Byline Bancorp, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Byline is a Chicago-based bank holding company operating Byline Bank, serving businesses and consumers, with commercial banking, equipment leasing, SBA lending, and wealth-management operations. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $52.6 | $54.4 | $105.4 | $104.5 |
| Provision for loan and lease losses | $15.5 | $6.4 | $30.0 | $10.4 |
| Non-interest income | $12.8 | $14.2 | $22.0 | $26.2 |
| Non-interest expense | $37.0 | $44.0 | $80.5 | $84.6 |
| Net income | $9.1 | $13.2 | $12.1 | $25.8 |
| Income available to common shareholders | $8.9 | $13.0 | $11.7 | $25.4 |
| Diluted EPS | $0.24 | $0.34 | $0.31 | $0.68 |
| Net interest margin | 3.71% | 4.51% | 3.93% | 4.47% |
| Efficiency ratio | 53.70% | 61.19% | 60.25% | 61.90% |
- Q2 net income fell 31% year over year; first-half net income fell 53%. Increased credit-loss provisioning was the principal earnings pressure. Lower interest expense and operating costs partly offset weaker loan yields and lower non-interest income.
- Q2 return on average assets was 0.59% (1.00% in Q2 2019); first-half return was 0.41% (1.02%). Q2 return on average equity was 4.74% (7.60%); first-half was 3.16% (7.67%).
- Average deposit cost declined to 0.36% in Q2 and 0.54% for the first half, versus 0.92% and 0.90%, respectively, in 2019. Lower asset yields and reduced acquired-loan accretion weighed on margin.
Financial position, liquidity, and capital
- At June 30, assets were $6.39 billion, up 15.8% from year-end 2019; gross loans and leases were $4.39 billion, up 16.0%; deposits were $4.96 billion, up 19.5%; and stockholders’ equity was $780.9 million, up 4.1%.
- Loan growth was substantially influenced by $626.6 million of PPP loans. Non-interest-bearing deposits rose to $1.77 billion, or 35.7% of deposits. The loan-to-deposit ratio was 88.62%, compared with 91.56% at December 31, 2019.
- Cash and cash equivalents were $139.9 million, compared with $80.7 million at year-end. Six-month operating cash flow was $43.3 million; investing cash outflow was $809.6 million, principally reflecting loan growth and securities purchases; financing cash inflow was $825.5 million, including deposit growth and PPP Liquidity Facility advances.
- Other borrowings totaled $510.4 million, including $449.9 million of Federal Reserve PPP Liquidity Facility advances, $56.5 million of repurchase agreements, and $4.0 million of FHLB advances. The company also had $48.8 million of subordinated notes, net, and $36.2 million of junior subordinated debentures, net.
- On June 26, the company issued $50 million of 6.00% fixed-to-floating subordinated notes, due 2030; an additional $25 million was issued on August 3, 2020. The notes are intended to qualify as Tier 2 capital.
- Regulatory capital ratios at June 30 included company CET1 of 12.33% and total capital of 15.86%; the bank’s CET1 was 13.02% and total capital was 14.21%. The bank was reported as well-capitalized and above applicable requirements.
- Available-for-sale securities were $1.43 billion, up from $1.19 billion at year-end. The company reported $20.0 million of accumulated other comprehensive income, largely reflecting unrealized securities gains.
Material changes and credit quality
- The allowance for loan and lease losses increased to $51.3 million from $31.9 million at year-end; allowance coverage was 1.17% of loans and leases, versus 0.84%. First-half provision was $30.0 million, including $13.6 million of COVID-19-related general reserve allocations.
- Six-month net charge-offs were $11.5 million; the annualized net charge-off ratio reported for Q2 was 0.57%, compared with 0.25% a year earlier. Non-performing assets were $52.3 million, or 0.82% of assets, versus $47.9 million at year-end. Non-accrual loans and leases were $40.5 million; there were no loans 90 days past due and still accruing.
- Management approved approximately $619.2 million of COVID-19 payment deferrals through June 30, equal to 16.4% of loans and leases excluding PPP. About $116.7 million of deferrals related to selected industries considered early affected by the pandemic. Deferrals and government support may delay visibility into underlying borrower stress.
- Loans in selected COVID-sensitive industries represented about 10.5% of the portfolio excluding PPP; these included restaurants and food services, accommodation, recreation, senior care, transportation, and certain nonprofit sectors. Commercial real estate and commercial and industrial lending remain significant portfolio exposures.
Outlook, risks, and unusual items
- The filing gives no numerical earnings or margin guidance. Management said it expected COVID-related deferral requests to continue during the pandemic and possibly beyond, and stated that liquidity resources were expected to meet requirements for at least the next twelve months.
- Byline originated more than 3,600 PPP loans totaling approximately $626.8 million through June 30 and reported approximately $22.6 million of federal PPP fee income, deferred over loan lives and before related costs. PPP loans carry a 1.0% rate and are generally SBA-guaranteed; forgiveness, guarantee, origination, servicing, and compliance outcomes remain risks.
- Management identified pandemic-related risks to borrower repayment, collateral values, credit losses, net interest income, liquidity, operations, and goodwill. It reported no goodwill impairment at June 30 but warned sustained deterioration or a stock-price decline could prompt future impairment analysis. Goodwill was $148.4 million.
- The company closed or restricted branch access during the pandemic and shifted non-retail employees to remote work. A first-quarter consolidation of three branches and repurposing of one resulted in a one-time charge of approximately $437,000; management expects $1.3 million in annual savings.
- The common-stock repurchase program was paused in March after 118,486 shares were repurchased for $1.7 million in Q1. A $0.03-per-share common dividend was declared in June and paid in July. Management reported no legal proceedings expected to have a material adverse effect.
- Interest-rate simulations estimated that an immediate +100 basis-point shift could increase net interest income by 4.0% over the twelve months to June 2021, while a -100 basis-point shift could reduce it by 2.3%. These are hypothetical estimates and depend on model assumptions.
Important facts for investors to verify
- Whether borrowers emerging from payment deferrals can resume scheduled payments, especially in commercial real estate, commercial and industrial, and pandemic-sensitive industries.
- Whether the allowance and reserve allocations adequately reflect changing economic conditions, and how subsequent charge-offs, delinquencies, and criticized loan classifications develop.
- PPP loan forgiveness and SBA guarantee performance, recognition of deferred fees, and any related compliance, litigation, or reputational exposure.
- Whether deposit growth and available borrowing facilities remain stable, and the effects of PPP-related funding and the new subordinated notes on funding costs and capital.
- Future net interest margin, loan yields, acquired-loan accretion, servicing-asset valuations, and any goodwill impairment indicators.