BYLINE BANCORP, INC. annual report, FY2023

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Byline Bancorp, Inc. — 2023 Form 10-K Summary

Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2023, not a standalone fourth-quarter report. Byline is a Chicago-focused bank holding company operating through Byline Bank, with commercial banking, equipment leasing, government-guaranteed lending, and wealth management businesses. It reported one operating segment. On July 1, 2023, Byline completed its acquisition of Inland Bancorp.

Financial performance and condition

  • Profit and revenue: Net income was $107.9 million, up $19.9 million (22.7%) from 2022; diluted EPS was $2.67 versus $2.34. Net interest income rose 24.6% to $330.6 million. Total revenue—net interest income plus non-interest income—was $386.9 million, up from $322.6 million.
  • Margins and costs: Net interest margin increased to 4.31% from 4.00%; the average yield on earning assets rose to 6.26%, while the average rate on interest-bearing liabilities rose to 2.95%. Average deposit cost increased to 1.90% from 0.36%. Non-interest expense rose 13.9% to $209.6 million, primarily reflecting Inland-related costs. The efficiency ratio improved to 52.62% from 54.99%.
  • Other income and unusual items: Non-interest income edged down to $56.3 million from $57.3 million. Loan-sale gains fell to $22.8 million from $31.9 million, while loan-servicing asset revaluation remained a downward adjustment ($5.1 million versus $11.7 million). The company recorded $9.2 million of merger-related expense and $2.4 million of impairment charges. Adjusted net income of $116.8 million and adjusted diluted EPS of $2.89 are non-GAAP measures.
  • Cash flow: Operating cash flow was $166.1 million, compared with $220.3 million in 2022. Investing activities used $336.2 million; financing activities provided $217.0 million. Cash and cash equivalents increased $46.8 million to $226.1 million. These are annual cash flows, not free cash flow.
  • Balance sheet and growth: Total assets were $8.88 billion, up 20.6%; gross loans and leases were $6.68 billion, up 23.3%; deposits were $7.18 billion, up 26.0%; and stockholders’ equity was $990.2 million, up 29.3%. Inland contributed materially to the growth. The acquisition consideration was $138.9 million and generated $33.4 million of goodwill.
  • Credit quality: The allowance for credit losses was $101.7 million, or 1.52% of loans and leases, versus $81.9 million and 1.51% a year earlier. Non-performing loans and leases increased to $64.1 million, or 0.96% of loans, from $36.0 million, or 0.66%. Net charge-offs were 0.38% of average loans, compared with 0.16% in 2022.
  • Deposits and liquidity: Non-interest-bearing deposits declined to $1.91 billion, or 26.6% of deposits, from $2.14 billion, or 37.6%. Core deposits were 87.0% of deposits, down from 92.7%; brokered deposits were 6.7%, up from 4.4%. Estimated uninsured deposits totaled $1.9 billion. At year-end, the Bank reported $1.6 billion of available aggregate borrowing capacity, subject to collateral and other terms.
  • Debt and capital: Year-end borrowings included $325 million of FHLB advances, an $18.3 million term loan, an $11.3 million line of credit, $73.9 million of subordinated notes, and $70.5 million of junior subordinated debentures. The Company’s CET1 ratio was 10.35%, total capital ratio 13.38%, and leverage ratio 10.86%; the Bank was categorized as well-capitalized. In January 2024, the Bank drew a $200 million, one-year BTFP advance at 4.91%.
  • Securities: Available-for-sale securities had a fair value of $1.34 billion and gross unrealized losses of $179.1 million at year-end. Management reported no identified credit losses on the securities and said it did not intend, and was not more likely than not required, to sell them before recovery of amortized cost.
  • Shareholder returns: The company paid a $0.09-per-share dividend each quarter in 2023 ($0.36 for the year). It made no repurchases under its 2023 repurchase program and authorized up to 1.25 million shares for repurchase during 2024.

Material changes versus 2022

  • Net income rose as higher asset yields and loan growth more than offset sharply higher deposit and borrowing costs, credit-loss provision, and operating expenses.
  • The Inland acquisition expanded assets, loans, deposits, branches, and acquired-loan balances; it also increased merger costs, goodwill, and acquisition-related accretion income. Net loan accretion was $16.7 million, up from $4.6 million.
  • Credit indicators weakened: non-accrual loans and leases and net charge-offs increased, although the allowance-to-loans ratio was broadly stable.
  • Funding became more rate-sensitive: average deposit cost rose substantially, non-interest-bearing deposits declined as a share of deposits, and brokered deposits increased.
  • Non-interest income remained nearly flat, but government-guaranteed loan-sale gains declined 28.5%. The decline was attributed to lower sale volume and market premiums.

Outlook, commentary, risks, and contingencies

  • Management expects 2024 effective tax expense to be approximately 25%–27% and stated that available cash and liquidity should meet liquidity and capital requirements for at least 12 months. The filing provides no explicit earnings or revenue guidance.
  • Management expects acquired-loan accretion to decline as acquired loans mature; projected accretion was $10.1 million for 2024, with projections subject to change and assuming no prepayments.
  • Two branches were planned for consolidation in the second quarter of 2024. Management expects approximately $1.1 million in annual savings and a one-time charge of $1.5 million.
  • Key risks include deterioration in Chicago-area commercial real estate and borrower credit quality; deposit outflows or repricing and resulting margin pressure; interest-rate and securities valuation exposure; reliance on acquisition integration and SBA/USDA programs; and cyber, third-party, regulatory, and compliance risks. Commercial real estate loans were 299.6% of total capital, close to the filing’s cited 300% concentration indicator.
  • The company had $2.35 billion of commitments to extend credit and letters of credit, which are not necessarily expected to be fully drawn. Management did not anticipate material losses from these commitments. It reported no legal proceedings expected to have a material adverse effect.
  • Moss Adams LLP gave unqualified opinions on the financial statements and internal control over financial reporting. The auditor identified the allowance for credit losses and Inland acquired-loan/core-deposit-intangible valuations as critical audit matters; these did not modify the audit opinion.

Important facts for investors to verify

  • Whether rising non-accruals, past-due balances, and net charge-offs lead to further provisions or losses, particularly in commercial real estate and commercial and industrial loans.
  • Deposit retention, uninsured and brokered deposit trends, funding costs, and use of borrowing facilities, including the post-year-end $200 million BTFP advance.
  • Whether the acquired Inland franchise delivers expected operating benefits and how quickly acquisition accretion and integration costs change.
  • The sensitivity of earnings and capital to interest rates, securities valuations, and the $179.1 million of unrealized available-for-sale securities losses.
  • Whether the stated 2024 tax, branch-savings, liquidity, and capital expectations are achieved; confirm that adjusted earnings measures are evaluated alongside GAAP results.