Byline Bancorp, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Byline is a Chicago-based bank holding company serving businesses and consumers, with commercial banking, equipment leasing, and SBA/USDA government-guaranteed lending operations. Unless noted, amounts are in U.S. dollars.
Financial results and condition
| Metric | Q1 2018 / March 31, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $45.1 million | $41.8 million, Q1 2017; up 7.8% |
| Net interest income | $33.7 million | $29.5 million, Q1 2017; up 14.1% |
| Net interest margin | 4.45% | 4.00%, Q1 2017 |
| Provision for loan and lease losses | $5.1 million | $1.9 million, Q1 2017 |
| Non-interest income / expense | $11.4 million / $31.9 million | $12.3 million / $28.9 million, Q1 2017 |
| Net income / income available to common stockholders | $6.8 million / $6.6 million | $6.6 million / $6.4 million, Q1 2017 |
| Diluted earnings per common share | $0.22 | $0.25, Q1 2017 |
| Cash and cash equivalents | $128.0 million | $58.3 million, December 31, 2017 |
| Total assets / loans and leases, gross / deposits | $3.46 billion / $2.28 billion / $2.52 billion | $3.37 billion / $2.28 billion / $2.44 billion, December 31, 2017 |
| Total stockholders’ equity | $462.9 million | $458.6 million, December 31, 2017 |
- Profitability and margins: Pre-tax income was $8.1 million versus $11.1 million a year earlier. The effective tax rate fell to 16.3% from 40.9%, primarily reflecting federal tax reform and a $724,000 tax benefit from revaluing deferred taxes. Management expected a 2018 effective tax rate of approximately 27%–29%. Efficiency ratio rose to 69.04% from 67.11%; return on average assets was 0.82% versus 0.80%, while return on average equity was 5.97% versus 6.83%.
- Cash flow: Operating activities provided $30.5 million, investing activities used $58.0 million, and financing activities provided $97.2 million. Cash and cash equivalents increased $69.7 million during the quarter. Financing included an $81.2 million net increase in deposits and substantial FHLB advance activity.
- Funding and liquidity: Deposits were $2.52 billion, up 3.4% from year-end; non-interest-bearing deposits were 29.7% of total deposits. Average deposit cost increased to 0.41% from 0.24% in Q1 2017. FHLB advances were $380.0 million, with a 1.88% weighted-average cost; the reported advances matured from April to June 2018. The bank reported $797.5 million of available FHLB borrowing capacity, $156.1 million of Federal Reserve capacity, and $55.0 million in federal funds lines. Available-for-sale securities were $626.1 million, including $387.8 million of unpledged securities.
- Debt and capital: Other reported funding included $27.8 million of customer repurchase agreements and $27.8 million of junior subordinated debentures at carrying value; the $30 million credit line was undrawn. Byline Bank was classified as well-capitalized. Company regulatory ratios included 13.49% CET1, 15.30% Tier 1 capital, and 16.05% total capital. Tangible common equity to tangible assets was 11.26%.
- Credit quality: Non-performing loans and leases rose to $24.7 million (1.08% of loans) from $16.8 million (0.74%) at year-end; non-performing assets increased to $35.1 million (1.01% of assets). Non-accrual loans rose to $23.6 million, primarily due to one downgraded commercial relationship and one government-guaranteed loan. The allowance was $17.6 million, or 0.77% of loans, versus $16.7 million, or 0.73%, at year-end. Net charge-offs were $4.2 million; the annualized net charge-off ratio was 0.75% versus 0.19% in Q1 2017.
Material changes versus Q1 2017 and year-end 2017
- Net interest income improved with higher loan and lease yields and a 45-basis-point expansion in net interest margin. Loan accretion contributed 31 basis points to margin, versus 23 basis points a year earlier.
- Higher interest expense—particularly on deposits and FHLB advances—partly offset income growth. Deposit cost rose, including an increase in time-deposit costs.
- Provision expense increased $3.2 million, mainly due to a specific commercial-loan reserve, some deterioration in acquired government-guaranteed loans, and reserve growth associated with new originations.
- Non-interest income declined $880,000, principally because gains on sales of government-guaranteed loans fell to $7.5 million from $8.1 million. Non-interest expense rose $3.1 million, including higher salaries and loan-origination-related expenses.
- Net income increased modestly, but diluted EPS declined from $0.25 to $0.22 as the weighted-average common share count increased. Available-for-sale securities’ net unrealized losses contributed to a $3.6 million other comprehensive loss for the quarter.
- Gross loans and leases were nearly flat versus year-end: originated balances grew $45.4 million while acquired balances declined $42.4 million. Commercial and industrial lending increased; commercial real estate balances declined.
Outlook, management commentary, risks, and unusual items
- Management described Q1 performance as solid net interest income and margin growth offset by higher credit costs, particularly from a single commercial relationship. The filing gives no numeric earnings or margin guidance.
- The pending First Evanston Bancorp acquisition, estimated at approximately $1.2 billion of assets at year-end 2017, had received required approvals and was expected to close by the end of May 2018. Consideration was expected to include $27 million cash and an estimated 6.7 million shares.
- In April 2018, the company announced plans to consolidate six branches and two other facilities, anticipated in June 2018, citing strategic footprint optimization.
- Key risks include borrower and commercial-real-estate credit deterioration, interest-rate and deposit repricing effects, liquidity and funding availability, acquisition integration, SBA/USDA program changes, regulatory requirements, and technology or cybersecurity incidents. Rate simulations estimated that an immediate +100-basis-point shift could increase net interest income 3.7% over the next 12 months, while -100 basis points could reduce it 5.8%; these are model scenarios, not forecasts.
- Off-balance-sheet commitments to extend credit totaled $568.9 million, with $6.1 million of standby letters of credit. Management did not anticipate material losses from these commitments. Management said pending ordinary-course legal matters were not expected to have a material adverse effect.
- The company revised its 2017 balance-sheet presentation to record a deferred tax liability associated with acquired bad-debt recapture, increasing goodwill and reducing deferred tax assets by $2.6 million each. It determined the prior error was not material; the revision did not affect net income or stockholders’ equity.
- Management reported disclosure controls were effective as of March 31, 2018, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the increase in non-accrual and past-due loans, provision expense, and charge-offs persists or is concentrated in the identified commercial relationship; review subsequent-quarter credit disclosures.
- Whether loan yields and margin growth can offset rising deposit and borrowing costs, and how much reported margin depends on acquired-loan accretion.
- The maturity, renewal, and repricing outcomes of the short-dated FHLB advances, as well as actual deposit growth and funding costs.
- Completion, final consideration, integration costs, and expected financial contribution of the First Evanston acquisition; execution and cost effects of planned facility consolidations.
- Whether the estimated 2018 effective tax rate of 27%–29% and the accounting for tax-reform effects change as the measurement period concludes.