Byline Bancorp reported a net income of $29.7 million, or $0.68 per diluted share, for the second quarter of 2024, with a strong pretax pre-provision return on assets. Despite a slight decrease in non-interest income and increased net charge-offs, the company maintains a robust capital position and is optimistic about future growth opportunities, including potential mergers and acquisitions (M&A) in the market.
Key Takeaways:
– Net income stood at $29.7 million, with earnings of $0.68 per diluted share.
– Pretax pre-provision net income was $46.2 million.
– Loan growth was strong at $103 million, while deposits remained flat at $7.3 billion.
– Non-interest income decreased by $2.6 million quarter-over-quarter, primarily due to fair value adjustments.
– The company successfully reduced non-interest expenses and is maintaining its expense guidance.
– Net charge-offs increased to $9.5 million.
– Capital ratios are healthy, with CET1 and total capital ratios nearing 11% and 14%, respectively.
– Management is optimistic about the commercial portfolio and sees potential for increased M&A activity.
Company Outlook:
– Byline Bancorp is focused on organic growth and remains open to M&A opportunities.
– The company anticipates stable margin trends and mid-single-digit loan growth in the latter half of the year.
– Deposit flows have stabilized, and the bank is positive about its commercial pipelines.
Bearish Highlights:
– Non-interest income saw a decline due to negative fair value adjustments.
– There was an uptick in net charge-offs to $9.5 million for the quarter.
Bullish Highlights:
– The bank reported strong loan growth and capital ratios.
– Executives expressed confidence in the bank’s commercial portfolio and upcoming loan maturities.
– There is a positive outlook on deposit relationship growth and long-term shareholder returns.
Misses:
– The loan-to-deposit ratio increased, influenced by loan growth and seasonal deposit outflows.
– Net interest income and non-interest income were down from the previous quarter.
Q&A Highlights:
– CEO Alberto Paracchini emphasized the bank’s focus on funding the balance sheet and organic growth.
– President Tom Bell noted the return of deposit flows in Q3, with most Q2 outflows back by July.
– Paracchini discussed the competitive landscape, noting that primary competitors remain active but some are shifting focus, which may benefit Byline Bancorp.
Byline Bancorp’s second-quarter performance showcased a company with a strong capital position and a clear strategy for growth. Despite some challenges in the market, the bank’s executives remain confident in their ability to attract new deposit relationships and manage capital effectively. With a solid foundation and a positive outlook on market conditions, Byline Bancorp appears well-positioned for the future.
InvestingPro Insights:
Byline Bancorp (BY) has a market capitalization of $1.28 billion, with a Price-to-Earnings (P/E) Ratio of 10.67 and a Price/Earnings to Growth (PEG) Ratio of 0.81, indicating potential undervaluation. Analysts have revised earnings upwards, and the stock is trading near its 52-week high, showing strong investor confidence. Investors can access additional insights from InvestingPro by using the coupon code PRONEWS24 for up to 10% off a subscription. Visit https://www.investing.com/pro/BY for more information.
Full transcript of Byline Bancorp Inc (BY) Q2 2024 earnings call is available on the company’s Investor Relations website. Management cautions that forward-looking statements may be subject to risks and uncertainties. The company’s focus on organic growth and M&A opportunities, coupled with a strong financial performance, positions Byline Bancorp well for future growth. CEO Alberto Paracchini and other executives provided insights into the company’s strategy and outlook during the call. Just a reminder, you can find the deck on our website, and please refer to the disclaimer at the front. Before we begin, I’ll pass the call over to Roberto for some comments. Roberto?
Roberto Herencia: Thank you, Alberto, and good morning everyone. Our performance this quarter, which Alberto and Tom will cover shortly, was once again solid across the Board with strong profitability metrics, ranking top quartile among our peer group. We are proud to deliver strong results as we position Byline to become the go-to commercial bank in Chicago. Recently, we witnessed a disturbing event in our history, highlighting the need for unity in our country. Our organization continues to attract top talent and has been recognized as a best company to work for in the Midwest. Our strategy is unique, differentiated, and hard to replicate, and we are optimistic about the future. Back to you, Alberto.
Alberto Paracchini: Thank you, Roberto. Overall, we are pleased with our results and the progress in executing our strategy. We continue to deliver strong operating results, profitability, and growth while increasing capital flexibility. Moving on to the highlights, we reported strong net income, revenue growth, and good loan growth. Our balance sheet remains strong, with expenses well managed and credit trends stable. Capital ratios have increased, and we consolidated two branches. Now, I’ll pass it over to Tom for more detail on our results. We started with a strong loan portfolio on Slide 4, with origination activity of $300 million for the quarter, a 14% increase compared to last quarter. Our loan portfolio increased to $6.9 billion, up 6% annually, driven by higher utilization rates and business development activity from our commercial and leasing teams. Our CRE concentration to total loans decreased by 2 percentage points to 33%, with a regulatory commercial real estate ratio of 171%. Looking ahead, we anticipate mid-single digit loan growth for the second half of the year.
Moving to Slide 5, total deposits remained at $7.3 billion, with seasonal outflows in the second quarter and a slight decline in broker deposits. We expect most of those outflows to return in the third quarter. Our deposit betas grew at a slower pace, with total deposits at 49% and interest-bearing deposits at 64%. We believe that funding high-quality relationships at a slightly higher cost is a favorable long-term strategy for net interest income expansion.
On Slide 6, net interest income for Q2 was $86.5 million, up 1% from the prior quarter, driven by loan portfolio growth. NIM remains stable at 3.98%, with core NIM expanding 1 basis point excluding loan accretion income. Non-interest income on Slide 7 totaled $12.8 million, down from the previous quarter due to fair value adjustments. Non-interest expenses on Slide 8 were well managed at $53.2 million, down 1% from the prior quarter.
Provision expenses for the quarter were $6 million, with an allowance for credit losses of $99.7 million. Net charge-offs increased to $9.5 million, primarily due to one acquired C&I loan relationship. Asset quality remains stable, with NPLs to total loans at 93 basis points. Liquidity and capital levels are strong, positioning us well for the second half of the year.
Our capital levels on Slide 11 are above pre-Inland transaction levels, with CET1 ratio at 10.84% and total capital at 13.86%. Tangible book value per share increased to $18.84, showing solid performance metrics for the first half of the year. We continue to focus on strategic priorities and are actively adding talent to our organization for growth opportunities. In terms of our outlook, we continue to see a strong deal flow with healthy pipelines. We are focused on adding attractive businesses and building long-term relationships, even if it means slightly higher funding costs in the short term. We are well positioned to seize opportunities and remain committed to delivering long-term growth to our shareholders and value to all stakeholders. We owe our success to the hard work and dedication of our Byline team. Now, I will turn it back to the operator for questions.
Operator: [Operator Instructions] The first question is from Nathan Race of Piper Sandler.
Nathan Race: Good morning, everyone. I was pleased to see improvements in the office commercial portfolio from a credit perspective. Can you provide any additional insights beyond what was shared on Slide 16?
Alberto Paracchini: We feel confident about our upcoming maturities and the renewals and extensions in our portfolio. We are well-prepared for the next several quarters and into early 2025. As for the office market in Chicagoland, Class B properties in the CBD face challenges, while suburban and newer urban buildings are more resilient. The West Loop, for example, has shown strong performance. Mark and Tom also shared their perspectives on the office market dynamics.
Mark Fucinato: We are still navigating the office market situation, but there are positive signs, especially in converting problem loans to multifamily properties. The appraisal values reflect the impact of recent market conditions.
Tom Bell: We focus on debt yields and property realities ahead of appraisals to anticipate changes in property values. We are prepared for declines in value as market conditions evolve.
Nathan Race: Thank you for the insights. Shifting gears, I appreciate Tom’s analysis of the NII impact from Fed rate cuts. Can you provide more information on this topic?
One: Is that under a static analysis? And two, to what extent or what amount of deposits do you guys feel the Fed can reprice of one for one, following each cut?
Alberto Paracchini: I know it’s dependent on competitive factors –
Tom Bell: Yes, it is static, and we also have a ramp scenario that you can refer to on the slide. Regarding repricing, a significant amount of liabilities will reprice. Our CD book has an average maturity of about 5.5 months, so there may be a slight lag, but we will have opportunities to reprice quickly following any Fed rate cuts. There may be some lag with the CD book.
Nathan Race: Can you provide more information on the amount of CDs maturing in the next few quarters, the current rates, and the theoretical replacement cost?
Tom Bell: The average maturity for the rest of the year is around 4.70, and we are issuing at that average level currently. So if rates were to be cut, we could see a repricing of 25 or 50 basis points depending on the Fed’s actions.
Nathan Race: Thank you. Moving on to M&A activity, have you observed any increase in chatter recently, and what opportunities do you see given your total assets are just under $10 billion?
Alberto Paracchini: There has been some underlying chatter, and we believe that recent rate movements may impact M&A activity positively, especially for institutions under $100 billion. Regulatory headwinds may be less of an issue for smaller institutions like ours. We anticipate increased market activity in the near future.
Nathan Race: Thank you for the insights.
Operator: Thank you. Our next question is from Brendan Nosal with Hovde Group. You may proceed.
Brendan Nosal: Hi, good morning. I would like to start by discussing the margin trends and how you see them evolving in the next few quarters given the recent firming of trends.
Tom Bell: We expect the margin to remain relatively stable, with some fluctuations due to factors like home loan bank borrowings at the end of the quarter. Accretion will be declining, but we anticipate offsetting this with net interest income from the balance sheet. The margin should hold steady barring any significant changes in funding costs.
Alberto Paracchini: Additionally, we are confident that our earning asset growth will offset any fluctuations in the margin, leading to higher net interest income. We anticipate marginal changes in the margin ex accretion, with net interest income continuing to rise.
Tom Bell: The term facility trade is currently impacting the margin, but depending on Fed actions, this may change in the future. The margin could expand even if net interest income remains stable. The transaction is set to end in January regardless.
Brendan Nosal: Thank you for the insights on margin trends. Moving on to credit quality, can you provide more information on any planned cleanup efforts in the coming quarters and the resulting impact on charge-offs and provisioning needs?
Alberto Paracchini: Thank you, Damon. We appreciate your questions.
Roberto Herencia: Thank you for your input.
Operator: Thank you. The next question is from Damon DelMonte of KBW. You may proceed.
Damon DelMonte: Hi, good morning, everyone. Hope you’re all doing well today. Great. Thank you. Question on the securities portfolio. It looks like balances were up this quarter on an average basis. Just wondering what the thoughts are going forward. Would you expect to continue to put excess liquidity into securities, or would you use cash flows to fund loan growth?
Tom Bell: Hi, Damon. Tom. Right now, the portfolio is relatively stable. I think it’s growing a little bit here. Just again, just given our sensitivity, we’d like to do probably some reduction of sensitivity as we move forward here. But certainly opportunistically, but also just managing, definitely replacing cash flows. I would point out, if you look at period-end balances on cash, that was certainly higher. But if you look more at the average for the quarter, the balances were much lower from a cash standpoint. So sometimes we just stay in cash given the investment rate versus securities, which are sort of certainly at lower levels given the inverted curve. But no real change in strategy at this point from a security standpoint.
Damon DelMonte: Okay. Got it. All right. And then as far as the loan growth goes, I think you guys said mid-single-digit growth here in the back half of the year. Do you expect that to be driven more by the C&I and leasing side of the lending platform, or do you feel like there is growing demand in commercial real estate?
Alberto Paracchini: I mean, we’re seeing. Yes, I think broadly speaking, Damon, commercial — broadly speaking, not necessarily just C&I, and maybe some of the smaller segments of the commercial business, for example, like business banking and some of the other smaller lines. So, yes, I think broadly speaking, commercial, certainly leasing as well. As far as CRE, we are seeing transactions. There are transactions getting done in the market, so it’s not like we are not seeing flow there. We are doing real estate transactions as we speak. I think to your point is, obviously, if rates were to decline here in the coming months, I think, what you’re going to see more broadly is transaction activity is likely to pick up, which is then going to lead to more financing activity on the CRE side. And I think for, I think, well understood reasons. I think that’s what the CRE market is waiting for, is waiting for a bit of rate relief, and that is likely to spur more activity broadly in the market. So we participate in that. So I think you can draw that straight conclusion from that comment.
Damon DelMonte: Got it. Okay. And then this was touched on I think before, but from a capital management standpoint, you noted that your TCE ratio is the higher end of your range, your target range. So any updated thoughts on capital management, whether it be through buybacks or dividends or just focusing on funding organic growth, or potentially M&A to get you over the $10 billion level?
Alberto Paracchini: Sure. So first and foremost, continue to fund the balance sheet, continue to focus on organic growth of the company. You heard our comments also in terms of both Tom and my comments related to both regulatory capital as well as TCE, and we are certainly at the upper end. So I think in terms of priorities outside of organic growth to the degree that there are M&A opportunities like we’ve seen throughout our history, certainly that’s something that we want to have the flexibility to participate in. And then secondly, and thirdly, that certainly we will look at the dividend and certainly buybacks. We have a program in place, so we will return capital accordingly.
Damon DelMonte: Got it. Okay, great. I think that’s all that I had. Yes. Thank you very much. Appreciate it.
Alberto Paracchini: You bet. Thank you, Damon.
Roberto Herencia: Thanks, Damon.
Operator: Thank you. The following question is from Terry McEvoy at Stephens. Please proceed.
Terry McEvoy: Good morning, everyone. Tom, could you provide some clarity on your earlier comments regarding deposit flows returning to the balance sheet in Q3? Were these non-interest-bearing funds? And if not, where do you anticipate these balances stabilizing in the second half of the year?
Tom Bell: Hi Terry. What we observed was a return of deposit flows from our typical commercial and consumer clients, including DDA accounts. While we are not providing specific guidance on DDA, we believe it has stabilized in the range of 24% to 25%. Most of these are interest-bearing accounts, and we have already seen a significant portion of the outflows from Q2 return in July. I hope this addresses your question.
Terry McEvoy: Thank you. Another question I had was regarding the increase in interest checking balances and rates quarter over quarter. Could you explain why we saw an increase in both rates and balances?
Tom Bell: Certainly. We have experienced a demand from commercial clients seeking to earn more than zero interest on their deposits, leading to a shift from DDA to interest-bearing accounts. The rates offered on these accounts are higher than zero, contributing to the increase in both rates and balances.
Terry McEvoy: Thank you for the clarification. That’s all from my end. Have a great weekend, everyone.
Tom Bell: Thanks, Terry.
Roberto Herencia: Thank you, Terry.
Operator: Next, we have a question from David Long at Raymond James. Please go ahead.
David Long: Good morning, everyone.
Tom Bell: Hi, David.
Roberto Herencia: Good morning, Dave.
David Long: You mentioned positive trends in your commercial pipelines. How do you view the competitive landscape in terms of opportunities in C&I and CRE? Have you noticed any changes in the competitive dynamics in recent months?
Alberto Paracchini: In response to your question, we continue to compete with our usual competitors in the market. However, some institutions may be shifting their focus due to acquisitions or regulatory considerations. Additionally, our ability to attract talent and serve clients differently from larger institutions has been a key factor in our success. While the competitive landscape remains consistent, our added talent and strategic hires have played a significant role in our recent achievements.
David Long: Thank you for the insights. That’s all I had for now.
Roberto Herencia: Thanks, Dave.
Operator: Thank you for your questions. Alberto Paracchini will now provide closing remarks.
Alberto Paracchini: Thank you for joining our call today and your interest in Byline. We look forward to speaking with you again next quarter. Have a great weekend.
Operator: This concludes today’s call. You may now disconnect. sentence: Please do not forget to turn off the lights before leaving the room.