Byline Bancorp, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Byline is a Chicago-based bank holding company serving small and midsize businesses, commercial real estate borrowers, consumers, and equipment-leasing customers. Financial amounts below are in U.S. dollars; “Q3” refers to the three months ended September 30.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $59.8 million | $53.5 million | $174.7 million | $159.0 million |
| Non-interest income | $18.5 million | $22.2 million | $55.2 million | $44.4 million |
| Non-interest expense | $44.2 million | $41.7 million | $126.0 million | $122.4 million |
| Provision for loan and lease losses | $0.4 million | $15.7 million | $2.8 million | $45.7 million |
| Net income | $25.3 million | $13.1 million | $75.6 million | $25.2 million |
| Diluted EPS | $0.66 | $0.34 | $1.95 | $0.64 |
- Margins and returns: Q3 net interest margin was 3.91%, up from 3.60%; fully taxable-equivalent margin was 3.92%, versus 3.61%. Nine-month net interest margin was 3.81% in both years. Q3 return on average assets was 1.53% versus 0.81%; return on average equity was 12.19% versus 6.57%.
- Operating efficiency: The Q3 efficiency ratio was 54.18%, compared with 52.46%; the nine-month ratio improved to 52.49% from 57.38%. Adjusted ratios, a non-GAAP measure, were 52.35% and 50.76% for those respective 2021 periods.
- Cash flow: For the nine months, operating activities provided $46.1 million (versus $3.1 million); investing activities used $248.5 million (versus $885.5 million); financing activities provided $261.9 million (versus $902.8 million). Cash and cash equivalents increased $59.5 million to $142.9 million.
Balance sheet, liquidity, and capital
- At September 30, total assets were $6.70 billion, up 4.9% from December 31, 2020. Gross loans and leases were $4.61 billion, up 6.2%; deposits were $5.16 billion, up 8.5%. Non-interest-bearing deposits rose to $2.12 billion, or 41.1% of deposits.
- Other borrowings fell 16.8% to $539.1 million, including $156.4 million of PPPLF advances and $355.0 million of FHLB advances. Subordinated notes were $73.5 million and junior subordinated debentures were $36.8 million. Cash, cash equivalents, and available-for-sale securities totaled about $1.57 billion.
- Management reported $232.8 million in available aggregate FHLB borrowing capacity, plus $115 million in uncommitted federal funds lines. Management expected bank operations to provide sufficient liquidity and capital for at least 12 months.
- Stockholders’ equity was $824.4 million. The Bank was classified as well-capitalized; its CET1, Tier 1, and total capital ratios were 12.38%, 12.38%, and 13.50%, respectively. The Company’s corresponding ratios were 11.32%, 12.32%, and 14.78%.
Credit quality and material changes
- Management attributed higher earnings primarily to much lower loan-loss provision, higher net interest income, and—in the nine-month period—higher gains on loan sales. Management said the lower provision reflected improving qualitative factors amid recovery from COVID-19.
- The allowance for loan and lease losses was $60.6 million, or 1.31% of loans and leases, down from $66.3 million and 1.53% at year-end 2020. Nine-month net charge-offs were $8.5 million; the annualized net charge-off ratio was 0.32%.
- Non-performing assets declined to $37.5 million from $47.5 million at year-end; non-performing loans and leases were 0.75% of loans and leases. Active COVID-related payment deferrals were $2.0 million, or 0.05% of loans and leases excluding PPP loans.
- Loan growth included commercial real estate, construction and land development, commercial and industrial, and equipment leasing. PPP loans declined to $275.6 million principal outstanding from $527.0 million at year-end; 70.7% of PPP loans had been forgiven. Real estate-secured loans were 53.5% of the portfolio, and commercial real estate loans equaled 302.3% of total capital.
- Available-for-sale securities had $18.9 million of gross unrealized losses at quarter-end, compared with $1.0 million at year-end 2020. The related decline contributed to accumulated other comprehensive income moving from positive $18.0 million to a loss of $5.5 million. Management judged the securities’ declines temporary and said it did not intend, and was not more likely than not required, to sell before recovery.
Outlook, risks, and unusual items
- The filing gives no specific earnings or balance-sheet guidance. Forward-looking statements are subject to uncertainty, including COVID-19 effects on borrowers and collateral, Chicago-area commercial real estate conditions, credit quality, interest-rate and deposit repricing, funding availability, competition, regulatory changes, and cyber and technology risks.
- Interest-rate simulations estimated that an immediate parallel +100 basis-point shift would increase net interest income by 5.7% through September 2022; a -100 basis-point shift would reduce it by 3.2%. Management cautioned that actual outcomes could differ materially with rate paths, deposit behavior, loan prepayments, growth, and balance-sheet mix.
- Q3 non-interest income was affected by a $2.7 million downward servicing-asset revaluation; nine-month revaluation was negative $4.1 million. Servicing asset values are sensitive to market premiums and prepayment assumptions. Nine-month gains on loan sales were $33.4 million.
- The Company repurchased 1.33 million shares for $28.9 million in the first nine months under a program authorizing up to 2.5 million shares through December 31, 2022. A $0.09-per-share common dividend was declared after quarter-end. Management reported no legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors.
- CECL adoption was anticipated for December 31, 2022, assuming the Company remains an emerging growth company; the impact was still being assessed. The Company had adopted lease accounting in 2021, recognizing $10.5 million of operating lease right-of-use assets and $11.7 million of lease liabilities at adoption.
Investor verification priorities
- Assess whether provision reductions and credit-quality improvement are sustainable, including trends in charge-offs, criticized loans, non-accruals, and the allowance as PPP balances run off.
- Verify the durability and mix of earnings: loan growth and yields, deposit costs, acquired-loan accretion, PPP-related fees, loan-sale gains, and servicing-asset valuation effects.
- Review commercial real estate and construction concentrations, including borrower and geographic exposures, collateral values, and sensitivity to economic conditions.
- Monitor securities’ unrealized losses and accumulated other comprehensive loss, along with the potential effect of interest-rate movements on asset values and earnings.
- Confirm liquidity and capital capacity after share repurchases and dividends, including collateral availability, borrowing capacity, and regulatory limits on Bank dividends to the parent.