Good morning. And welcome to the Byline Bancorp Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions [Operator Instructions]. 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. Good morning everyone and thank you for joining us today for the Byline Bancorp fourth quarter 2018 earnings call. We will be using a slide presentation as part of our discussion this morning. Please visit the Events and Presentations page of Byline’s Investor Relations Web site for access to the presentation. Before we begin, I’d like to remind you that this conference call contains forward-looking statements with respect to future performance and financial condition of Byline Bancorp that involves risks and uncertainties. Various factors could cause actual results to be materially different from any future results, expressed or implied by such forward-looking statements. These factors are discussed in the company’s SEC filings, which are available on the company’s Web site. The company disclaims any obligation to update any forward-looking statements made during the call. 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 Web site contains the financial and other quantitative information to be discussed today, as well as the reconciliation of the GAAP to non-GAAP measures. And with that, I'd like to turn the call over Alberto Paracchini, President and CEO.

Thank you, Allyson. Good morning, Happy New Year and welcome to our fourth quarter earnings call. As usual joining me today are Lindsay Corby, our CFO and Tim Hadro, our Chief Credit Officer. I'll begin with an overview of our performance and key highlights for the quarter then pass the call over to Lindsay who will give you a detailed overview of our financials. After that, I'll come back and give you closing remarks before opening the call for questions. Moving over to Slide 3 on our deck. We ended 2018 with very strong quarter where we had our highest level of earnings since becoming a public company in 2017. The increase in our earnings power reflects solid execution on organic growth strategies as well as the continued benefits from our acquisition of First Evanston. Net income came in at $17.1 million or $0.46 per diluted share, which included an asset impairment charge, certain merger related and conversion expenses that impacted our earnings by $0.03 per share. Along with our growth in earnings, we saw a steady increase in our level of returns. ROA came in at 139 basis points and ROTC was 15.49%. Pre-tax preparation ROA was 2.23% in the fourth quarter, an increase from 2.13% last quarter and 1.73% from a year ago period. The higher level of earnings was primarily driven by an increase in revenue, which came in at $67.8 million or 6.4% higher than last quarter. Our net interest income was up 1.3% with solid growth and average loan balances, offset by a decline in accretion income this quarter. However, if we exclude accretion income, the core margin expanded nicely, which increased 14 basis points to 4.13%. The quarter was strong in terms non-interest income growth, which was up 30% from the prior quarter. Our…

Thanks, Alberto. Good morning everyone. I'll start on Slide 4 with a review of our loan and lease portfolio. Our total loans and leases held for investment were $3.5 billion at December 31st, a net increase of $45.8 million from the end of the prior quarter. Our originated loan portfolio increased approximately $172 million net. This increase was offset by a decline of $126 million in our acquired portfolio. As Alberto mentioned, our payoffs were higher in the fourth quarter as we anticipated with approximately $111 million in pay off compared to $99 million in the prior quarter. Moving on to deposits. On Slide 5, our total deposits increased $9 million to $3.75 billion at December 31st. We saw the strongest growth in our non-interest bearing demand deposits and our time deposits. This was offset by declines in other deposit category. The increase in our non-interest bearing demand deposits was driven by seasonal inflows from commercial relationships, which pushed up our average non-interest bearing deposits by $18 million in the quarter. During the quarter, we were able to manage the time deposit costs, which helped us to reduce the increase in our cost of interest bearing deposits compared with the two prior quarters. Moving to Slide 6, I’ll discuss our net interest income and margin. Our net interest income increased by approximately $700,000 due to higher balances of loans and leases. Accretion income decreased by $1.9 million from the prior quarter. Yields on earning assets expanded 5 basis points from 5.49% to 5.54%, which was offset by an 11 basis points increase in our cost of deposits, resulting in a 4 basis point decline in our reporting net interest margin from 4.73 to 4.69. When the impact of the accretion income is excluded, our net interest margin increased 14 basis…

Thank you, Lindsay. Before opening the call to questions, I want to spend a few minutes talking about our outlook and strategic priorities for 2019. With respect to our Oak Park River Forest acquisition, we have received all required regulatory approvals. We've also submitted our registration statement to the SEC but are subject to some degree of timing uncertainty there due to the government shutdown. As a result, we are unable to provide you with a target closing date at this point. Notwithstanding, we continue to move forward on our integration plans and still expect the closing to occur in the second quarter. With each acquisition we do, our integration process gets better and we're well on our way with our Oak Park transaction. As was the case with First Evanston, we're partnering with a quality institution and team. We're excited about getting to work with our colleagues there and growing our business in the Oak Park and River Forest markets. As far as organic growth is concerned, we expect to continue to generate solid loan growth consistent with our guidance into mid to high-single-digit range. We're well positioned to capitalize on opportunities in the market stemming from any dislocation, both in terms of customers and talent. We built a solid platform, we'll continue to invest in it and have a unique position in the market. With respect to the process, we remain focused on executing our relationship banking strategy and identifying opportunities in select customer segments that we can grow. We also remain on the lookout for opportunities to do smart transactions that allows us to add core deposits to the franchise. Lastly, we'll continue to look for ways to gain efficiencies both on the revenue and expense side in order to increase our ability to invest in the business and gain operating leverage. As we start 2019, we have flexibility to support growth, take advantage of opportunities in the market and continue to increase franchise value. With that, operator, we can open the call for questions.

Thank you [Operator Instructions]. And our first question will come from Terry McEvoy of Stephens.

If I think about the first quarter outflow of non-interest bearing deposits, which had a nice increase in the fourth quarter, combined with just the impact of the recent fed rate hike in December. Could you just talk about anticipated funding costs or deposit costs in the first quarter? And then generally speaking, your thoughts on the core margin?

In terms of where we think things are going for the cost of deposits, I think there is obviously pressure out there in the market. I do believe that with the current market outlook for the fed hiking rates being more muted now, I do think that you're seeing some stabilization there. You're continuing to see pressure on the time deposits and the money market. So I do think that you'll continue to see competition there and that'll cause a slight increase in terms of deposit costs going forward. Related to your question about the commercial deposit and the inflows, that’s typical again with our acquisition from First Evanston. They have larger commercial deposits that tend to have these fluctuations from time to time, and you will see that coming through. We continue to capitalize on their commercial banking relationships that they've had and new ones that we're bringing into the Bank. So we were really pleased with the non-interest bearing performance during the quarter. In terms of the outlook on the core margin, we are consistent in terms of what we've been guiding you to. We do think that you'll see some benefit during the first quarter from the December rate increase. Though you may be a slight expansion in the first quarter but relatively flat throughout the remainder of the year.

And then just as a follow up given all the focus on leverage lending over last month. I remember when you went public there was mention of a sponsored finance group that you started that had a portfolio of about $125 million. And I guess my question is how much of that would be considered leverage loans? Has that portfolio grown in the last couple years? And just any comments about the credit, how specifically of that portfolio?

So the portfolio size of that segment I guess or that part of our commercial portfolio Terry is just around $230 million plus or minus a couple of million bucks. I think as far as credit quality and performance, it's been very, very good. We don't see at this point in time any deterioration in that portfolio, portfolios continues to perform well. One thing to note is despite the talk in the markets about loosening of standards, covenants, structure, pricing, we're in a segment of the market that is not we're intent finance lower middle market companies being purchased obviously by sponsors. But we remain disciplined in terms of both pricing and structure. So I think the key thing for us there is to continue to see good transaction flow and just maintain our sell activity as we continue to grow in that business, but so far so good.

I would just like to add that the one impact we have seen from changes in the marketplace is that our hit ratio has gone down. For every 10 credits we look at, we are now successfully fitting and winning fewer credits than we were in the last several years.

And I think just to expand just briefly on that, I think we're very comfortable with that. Again, the key thing for us is just making sure that we continue to see good transaction flow, stay disciplined with our credit box and our model. And if our hit rate goes down, so be it. But as long as we continue to get that back, I think we’ll be fine in that business.

The next question comes from Michael Perito of KBW.

I want to start I was hoping maybe we could spend a minute on the SBA side of the business and the government slowdown. I was wonder can you give us a little bit more color about what type of production you guys are anticipating. Obviously, the fourth quarter seems pretty strong and I know it can be choppy even without the government shutdown. So I was wondering, I guess number one of that piece and then on the other piece, if there's any other expected flow through to the provision or expense line that that could also have an impact on?

I think more generally in terms of the shutdown there, I think, Mike as we said during our remarks we have gone through these periods before. Our team there has experienced shutdowns. We anticipated that there would be a shutdown. And I think with respect to loans that we have in the pipeline where we were able to pull guarantees prior to the SBA shutting its doors, we continue to do business as usual. We'll close those loans. Obviously, we can't sell them until the shutdown is over, because the SBA is part of the sales process. And with them being kind of out of the picture at this point, the secondary market is not operating normally. That being said, we have the capacity to hold loans until the market resumes. So I think that's just an issue of timing there in terms of waiting for the shutdown to end. As far as new business is concerned and this is business where we didn't have the business in the pipeline prior to the shutdown beginning. Obviously, we can only go so far there in terms of -- at some point we need get, we need the full guarantees. And therefore, we're not going to be able to close new originations until the shutdown end. We obviously hope, we have no wish we had a crystal ball and we could tell you that shut down is going to end soon. But eventually the shutdown will end and I think business will resume. We'll be able to resume selling loans in the secondary market full guarantees on loans that we have in the pipeline and move forward. At this point, if you ask question a little bit about credit quality there, obviously when we're trying to -- we have these loans in our non-performing category where we have guaranteed portions where we want to collect on the guaranty. Obviously timing there could be impacted, because we're not able to collect on a guarantee from the SBA until the shutdown ends. But aside from that, we continue to operate the business. We're in this business for the long run. We have a good platform and we'll continue to support small businesses going forward.

And I'll ask question a little bit differently, and you could disregard this first number I am just using as an example. But let's say we were expecting you do $31 million of revenue in the SBA business in 2019. Does the shutdown alter potentially that number, or does it just alter the timing of which that number will be recognized potentially over the course of the year?

I think the further -- we discussed this lot internally. And obviously some of it is just an element of timing. The longer the shutdown goes, the more that timing will impact call it the calendar year, so to speak, because things will slide. The flip side of that, which is I think the other part of your question is, the longer the shutdown goes, obviously, more small businesses are going to be impacted that depend on SBA financing. I don't think or at least for our view is that doesn't mean that the demand goes away. So we tend to view it as more of timing issue really impacting both sides.

And then maybe switching over to the expenses, just curious Lindsey maybe if you have any initial thoughts as you start to budget for next year, I mean I think if you adjust for some of the noise in the fourth quarters, it was a little over $39 million with quarterly expense run rate. And it sounds like they're still, while maybe nothing really major, still some efficiency focus that you guys are doing. So I mean, how should we be thinking about the expense still for next year? You guys obviously continue to target having the growth posture?

I think you're really starting to see some efficiencies come through. Obviously, based on our results this quarter you can see improvements just in terms of efficiency ratio and expenses incentive average assets. Things are coming through slowly but surely here. And I do think that they'll remain elevated here for the first half of the year and then come down consistent with the guidance that we've given in the past in terms of the acquisition and we remain on track. And I feel comfortable with where we're heading. So there is always seasonality to do just in our core numbers, excluding acquisition, because of the first quarter you have higher payroll taxes. We have negative facts and reasons, snow here in Chicago. So there's always some seasonality here in this first quarter. So I think from a run rate standpoint, they will remain elevated for the first half and then you will see the rest it come through.

And then just lastly, if I could quickly just on the state of the Chicago market, just curious if you started to notice any form of accelerated disruption or anything of note over the -- as people post year end . And I assume there are starting to be some more year end conversations with some of your competitors that could be involved in M&A transactions, et cetera. I just curious, Alberto, you can just give us a quick update on what you're seeing in the market?

I think things slow down on the M&A side, I think with equity markets, with the performance of the equity markets in December. I think conversations that were ongoing and chatter, so to speak that was out there in the market, I think got muted for a period of time. I think markets have come back a bit. So I don't know -- I think it's too early to tell in terms of the level of activity that I think we can expect this year. But certainly with valuations where they are, I think it goes without saying that that's going to have some degree on impact on transactions. That being said for us, we have very good flexibility at this point where profitability is up. We're generating capital, which gives us a lot of flexibility to grow organically to take advantage of opportunities, be it teams, be it obviously customers that that are impacted here a bit by the disruption in the market. And as we said in our comments to do smart transactions like we've done in the past, we're looking -- we can look to first and foremost to look for opportunities to acquire core deposits. And I think we remain focus on that. And if history is a guide there, I think we'll be our share of opportunities.

The next question comes from Nathan Race of Piper Jaffray.

Lindsay, just going back to your comments around the loan yield expansion this quarter and your outlook there. I'm just curious, I am just curious given the prepayments that you guys had late in the quarter and so forth on the commercial real estate side of things. Is there any prepay fees that may have impacted the loan yields here in 4Q.

No, it's pretty clean this quarter. There wasn’t a lot in there that really stood out in terms of anything that would have accelerated, it was just blocking and tackling good new production. And we're seeing the impact of the rate environment.

And then just thinking about accretion in 2019, I know it can be tough to predict. And there was a decent step down versus what we had last quarter. I know the impact of OPRS probably in 2Q will have some impact as well. I was just curious what you guys have budgeted or how we should think about the progression of accretion income in 2019?

Like you stated, the accretion is one of those things where at the point in time and subject to fluctuations. But I did guide you guys down in terms of accretion levels. And as I stated, it's hard to give you an exact number. But I think you saw the variance between Q3 and Q4 to be around $2 million, let's call it. So, I think if you use that as a guide, if you will, it would probably be pretty good.

And then just kind of last question on low growth expectations on organic basis. It sounds like you guys still are looking at a good amount of opportunities in the pipeline, still pretty full heading into this year. So just curious if high single digits is still the reasonable expectation on an organic basis for this year?

I think like we stated before, mid to high single digits is what we're operating under. Obviously, pay off activity and some things that we really have no visibility on is really the key variable there. But in the mid to high single digits it's still -- we're still comfortable with that guidance.

The next question will come from Andrew Liesch of Sandler O'Neill.

Just a question on the increase on the gain on sale premium this quarter, you referenced in the release and in the presentation it was probably due to mix shift. What was this mix shift?

The mix shift was primarily USDA loans. So, Andrew, when you sell USDA loan; number one, you don't share any of the premium with the government, so it's all ours; and then number two, the premiums tend to be higher given the fact that there are prepayment penalties with USDA loans. So the premiums on those tend to trend higher.

And then my other question just revolves around the C&I growth this quarter, it's certainly impressive. I am just curious what's driving that? Is that you’re taking market share from other players? Is it business expansion from existing customers? It was solid. I'd just like to know what's driving it.

I think you answered it, Andrew. I think it's a combination of both. And the fact that we have our combined team now, so we took what was formerly the First Evanston team and now is the Byline team with ours. They're operating. We've integrated that. They’re operating as a unit, focused on looking at opportunities and taking care of customers. But I think you answered the question by the two statements that you said. It's a function of we're seeing customers certainly look for expansion opportunities in terms of whether it'd be equipment, whether it'd be expanding facilities, whether it'd be, we're seeing some of that with existing customers and I think we're seeing also opportunity to take share in the market as well.

Did you saw commercial customers and the ones anyway come with deposit relationships?

Yes...

So that'd be a source of non-interest bearing account growth?

Yes. And I think in -- in reference to my remarks as far as deposits is concerned that is correct and that is our relationship banking strategy there.

[Operator Instructions] Our next question will come from Sean Tobin of FIG Partners.

I guess just starting on the provision. The provision has bounced around due to the government guaranteed portfolio. Can you give us any color on how to think of the reserves in the next couple quarters or in the next year?

Sean, in terms of the provision for this quarter, it was around $4 million, which was lower than the previous quarter and was a reflection of the improvement in terms of the non-performing loans coming down and just some improvements in terms of some credits on the SBA side. So I think on a go forward basis, you'll continue to see consistent inflow and outflow from the FDA business. And so we'll continue to provision accordingly under GAAP for that and continue to see our reserve grow in proportion to our loan portfolio. So the bulk of the provision has really been coming from the growth that we've been experiencing. So I think you'll see consistent trends in regards to that. Tim, I don't know if you have anything to add.

I would add to that in any given quarter, the amount of provision we take is, as Lindsay said, largely from new originations. But it depends on what sector of our lending operations is doing particularly well that quarter, because we assess different loss factors based on the type of lending it is. General C&I lending is we have certain factors. And some of the, what I'd characterize is perhaps higher risk, higher return, we use higher loss factors. So it really depends on the mix of business we do during the quarter.

And then I guess switching to fees. We saw servicing fees jump around quite a bit in 2018. How should we think about that going into next year?

I think, before I pass this question on to Lindsay. One thing to note there is because we've seen it in some of the releases from some other institutions. So this year and this quarter so you saw the fair value charge or cost that is embedded in our numbers related to the servicing asset that we have for the SBA guaranteed business. I think as for the first time we're starting to provide you with more details, so that you can see the break-up between what is fair value adjustments that we're making to the asset itself vis-à-vis the underlying trend of servicing income coming in. So I think hopefully that's more color for you guys and that gives you a little bit more clarity there in terms of what's driving that particular line.

Yes, so I think Alberto is spot on and that's why we broke it out. And going forward, I think what's really been driving that volatility was that the prepayment fees, the increase here in the second half of the year. And so we'll slowdown, time will tell, we think so but we don't have a crystal ball here. So that's what drove it historically and we'll see what happens next year.

And this concludes question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Great. Thank you, Operator. So first I'd like to thank you for joining us today. Thank you for your interest in Byline. And we look forward to speaking to you again next quarter. Thank you.

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