Byline Bancorp(BY) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited interim financial statements show total assets grew to $5.7 billion while net income fell to $3.0 million due to increased loan loss provisions Condensed Consolidated Statements of Financial Condition (Balance Sheet) | Financial Metric | March 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 5,734,754 | 5,521,809 | +3.9% | | Net Loans and Leases | 3,818,419 | 3,753,725 | +1.7% | | Securities Available-for-Sale | 1,299,483 | 1,186,292 | +9.5% | | Total Liabilities | 4,972,087 | 4,771,694 | +4.2% | | Total Deposits | 4,238,836 | 4,147,577 | +2.2% | | Short-term Borrowings | 640,647 | 539,638 | +18.7% | | Total Stockholders' Equity | 762,667 | 750,115 | +1.7% | Condensed Consolidated Statements of Operations (Income Statement) | Financial Metric | Three Months Ended Mar 31, 2020 ($ thousands) | Three Months Ended Mar 31, 2019 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | 52,825 | 50,085 | +5.5% | | Provision for Loan and Lease Losses | 14,455 | 3,999 | +261.5% | | Non-Interest Income | 9,173 | 11,988 | -23.5% | | Non-Interest Expense | 43,527 | 40,679 | +7.0% | | Net Income | 2,966 | 12,597 | -76.5% | | Diluted EPS | $0.07 | $0.34 | -79.4% | Consolidated Statements of Cash Flows Summary | Cash Flow Activity | Three Months Ended Mar 31, 2020 ($ thousands) | Three Months Ended Mar 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | 25,853 | 13,651 | | Net Cash used in Investing Activities | (177,191) | (113,117) | | Net Cash from Financing Activities | 190,220 | 59,603 | | Net Increase (Decrease) in Cash | 38,882 | (39,863) | Note 3—Acquisition The company acquired Oak Park River Forest Bankshares, Inc for $35.5 million, resulting in $20.2 million of goodwill - The acquisition of Oak Park River Forest Bankshares, Inc was completed on April 30, 2019, for a total consideration of $35.5 million[48][49] - The transaction resulted in goodwill of $20.2 million, which is non-deductible for tax purposes[50] Fair Value of Assets Acquired and Liabilities Assumed | Category | Fair Value ($ thousands) | | :--- | :--- | | Total Assets Acquired | 321,199 | | Total Liabilities Assumed | 305,892 | | Net Assets Acquired | 15,307 | Note 5—Loan and Lease Receivables Total loans and leases increased to $3.86 billion, led by growth in commercial real estate and commercial and industrial loans Loan and Lease Portfolio Composition | Loan Category | March 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Commercial real estate | 1,293,225 | 1,275,058 | | Commercial and industrial | 1,413,090 | 1,330,418 | | Residential real estate | 693,650 | 711,499 | | Construction, land development, etc. | 278,579 | 279,403 | | Lease financing receivables | 170,734 | 177,774 | | Total Loans and Leases | 3,854,918 | 3,780,636 | - The loan portfolio is categorized into originated loans ($2.98 billion), acquired impaired loans ($243.4 million), and acquired non-impaired loans ($632.2 million) as of March 31, 2020[78] Note 6—Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments The allowance for loan and lease losses increased significantly to $41.8 million, driven by a $14.5 million provision for losses in Q1 2020 Allowance for Loan and Lease Losses Activity (Q1 2020) | Metric | Amount ($ thousands) | | :--- | :--- | | Beginning Balance (Jan 1, 2020) | 31,936 | | Provisions | 14,455 | | Charge-offs | (4,972) | | Recoveries | 421 | | Ending Balance (Mar 31, 2020) | 41,840 | - The company increased its ALLL by $9.9 million during Q1 2020, compared to a $1.9 million increase in Q1 2019[90] Loan Delinquency Status (Originated & Acquired Non-Impaired) | Status | March 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Current | 3,508,829 | 3,450,557 | | 30-59 Days Past Due | 55,282 | 25,963 | | 60-89 Days Past Due | 3,757 | 14,201 | | Nonaccrual | 48,963 | 36,272 | Note 12—Short-Term Borrowings Short-term borrowings rose to $640.6 million, primarily due to a new $250.0 million borrowing from the Federal Reserve Bank discount window Short-Term Borrowings Composition | Borrowing Source | March 31, 2020 ($ thousands) | December 31, 2019 ($ thousands) | | :--- | :--- | :--- | | Federal Reserve Bank discount window | 250,000 | — | | Federal Home Loan Bank advances | 335,000 | 490,000 | | Securities sold under agreements to repurchase | 55,647 | 49,638 | | Total | 640,647 | 539,638 | - As of March 31, 2020, the company had available credit lines of $1.57 billion from the Federal Home Loan Bank and $346.7 million from the Federal Reserve Bank discount window[131] - The company established access to the Paycheck Protection Program Liquidity Facility (PPPLF) in April 2020 to support its PPP lending activities[132] Note 19—Stockholders' Equity The company initiated a stock repurchase program, buying back 118,486 shares for $1.7 million in Q1 2020 - A stock repurchase program for up to 1,250,000 shares was approved in November 2019 and is effective until December 31, 2020, though it was paused in March 2020[226] - In Q1 2020, the company repurchased 118,486 shares at a cost of $1.7 million[227] - A cash dividend of $0.03 per common share was declared on March 13, 2020[228] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the COVID-19 impact, including a higher loan loss provision, active PPP lending, and growth in net interest income and total assets Response to COVID-19 Pandemic The company responded to the pandemic by participating in the PPP, offering loan deferrals, and modifying branch operations - The company actively participated in the Paycheck Protection Program (PPP), registering over 3,550 loans totaling $716.4 million through April 29, 2020, with an expected fee income of approximately $23.5 million[238][301] - Through April 29, 2020, the company approved approximately $395.7 million in COVID-19 related payment deferrals, representing 10.3% of its total loans and leases[239] - Operational changes included temporarily closing 19 branches, converting 25 to drive-thru only, and keeping 16 open for appointments to ensure social distancing[241] Results of Operations Q1 2020 net income fell to $3.0 million due to a $10.5 million increase in the provision for loan and lease losses - Net income decreased by $9.6 million year-over-year, mainly due to a $10.5 million increase in the provision for loan and lease losses[288] - Net interest margin decreased by 26 basis points to 4.17% in Q1 2020 from 4.43% in Q1 2019, primarily due to lower loan accretion income[302][303] - Non-interest income decreased by $2.8 million, driven by a $1.8 million increase in the loan servicing asset revaluation (downward adjustment) and a $1.5 million decrease in net gains on loan sales[306][311][315] - Non-interest expense increased by $2.8 million, primarily due to a $1.8 million rise in salaries and employee benefits from organizational growth and the Oak Park River Forest acquisition[319][320] Financial Condition Total assets grew 3.9% to $5.7 billion, driven by increases in net loans, securities, and total deposits - Total assets increased by $212.9 million (3.9%) since year-end 2019[331] - The loan portfolio's growth was driven by a $149.0 million increase in originated loans, which offset a $74.4 million decrease in the acquired loan portfolio due to renewals and paydowns[344][346] - Total deposits increased by $91.3 million (2.2%), with non-interest-bearing deposits comprising 30.5% of the total[332][373] - Non-performing assets increased by 25.1% to $60.0 million from $47.9 million at year-end 2019, primarily due to a $12.7 million increase in non-accrual loans[366] Capital Resources The company and Byline Bank remained 'well-capitalized' under regulatory standards, with stockholders' equity increasing to $762.7 million Regulatory Capital Ratios (Company) | Ratio | March 31, 2020 | Minimum Required | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.24% | 4.50% | | Tier 1 Capital | 13.52% | 6.00% | | Total Capital | 14.50% | 8.00% | | Leverage Ratio | 11.18% | 4.00% | - As of March 31, 2020, Byline Bank exceeded all applicable regulatory capital requirements and was considered "well-capitalized"[394] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with models showing a +100 bps rate shift would increase NII by 4.6% - The company's primary market risk is interest rate risk, which it manages through its Asset Liability Committee by monitoring metrics like economic value of equity and net interest income simulations[427] Net Interest Income Sensitivity (Immediate Rate Shifts) | Rate Change | Estimated NII Change (Next 12 Months) | | :--- | :--- | | +200 bps | +9.3% | | +100 bps | +4.6% | | -100 bps | -5.2% | Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020 - The President and CEO, along with the CFO, concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[436] - No changes in internal control over financial reporting occurred during the quarter ended March 31, 2020, that materially affected, or are reasonably likely to materially affect, internal controls[437] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently party to any legal proceedings expected to have a material adverse effect on its business - The company is not presently party to any legal proceedings expected to have a material adverse effect on its business[441] Item 1A. Risk Factors A significant new risk factor has been added related to the business, financial, and operational impacts of the COVID-19 pandemic - A new material risk factor has been introduced concerning the adverse effects of the COVID-19 pandemic on the company's business, employees, customers, and financial results[442] - Key pandemic-related risks include potential for increased loan losses, declining collateral values, reduced net interest income due to lower interest rates, and possible goodwill impairment[442][444][445] - The company faces risks related to its participation in the PPP, including potential litigation over its loan processing and the risk that the SBA may deny its guarantee if loans were not originated or serviced correctly[449][450] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 118,486 shares for $1.7 million in Q1 2020 under its stock repurchase program Q1 2020 Stock Repurchase Activity | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | February 2020 | 7,778 | $17.00 | | March 2020 | 110,708 | $13.87 | | Total Q1 2020 | 118,486 | $14.08 | Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including required CEO and CFO certifications - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[461]