Business context and reporting period
Byline Bancorp, Inc. is a Chicago-based bank holding company operating through Byline Bank and subsidiaries. It serves businesses, commercial real estate borrowers and consumers, and also provides SBA/USDA lending, equipment leasing, and wealth management. This is the fiscal-year 2019 Form 10-K, for the year ended December 31, 2019; quarterly figures below are unaudited.
Byline completed its acquisition of Oak Park River Forest Bankshares on April 30, 2019, issuing approximately 1.46 million shares and paying $6.2 million cash, with total consideration of approximately $35.5 million. At year-end, assets were $5.52 billion, gross loans and leases $3.79 billion, deposits $4.15 billion, and stockholders’ equity $750.1 million.
Financial performance and condition
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net interest income | $216.3 million | $178.6 million |
| Non-interest income | $55.5 million | $50.5 million |
| Total revenue | $271.8 million | $229.1 million |
| Provision for loan and lease losses | $20.7 million | $18.8 million |
| Non-interest expense | $173.8 million | $154.9 million |
| Net income | $57.0 million | $41.2 million |
| Diluted earnings per share | $1.48 | $1.18 |
| Net interest margin | 4.47% | 4.60% |
| Efficiency ratio | 61.09% | 65.15% |
Net income available to common stockholders was $56.2 million, or $1.51 basic and $1.48 diluted per share. Adjusted diluted EPS, a non-GAAP measure excluding specified merger, system-conversion and impairment items, was $1.62 versus $1.43.
Fourth-quarter 2019 net income was $15.9 million and diluted EPS was $0.41, compared with $17.1 million and $0.46 in fourth-quarter 2018. Q4 2019 net interest income was $53.9 million; provision was $4.4 million.
Balance sheet, liquidity and capital: Total assets rose 11.7% year over year; loans and leases rose 8.1%, and deposits rose 10.6%. Cash and cash equivalents were $80.7 million, down from $121.9 million. Consolidated cash from operating activities was $29.3 million (2018: $79.9 million); investing activities used $250.6 million and financing activities provided $180.1 million. Year-end FHLB advances were $490.0 million, repurchase-agreement funding $49.6 million, and junior subordinated debentures had a $37.3 million carrying value. Available aggregate FHLB and Federal Reserve borrowing capacity was reported at approximately $1.4 billion, subject to collateral and other conditions.
Byline Bank was well-capitalized: CET1 and Tier 1 risk-based ratios were each 13.11%, total capital was 13.87%, and Tier 1 leverage was 10.92%. Core deposits were 83.1% of total deposits; the average deposit cost increased to 0.91% from 0.60%.
Credit quality: The allowance for loan and lease losses was $31.9 million, or 0.84% of loans, versus $25.2 million, or 0.72%, a year earlier. Non-performing loans and leases increased to $38.0 million, or 1.00% of loans, from $27.6 million, or 0.79%. Non-performing assets were $47.9 million, or 0.87% of assets. Net charge-offs were 0.37% of average loans and leases.
Material changes versus the prior comparable period
- Net interest income increased 21.1%, mainly from acquisitions, loan and lease growth, and a larger securities portfolio. Higher deposit and borrowing costs contributed to a 13-basis-point decline in net interest margin.
- Net income increased 38.4%; revenue growth exceeded higher credit provision and operating expenses. Salaries and benefits rose 18.6%, mainly reflecting acquisition-related staffing.
- Non-interest income included $31.8 million of gains on sales of government-guaranteed loans, nearly unchanged from 2018. The loan-servicing asset revaluation remained negative, at $6.6 million versus $9.3 million.
- Construction and development loans increased 50.3% to $278.7 million. Non-accrual loans rose $10.4 million, and other real estate owned increased to $9.9 million from $5.0 million.
- Operating cash flow declined to $29.3 million from $79.9 million; securities purchases were substantially higher. Comparisons also reflect the 2019 Oak Park River Forest acquisition and the full-year impact of the 2018 First Evanston acquisition.
Outlook, commentary, risks and unusual items
The filing provides no earnings or revenue guidance. Management expected a 2020 effective tax rate of approximately 26%–28% and stated that available liquidity was expected to meet short-term needs for at least 12 months. Branch consolidations completed in the first quarter of 2020 were expected to produce $1.3 million of annual cost savings; the filing estimated a one-time charge of approximately $437,000.
Key risks include credit deterioration, particularly in Chicago-area commercial real estate and small-business lending; higher deposit funding costs and interest-rate sensitivity; dependence on bank-subsidiary dividends; and execution and integration risks from acquisitions. The filing also identifies LIBOR transition exposure: just over 52% of the loan and lease portfolio was floating-rate, with slightly less than half of that portion tied to LIBOR. Cybersecurity, third-party systems, SBA program changes, regulatory requirements, and local economic and fiscal conditions are additional risks. The filing cited the coronavirus outbreak as a potential source of economic disruption, but did not quantify its financial impact.
Unusual and accounting items include $4.3 million of merger-related expense and $2.0 million of core-system conversion expense in 2019. The Bank’s core-system conversion was completed in February 2019. The company adopted accounting changes that affected presentation of ATM and interchange costs and fair-value changes in equity securities. CECL adoption was scheduled for 2023 under the company’s emerging-growth-company transition election; management had not quantified the impact. Management reported effective disclosure controls and internal control over financial reporting; the external auditor did not attest to internal controls because of the company’s emerging growth company status. The auditor gave an unqualified opinion on the consolidated financial statements.
Management reported no legal proceedings expected to have a material adverse effect. The company declared a $0.03-per-share common dividend payable in January 2020 and authorized repurchases of up to 1.25 million shares through December 31, 2020; no shares were repurchased in fourth-quarter 2019.
Important facts for investors to verify
- Whether the rise in non-performing loans, past-due loans and charge-offs persists, and whether the allowance adequately covers subsequent credit deterioration.
- How much of 2019 earnings growth is sustainable from core lending versus acquisitions and SBA loan-sale gains; review the assumptions underlying servicing-asset valuations.
- Whether deposit-cost increases continue to pressure net interest margin, and how interest-rate changes affect modeled net interest income.
- The status and terms of the LIBOR transition, including affected loans, derivatives and subordinated debt.
- Post-acquisition integration, branch-consolidation savings, capital allocation and any actual share repurchases or dividends; confirm liquidity capacity remains available under collateral and regulatory constraints.