BY

Business Context and Reporting Period

Byline Bancorp, Inc. (NYSE: BY) is a bank holding company headquartered in Chicago, Illinois, operating primarily through its subsidiary, Byline Bank. The company focuses on commercial banking, small business lending (including SBA and USDA guaranteed loans), and equipment leasing. This Form 10-Q covers the quarterly period ended September 30, 2024, and the nine months ended September 30, 2024.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased $2.1 million (7.4%) for Q3 2024 compared to Q3 2023, driven by a $3.6 million decrease in non-interest expense and a $2.0 million increase in non-interest income, partially offset by a $5.0 million decrease in net interest income. For the nine months, net income rose $12.2 million, primarily due to a $15.2 million increase in net interest income and a $4.3 million decrease in the provision for credit losses.
• Net Interest Income: NIM compressed to 3.88% in Q3 2024 from 4.46% in Q3 2023. The decline was attributed to higher rates paid on deposits and lower loan accretion income from the 2023 Inland Bancorp acquisition. Average cost of deposits rose to 2.76% in Q3 2024 from 2.13% in Q3 2023.
• Expense Management: Non-interest expense decreased $3.6 million in Q3 2024, largely due to a $2.3 million reduction in data processing expenses related to the completion of the Inland Bancorp integration. Salaries and employee benefits remained flat quarter-over-quarter.
• Asset Quality: Non-performing loans and leases totaled $70.5 million (1.02% of total loans) at September 30, 2024, up from $64.1 million (0.96%) at December 31, 2023. The allowance for credit losses (ACL) decreased to $98.9 million, or 1.44% of total loans, from $101.7 million at year-end 2023.
• Balance Sheet Growth: Total assets grew 6.1% year-over-year to $9.42 billion. Loans and leases increased 2.9% to $6.88 billion, while deposits grew 4.5% to $7.50 billion.

Guidance, Outlook, and Risks

• Acquisition Activity: On September 30, 2024, the company announced an agreement to acquire First Security Bancorp, Inc., expected to close in the first half of 2025. The transaction is valued at approximately 1.5 million shares of Byline common stock plus cash for preferred shares.
• Loan Accretion: Management expects loan accretion income to decline over time as acquired loans from the Inland Bancorp transaction amortize. Projected accretion for the remainder of 2024 is $1.8 million.
• Interest Rate Risk: The company remains exposed to interest rate risk. Simulations indicate that a 200 basis point increase in rates would increase net interest income by 7.9% over the next 12 months, while a 200 basis point decrease would reduce it by 6.5%.
• Regulatory Capital: As of September 30, 2024, the company and its bank subsidiary exceeded all regulatory capital requirements and were classified as "well-capitalized."
• Risks: Key risks include commercial real estate market conditions in the Chicago area, potential deterioration in borrower financial conditions, and the impact of rising deposit costs on net interest margins.

Investor Verification Checklist

• Deposit Cost Trends: Verify the sustainability of the rising cost of deposits (2.76% in Q3) and its impact on future NIM compression.
• Commercial Real Estate Exposure: Review the concentration of commercial real estate loans ($2.36 billion, or 34.4% of the portfolio) and the specific risk ratings within that segment.
• First Security Acquisition: Monitor regulatory approval status and integration costs associated with the proposed acquisition of First Security Bancorp.
• Non-Performing Assets: Track the trend in non-accrual loans, which increased to $70.5 million, and the adequacy of the ACL coverage ratio (140.21% of non-performing loans).
• Loan Accretion Run-off: Assess the timeline for the decline in accretion income from the Inland Bancorp acquisition and its effect on reported earnings.