Byline Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results reflect Byline Bancorp and its subsidiaries, including Byline Bank. Balance-sheet comparisons are to December 31, 2022 unless noted.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $76.2 million | $61.6 million | $151.9 million | $120.4 million |
| Net interest margin, reported | 4.32% | 3.76% | 4.35% | 3.78% |
| Provision for credit losses | $5.8 million | $5.9 million | $15.6 million | $10.9 million |
| Non-interest income | $14.3 million | $14.2 million | $29.4 million | $33.6 million |
| Non-interest expense | $49.3 million | $43.8 million | $98.1 million | $88.3 million |
| Net income | $26.1 million | $20.3 million | $50.1 million | $42.6 million |
| Diluted EPS | $0.70 | $0.54 | $1.34 | $1.12 |
- Q2 net income rose 28.7%; six-month net income rose 17.5%. Management attributed the improvement principally to higher loan yields and loan and lease growth.
- Net interest income increased 23.6% in Q2 and 26.2% year to date. The six-month fully taxable-equivalent net interest margin was 4.36%, versus 3.80% a year earlier.
- Higher funding costs partly offset asset-yield gains: Q2 average deposit cost was 1.70%, compared with 0.16%; average cost for the first half was 1.43%, compared with 0.12%.
- Non-interest income was broadly flat in Q2 but declined 12.4% for the first half, mainly as loan-sale gains fell. Six-month loan-sale gains decreased to $10.9 million from $20.8 million.
- Q2 efficiency ratio improved to 52.92% from 55.29%; first-half ratio improved to 52.51% from 55.12%. Adjusted ratios are non-GAAP measures.
Financial position, liquidity and capital
- Total assets were $7.58 billion; gross loans and leases were $5.57 billion, up 2.8%; deposits were $5.92 billion, up 3.9%; and stockholders’ equity was $813.9 million.
- Cash and cash equivalents were $320.2 million, versus $179.4 million at year-end. For the first half, operating cash flow was $92.5 million, investing cash outflow was $102.1 million, and financing cash inflow was $150.4 million.
- Deposits grew, but the mix shifted: non-interest-bearing deposits fell $344.9 million to $1.79 billion, or 30.3% of deposits. Brokered deposits rose to $551.4 million, or 9.3% of deposits, from $251.5 million at year-end.
- Other borrowings totaled $574.9 million, including $540.0 million of FHLB advances, down from $640.4 million. The advances had rates of approximately 5.18%–5.28% and maturities from July through September 2023. Management reported $1.0 billion of available aggregate borrowing capacity based on pledged collateral, plus federal funds lines and Federal Reserve discount-window capacity.
- Regulatory capital ratios at June 30 included company CET1 of 10.58%, Tier 1 capital of 11.22%, and total capital of 13.52%. Byline Bank was reported well-capitalized; its CET1 ratio was 11.64% and total capital ratio was 12.89%.
- Available-for-sale securities had $1.33 billion amortized cost and $1.13 billion fair value, including $203.2 million of gross unrealized losses. AOCI loss was $114.9 million, net of tax. Management reported no identified securities credit losses, no intent to sell, and no expectation it would be required to sell before recovery.
Credit quality and material changes
- The allowance for credit losses on loans and leases was $92.7 million, or 1.66% of loans and leases held for investment before the allowance, versus $81.9 million and 1.51% at year-end. The increase reflected specific reserves and portfolio growth.
- Non-performing loans and leases were $38.3 million, or 0.69% of loans and leases, compared with $36.0 million, or 0.66%, at year-end. Non-performing assets were $40.5 million, approximately flat with year-end; lower other real estate owned partly offset higher non-accrual loans.
- Net charge-offs were $8.6 million for the first half. Commercial real estate was 35.2% of the loan and lease portfolio; commercial and industrial loans were 37.8%. Lease financing receivables grew 15.6% to $605.7 million.
- Deposit interest expense and overall borrowing costs rose sharply, while non-interest-bearing deposits declined. These funding trends are important to future margin performance.
Outlook, notable items and risks
- The filing provides no earnings or margin guidance. Management estimated a 2023 effective tax rate of approximately 25%–27% and stated liquidity resources should meet requirements for at least the next twelve months.
- On July 1, 2023, after quarter-end, Byline completed its acquisition of Inland Bancorp for approximately $129.0 million in cash and stock. Inland had approximately $1.2 billion of assets, $861.5 million of loans and $967.6 million of deposits as of June 30. Purchase accounting fair values remained in process; Byline cited stronger Chicagoland presence, business diversification and core deposits as expected benefits. The filing also records $1.9 million of first-half merger-related expenses.
- Management identifies economic and borrower conditions, Chicago-area commercial real estate, interest-rate changes, deposit competition and funding availability, fair-value assumptions, cyber and technology risks, regulatory change, and acquisition integration as risks. The filing says there were no material changes to previously disclosed risk factors.
- Interest-rate simulations showed that immediate parallel rate increases of 100 basis points could increase modeled net interest income 5.8%, while a 100-basis-point decline could reduce it 4.1%. Under a gradual dynamic scenario, a 100-basis-point increase was modeled to raise NII 3.3%, and a 100-basis-point decline to reduce it 3.0%. These are hypothetical estimates, not forecasts.
- Commitments to extend credit and letters of credit totaled $2.12 billion in notional amounts; management said it did not anticipate material losses. Ordinary-course legal proceedings were not expected to have a material adverse effect.
- Common dividends were $0.09 per share for Q2; the board declared another $0.09 dividend payable in August. No shares were repurchased under the open-market program during the first half.
Important facts for investors to verify
- Whether deposit pricing, non-interest-bearing deposit balances and brokered-deposit reliance continue to pressure funding costs and net interest margin.
- Credit trends, particularly non-accrual commercial real estate and commercial and industrial exposures, charge-offs, and the adequacy of the allowance.
- Inland’s final purchase accounting, integration costs, deposit retention, realized synergies and resulting share dilution. The filing reports 43,692,755 common shares outstanding as of August 1, after the acquisition.
- The liquidity and capital effects of maturing FHLB advances, collateral availability, and the significant unrealized losses in the securities portfolio.
- How reported GAAP results compare with management’s non-GAAP adjusted measures, which exclude specified merger-related and other items.