Byline Bancorp, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited consolidated results. Byline is a Chicago-based bank holding company operating primarily through Byline Bank, serving small and medium-sized businesses, commercial real estate borrowers, consumers, and equipment-leasing customers.
Financial performance and position
- Q3 revenue and earnings: Net interest income was $68.9 million, up 15.1% year over year; non-interest income was $12.0 million, down 35.2%. Net income was $22.7 million, down from $25.3 million; diluted EPS was $0.61 versus $0.66.
- Nine-month results: Net interest income was $189.2 million, up 8.3%; non-interest income was $45.6 million, down 17.5%. Net income was $65.3 million versus $75.6 million; diluted EPS was $1.73 versus $1.95.
- Margins and returns: Q3 net interest margin was 4.04% (4.05% fully taxable-equivalent), compared with 3.91% (3.92% FTE) a year earlier. Nine-month NIM was 3.87% (3.88% FTE), versus 3.81% (3.82% FTE). Q3 return on average assets was 1.26% and return on average equity 11.59%; both were lower year over year.
- Costs and credit provision: Q3 non-interest expense rose 4.5% to $46.2 million. Provision for loan and lease losses was $4.2 million, versus $0.4 million; nine-month provision was $15.1 million, versus $2.8 million. Management attributed the increases mainly to loan growth and higher specific reserves on impaired loans.
- Balance-sheet growth: At September 30, total assets were $7.28 billion, gross loans and leases $5.28 billion, deposits $5.61 billion, and stockholders’ equity $747.6 million. Since year-end 2021, loans and leases grew 16.3% and deposits 8.9%.
- Asset quality: Non-performing assets were $39.6 million, or 0.54% of assets, versus $25.2 million, or 0.38%, at year-end. Non-performing loans and leases were 0.67% of loans, up from 0.51%. The allowance was $64.7 million, or 1.23% of loans and leases held for investment; annualized nine-month net charge-offs were 0.15%.
- Funding, debt and liquidity: Deposits totaled $5.61 billion, including $2.14 billion of non-interest-bearing deposits (38.2% of deposits); estimated uninsured deposits were $1.6 billion. Other borrowings were $654.0 million, including $600.0 million of FHLB advances, most of which matured in November–December 2022. The company reported $283.9 million of available aggregate borrowing capacity based on pledged collateral, plus $135.0 million in uncommitted federal funds lines. Subordinated notes were $73.6 million and junior subordinated debentures $37.2 million.
- Cash flow: For the first nine months, operating activities provided $185.6 million, investing activities used $681.8 million, and financing activities provided $554.6 million. Cash and cash equivalents increased $58.4 million to $216.3 million.
- Capital and securities: Byline Bank was classified as well-capitalized. At September 30, company ratios included CET1 of 10.24%, Tier 1 capital of 10.91%, and total capital of 13.02%. Available-for-sale securities had $217.2 million of gross unrealized losses; accumulated other comprehensive loss was $124.9 million, net of tax.
Material changes versus comparable periods
- Higher loan balances and yields lifted Q3 net interest income by $9.0 million and nine-month net interest income by $14.6 million. Funding costs rose as deposit and borrowing rates increased.
- Lower gains on loan sales were the primary driver of weaker non-interest income: Q3 gains fell 56.3% to $5.6 million; nine-month gains fell 20.9% to $26.4 million. Management cited lower Q3 sale volume and reduced secondary-market premiums.
- Salary and employee-benefit expense rose 13.9% in Q3 and 19.2% year to date, attributed to headcount, incentive compensation, and lower deferred costs than in the prior-year period.
- Gross unrealized losses on available-for-sale securities increased substantially from year-end amid market interest-rate changes, reducing equity through other comprehensive loss. Management considered the declines temporary and stated it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Common equity declined 10.6% from year-end, primarily due to securities-related accumulated other comprehensive loss, preferred-stock redemption, and share repurchases, partly offset by retained earnings.
Outlook, commentary and risks
- Management expected 2022 effective tax rate of approximately 25%–27% and stated available liquidity was expected to meet liquidity and capital needs for at least the next 12 months. No broader earnings or growth guidance was provided.
- Interest-rate simulation indicated that an immediate 100-basis-point increase could raise modeled first-year net interest income by 7.2%, while a 100-basis-point decrease could lower it by 5.6%. Management cautioned that simulation results are hypothetical and actual outcomes may differ.
- Key disclosed risks include economic and geopolitical uncertainty, borrower repayment and collateral deterioration, Chicago-area and southern Wisconsin commercial real estate conditions, rising funding costs and interest-rate shifts, liquidity and capital availability, competition, regulatory changes, cybersecurity and third-party technology risks, and SBA/USDA program changes.
- Off-balance-sheet commitments to extend credit and letters of credit totaled $2.04 billion. Management did not anticipate material losses from these commitments. Management said ordinary-course legal matters were not expected to have a material adverse effect; no material change to previously disclosed risk factors was reported.
- The company redeemed all Series B preferred shares for approximately $10.6 million on March 31, 2022. It repurchased 689,068 common shares for $17.3 million in the first nine months. A $0.09-per-share common dividend was declared October 25, payable November 22, 2022.
- The company planned to adopt the expected-credit-loss standard (CECL) on December 31, 2022; it expected an increase in the allowance, but the amount was not specified. LIBOR-linked exposures included $822.4 million of loans, $457.5 million of derivatives, $43.9 million fair value of available-for-sale securities, and $37.2 million of junior subordinated debentures.
Most important facts for investors to verify
- Whether deposit pricing and borrowing costs continue to rise faster than yields on loans and securities, and how that affects net interest margin.
- Whether loan growth, especially commercial real estate, construction and commercial-and-industrial lending, produces further deterioration in non-performing assets, reserves, or charge-offs.
- How the $217.2 million of unrealized securities losses, related AOCI, and upcoming FHLB advance maturities affect tangible capital and liquidity if securities are sold or funding conditions change.
- Whether gains on government-guaranteed loan sales and servicing-asset valuations stabilize; both materially affect non-interest income.
- The actual CECL transition adjustment, LIBOR fallback execution, and any changes in regulatory capital, uninsured deposits, or available collateral-based borrowing capacity.