Byline Bancorp, Inc. — 2018 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018; financial comparisons are primarily against 2017. Byline is a Chicago-based bank holding company operating through Byline Bank and its subsidiaries, with commercial and consumer banking, equipment leasing, government-guaranteed lending, and trust and wealth management. The May 2018 First Evanston acquisition added approximately $1.1 billion in assets at acquisition. At year-end, Byline reported $4.94 billion in assets, $3.50 billion in loans and leases, $3.75 billion in deposits, and $650.7 million in stockholders’ equity.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net interest income | $178.6 million | $122.9 million |
| Non-interest income | $51.6 million | $50.1 million |
| Total revenue | $230.2 million | $173.0 million |
| Provision for loan and lease losses | $18.8 million | $12.7 million |
| Non-interest expense | $156.0 million | $119.5 million |
| Net income | $41.2 million | $21.7 million |
| Diluted earnings per share | $1.18 | $0.38 |
| Net interest margin | 4.60% | 4.11% |
| Efficiency ratio | 65.31% | 67.32% |
- Growth and earnings: Net income increased by $19.5 million. Net interest income rose 45.3%, reflecting First Evanston, organic loan growth, higher market rates, and acquired-loan accretion. The margin excluding acquired-loan accretion was 4.07%, up from 3.82%. Adjusted diluted EPS, a non-GAAP measure, was $1.43 versus $0.52.
- Cash flow: Operating activities provided $79.9 million, investing activities used $369.4 million, and financing activities provided $353.0 million. Cash and cash equivalents increased $63.5 million to $121.9 million. Investing outflows included $300.1 million of net loan growth; financing inflows included deposit growth and borrowings.
- Loans and credit: Gross loans and leases increased 53.7% to $3.50 billion, driven by First Evanston and organic growth. The allowance was $25.2 million, or 0.72% of loans, versus 0.73% in 2017. Nonperforming loans and leases were $27.6 million, or 0.79% of loans, compared with $16.8 million, or 0.74%; nonaccrual loans rose to $25.8 million from $15.8 million. Net charge-offs were 0.35% of average loans, compared with 0.31%.
- Deposits, liquidity, and debt: Deposits grew 53.5% to $3.75 billion; core deposits were 81.7% of deposits, down from 86.1%. Average deposit cost rose to 0.60% from 0.31%. FHLB advances were $425.0 million, up from $361.5 million; junior subordinated debentures were $36.8 million carrying value, and customer repurchase agreements were $34.2 million. The revolving corporate line had no balance outstanding. Byline reported $1.3 billion of available aggregate borrowing capacity from the FHLB and Federal Reserve, plus a $55 million uncommitted federal funds line. Management said liquidity resources should meet requirements for at least 12 months.
- Capital: Stockholders’ equity rose to $650.7 million from $458.6 million, primarily reflecting shares issued for First Evanston. Byline Bank was well-capitalized: CET1 12.71%, Tier 1 12.71%, total capital 13.40%, and leverage 10.56% at year-end. The Company’s CET1 ratio was 11.85%.
Material changes versus the prior comparable period
- First Evanston was acquired on May 31, 2018 for approximately $179.1 million in total consideration, including $27.0 million cash and 6.68 million Byline shares. The acquisition contributed assets, deposits, loans, and wealth management; acquisition accounting recorded $73.6 million of goodwill.
- Assets grew 46.8%, loans and leases 53.7%, and deposits 53.5%. These figures include the acquisition and should not be interpreted as solely organic growth.
- Non-interest expense increased 30.5%, including higher staffing and acquisition costs and $9.8 million of core-system conversion expenses. Data processing expense included $8.1 million of contract termination costs.
- Loan-sale gains were $31.6 million, down from $33.1 million; loan servicing asset revaluation was a $9.3 million loss, compared with a $5.9 million loss in 2017. Provision expense increased 48.5%.
- Quarterly net income was $17.1 million in Q4 2018 versus a $0.8 million loss in Q4 2017. Q4 2018 diluted EPS was $0.46. Quarterly results were affected by acquisition timing and conversion expenses.
Outlook, commentary, risks, and unusual items
- Management expected the Oak Park River Forest acquisition to close in the first half of 2019, subject to stockholder and customary approvals. At December 31, 2018, that target had $327.6 million in assets and $287.1 million in deposits.
- Management projected a 2019 effective tax rate of approximately 27%–29% and stated that liquidity was expected to be adequate for at least the following 12 months. The filing provides no numerical earnings or growth guidance.
- The core banking system conversion was completed in February 2019. Related 2018 expenses included $9.8 million in adjusted-result exclusions, including the $8.1 million contract termination cost.
- Results include material acquisition accounting and non-GAAP adjustments. In 2017, the federal tax-rate reduction caused $7.2 million of tax expense; in 2016, reversal of a deferred-tax valuation allowance produced a $61.4 million tax benefit. These items make reported net income across those years less comparable.
- Key risks include Chicago-area economic and commercial real estate conditions, credit deterioration and loan-loss estimation, rising deposit costs and interest-rate sensitivity, funding availability, acquisition integration, SBA program dependence, and cybersecurity and third-party technology risks. Byline reported that 53.3% of loans and leases were floating-rate, predominantly LIBOR-linked, while LIBOR was expected to cease after 2021; replacement-rate effects remained uncertain.
- Commitments to extend credit and letters of credit totaled approximately $1.04 billion. Management did not anticipate material losses from these commitments. Management reported no legal proceedings expected to have a material adverse effect. The independent auditor issued an unqualified opinion on the financial statements; management assessed internal controls as effective, but auditor attestation was not required while Byline remained an emerging growth company.
- Byline did not expect to pay common-stock cash dividends in the foreseeable future. The bank’s dividends to the parent are regulated and are a key source of parent-company liquidity.
Important facts for investors to verify
- Separate acquisition-related growth from organic loan and deposit growth, and assess integration progress and costs for First Evanston and the pending Oak Park River Forest deal.
- Track nonaccrual and past-due loans, specific reserves, charge-offs, and the adequacy of the allowance, particularly as the loan portfolio seasons.
- Assess sustainability of earnings excluding acquired-loan accretion, government-guaranteed loan-sale gains, servicing-asset valuation changes, and unusual conversion or merger costs.
- Monitor deposit pricing, core-deposit mix, borrowing dependence, near-term FHLB maturities, and available contingent liquidity.
- Review the sensitivity of results to interest rates and the company’s LIBOR transition plans, including effects on floating-rate loans, borrowings, and derivatives.
- Confirm whether the stated 2019 tax-rate outlook and expected acquisition timing were achieved; this filing does not provide full-year 2019 earnings guidance.