Byline Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are against December 31, 2020 unless noted. Byline is a Chicago-based bank holding company focused on commercial banking, small-business lending, equipment leasing, government-guaranteed lending, and wealth management. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparable / prior period |
|---|---|---|
| Net interest income | $56.6 million | $52.8 million in Q1 2020 |
| Non-interest income | $15.7 million | $9.3 million in Q1 2020 |
| Total revenue (net interest income plus non-interest income) | $72.4 million | $62.1 million in Q1 2020 |
| Provision for loan and lease losses | $4.4 million | $14.5 million in Q1 2020 |
| Non-interest expense | $38.8 million | $43.7 million in Q1 2020 |
| Net income | $21.8 million; $0.57 basic and $0.56 diluted EPS | $3.0 million; $0.07 basic and diluted EPS in Q1 2020 |
| Net interest margin | 3.77% | 4.17% in Q1 2020 |
| Efficiency ratio | 51.25% | 67.23% in Q1 2020 |
| Total assets | $6,750.1 million | $6,390.7 million |
| Gross loans and leases | $4,454.6 million | $4,340.5 million |
| Total deposits | $5,024.5 million | $4,752.0 million |
| Cash and cash equivalents | $113.1 million | $83.4 million |
| Other borrowings | $749.7 million | $647.9 million |
| Stockholders’ equity | $793.8 million | $805.5 million |
- Profitability improved substantially year over year. Management attributed the increase in net income chiefly to a $10.1 million reduction in credit-loss provision, $3.8 million higher net interest income, $6.4 million higher non-interest income, and $4.8 million lower expenses; higher income taxes partly offset these gains.
- Net interest income rose despite lower asset yields, as funding costs fell. Average deposit cost declined to 0.12% from 0.75%, while lower loan and securities yields, PPP balances and acquisition-related loan accretion contributed to the 40-basis-point margin decline.
- Non-interest income benefited from $8.3 million of loan-sale gains, compared with $4.8 million a year earlier, and a smaller downward servicing-asset revaluation. Non-interest expense fell primarily because PPP origination costs were deferred and other expenses declined.
- Loans increased $114.1 million during the quarter, including growth in PPP lending and leases. PPP loans totaled $631.2 million gross ($617.0 million net of deferred fees and costs). Deposits grew $272.5 million, including $253.0 million growth in non-interest-bearing deposits, which were 40.1% of deposits at quarter-end.
- Operating cash flow was $15.0 million, versus $25.8 million in Q1 2020. Investing activities used $351.8 million, including a $50.0 million investment in bank-owned life insurance and net securities purchases; financing activities provided $366.5 million. Cash and cash equivalents increased $29.7 million during the quarter.
Material changes, credit, capital and liquidity
- Available-for-sale securities rose to $1,675.9 million from $1,447.2 million. Their net unrealized position moved from $28.8 million of gains at year-end to $12.8 million of losses at March 31, 2021. The resulting after-tax securities loss contributed to a $26.4 million decline in other comprehensive income and a comprehensive loss of $4.6 million despite positive net income.
- The allowance for loan and lease losses was $65.6 million, down $0.8 million from year-end; it equaled 1.47% of loans and leases held for investment (1.74% excluding PPP loans). Q1 net charge-offs were $5.1 million. Non-performing assets declined to $43.0 million from $47.5 million, and non-performing loans were 0.83% of loans and leases. Accruing loans past due increased to $27.7 million from $14.6 million.
- At March 31, active COVID-related payment deferrals were $54.4 million, or 1.31% of loans and leases excluding PPP loans. The filing reports more than $501.2 million of PPP loans in the SBA forgiveness process, with over $283.7 million approved for forgiveness.
- Other borrowings included $387.6 million from the PPP Liquidity Facility and $329.0 million of FHLB advances; the latter matured between April and May 2021. The company also had $73.4 million of subordinated notes and $36.6 million of junior subordinated debentures. Available FHLB borrowing capacity was approximately $308.7 million after advances and letters of credit; additional disclosed facilities included $885.5 million of Federal Reserve capacity and $115.0 million of federal funds lines.
- Management said available cash and liquidity resources are expected to meet liquidity and capital requirements for at least the next 12 months. The Bank exceeded regulatory requirements and was classified as well-capitalized. Company ratios included 12.09% CET1, 13.20% Tier 1 capital, and 15.96% total capital; the Bank’s corresponding ratios were 12.92%, 12.92%, and 14.17%.
- Stockholders’ equity declined primarily because of securities-related accumulated other comprehensive losses. The company repurchased 332,744 shares for $6.4 million in Q1 under its authorization of up to 1.25 million shares through December 31, 2022. The common dividend was $0.06 per share, twice the $0.03 declared in Q1 2020.
Outlook, risks and other notable items
- The filing provides no specific earnings or financial guidance. Management cited continued uncertainty from COVID-19 and its effects on borrowers, collateral values, credit costs and demand. It expects liquidity to remain sufficient for at least 12 months.
- Key disclosed risks include Chicago-area commercial real estate conditions, borrower credit deterioration, interest-rate and prepayment sensitivity, deposit and funding availability, competition, regulatory and SBA program changes, and operational, technology and cybersecurity risks. The company’s rate simulations project higher net interest income in rising-rate scenarios and lower income in a gradual 100-basis-point decline, but management cautions these are hypothetical and depend on assumptions.
- The company reported no legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
- Operating lease accounting was adopted January 1, 2021, adding a $9.7 million right-of-use asset and $12.3 million lease liability at March 31. The company had not yet adopted the expected-credit-loss standard (CECL); assuming it remains an emerging growth company, it expected adoption for fiscal years beginning after December 15, 2022 and was evaluating the impact.
Important facts for investors to verify
- Whether PPP forgiveness, the ending of new PPP applications, and related fee recognition materially affect future loan balances, revenue and funding.
- Trends in active deferrals, past-due loans, non-performing assets, charge-offs and reserve adequacy, particularly as pandemic support programs wind down.
- Whether net interest margin stabilizes and how actual deposit pricing, asset repricing, prepayments and loan accretion compare with management’s assumptions.
- The effect of further interest-rate changes on available-for-sale securities, accumulated other comprehensive income, capital and liquidity; assess the scale of unrealized losses and management’s stated intent and ability to hold securities through recovery.
- Rollover or replacement of near-term FHLB advances, use of contingent borrowing facilities, and the sustainability of deposit growth and liquidity.
- The quality and persistence of earnings, including loan-sale gains, lower credit provisions, PPP-related cost deferrals, bank-owned life insurance income and other non-recurring or valuation-sensitive items.