, what is an impact from the interest rates or something else going on in the market and how you see payoffs trending as we think about the back half of the year.

Sure. So I would say, EB, we were a bit surprised in a way, in the sense that I think the part that was more surprising is just the confluence of factors that kind of aggregated a lot of activity. It seems like throughout the first -- the first after January, we saw activity pick up in February, March and then certainly continued a bit furthermore in the second quarter. But in -- I'll give you couple of examples. In terms of -- for example, we had some in our real estate portfolio, and this is just simply just a function of good loans, good construction loans that reach stabilization. And essentially, the client opted to secure longer-term financing a little bit earlier than we anticipated. So -- and that happened on 2 projects that were very much along similar time lines in terms of construction. They both stabilized. These were 2 student housing projects. They both stabilized right around at the same time. And I think with the dip in rates, the client opted to secure financing on a long-term basis. And therefore, we got paid off a bit earlier. Other activity that we saw, for example, on our syndicated loan book, there was a fair amount of refinancing activity. And in some cases, we were fine with it in the sense that we decided to stay in the transaction. And others, the levels at which the transactions priced were just simply not attractive. So we opted to pass. Lastly, we had a loan that we had done approximately 3 years ago as part of a disposition, a trade that we did on our legacy portfolio to dispose of assets. That loan had been paying off steadily and essentially paid off in full just a bit earlier than we anticipated, early on in the second quarter. So I think the surprise was more -- I mean, there's one thing to note here. And sometimes when you make good loans, good loans eventually paid off as we saw on those 2 construction projects. But I think the biggest surprise was just everything kind of happening at once. I can tell you that starting off in the third quarter, we've seen payoff activity dropped off considerably. So we certainly are not expecting the same level of runoff that we saw in the first and second quarter. So hopefully, that answered your question, EB.

No. That was good color. I guess as we think about -- and I know it's difficult to predict what payoffs will be. But assuming that you're originating somewhere around what we did in the second quarter, like what's the reasonable net loan growth that we should think about as we think about this year, and generally, as you think about what Byline should be growing given the team that you just brought on board and if you have any plans to hire additional bankers through the next few months.

So I'll take the latter part of your question, EB, and then Lindsay will take the early part of the question. But as far as bankers and teams and pipelines, we continue to actively look for talented bankers to join our company. We had additional success this quarter. We attracted a team of 3 bankers in our traditional commercial banking business. We also did a hire of one banker that joined our commercial real estate group. So in terms of new teams, it usually takes a little bit of time for that team to build a pipeline and start contributing in terms of outstandings to the portfolio. But we're -- they've hit the ground running and certainly have -- we're starting to see the pipeline build, so we're pretty excited about that. We continue to talk to people in the marketplace. And as I said earlier in my remarks, we think we have a very attractive platform, a great culture. And we offer opportunities for people to be able to grow, so we think that we'll continue to see that going forward. Lindsay?

Sure. Thank you. EB, it's pretty consistent with the guidance that we've previously given. We really want to stick to that estimate in terms of where we think we're going to end up. I don't think it's going to be really any different from the previous guidance. So we see it as very robust right now for the second half of the year. And the payoffs, obviously, will be muted. So I think it's pretty consistent with what we've previously disclosed.

Understood. And one last question, and then I'll hop off. But now that we are done with the IPO, you've got the cash and the capital in house. Would love to get your thoughts around outlook for M&A and in terms of where you see the market around [ seller ] expectations? And is it realistic to assume that there might be an opportunity over the coming months, I know it's always hard to predict, but to deploy some of that capital towards a whole bank deal?

EB, I -- let me just comment on that. There's certainly a lot of conversations taking place in the market. I think that's been consistent now for some time. As you pointed out, the gestation period of these things, sometimes it can be shorter. Sometimes it can be longer. I think what I would say on there is we continue to talk to people. We think that, again, now having a public currency, it certainly makes us a very competitive potential acquirer for other institutions. So we feel good about where we are and with respect to M&A. But first and foremost, we kind of focus on the things that we can control, which is let's execute our organic strategies primarily and certainly be in a good position to participate and take advantage of opportunities as they surface on the market.

Our next question comes from Nathan Race of Piper Jaffray.

Just wanted to start on the uptick in NPLs this quarter. It sounds like one of the credits was tied to a small -- an SBA deal. And can you kind of just provide any additional color on the other credit, maybe in terms of geography, industry type, and if this was a credit that was previously on substandard or watch?

You want to take it, Tim?

Sure, sure. The -- to answer your first question, there is no common theme in terms of industry or geography. In terms of the individual credit, there were 5 credits which essentially account for the increase in NPL. Of the approximately $7.6 million total, $5.8 million is either covered by a government guarantee, or in fact, cash collateral for the principal. So it's a high-quality nonperforming position. So we have, as part of identifying, these were previously identified as concerning credits. During the quarter, we sat down and did the review. We determined that the deterioration had taken to the point where we needed to carry them as nonperforming loans. We also, as part of our review, set up the appropriate reserves. And in fact, subsequent to the quarter, one of the loans has already been -- we expect it will return to performing status shortly.

Nate, does that answer the question?

Yes. That's great color. Appreciate that, Tim. And then just kind of changing gears on the NIM looking forward. Lindsay, can you just kind of help us in terms of thinking about core loan yields and just the reported loan yields going forward. Sounds like purchase accounting accretion contribute to the uptick we saw on loan yields this quarter. So any commentary you can provide in terms of thinking about both loan yields and the margin particularly, given that it sounds like you guys kind of increased your deposit price this quarter, try to get ahead of some competitive factors within your footprint.

Sure. So loan yields, we expect that they'll continue to expand, Nate, in terms of the go forward. Pretty consistent in terms of what we've previously disclosed. Again, we don't -- we haven't seen any real change there. The only difference, as we talked about earlier, was the accretion. So we did have a slight uptick in terms of accretion just due to the fact that the portfolios were improving. In terms of the NIM, we see it expanding, but it'll be offset by rising rates of cost of liabilities, obviously. So again, consistent with previous disclosures that we've provided, it's going to slowly expand through the cycle. So we do have expectation of rising rates, and so you can see an expansion of another 10 basis points approximately.

Yes. Nate, just to add there in terms of how we think about interest rates going forward. So we have just one 25 basis point increase in '17, one in '18 and one in '19. So in aggregate, 75 basis points all the way through to '19 is kind of how we're modeling rates at this point.

Understood. And if I could just sneak one last one on SBA gain-on-sale revenue. Nice uptick this quarter in the 4% to 5% range. And it looks like gain-on-sale margins ticked up a little bit as well. Is it fair to expect this kind of build to persist near term? Or how should we be thinking about the pace of growth that's in the fee income as it relates to SBA revenue?

I think that's a good assumption, Nate. I think we saw -- I mean, so far, as you saw in the results, I think it's fair to say that things are pretty stable on this place right now. Obviously, that can change. But so far, we're not seeing anything that would jump out at us to change that view.

Our next question comes from Michael Perito of KBW.

Few for me. Maybe just following up on the SBA question. I understand there's obviously the gain on sale, and there's the piece that kind of, I think, is evenly split between C&I and CRE balances. But just maybe taking it from a broader perspective, I guess, what do you guys think is kind of an overall realistic growth range annually for the Small Business Capital unit at this point?

Sure. Mike, I think for -- the way we kind of think about that at this point is if you think about gross originations for that business, and the current run rate right now is about -- we did about $110 million in gross originations for the quarter. So if you, roughly speaking, annualize that, take about 75% of that being the guaranteed portion and then you have the remainder being the unguaranteed portion that we keep on the balance sheet today, that should give you a pretty good sense on -- in terms of growth and kind of where the business is at, at this point.

Okay. And is there any -- maybe a question for Lindsay. But is there any -- I don't know if seasonality is the right word. But I mean, is there any kind of choppiness or volatility on a quarter-to-quarter basis that we could anticipate in the gain on sale, SBA business? Or historically at Ridgestone, was it fairly consistent on a quarter-to-quarter basis?

They're fairly consistent. I'd say the beginning of the year, you'd see a little bit of a dip but nothing drastic. It's a pretty stable outlook for the gain on sale.

One thing to add there, Mike, and this is just -- we're not seeing anything on the horizon, but a couple of things to keep in mind. Fiscal year for the SBA ends as of September 30 and then from time to time, the SBA program, like many other government programs, there's political noise around it. But at this point, we -- there's nothing in the horizon that would seem to be in play right now. But those are 2 things to just keep in mind.

Helpful. And then maybe switching over to the expenses in the quarter. I mean, it sounds like the new team of 3 lenders kind of came on mid-quarter. Any sense on kind of where the quarterly expense run rate could trend? I mean, is it fair to assume that there could be some pickup in the third and fourth quarter with a full quarter from that team and maybe the other hire as well?

Yes. That's a fair assumption. And as Alberto mentioned, we're continuing to look for additional teams and professionals throughout the industry. So that's a consistent assumption.

Okay. I just got -- I just have one more quick clarification question. I think last quarter, the accretion recognized was about $5.8 million or so, in that ballpark. Lindsay, do you happen to have that number for the second quarter as well?

For the second quarter for accretion?

Yes.

About $7 million -- it's about $7 million for the second quarter.

[Operator Instructions] Our next question comes from Terry McEvoy of Stephens.

Just trying to put the $149 million of loan kind of runoff or payoffs in perspective. Do you have that figure for, call it, the first quarter of this year and the fourth quarter of last year, just to put some context behind that?

Terry, we can -- we don't have that in front of us. We can certainly provide it. Happy to get you those estimates. If we can do it offline, and if anybody else would like to get it, we're happy to send it to you. So if you could just send us an e-mail that -- we'd be happy to provide it.

Okay, great. And then if I look at the margin ex accretion, it was down about 8 basis points, and it looks like deposit costs were up about 7. How much of that came from just acquisition accounting and the impact on deposit costs versus just the core deposit pricing and being proactive and raising rates with it?

You're spot on with the deposit costs. So it was 6 basis points was just the cost of time deposits. That was the increase there. Really, there was little to no impact from what we deem as our core deposits. There was also an impact from the accretion that was related to the time deposits on Ridgestone, so that accounted for a good portion of it. And then as well, we had an uptick in the Federal Home Loan Bank advance expenses. So that was the other component.

[Operator Instructions] As we have no further questions, I would like to turn the conference back over to Mr. Paracchini for any closing remarks.

Well, thank you. I think I'll just end the call by thanking you all for your interest in Byline. We look forward to working with you in the quarters and years ahead, and look forward to seeing you at some point in the fall and at our next call later on this year. So thank you.

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