Good morning, and welcome to the Byline Bancorp's Second Quarter 2021 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Brooks Rennie, Head of Investor Relations, please go ahead.
Thank you, Andrew. Good morning, everyone, and thank you for joining us today for the Byline Bancorp's 2nd quarter In accordance with Regulation FD, this call is being recorded and is available via webcast on our Investor Relations website along with our earnings release and the corresponding presentation slides. Management would like to remind everyone that certain statements on today's call involve projections or other forward looking statements regarding future events or the future financial performance of the company. We caution that such statements subject to certain risks, uncertainties and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are fully disclosed and discussed within its SEC filings.
In addition, certain slides contain and we may refer to non GAAP measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures. Reconciliation for these numbers can be found within the appendix of the earnings presentation. For the additional information about risks and uncertainties, please see the forward looking statements and non GAAP financial measures disclosures and our 2021 Q2 earnings release. The information we will provide today is accurate as of June 30, 2021, and we undertake no duty to update the information. I would now like to turn the conference call over to Alberto Paracini, President of Byline Bancorp.
Thank you, Brooks, and good morning and thank you all for joining us on the call today to review our Q2 results. First off, I'd like to welcome Brooks Rennie, We recently joined Byline as our Head of Investor Relations to his first earnings call. Joining me on the call are our Chairman and CEO, Roberto Valencia, our CFO, Lindsay Corby and Mark Fusenato, our Chief Credit Officer. I'll start by giving you an overview of the results and highlights for the quarter before passing the call over to Lindsay, who will walk you through our financials in more detail. I will then provide you with closing remarks before opening the call up for questions.
Starting on Slide 3 of the deck, I'm pleased to report that we Earnings for the quarter were at record levels for us as a public company with net income coming in at $28,500,000 or 0.73 CE was 18.9%. Pretax pre provision ROA came in at 2 16 basis points, up 10 basis points from the previous quarter. Revenue growth was solid and was primarily driven by strong loan production across all our lending areas. Excluding PPP loans, we had $315,000,000 in loan originations during the Q2, a record level for the company and up from $152,000,000 in the prior quarter. Notwithstanding the impact of payoffs, which also increased, total loans ex PPP increased by $155,600,000 or 16% annualized and stood at $4,000,000,000 as of quarter Demand for credit continued to build throughout the quarter as borrowers became more confident in the recovery and economic activity continued to return to normal.
Overall, loan production was well balanced across commercial, commercial real estate, sponsor and equipment leasing. Notably, we also saw an uptick in commercial line utilization, which helped us to drive While increasing loan demand was a key factor in our growth, we're also seeing the benefit from the talent additions we've made over the past few years, Particularly in C and I and CRE, these bankers are steadily building their books and making a larger contribution to balance sheet growth. Last quarter, I mentioned that we were encouraged by the growth we're seeing in our leasing business. Contributing to that growth were additions made to the team with expertise in industrial and material handling equipment. These hires not only complement our team and increase volume, but also add diversification to the portfolio at attractive risk adjusted yields.
We continue to actively look at opportunities to add talented bankers to our franchise. Moving on to government guaranteed lending. This business also had another Strong quarter of production with $143,000,000 in closed loans compared to $112,000,000 in the prior quarter. Investor appetite for these loans remains robust with secondary market premiums at record levels. Compared to the Q1 of 2021, gain on sale income increased by nearly 48% to 12,300,000 We remain a market leader in this business and as of June 30, we are the 4th largest 7 lender in the United States, account for 41% of total deposits.
This improvement in our mix drove another 4 basis point decline in deposit costs to just 8 basis points, which is a cycle low. This combined with stable earning asset yields help us to increase our margin by 1 basis point for the quarter, excluding the impact of accretion income, which today is no longer as material as it was in prior quarters. Notwithstanding the rate environment and higher liquidity, the margin has held up very well when compared to other banks in our market. Asset quality continued to improve with both NP or 155 basis points excluding PPP. Our capital position remains strong with a CET1 ratio of just under 12% and total capital ratio of just under 16% at quarter end.
With our strong level of profitability and capital position, we've been able to increase the amount of capital that we return Our Board authorized an increase to our quarterly common stock dividend from $0.06 to $0.09 per share, which is now 200% higher than when we initiated it at the end of 2019. During the Q2, we repurchased approximately 539,000 shares of common stock and our Board also authorized the repurchase of an additional 1,250,000 shares. Given the strength of our balance sheet, we are well positioned to support organic growth, continue investing in the franchises in our franchise and pursue strategic opportunities while returning capital to shareholders. Now, I'd like to turn over the call to Lindsay, who will provide you more detail on our results.
Thanks, Alberto. Good morning, everyone. I'll start with some additional information on our loan portfolio on Slide 4. As Alberto discussed earlier, the new loan production and increased line utilization more than offset the forgiveness we had on PPP loans and runoff in the acquired portfolio. Our originated loan portfolio increased by $64,000,000 or $205,000,000 when PPP loans are excluded.
Each major area of the portfolio increased from the prior quarter with the exception of the expected residential mortgage runoff. When PPP loans and the residential mortgage loan portfolio are excluded, our originated loan portfolio increased 22% over the past year, which reflects the growth in our core commercial client base as well as the strong demand we have seen for equipment financing, which is up 66% over the past year. The growth of the originated portfolio during the Q2 was offset by a decrease of $49,000,000 in our acquired loan portfolio, including $13,100,000 in resolutions and acquired impaired portfolio. Excluding PPP, we had 315,000,000 of new originations in the Q2, which was partially offset by $218,000,000 of payoff. With respect to Slide 5, we'll look at our government guaranteed lending business.
At June 30, the on balance sheet SBA 7 exposure was $474,000,000 approximately $32,000,000 higher than the end of the prior quarter, With $78,000,000 being guaranteed by the SBA, the USDA on balance sheet exposure was $68,000,000 down $20,000,000 from the end of the prior quarter, of which $32,000,000 is guaranteed. We are seeing generally improving trends in this portfolio with most borrowers returning to regular payment status following the expiration of deferral periods and subsidies. However, we remain cautious until the economy demonstrates more resiliency. As a result, we've kept our allowance as a percentage of the unguaranteed loan balances unchanged from the end of the prior quarter at just under 9%. Moving over to deposits on Slide 6.
Our total deposits increased $68,000,000 from the end of the prior quarter to just Under $5,100,000,000 The growth came in our lower cost of deposit categories as we continue to see strong inflows of commercial transaction deposits that are replacing higher cost time deposits. This resulted in a continued positive shift in our mix of deposits. Non interest bearing deposits increased to 41% of total deposits from 40.1% at the end of the prior quarter, While commercial deposits continue to account for over 75% of all non interest bearing accounts, time deposits represent only 14% of total deposits. We anticipate that the margin should stabilize by the end of the year and begin to increase as rates begin to rise. Turning to non interest income on Slide 8.
In the Q2, our non interest income increased $5,300,000 from the prior quarter. Relative to the Q1 of 2021, we had balanced growth in fee income consistent with economic activity in our markets. The largest increase came in our net gain on sale of loans, which were up $4,000,000 due to higher volume of loans sold and record level premium. We sold $100,600,000 of loans in the 2nd quarter, up from $73,900,000 in the prior quarter. Longer term loans accounted for a higher percentage of the loans that were sold this quarter, which had a positive impact on premiums.
Our non interest income also benefited from a smaller change in our loan servicing asset revaluation this Our branch count is now at 44 and average branch size has increased to 115,000,000 deposits per branch. We continue to focus on our expense run rate and look for opportunities to gain efficiencies. Our adjusted efficiency ratio improved to 49.5% in the 2nd quarter from 50.4% in the prior quarter due to our growth in revenue. As we continue to invest in our talented team, including the additional bankers as Alberto described earlier, we believe the Earlier, we believe the quarterly expense run rate will increase slightly. We believe non interest expense will begin trending between $42,000,000 to $44,000,000 per quarter.
Turning to Slide 10, we'll take a look at asset quality. We continue to see positive trends across the loan portfolio during the quarter. Excluding government guaranteed loans, our non performing loans declined 10 basis points to 66 basis points of total loans and leases, which was reflective of solid resolution activity. Net charge offs also declined to 17 basis points from 47 basis points of average loans and leases in the prior quarter. In addition, we saw a 27% decline in delinquencies and continued improvement in classified assets.
Given the reserve build we've had since the start of the pandemic, the positive trends we are seeing in the portfolio and the improving economy, We had a negative provision of $2,000,000 this quarter, which resulted in a small reserve release. Despite the small reserve release, We continue to have a high level of total loss absorbency measured by our allowance plus acquisition accounting adjustments, which represented 1.78 percent of Total loans and leases excluding PPP loans at June 30. On Slide 11, our strong capital position and financial performance have enabled us to accelerate through the common stock dividend and stock repurchase program. As Alberto mentioned, during the quarter, we continued to repurchase shares. Year to date, we have repurchased 871,000 shares and with the expanded program, we have approximately 1,600,000 shares remaining.
We continue to opportunistically manage our capital through share repurchases. Our capital deployment actions reflect our strong capital position and increasing optimism. We continue to generate excess capital while allowing us the flexibility to grow both organically and strategically. With that, Alberto back to you.
Thank you, Lindsay. And turning to Slide 12, I'd like to wrap up today with a few comments about our outlook for the remainder of 2021. While the emergence of the Delta variant creates some level of near term uncertainty, we generally expect the positive trends we've seen in the first half of the year to continue. No doubt there will be headwinds that will cause some level of variance in our performance, most notably the contribution of gain on sale income as we reach the seasonally slower period for loan production and premiums potentially moderating when SBA enhancements and in September. Our pipelines though remain strong, which position us well for continued growth in And we're focused on executing our strategy of growing loans, deposit, improving profitability, continuing to invest in technology and capitalize on opportunities to add talent to the organization.
We built a strong reputation in the market as a bank with sophistication, balance sheet, products, support and culture for talented bankers and teams to thrive in serving clients. We continue to look for opportunities to add bankers to further improve our business development capabilities. With respect to M and A, the market has been active and we continue to evaluate opportunities
The first question comes from Terry McEvoy with Stephens. Please go ahead.
Hi, good morning, everyone.
Good morning, Barry.
I guess, Lindsay, a question on the $42,000,000 to $44,000,000 quarterly expense outlook. Within that outlook, do you assume any additional new banking hires?
Yes. So Alberto talked about some of them in his remarks. So yes, there are some. If we continue on the trajectory, it will trend very likely towards the higher end and from there, I'll keep you posted. Yes, it does include the ones that Alberto had referenced in terms of his comments.
Great. And then I guess just as a follow-up, all the other banks that I talked to are just fighting over good credits and really not showing a lot of growth. I guess my question is, Can you help us get comfortable with 16% annualized loan growth and making sure that you're winning those good credits just more than others?
Sure, Terry. And I think this goes back to previous quarters where we've kind of guided to the fact that pipelines had been building up. And I think this quarter, we just benefited from Really business development efforts that have been building out throughout the course of the year. We do expect And I guess just to add to your question, give you a little bit of guidance, we do expect still kind of that mid Single digit growth over the course of the year. So I think this is a good quarter.
Payoffs as you noted there in the deck also increased. So I think we were fortunate to have really good originations this quarter across the board And also payoffs, while they increased, still were very manageable. So we'll have to see in the quarters ahead, But we're seeing good pipeline still today. The market is competitive. That being said, demand for credit is good.
The other thing I would add, Terry, is line utilization was better this quarter and was certainly up, which certainly aided balanced growth for the quarter as well.
The next question comes from Nathan Race with Piper Sandler. Please go ahead.
Yes. Hi, everyone. Good morning.
Hey, Nate.
I was hoping to discuss the capital deployment outlook. It sounds like you guys are still seeing some Acquisition opportunities, we've obviously seen a number of announcements in the Chicago land area recently. So just curious in terms of The feasibility and likelihood for an acquisition over the next year or so and within that context, curious How price sensitive you guys are going to be with additional share repurchases going forward? Obviously, you increased the authorization along with 2Q results today. So just trying to get some color in terms of how we should expect buybacks to unfold over the back half of this year within other options to deploy capital?
Yes, I think Nate the guidance there is we have We look at acquisitions with certain parameters in terms of fit, in terms of Pricing and we have been very disciplined in the acquisitions that you've seen 2 transactions This year happened. So I think conversations and the M and A, call it environment is certainly active and we are participating in that. We're also seeing opportunities outside of traditional bank M and A. So we're evaluating those as Well, so with discipline and with the approach that we've taken in the past is, I would say Hopefully shareholders appreciate that, and we will be opportunistic also in terms of Buyback activity in the context of us continuing to build excess capital. So I think that's what Lindsay, I don't know if you want to add Roberto, I don't know if you want to add anything else to that.
I would just say, I mean, it's a small share repurchase program, Nate. And the dividend, we still feel very comfortable with where we are relative to our peers. And again, I think we just we love the position we're in, right, with the capital to support The growth and organic and through some and the growth that we think may come from some acquisition opportunities in the next 12 months.
Got it. It's great color, very helpful. And just staying on the M and A disruption topic, Curious if there's any lines of business or kind of other areas that you guys would maybe look to grow or Opportunistically add talent into continue to kind of smooth out the overall revenue equation in terms of
Yes, Nate, certainly in our commercial lines, but I would say in general across the board, we still feel like we have Opportunity across the board in all of our lines. So there's plenty of share for us to gain. So that does not preclude us to look at even on the government guaranteed side to look at opportunities there if they were to arise. But I would say to your question in terms of the more traditional kind of balance sheet lending business, I would say commercial real estate and certainly our leasing business as well.
Okay, great. And if I could just last ask one more on credit. The SBA charge offs and overall charge off levels were Pretty low in the quarter and obviously that's benefiting from all the stimulus efforts that's been particularly targeted across the FDA space. So as we look out to next year, can you guys just Remind us in terms of thinking about normalized charge off levels as it relates to your government guaranteed line of business?
I think we're still going through a period, Nate, where subsidy payments To some degree are still there. You have certain other government programs that benefited, for example, restaurants, You know entertainment kind of amusement type industries. So we are monitoring that quickly. I think the comments that Lindsby made are Spot on, which is we're cautiously optimistic, but as you see, we're remaining cautious there because we want to see really when the impact of all of these programs and really how these borrowers are going to be able to come out of that. That said, the trends so far are positive.
We have seen borrowers that are coming up Subsidy, the significant vast majority of those borrowers just resume and have resumed making their payments. So we're optimistic in that end. Certainly for the rest of the year and I would say for the beginning of 2022 as well.
The next question comes from Tim Switzer with KBW. Please go ahead.
Hey, good morning. This is Tim Switzer on for Mike Perito.
Good morning, Tim.
If I could get one more from you guys on your capital distribution, you guys have increased the dividend 2 times now this year. Is there kind of a Total or just sort of a targeted dividend payout ratio you guys are targeting over the long term that you're hoping to kind of build up to over the next year, 2 or 3 years at all?
I don't know that we have anything, Tim, anything that where we would tell you like that's kind of what our target is. I think The answer to that is really contingent on capital deployment opportunities. I also would remind you that Remember in 2019, we had never really paid a dividend. And really we started with a very, very modest dividend. We also the following we also that was the first time also that our Board authorized a buyback authorization And we've increased that over time as our earning power has increased and certainly as our capital has Built up to a point where really in our view we were generating excess capital.
So we wanted to make sure that we were returning that capital back to our So in that context is how I would say that we would think about future increases in the dividend and buyback activity as well. I hope that gives you an answer to the question.
Yes, yes. No, we're just trying to determine, I mean, you're kind of generating a little bit of extra capital with these PPP fees. So deploying that through share repurchase make But trying to get more of a long term look at what your capital distribution will be over the long term. Yes. I would add to
the comment that Roberto May, on the prior question, remember, we're coming off a low base. So certainly as the earnings power and the earnings of the company continues in an upward trajectory, certainly we certainly feel we have With respect to our dividend in the future.
And I would just add, Lindsay keeps us really very grounded and honest and we never want to be in Right, to disappoint, meaning that you're paying a certain dividend and then you have to Reduce it or do something that doesn't make sense, right? So I think we're guided by all the factors that Alberto mentioned, but also by Where we are relative to our peers and also not wanting to disappoint the market.
Of course. Okay. And if I could get just a little bit more color on maybe what are you thinking longer term for your SBA If we have a more normalized market, you guys have clearly won share I think over the last year. So, what's kind of a normalized level we should be looking at?
Yes. So the premiums are really being driven right now by the subsidies that are out there So I do think that this year has been an anomaly, in particular. So in terms of guidance, I'd look back Historically, and it's a function of just historical premiums and really volumes. So we continue to grow the business. And
you could talk about if there's any categories or it's a little bit more intense than others competition wise?
Sure. I think Tim, I think it's Fair to say that I'm sure every banker that you cover tells you that their market is the most competitive market ever and we would agree with that. So yes, the market is competitive. I would say in relative terms today, I would say C and I is probably the most competitive market followed by CRE. CRE has been compressing.
Pricing had widened And certainly came into the year wider than it is today. It's been compressing. So far, we have not A deterioration in terms of structure, although that probably is The next shoe to drop, so to speak. But I would say those 2, probably C and I has been consistently very competitive and it makes Because you're competing it's a set pool of customers, you're competing for credit worthy customers And you're trying to establish long term relationships. So people are generally going to be aggressive to try to win the business First in the context of that business really being with the bank for an extended period of time.
On the SBA front, I think We've been pretty disciplined in how we approach that. And in some of our other niche businesses like leasing, I think If anything that's been pretty steady and sponsor again a little bit more competitive, but I think Again, consistent with what we have seen within bounds with what we are Accustomed to operating in.
Great. Thanks for the color.
The next question comes from Brian Martin with Janney Montgomery. Please go ahead.
Hey, good morning, guys.
Good morning. Good morning.
Could you guys just give a little thought, maybe Lindsey on or just even Alberto on the margin and just to the context that The loan yields may be coming under a little pressure to Lindsay's comments earlier, but the in this quarter, there was some nice expansion of the core loan yield So just trying to understand what the driver was of that this quarter and then just kind of the context of the guidance going forward that those Loan yields certainly would be under pressure given the competitive environment.
Yes. So I think really the wild card with the loan yields is really pay In terms of what's driving that. So what we've been seeing is at times we have payoffs That have higher loan yields and we just can't replace those yields. So you're seeing that headwind and I think that's, what's reflective in my Comments, Brian. But there are some upsides for sure in terms of the other mix of loans and what Types of loans we bring on.
So for example, in September as the SBA subsidies expire, we'll go back to a 75% guarantee. The SBA loans, for example, are yielding a higher percentage at prime plus 2.50 to 2.75. So Those will obviously help the margin and offset some of that. So, again, there's moving pieces and again, the payoffs are really the wildcard And if payoffs are less than we anticipate, things will be better. But given what we've been seeing and as these higher yielding assets come off, It's very difficult to replace them.
Yes, got you. Okay, thanks for the help there. And then just with regard to the SBA, is there a new legislation out there that could changed kind of the outlook for I guess there's been some talk it seems like that there could be some benefit with this new legislation out there. I guess Can you guys comment on that at all? It's just kind of what you're seeing with the new legislation that's out there?
Actually, Brian, the only thing new That I've heard very recently is the infrastructure bill potentially Taking some of the essentially ending the benefit sooner. Now remember the fiscal year was scheduled to And at the end of September anyways, but if the bill were to pass and the bill would be signed by the President and the language 6 in the legislation then potentially that subsidy would go away quicker. It doesn't impact the subsidy payments though That comes from a different pot of money, but that's as far as we know, that's the latest that we've heard Most recently, frankly, this week.
Yes. Okay. All right. I'll check into that. And then just On the reserve in general, it sounds as though you're still carrying a high level of reserves on that government guaranteed book.
I guess as we think about Some of these things change and you guys get more clarity. I guess it feels like there's opportunity for that to move lower as you is that the plan as you guys get more clarity and As these subsidies kind of wind down?
I think potentially, I would caution you though on the To the degree that the portfolio continues to grow, naturally, you would obviously see us provisioning to account for Growth in the overall portfolio. So just keep that in mind.
Got you. Yes. Okay. And then last one for me is just really on the Yes, I guess on the timing of the PPP, I guess given what we've seen from some other banks and commentary, it seems consistent that you guys would expect the bulk of the PPP to try and get resolved if forgiven this year and some maybe some tail into next year, is that still
Forgiveness process continues to unfold. I mean, we saw deposit growth Slow a little bit in the quarter on an average basis. So just curious as the PPP runoff continues, do you guys expect Overall earning asset growth, going forward or is it more of a remix equation that we should be thinking about in the back half of this year and into 2021 I'm sorry, 2022 as well?
Sure. So as long as loan growth continues, obviously, we'd like to See that mix change, right? And as we have excess liquidity to continue deploying that into loans and letting the securities portfolio run down. So It's really a little bit of both, Nate, in terms of redeploying here. So, as a reminder, we do have PPPLF on our balance sheet, so That does play a factor as well.
So in terms of the balance sheet mix, yes, we'd like to try to continue to
The earning asset balances to grow as the PPP loan runoff or do you expect that kind of liquidity to kind of remain on balance sheet to some extent?
It'll remain to some extent. I mean that we still have $400,000,000 that's going to be coming off here over the course of the next 6 to 9 months, Call it and it's going to be tough to deploy it that fast. So I think you'll see it Come down a little bit in terms of overall earning assets.
Okay, very helpful. Thanks again everyone.
Thanks, Nate.
This concludes our question and answer session. I would like to turn the conference back over to Alberto Paratini for any closing remarks.
Great. Thank you, operator. So that concludes our call this morning. On behalf of all of us Thank you for your time today, your interest in Byline, and we look forward to speaking to you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.