Byline Bancorp, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unless noted, amounts are in millions of dollars. Byline is a Chicago-based bank holding company serving businesses and consumers, with commercial banking, small-ticket leasing and, following its October 2016 Ridgestone acquisition, government-guaranteed lending. Q2 2016 did not include Ridgestone, so year-over-year comparisons reflect both acquisition-related scale and operating changes.
Financial results and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $29.8 | $20.4 | $59.3 | $41.5 |
| Provision for loan and lease losses | $3.5 | $1.2 | $5.4 | $3.7 |
| Non-interest income | $13.2 | $6.2 | $25.5 | $10.5 |
| Non-interest expense | $29.2 | $22.8 | $58.1 | $47.3 |
| Income before income taxes | $10.2 | $2.6 | $21.3 | $1.0 |
| Net income | $6.1 | $2.6 | $12.7 | $1.2 |
| Income (loss) attributable to common shareholders | $(4.6) | $2.6 | $1.8 | $1.2 |
- Revenue and earnings: Q2 total revenue was $43.0 million, up from $26.6 million. Net income increased 136% year over year. Non-interest income included $8.4 million in net loan-sale gains, principally from government-guaranteed lending; servicing fees contributed $1.1 million. These activities were not present in the 2016 comparison period.
- Common-shareholder result: Q2 basic and diluted loss per common share was $0.18, despite consolidated net income of $6.1 million. Preferred dividends included a one-time $10.5 million charge associated with the agreed Series A preferred-stock repurchase, as well as Series B dividends. First-half basic and diluted earnings per share were $0.07.
- Margins and efficiency: Q2 net interest margin was 4.02%, versus 3.41%; excluding acquired-loan accretion, the company-reported non-GAAP margin was 3.69%, versus 3.30%. The efficiency ratio improved to 66.23% from 83.03%. The company attributed the gains to Ridgestone, loan growth, improved asset yields and branch-consolidation savings.
- Balance sheet at June 30: Total assets were $3.36 billion, up 2.0% from December 31, 2016. Loans and leases were $2.15 billion, broadly unchanged; deposits were $2.54 billion, up 2.0%. Non-interest-bearing deposits were $781.6 million, or 30.8% of deposits.
- Credit quality: The allowance for loan and lease losses rose to $14.0 million from $10.9 million at year-end, or 0.65% of loans versus 0.51%. First-half provision was $5.4 million; net charge-offs were $2.36 million. Non-performing assets increased to $29.0 million from $24.0 million; non-performing loans and leases were 0.76% of loans versus 0.34%. The increase in non-accrual loans was primarily in the government-guaranteed portfolio.
- Cash flow and liquidity: For the first half, operating cash flow was $14.4 million, investing cash flow was $50.7 million and financing cash flow was $(31.8) million. Cash and cash equivalents rose to $79.8 million from $46.5 million. The company also reported $573.5 million of unpledged securities and $1.1 billion of available aggregate borrowing capacity.
- Funding and capital: FHLB advances fell to $219.6 million from $313.7 million; $210.0 million was scheduled to mature in 2017. Stockholders’ equity increased to $447.7 million from $382.7 million, primarily reflecting the IPO. At June 30, the Bank’s total risk-based capital ratio was 14.33%, CET1 ratio 13.69%, and leverage ratio 10.38%; management reported the Bank was well-capitalized.
Material changes, outlook and risks
- IPO and subsequent transactions: The June 2017 IPO issued 4.63 million company shares at $19 per share and generated $76.8 million in net proceeds, received July 6. Certain existing shareholders also sold shares; those proceeds went to the selling shareholders. After quarter-end, the company used $16.2 million to repay its line of credit and $25.5 million to repurchase all Series A preferred stock. The company reported $82.7 million due from broker at quarter-end related to the IPO settlement.
- Costs and taxes: Q2 non-interest expense rose 28.8% year over year, largely due to Ridgestone staffing and operating costs. Illinois enacted a corporate tax-rate increase effective July 1, 2017; management said this would raise the effective tax rate in future quarters, with a potential offsetting tax benefit from revaluing state loss carryforwards.
- Management outlook: No quantified earnings or revenue guidance is provided. Management anticipated a further, smaller decline in the benefit from acquisition accounting on time deposits in Q3 2017. It cited the IPO capital as supporting continued franchise growth and market-share expansion.
- Interest-rate and credit risks: The company identified interest-rate risk, borrower deterioration, commercial real estate conditions in Chicago and southern Wisconsin, funding availability, SBA program changes, competition, technology/cybersecurity and acquisition integration among the risks that could affect results. Its model estimated that an immediate 100-basis-point rate increase would raise net interest income by 4.0% over the following 12 months, while a 100-basis-point decline would reduce it by 6.8%; management cautioned that actual results could differ materially.
- Other disclosures: Management determined that securities’ unrealized losses were temporary and reported no securities classified as other-than-temporarily impaired. Legal proceedings were not expected to have a material adverse effect. The filing reported no material change in risk factors from the IPO prospectus and no subsequent event requiring financial-statement adjustment or note disclosure.
Important facts for investors to verify
- How sustainable are loan-sale gains and servicing revenue, and how much of earnings growth is recurring versus acquisition-related?
- What is driving the increase in non-accrual loans, particularly in government-guaranteed lending, and are the allowance and charge-off trends adequate for evolving portfolio risk?
- How will the post-quarter preferred-stock repurchase, IPO proceeds and line-of-credit repayment affect common earnings, capital and share dilution?
- How will deposit repricing, maturing FHLB advances and the declining acquired-deposit accounting benefit affect funding costs and net interest margin?
- What are the eventual effects of Illinois tax changes and the future adoption of expected-credit-loss accounting? The filing says the credit-loss impact had not been quantified.