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Byline Bancorp Inc  (NYSE:BY)
Q4 2018 Earnings Conference Call
Jan. 25, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

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.

Allyson Pooley -- Investor Relations

Thank you, Laura. 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 Presentation page of Byline's Investor Relations website for access to the presentation.

Before we begin, I would like to remind you this 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 filings which are available on the Company's website. 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 gap measures. The press release available on the website, contains the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures.

And with that, I would like to turn the call over to Alberto Paracchini, President and CEO.

Alberto Paracchini -- President and Chief Executive Officer

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 three on our deck. We ended 2018 with a 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 our 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 and earnings, we saw a steady increase in our level of returns. ROAA came in at 139 basis points and ROATCE was 15.49%. Pre-tax pre-provision ROA was 2.23% in the fourth quarter, an increase from 2.13% last quarter and 1.73% from the 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 in 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 of non-interest income growth, which was up 30% from the prior quarter. Our small business capital group had a good quarter of loan production, which resulted in higher gain on loan sales. Overall business development activity was solid with loan originations coming in at $164.9 million, which was anticipated after the very strong levels we experienced in the third quarter.

Payoff activity increase, however, which moderated the net growth in the portfolio this quarter. Loans grew by 45.8 million or 5.3% annualized. The loan growth was strongest in the C&I category. Commercial banking team had a particularly good quarter of production, and we're pleased with the synergies that we're seeing from our combination. Customer activity in commercial banking was very good during the quarter and the second half of the year.

We're seeing customers investing in their business buying equipment and expanding or modernizing facilities. Moving over to liabilities. Total deposits were essentially flat growing by $9 million. That said we had solid inflows of non-interest bearing demand deposits in the quarter, which increased to 31.8% of our total deposits. This allowed us to be proactive with deposit pricing given the shift in expectations regarding additional rate increases.

We've been very pleased with the deposit trends that we have seen in the Evanston market. It's customary to see some runoff after an acquisition, but deposits at the former first Evanston branches were higher at the end of the year than they were at the time of the merger. We think this speaks to the quality of the deposit base acquired, the continuity and strength of the team, and the approach taken with our integration and customer transition plans.

We've also had a positive shift in the mix of those deposits, as we've replaced higher costs municipal deposits with lower cost commercial deposits in the market. With respect to expenses and efficiency, we continue to make strides toward our objectives in this area. Last quarter our adjusted efficiency ratio improved to just under 55%. On a year-over-year basis, we improved by approximately eight percentage points and our deposit -- our average deposits per branch increased to $63.6 million from $43.6 million, which reflects both positive impact of the transaction and the efficiencies generated from our branch rationalization efforts.

Asset quality improved with NPLs coming down, charge-offs remaining stable, and the allowance for loan losses increasing to support loan growth. Before I pass the call over to Lindsay. I would like to take a moment to talk about the impact that the government shutdown is having on our government guaranteed lending business.

First off, I'll start by saying that we hope our leaders can come together and solve a problem directly impacting over 800,000 employees in a significant number of small businesses throughout the country. The shutdown impacts us primarily in two ways. First, it impacts our ability to obtain guarantees on new originations. In anticipation of the shutdown we secured guarantees on loans we had in our pipeline, but have not been able to secure guarantees for newer underwriting.

Second, the shutdown also impacts our ability to sell loans in the secondary market as the SBA plays a role in the sale process and their inability to participate negatively impact secondary market sales. We have experienced and navigated through shutdowns before and continued to originate new business and close loans with guarantees.

We have the financial strength and capacity to use our balance sheet and portfolio loans until the secondary market comes back to normal. More importantly, we'll continued to provide small businesses with access to capital and look forward to the resolution of the shutdown.

And with that I'll pass the call over to Lindsay.

Lindsay Corby -- Chief Financial Officer

Thanks, Alberto. Good morning, everyone. I will start on slide four, 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 payoff compared to $99 million in the prior quarter.

Moving on to deposits. On slide five, 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 categories. 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 quarter.

Moving to slide six. 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 five basis points from 5.49% to 5.54%, which was offset by an 11 basis point increase in our cost of deposits, resulting in a four basis point decline in our reported 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 points to 4.13% primarily due to the positive impact of loan repricing and higher rates on our new loan production. Yields on loans and leases excluding the accretion income expanded to 5.75% from 5.48% the previous quarter.

Turning to non-interest income on slide seven. Compared to the prior quarter, our non-interest income increased by $3.4 million. This was primarily due to a $4.3 million increase in our net gains on government guaranteed loan sale. This was the result of higher volumes of loan sold as well as a slight increase in average premium due to a more favorable mix of loan sold during the quarter.

The higher interest rate environment continues to drive increased prepayment speeds that are reducing the value of our servicing assets. In the fourth quarter earnings release, we expanded our disclosures around the net servicing fee income to break out the loan servicing revenue and the revaluation of the servicing assets to provide better visibility.

During the fourth quarter, we recorded a $2.9 million fair value adjustments to reflect the revaluation of our servicing asset, which once again reduced our net servicing fees this quarter. The loan servicing revenue was $2.7 million for the quarter up slightly from $2.6 million in the prior quarter. The remaining fee income line items remained stable for the quarter including our wealth management and trust business with $679,000 of revenue during the quarter.

Moving to slide eight. Let's look at our non-interest expense. Our fourth quarter expenses include $1.3 million related to the significant item. Excluding these items, our non-interest expense increased 4.4%, primarily due to higher loan and lease related expenses, occupancy expense and professional fees.

Our largest expense line items, salary and employee benefits was relatively flat with the prior quarter. We expect to see the remaining cost savings projected for the First Evanston transaction in the second half of the year. That being said, we continued to see the beneficial impact of the acquisition on our adjusted efficiency ratio, which improved to 54.95% in the fourth quarter.

Turning to slide nine, we'll take a look at asset quality. We saw positive trends in the loan portfolio this quarter and it remains well controlled. Our non-performing assets declined to 67 basis points of total assets from 71 basis points at the end of the prior quarter. Although we had some influence in OREO, this was more than offset by a decline in our non-performing loans and leases largely related to government guaranteed collections from the SBA on non-performing government guaranteed loans.

As a result the government guaranteed balances in our non-performing assets declined to $4.6 million from $7.3 million at the end of the prior quarter. Excluding government guaranteed NPAs our non-performing loans to total loans ratio remained unchanged at 66 basis points. Our net charge-offs were $2.1 million or 24 basis points of average loans and leases for the quarter essentially equivalent to the prior quarter.

Charge-offs were primarily related to the unguaranteed portion of SBA loans. Provision expense for the fourth quarter was $3.9 million. Fourth quarter provision included allocations of $2.5 million for originated loans and leases and $1.6 million for acquired non-impaired loans. Relative to the prior quarter, our provision expense declined due to a reduction in specific impairment in the unguaranteed portion of the government guaranteed portfolio.

Our provision for the fourth quarter increased our allowance for loan and lease losses to 72 basis points of total loans and leases from 68 basis points at the end of the prior quarter, and our coverage of NPLs excluding the government guaranteed portion increased seven basis points to 109 basis points from the prior quarter.

In addition to the traditional allowance as a percentage of loan and lease metric, we also analyze the allowance in conjunction with the acquisition accounting adjustment impacting our acquired portfolio. At December 31st, the acquisition accounting adjustments plus the allowance for loan and lease losses represented 169 basis points of total loans and leases.

With that, I would like to pass the call back to Alberto.

Alberto Paracchini -- President and Chief Executive Officer

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 a 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 continued 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 deposits, 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 opportunity 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.

Questions and Answers:

Operator

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

Terry McEvoy -- Stephens Inc. -- Analyst

Good morning, everyone.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Terry.

Lindsay Corby -- Chief Financial Officer

Good morning, Terry.

Terry McEvoy -- Stephens Inc. -- Analyst

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?

Lindsay Corby -- Chief Financial Officer

Sure. Terry, good morning. 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 in the money market. So I do think that you'll continue to see competition there and that will cause a slight increase in terms of deposit costs going forward. Related to your question about the commercial deposits and the inflow, that's typical again with our acquisition from First Evanston. They have larger commercial deposits that do 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 are 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. So, you may see a slight expansion in the first quarter, but relatively flat throughout the remainder of the year.

Terry McEvoy -- Stephens Inc. -- Analyst

Great. And then just as a follow-up. Given all the focus on leverage lending over the 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 of years and just any comments about the credit how specifically of that portfolio?

Alberto Paracchini -- President and Chief Executive Officer

Sure. So, the portfolio size of that segment, I guess, or that part of our commercial portfolio Terry is just under -- just around $230 million plus or minus a couple 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 -- it's -- we're intend to 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, and Tim has some additional comments.

Timothy Hadro -- Chief Credit Officer

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 credit, you know, for every 10 credits we look at, we are now successfully fitting and winning fewer credits than we were in the last several years.

Alberto Paracchini -- President and Chief Executive Officer

Yes, 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 the ad back, I think we'll be fine in that business.

Terry McEvoy -- Stephens Inc. -- Analyst

Thank you.

Alberto Paracchini -- President and Chief Executive Officer

Thank you.

Operator

The next question comes from Michael Perito of KBW.

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

Good morning.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Mike.

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

Couple of questions. I wanted to start -- I was hoping maybe we could spend a minute on the SBA side of the business since the government slowdown. I was wondering, can you give us a little bit more color about what type of production you guys are anticipating, obviously, the fourth quarter seemed 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 kind of flow through to the provision or expense line that could also have an impact on?

Alberto Paracchini -- President and Chief Executive Officer

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 are -- 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 still far there in terms of -- at some point we need the -- we need to pull guarantees, and therefore we're not going to be able to close new originations until the shutdown ends. We obviously hope, we have no, wish we had a crystal ball and we could tell you a shutdown 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, pool guarantees on loans that we have in the pipeline and move forward. At this point, you asked question a little bit about credit quality there, obviously, when we're trying, as you know, we have these loans in the -- in our non-performing category, where we have guaranteed portions, where we want to collect on the guarantee. 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.

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

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

Alberto Paracchini -- President and Chief Executive Officer

I think the further -- we discussed this a 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 does -- 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 a -- as more of a timing issue really impacting both sides.

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

Okay. Helpful, Alberto. Thanks for the color there. And then maybe switching over to the expenses. Just kind of curious, Lindsay, 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 quarter is little over $39 million was the quarterly expense run rate, and it sounds like there's 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 build for next year as you guys obviously continue to target having a growth posture?

Lindsay Corby -- Chief Financial Officer

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 noninterest expense as a percent of 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, Mike, 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 just in our core numbers excluding the acquisition because of the first quarter you have higher payroll taxes. We have negative five degrees in 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'll see the rest of it come through.

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

Okay. And then just lastly if I could quickly just on the kind of 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 push here and here, and I assume there starting to be some more year-end conversations with some of your competitors that could be involved in M&A transactions etcetera. I was just curious, if Alberto maybe you can just give us a quick update on what you're seeing in the market?

Alberto Paracchini -- President and Chief Executive Officer

Yeah, I think, look things slowed 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 you know kind of where they are, I think, it goes without saying that's going to have some degree on impact on transactions. That being said for us look 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 at teams be at obviously customers that are impacted here 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 where we're looking we can look to first and foremost to look for opportunities to acquire core deposits, and I think we remain focused on that and if history is a guide there I think we'll see our share of opportunities.

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

Right. Thank you for taking my questions this morning. I appreciate it.

Alberto Paracchini -- President and Chief Executive Officer

Thank you, Mike.

Lindsay Corby -- Chief Financial Officer

Thanks, Mike.

Operator

The next question comes from Nathan Race of Piper Jaffray.

Nathan Race -- Piper Jaffray and Company -- Analyst

Hey, everyone. Good morning.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Nate.

Lindsay Corby -- Chief Financial Officer

Good morning, Nate.

Nathan Race -- Piper Jaffray and Company -- Analyst

Lindsey, just going back to your comments around the loan yield expansion this quarter and some of your outlook there. 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 prepaid fees that may have kind of impacted the loan yields here in 4Q?

Lindsay Corby -- Chief Financial Officer

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

Nathan Race -- Piper Jaffray and Company -- Analyst

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

Lindsay Corby -- Chief Financial Officer

Yes, and like you stated, the accretion is one of those things, we're at the point in time and subject to fluctuation. But I did guide you guys down in terms of the 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 sort of a guide, if you will, it would probably be pretty good.

Nathan Race -- Piper Jaffray and Company -- Analyst

Okay. Got it. And then just kind of last question on low growth expectations, on a 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 it's kind of high single-digits. It's still kind of a reasonable expectation on a organic basis for this year?

Alberto Paracchini -- President and Chief Executive Officer

Yes, I think, Nate. Like we stated before, mid to high single-digits is kind of what we're operating under, obviously payoff 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.

Nathan Race -- Piper Jaffray and Company -- Analyst

Okay. Great. Thank you for taking the questions.

Lindsay Corby -- Chief Financial Officer

Thank you.

Alberto Paracchini -- President and Chief Executive Officer

Thanks, Nate.

Operator

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

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

Good morning, everyone.

Alberto Paracchini -- President and Chief Executive Officer

Good morning, Andrew.

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

Just a question on the increase on the gain and 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?

Lindsay Corby -- Chief Financial Officer

Sure, the mix shift was primarily USDA loans. So, Andrew, when you sell a 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.

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

Got you. Okay. Thank you for that point of clarification. But my other question just revolves around the C&I growth this quarter. It's certainly impressive. I was just curious what's driving that, as you're taking market share from other players, business expansion from existing customers, it's just, it was solid, I would just like to know what's driving it?

Alberto Paracchini -- President and Chief Executive Officer

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 the -- 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 would be equipment, whether it would be expanding facilities whether it would be, we're seeing some of that with existing customers, and I think we're seeing also opportunities to take share in the market as well.

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

Okay. Did you use the commercial customer than new ones anyway come with deposit relationships?

Alberto Paracchini -- President and Chief Executive Officer

Yes, sir.

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

So, that would be a source of non-interest bearing accounting growth?

Alberto Paracchini -- President and Chief Executive Officer

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

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

Okay. Great. Thanks. That covers everything.

Alberto Paracchini -- President and Chief Executive Officer

Okay. Thank you.

Operator

(Operator Instructions) Our next question will come from Sean Tobin of FIG Partners.

Sean Tobin -- FIG Partners -- Analyst

Good morning, everyone. Nice quarter.

Alberto Paracchini -- President and Chief Executive Officer

Thank you, Sean. Thank you.

Lindsay Corby -- Chief Financial Officer

Thank you, Sean.

Sean Tobin -- FIG Partners -- Analyst

Good morning, everyone. Nice quarter.

Lindsay Corby -- Chief Financial Officer

Hi, Sean. Can you hear us?

Alberto Paracchini -- President and Chief Executive Officer

Thank you, Sean. Can you hear us?

Sean Tobin -- FIG Partners -- Analyst

Yes, I got you now. Sorry about that. I guess just starting on the provision -- the provision is bounced around due to the government guarantee portfolio. Can you give us any color on how to think of the reserve in the next couple of quarters or even in the next year?

Lindsay Corby -- Chief Financial Officer

Sure. In terms of the provision for this quarter, it was around $4 million, which was lot 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 growing 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 to that.

Timothy Hadro -- Chief Credit Officer

Yeah, I would add to that the, 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 characterize is perhaps higher risk, higher return. We use higher lost factors. So it really depends on the mix of business we do during the quarter.

Sean Tobin -- FIG Partners -- Analyst

Understood, understood. That's very helpful. And then I guess switching to fees, we saw servicing fees kind of jump around quite a bit in 2018. How should we think about that going into the next year?

Alberto Paracchini -- President and Chief Executive Officer

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 is. So, this year on 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 detail so that you can see the breakup between what is fair value adjustments that we're making to the asset itself vis-a-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.

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

Sean Tobin -- FIG Partners -- Analyst

Awesome. Thanks. Thanks a lot for taking my questions. Nice quarter.

Alberto Paracchini -- President and Chief Executive Officer

Thank you, Sean.

Operator

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

Alberto Paracchini -- President and Chief Executive Officer

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

Operator

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

Duration: 42 minutes

Call participants:

Allyson Pooley -- Investor Relations

Alberto Paracchini -- President and Chief Executive Officer

Lindsay Corby -- Chief Financial Officer

Terry McEvoy -- Stephens Inc. -- Analyst

Timothy Hadro -- Chief Credit Officer

Michael Perito -- Keefe, Bruyette & Woods, Inc -- Analyst

Nathan Race -- Piper Jaffray and Company -- Analyst

Andrew Liesch -- Sandler O'Neill & Partners L.P. -- Analyst

Sean Tobin -- FIG Partners -- Analyst

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