Byline Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021 unless noted. Byline is a Chicago-based bank holding company serving small and midsize businesses, commercial real estate customers and consumers, with additional equipment leasing, government-guaranteed lending, and loan servicing activities. Amounts below are in U.S. dollars; financial statement amounts are generally rounded to millions.
Financial performance and condition
| Metric | Q2 2022 / June 30, 2022 | Comparable period / change |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $75.8 million | $79.2 million in Q2 2021; down 4.3% |
| Net interest income | $61.6 million | $58.2 million; up 5.9% |
| Net interest margin | 3.76% GAAP; 3.77% fully taxable equivalent | 3.74% GAAP; 3.76% fully taxable equivalent in Q2 2021 |
| Provision for loan and lease losses | $5.9 million | $2.0 million recapture in Q2 2021 |
| Non-interest income | $14.2 million | $21.0 million; down 32.6% |
| Non-interest expense | $43.8 million | $43.0 million; up 1.8% |
| Net income / diluted EPS | $20.3 million / $0.54 | $28.5 million / $0.73 in Q2 2021 |
| Six-month net income / diluted EPS | $42.6 million / $1.12 | $50.3 million / $1.29 in the first half of 2021 |
| Total assets / gross loans and leases | $7.13 billion / $5.17 billion | Assets up 6.5%; loans up 13.9% from year-end |
| Deposits / cash and cash equivalents | $5.39 billion / $141.9 million | Deposits up 4.5%; cash was $157.9 million at year-end |
| Other borrowings | $748.1 million, including $650.0 million of FHLB advances | $519.7 million at year-end |
| Stockholders’ equity | $765.2 million | $836.4 million at year-end; down 8.5% |
| Six-month cash flows | Operating +$152.9 million; investing −$601.0 million; financing +$432.1 million | Cash and equivalents decreased $16.0 million to $141.9 million |
- Profitability weakened year over year: Q2 net income fell 28.8%; annualized return on average assets was 1.17% versus 1.70%, and return on average equity was 10.42% versus 14.10%. The Q2 efficiency ratio rose to 55.29% from 51.95%.
- Loan growth was broad-based, particularly in commercial real estate, commercial and industrial lending, construction, and equipment leases. PPP loans fell to $10.4 million from $123.7 million at year-end. Loans were 96.2% of deposits, up from 89.3% at year-end.
- The allowance for loan and lease losses was $62.4 million, or 1.21% of loans, versus $55.0 million and 1.21% at year-end. Management attributed the increased provision to portfolio growth, qualitative credit factors, the macroeconomic environment, and rising interest rates.
- Available-for-sale securities had a June 30 fair value of $1.27 billion, down from $1.45 billion at year-end. Gross unrealized losses were $151.2 million; management judged declines temporary and stated it did not intend, and was not more likely than not required, to sell the securities before recovery. First-half other comprehensive loss was $83.0 million, contributing to lower equity.
- Regulatory capital ratios at June 30 included company CET1 of 10.26% and total capital of 13.09%; the Bank’s CET1 was 11.34% and total capital was 12.34%. The Bank was reported as well-capitalized.
Material changes and management commentary
- Net interest income increased as average loan balances grew, partly offset by lower PPP-related income and higher deposit and borrowing costs. Q2 interest expense rose $1.8 million year over year. Average deposit cost increased to 0.16% from 0.08%.
- Lower non-interest income primarily reflected a $4.6 million Q2 downward revaluation of loan servicing assets and lower loan-sale gains. Loan-sale gains were $10.0 million versus $12.3 million; management cited reduced secondary-market premiums. First-half servicing-asset revaluation was negative $5.9 million.
- First-half non-interest expense increased 8.0% to $88.3 million, mainly due to a 22.1% rise in salaries and benefits, including lower deferred costs than in the prior-year period and higher incentive compensation. Data-processing and other expenses also increased.
- Asset quality measures were mixed: non-performing loans and leases rose to $33.9 million from $23.1 million at year-end, primarily due to one commercial relationship; non-performing assets were $38.7 million. Non-performing loans were 0.66% of loans, compared with 0.51% at year-end. The allowance covered 183.94% of non-performing loans, down from 237.84%.
- Liquidity sources included $1.7 billion of FHLB capacity, $822.1 million of Federal Reserve discount-window capacity, and $90.0 million of uncommitted federal funds lines. The filing also reports $129.7 million of available aggregate FHLB borrowing capacity after advances and letters of credit, based on pledged collateral. Management said liquidity was expected to meet short-term obligations for at least the next twelve months.
- The Company redeemed all Series B preferred shares on March 31, 2022 for approximately $10.6 million including dividends. It repurchased 514,819 common shares for $13.1 million in the first half. The Board declared a $0.09-per-share dividend payable in August 2022.
Outlook, risks and contingencies
- No broad earnings or revenue guidance is provided. Management estimated a 2022 effective tax rate of approximately 25%–27% and projected $532,000 of loan accretion for the remainder of 2022, while expecting net loan accretion to continue declining.
- In its dynamic interest-rate simulation, management estimated that a gradual 100-basis-point rise would increase net interest income 1.3% over the next 12 months, while a 100-basis-point decline would reduce it 1.3%; a gradual 200-basis-point rise would increase it 2.8%. These are model-based estimates, not forecasts, and depend on assumptions about rates, balances, prepayments, and product mix.
- Key disclosed risks include borrower credit deterioration, Chicago-area and southern Wisconsin commercial real estate conditions, rising rates and funding costs, liquidity and capital access, deposit competition, cybersecurity and third-party systems, regulatory and SBA/USDA changes, and fair-value estimation. About $1.0 billion of loans, $466.9 million of derivative notional, $47.7 million of securities, and $37.1 million of junior subordinated debentures were LIBOR-linked; management had approved Term SOFR as an alternative reference rate.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $1.98 billion. Management did not anticipate material losses from these commitments. Management stated ordinary-course legal matters were not expected to have a material adverse effect; the filing reports no material change to previously disclosed risk factors and no subsequent event requiring disclosure.
Most important facts for investors to verify
- Whether strong loan growth can be sustained without further deterioration in credit quality, particularly in commercial relationships, commercial real estate, and construction lending.
- Whether the allowance and provision remain adequate as rates, economic conditions, and portfolio composition change; monitor non-performing loans, charge-offs, and criticized loan categories.
- How securities valuation losses, deposit pricing, and borrowing needs affect tangible capital, liquidity, and net interest margin; confirm the maturity and refinancing of the $650 million of FHLB advances due August–September 2022.
- Whether servicing-asset marks and loan-sale margins stabilize, and whether the $532,000 remaining-year loan-accretion estimate and stated tax-rate outlook are realized.
- Reconcile reported borrowing-capacity disclosures and assess availability after collateral requirements, pledged assets, and off-balance-sheet commitments.