Byline Bancorp, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Byline Bancorp is a Chicago-based bank holding company operating through Byline Bank, with commercial banking, equipment leasing, government-guaranteed lending, and wealth-management businesses. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless stated otherwise. Balance-sheet comparisons are with December 31, 2021. Dollar amounts below are in millions unless noted.
Financial results and condition
- Profit and revenue: Net income was $22.3 million, up 2.4%; income available to common stockholders was $22.1 million. Basic and diluted EPS were $0.60 and $0.58, compared with $0.57 and $0.56. Total revenue (net interest income plus non-interest income) rose 8.0% to $78.2 million.
- Interest income and margins: Net interest income increased 3.7% to $58.7 million. Net interest margin was 3.81%, up 4 basis points; fully taxable-equivalent margin was 3.82%, versus 3.78%. Average cost of deposits fell to 0.08% from 0.12%.
- Non-interest income and expenses: Non-interest income increased 23.4% to $19.4 million, led by loan-sale gains of $10.8 million, up 30.1%. Non-interest expense rose 14.7% to $44.6 million, including a 32.8% increase in salaries and benefits to $29.0 million. The efficiency ratio worsened to 54.96% from 51.25%.
- Credit costs and asset quality: Provision for loan and lease losses was $5.0 million, up from $4.4 million. The allowance was $59.5 million, or 1.24% of loans and leases held for investment, versus 1.21% at year-end. Nonperforming loans and leases fell to $20.3 million from $23.1 million; the ratio declined to 0.42% from 0.51%. Annualized net charge-offs were 0.05%, versus 0.47% in Q1 2021.
- Cash flow: Operating activities provided $92.8 million, investing activities used $242.8 million, and financing activities provided $145.7 million. Cash and cash equivalents ended the quarter at $153.6 million, down $4.4 million from year-end.
- Balance-sheet growth and liquidity: Total assets were $6.83 billion, up 2.1% from year-end. Gross loans and leases increased 5.6% to $4.79 billion; deposits increased 7.3% to $5.53 billion. Non-interest-bearing deposits were $2.28 billion, 41.3% of deposits. The loan-to-deposit ratio was 87.3%.
- Debt and capital: Other borrowings were $311.5 million, including $280.0 million of FHLB advances, down from $519.7 million of other borrowings at year-end. Subordinated notes were $73.6 million and junior subordinated debentures were $37.0 million. The Bank was reported well-capitalized; its CET1, Tier 1, total capital, and leverage ratios were 11.80%, 11.80%, 12.81%, and 10.97%. Company ratios were 10.75%, 11.49%, 13.72%, and 10.70%, respectively.
- Equity and securities: Stockholders’ equity declined 5.7% to $788.7 million, primarily reflecting a $48.1 million after-tax other comprehensive loss, preferred-stock redemption, and share repurchases. Available-for-sale securities had $97.2 million of gross unrealized losses at March 31, versus $22.4 million at year-end; management considered the losses temporary and said it did not intend, and was not more likely than not required, to sell before recovery.
Material changes versus the prior comparable period
- Net interest income and loan-sale gains increased, but higher operating costs and provision expense limited net-income growth. Management attributed the increase in net interest income to higher average earning assets, loan growth, and lower funding costs; lower acquired-loan accretion partially offset this.
- Non-interest income rose partly from higher gains on sales of U.S. government-guaranteed loans: $102.3 million of such loans were sold, compared with $73.9 million in Q1 2021. Swap-related and bank-owned life insurance income also contributed to higher other income.
- Salary and benefit expense increased mainly due to new hires. Deposit growth helped reduce reliance on borrowings, while PPP balances continued to run off.
- Q1 2022 included no securities-sale gains, versus $1.5 million of net realized gains in Q1 2021. Conversely, Q1 2021 included a $0.6 million impairment charge on assets held for sale.
Outlook, management commentary, and risks
- Management projected an effective tax rate of approximately 25%–27% for 2022 and estimated $0.9 million of acquired-loan accretion for the remainder of 2022, with accretion expected to continue declining. No earnings or revenue guidance was provided.
- Management said cash and liquidity resources were expected to meet requirements for at least the next 12 months. The filing reported $354.4 million of remaining aggregate borrowing capacity based on pledged collateral, plus $115 million in uncommitted federal funds lines.
- Interest-rate simulation estimated that a gradual 100-basis-point decline would reduce net interest income by 0.8% over the next 12 months, while gradual increases of 100 and 200 basis points would raise it by 1.6% and 3.1%. These are model estimates, not forecasts; a downward 200- or 300-basis-point scenario was not meaningful in the prevailing rate environment.
- Key exposures include commercial real estate, borrower credit quality, interest-rate movements, securities valuation and liquidity, deposit competition, and economic conditions—particularly in the Chicago metropolitan area and southern Wisconsin. Commercial real estate was 37.1% of loans and leases; total CRE loans equaled 314.7% of total capital. Approximately $1.1 billion of loans, $475.8 million of derivatives, and $58.3 million of available-for-sale securities had LIBOR fallback provisions; management had approved Term SOFR as an alternative rate.
- Commitments to extend credit and letters of credit totaled $1.97 billion at quarter-end; management did not anticipate material losses from these arrangements. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors and no subsequent events requiring disclosure.
- The Company redeemed all Series B preferred shares on March 31, 2022 for $10.6 million, including the quarterly dividend, and repurchased 282,819 common shares for $7.6 million during the quarter. The Board declared a $0.09-per-share common dividend payable in May 2022.
Important facts for investors to verify
- Whether loan growth, deposit mix, and funding costs sustain net interest income as rates change and acquired-loan accretion declines.
- Whether rising unrealized securities losses affect capital, liquidity, or the ability to avoid selling securities before recovery; reported AFS losses were $97.2 million pre-tax at quarter-end.
- Credit performance and reserve adequacy as the portfolio grows, particularly in commercial real estate and commercial and industrial lending; review delinquency, criticized-loan, and charge-off trends.
- The sustainability of loan-sale gains and other non-interest income, alongside salary growth and the higher efficiency ratio.
- Actual liquidity available against near-term FHLB maturities and contingent funding needs, and the effect of uninsured deposits and off-balance-sheet commitments.
- Capital impacts from the securities portfolio, preferred-stock redemption, and continuing repurchases; confirm that capital buffers remain comfortably above regulatory requirements.