Byline Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless otherwise noted. Byline is a Chicago-based bank holding company serving businesses and consumers through Byline Bank, with commercial banking, equipment leasing, SBA and USDA guaranteed lending, and wealth-management operations. The filing was signed May 5, 2020.
Financial results and key metrics
- Earnings: Net interest income was $52.8 million, up 5.5% from $50.1 million. Total revenue (net interest income plus non-interest income) was $62.0 million, essentially unchanged from $62.1 million. Net income declined to $3.0 million from $12.6 million; diluted EPS was $0.07 versus $0.34. Adjusted diluted EPS, a non-GAAP measure, was $0.09 versus $0.38.
- Credit provision and margins: Provision for loan and lease losses rose to $14.5 million from $4.0 million, including a $6.3 million allocation for estimated COVID-19 effects. Net interest margin fell to 4.17% from 4.43%; average cost of deposits improved to 0.75% from 0.87%. The efficiency ratio increased to 67.16% from 62.68%.
- Income and expenses: Non-interest income decreased to $9.2 million from $12.0 million, including a $3.1 million servicing-asset revaluation loss and lower loan-sale gains, partly offset by $1.4 million in securities-sale gains. Non-interest expense increased to $43.5 million from $40.7 million, primarily from compensation and occupancy costs.
- Balance sheet: Total assets were $5.735 billion, up 3.9%; gross loans and leases were $3.860 billion, up 2.0%; deposits were $4.239 billion, up 2.2%. Stockholders’ equity was $762.7 million. Available-for-sale securities totaled $1.299 billion, up $113.2 million during the quarter.
- Credit quality: Allowance for loan and lease losses rose to $41.8 million from $31.9 million, or 1.08% of loans and leases versus 0.84%. Non-performing loans and leases were $50.7 million, 1.31% of loans, compared with $38.0 million and 1.00% at year-end; non-performing assets were $60.0 million. Annualized net charge-offs were 0.48% of average loans versus 0.24% a year earlier.
- Cash flow: Operating activities provided $25.9 million, compared with $13.7 million in Q1 2019; investing activities used $177.2 million versus $113.1 million; financing activities provided $190.2 million versus $59.6 million. Cash and cash equivalents ended the quarter at $119.6 million, up $38.9 million during the period.
- Funding and liquidity: Short-term borrowings were $640.6 million, including $250.0 million borrowed from the Federal Reserve discount window, $335.0 million of FHLB advances, and $55.6 million of customer repurchase agreements. The Fed borrowing was due April 21, 2020. The company reported $1.6 billion of available aggregate FHLB borrowing capacity, plus $346.7 million available under the discount-window line and $115.0 million in federal funds lines. Management stated liquidity was expected to meet requirements for at least the next 12 months.
- Capital: The bank was reported as well-capitalized. At March 31, company ratios included 12.24% CET1, 13.52% Tier 1 capital, 14.50% total capital, and an 11.18% leverage ratio. Tangible common equity to tangible assets was 10.33%.
Material changes and management commentary
- Management attributed the sharp earnings decline principally to the $10.5 million year-over-year increase in provision expense, alongside weaker non-interest income and higher expenses. Loan growth, securities purchases, and lower funding costs supported net interest income, but lower loan yields and reduced acquired-loan accretion pressured margin.
- Loans and leases increased $74.6 million from year-end, with originated balances growing and acquired balances declining through renewals, payoffs, and paydowns. Commercial and industrial loans rose 6.2%; residential real estate loans declined 2.5%.
- Non-performing assets increased 25.1% from year-end, driven primarily by higher non-accrual loans. Past-due accruing loans also increased, particularly in commercial real estate and commercial and industrial categories.
- Three branches were consolidated and one repurposed in Q1, with an approximately $437,000 one-time charge. Management expects about $1.3 million in annual cost savings, some of which may be reinvested.
- The company repurchased 118,486 shares for $1.7 million during Q1 under its 1.25 million-share authorization; the program was paused in March. A $0.03-per-share common dividend was declared and paid in April.
COVID-19, outlook, risks, and contingencies
- COVID-19 was identified as a material source of uncertainty for borrowers, collateral values, revenue, credit losses, funding, operations, and profitability. The filing provides no formal earnings or financial guidance.
- Through April 29, 2020, Byline had approved approximately $395.7 million of COVID-related payment deferrals, equal to 10.3% of March 31 loans and leases. Deferrals included $311.4 million in commercial and industrial and commercial real estate, $39.1 million in leases, $27.4 million in government-guaranteed lending, and $17.8 million in consumer loans.
- By April 29, the bank had registered more than 3,500 PPP loans totaling $716.7 million. Management estimated approximately $23.5 million of federal fees, based on a 3.3% weighted-average fee, subject to final registrations and funding. Fees are deferred over the PPP loan lives; this estimate is not Q1 recognized revenue.
- Byline warned that PPP processing could create litigation and SBA-guaranty risks, and that PPP funding could disrupt traditional SBA 7(a) lending. The filing also cited possible increased borrower defaults, further allowance needs, lower interest margins, and potential goodwill impairment if adverse conditions persist. Goodwill was not considered impaired at March 31.
- On April 21, the bank obtained access to the Federal Reserve’s PPP Liquidity Facility but had not drawn funds as of the filing. Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect.
- Management stated it expects to continue assisting customers and monitoring credit and liquidity. Its interest-rate sensitivity model estimated net interest income would decline 5.2% under an immediate 100-basis-point rate decrease over the following 12 months, while results under rising-rate scenarios were positive; management cautioned that modeled outcomes are hypothetical and assumption-dependent.
Important facts for investors to verify
- Subsequent-quarter trends in payment deferrals, delinquencies, non-accrual loans, charge-offs, and allowance needs, especially among COVID-affected industries and unguaranteed SBA/USDA exposures.
- Actual PPP loan funding and forgiveness, realized fee income and costs, and any SBA-guaranty disputes, processing litigation, or effects on traditional SBA lending.
- Liquidity and funding developments, including repayment or replacement of the $250.0 million discount-window borrowing due April 21, FHLB maturities, deposit trends, and use of PPPLF advances.
- Net interest margin and servicing-asset valuation under the low-rate environment, along with the assumptions and sensitivity of management’s interest-rate simulations.
- Whether branch-consolidation savings materialize, the status of the paused share-repurchase program, and any future goodwill impairment assessment.