Byline Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited. Dollar amounts below are in millions unless stated otherwise.
Business context and reporting period
Byline is a Chicago-based bank holding company serving small and medium-sized businesses, commercial real estate borrowers, consumers and equipment-leasing customers. On July 1, 2023, it completed its acquisition of Inland Bancorp, expanding its Chicagoland footprint and deposit base. Results include Inland from the acquisition date; the filing does not separately report Inland’s post-acquisition revenue or earnings.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $92.5 | $68.9 | $244.3 | $189.2 |
| Non-interest income | $12.4 | $12.0 | $41.8 | $45.6 |
| Total revenue | $104.8 | $80.9 | $286.1 | $234.8 |
| Provision for credit losses | $8.8 | $4.2 | $24.4 | $15.1 |
| Non-interest expense | $57.9 | $46.2 | $156.0 | $134.5 |
| Net income | $28.2 | $22.7 | $78.3 | $65.3 |
| Diluted earnings per share | $0.65 | $0.61 | $1.98 | $1.73 |
- Net interest margin was 4.46% in Q3 and 4.39% for the first nine months, up from 4.04% and 3.87%, respectively. Higher loan yields and balances supported income; acquired-loan accretion contributed 50 basis points to Q3 margin and 21 basis points year to date.
- Deposit costs rose sharply: average cost was 2.13% in Q3 and 1.70% year to date, compared with 0.43% and 0.22% in 2022. Q3 interest expense increased to $44.1 million from $11.0 million.
- Reported efficiency ratio improved to 53.75% in Q3 from 55.11%, and to 52.96% year to date from 55.12%. Adjusted efficiency ratios, a non-GAAP measure, were 47.35% and 49.96%, respectively, reflecting exclusions including merger costs.
- Non-interest income was down 8.3% year to date, mainly because loan-sale gains declined to $17.3 million from $26.4 million. Q3 loan-sale gains rose to $6.5 million from $5.6 million.
Financial position, liquidity and capital
- At September 30, total assets were $8.94 billion, gross loans and leases were $6.61 billion, deposits were $6.95 billion, and stockholders’ equity was $919.9 million. Since December 31, 2022, assets grew 21.5%, loans and leases 22.0%, and deposits 22.1%, substantially reflecting the Inland acquisition.
- Cash and cash equivalents were $428.9 million, versus $179.4 million at year-end. For the first nine months, operating cash flow was $171.0 million, investing cash outflow $237.2 million, financing cash inflow $315.7 million, and cash increased $249.5 million.
- Other borrowings totaled $713.2 million, including $640.0 million of FHLB advances, a $20.0 million term loan and a fully drawn $15.0 million line of credit. Most FHLB advances were due in November–December 2023. Subordinated notes and junior subordinated debentures were $73.8 million and $70.3 million, respectively.
- Liquidity included $1.0 billion of stated available aggregate borrowing capacity based on pledged collateral, plus $734.8 million available under the Federal Reserve discount window and $135.0 million in uncommitted federal funds lines. Management said liquidity was expected to meet requirements for at least 12 months.
- Non-interest-bearing deposits fell to $1.96 billion, or 28.2% of deposits, from $2.14 billion, or 37.6%, at year-end. Brokered deposits rose to $549.1 million (7.9% of deposits); estimated uninsured deposits were $1.8 billion (26.1%).
- The allowance for credit losses was $105.7 million, up from $81.9 million; allowance to loans and leases was 1.60%. Non-performing loans and leases were $52.1 million, or 0.79% of loans, versus $36.0 million, or 0.66%, at year-end. Net charge-offs were 0.33% of average loans in Q3 and 0.25% year to date.
- Unrealized losses on available-for-sale securities were $240.5 million before tax; accumulated other comprehensive loss was $142.2 million net of tax. Management said it did not intend, and was not more likely than not required, to sell the securities before recovery of amortized cost.
- At September 30, the Company’s CET1, Tier 1 and total capital ratios were 10.08%, 11.12% and 13.17%; Byline Bank’s were 11.66%, 11.66% and 12.81%. The Bank was reported as well-capitalized.
Material changes, outlook and risks
- Inland added approximately $1.16 billion of assets and $964.5 million of deposits at acquisition. Consideration was $138.9 million, including 5.93 million Byline shares; goodwill recorded was $33.4 million. Preliminary purchase accounting remains subject to refinement. Merger-related expenses were $8.2 million year to date.
- Management expects the 2023 effective tax rate to be approximately 25%–27%. No earnings or revenue guidance is provided. Management expects acquired-loan accretion to decline; estimated remaining accretion was $39.5 million, subject to change and assumptions including no prepayments.
- Interest-rate simulations showed net interest income sensitivity to immediate rate shifts: a +100-basis-point shift indicated +5.1% in year one, while a −100-basis-point shift indicated −3.7%. Management cautioned that simulations are hypothetical and actual results may differ.
- Key disclosed risks include rising deposit costs and shifts toward interest-bearing funding, commercial real estate conditions in Chicago and southern Wisconsin, borrower credit deterioration, rate changes, securities valuation and liquidity, and Inland integration. Commercial real estate loans were 301.5% of total capital; non-owner-occupied CRE loans were 97.5% of total capital.
- The filing reports no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective. A $0.09-per-share dividend was declared October 24, payable November 21, 2023.
Important facts for investors to verify
- Track deposit pricing, non-interest-bearing deposit retention, brokered and uninsured deposit levels, and upcoming FHLB advance maturities.
- Review credit migration, non-performing loans, charge-offs and allowance adequacy, especially in commercial real estate and acquired Inland portfolios.
- Assess realized or potential effects of securities losses on liquidity and capital, including the assumptions supporting management’s ability to hold securities to recovery.
- Monitor Inland integration costs, purchase-accounting revisions, loan accretion and whether anticipated acquisition benefits emerge.
- Reconcile reported profitability with adjusted non-GAAP measures and note that Q3 return-on-equity figures differ within the MD&A presentation; the filing’s selected financial data reports 12.11%, while a narrative passage reports 11.59%.