Byline Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Dollar amounts below are in millions unless noted. Byline is a Chicago-based bank holding company operating through Byline Bank, with commercial and consumer banking, equipment leasing, government-guaranteed lending, and wealth management businesses.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $57.8 | $52.6 | $162.4 | $125.3 |
| Non-interest income | $14.8 | $10.9 | $41.0 | $36.2 |
| Net income | $15.3 | $14.5 | $41.2 | $24.1 |
| Diluted EPS | $0.39 | $0.39 | $1.07 | $0.71 |
| Net interest margin | 4.62% | 4.73% | 4.52% | 4.56% |
- Q3 total revenue was $72.6 million, up 14.4%; net income rose 5.5%. Nine-month revenue was $203.3 million, up 25.8%, and net income increased 71.0%. Growth reflected acquisitions, organic lending, securities, and loan-sale activity; comparisons also reflect differing acquisition timing.
- Q3 provision for loan and lease losses was $5.9 million; nine-month provision was $16.3 million. Non-interest expense rose 20.5% in Q3 to $45.4 million, primarily from acquisition-related staffing, professional fees, and Oak Park River Forest system-conversion work. Nine-month expense rose 13.3% to $130.1 million.
- Q3 efficiency ratio was 59.81%, versus 56.41%; nine-month ratio improved to 61.15% from 68.70%. These are reported ratios; management also presents adjusted non-GAAP measures.
- At September 30, total assets were $5.44 billion, up 10.0% from year-end 2018; gross loans and leases were $3.83 billion, up 9.4%; deposits were $4.08 billion, up 8.8%; and stockholders’ equity was $735.9 million, up 13.1%.
- Cash and cash equivalents were $108.8 million, down from $121.9 million at year-end. For the first nine months, operating cash flow was $11.5 million versus $62.2 million a year earlier; investing cash outflow was $135.4 million and financing cash inflow was $110.9 million.
- FHLB advances were $506.0 million, versus $425.0 million at year-end; repurchase agreements were $32.3 million. No line-of-credit balance was outstanding. The Bank reported $1.4 billion of available FHLB capacity, subject to eligible collateral, and $419.1 million of Federal Reserve discount-window capacity.
- Regulatory capital remained strong: company CET1 ratio was 12.12%, Tier 1 capital ratio 13.43%, and total capital ratio 14.19%. The Bank was classified as well-capitalized.
Material changes and credit quality
- Byline completed its acquisition of Oak Park River Forest Bankshares on April 30, 2019, for approximately $35.5 million of consideration. The acquired business contributed about $329.8 million of assets at acquisition; $17.5 million of goodwill was recorded. Acquisition-related and system-conversion expenses affected 2019 results.
- Loan growth included a $95.7 million increase in construction, land development, and other land loans from year-end, and a $157.4 million increase in commercial and industrial loans. Loans and leases were 47.7% fixed-rate and 52.3% floating-rate.
- Credit indicators weakened: non-performing assets rose to $50.3 million from $33.0 million at year-end, and non-performing loans and leases were 1.09% of loans versus 0.79%. The allowance for loan and lease losses rose to $31.6 million, or 0.82% of loans, from $25.2 million, or 0.72%. Management cited downgrades in government-guaranteed lending and a commercial relationship. Q3 annualized net charge-offs were 0.56% of average loans, compared with 0.25% a year earlier.
- Available-for-sale securities increased to $1.03 billion. Byline reclassified $94.8 million of held-to-maturity securities to available-for-sale upon adopting hedge-accounting guidance. Unrealized securities losses were assessed as temporary; management reported no securities with other-than-temporary impairment.
Outlook, commentary, and risks
- Management expects a 2019 effective tax rate of approximately 27%–29%. No broader earnings or revenue guidance is provided in the filing.
- Management identified three branches for consolidation and one for repurposing, expected in Q1 2020. It anticipates a one-time charge of about $817,000 and annual cost savings of $1.2 million, with some savings potentially reinvested.
- Following the Federal Reserve’s October 30, 2019 rate reduction, Byline lowered the prime rate on variable-rate loans. Management estimated the change would reduce net interest income by approximately $560,000 over the remainder of 2019. Its simulations show sensitivity to rate changes; actual results may differ with deposit repricing, balance-sheet mix, prepayments, and other factors.
- On November 1, 2019, the Board authorized repurchases of up to 1.25 million common shares, approximately 3.3% of shares outstanding at quarter-end. Purchases are discretionary; the company is not obligated to buy shares.
- Key stated risks include borrower and commercial real estate credit deterioration, interest-rate and funding pressures, acquisition integration and cost execution, liquidity availability, SBA/USDA program changes, competition, cybersecurity and third-party technology disruptions, and regulatory or tax changes. Management said pending legal matters were not expected to have a material adverse effect and did not anticipate material losses from credit commitments.
- Unfunded commitments to extend credit and letters of credit totaled $1.02 billion. The filing says many commitments may expire undrawn and management does not anticipate material losses. Byline was implementing the expected-credit-loss standard (CECL); its impact was not yet quantified.
Most important facts for investors to verify
- Whether loan growth and earnings continue after separating organic performance from acquisition effects and acquired-loan discount accretion.
- Whether deposit costs and funding needs continue to pressure net interest margin, particularly after the rate reduction.
- Whether non-performing assets, charge-offs, and the allowance trend stabilize, including in commercial and government-guaranteed lending.
- Whether Oak Park River Forest integration costs and the planned branch savings meet management’s expectations.
- Whether any share repurchases occur and how they affect capital and per-share results; the authorization itself does not require purchases.
- The eventual quantified impact and implementation timing of CECL, and the realization of the stated rate-sensitivity estimates.