Byline Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Byline Bancorp is a Chicago-based bank holding company operating through Byline Bank, serving small and midsize businesses, commercial real estate customers and consumers. Results include the Ridgestone government-guaranteed lending business, acquired in October 2016; accordingly, year-over-year comparisons are affected by the acquisition.
Key financial results
Unless stated otherwise, amounts are in millions of dollars. Comparisons are with the same 2016 period.
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Total revenue (net interest income plus non-interest income) | $43.3 | $128.2 | $25.6 Q3; $77.6 nine months |
| Net interest income | $31.4 | $90.8 | $20.9 Q3; $62.4 nine months |
| Net income | $9.8 | $22.5 | $1.6 Q3; $2.8 nine months |
| Income available to common shareholders | $9.6 | $11.4 | $1.6 Q3; $2.8 nine months |
| Diluted earnings per common share | $0.32 | $0.43 | $0.08 Q3; $0.15 nine months |
| Net interest margin | 4.18% | 4.07% | 3.37% Q3; 3.46% nine months |
| Efficiency ratio | 69.92% | 67.76% | 84.38% Q3; 86.88% nine months |
- Revenue drivers and earnings quality: Net interest income rose 50.6% in Q3, primarily from loan and lease growth, the Ridgestone acquisition and higher loan yields. Non-interest income included $7.5 million of Q3 gains on government-guaranteed loan sales; nine-month gains were $24.0 million. Loan accretion contributed $2.2 million to Q3 net interest income and $6.3 million year to date. These items make reported revenue and margin partly dependent on acquired-loan accounting and loan-sale activity.
- Costs and credit: Q3 provision for loan and lease losses was $3.9 million, versus $1.7 million; nine-month provision was $9.3 million, versus $5.3 million. Non-interest expense rose 38.8% in Q3 to $31.1 million, mainly reflecting the acquired business, additional employees, public-company costs and a $951,000 impairment charge on assets held for sale. Net interest income after provision was $27.5 million for Q3 and $81.5 million for the nine months.
- Tax and preferred shares: Q3 included a $4.6 million benefit from the increase in Illinois’s corporate tax rate, which raised the value of deferred tax assets; the quarter recorded a $1.4 million income tax benefit. Nine-month preferred dividends of $11.1 million included a one-time $10.5 million dividend associated with repurchase of Series A preferred stock. This reduced nine-month income available to common shareholders relative to net income.
Financial position, liquidity and capital
- At September 30, total assets were $3.305 billion, up $9.6 million from year-end 2016. Gross loans and leases were $2.216 billion, up $68.5 million; deposits were $2.521 billion, up $30.5 million. Stockholders’ equity was $459.5 million, up $76.9 million, principally reflecting the IPO and retained earnings, partly offset by the preferred-stock repurchase.
- Cash and cash equivalents were $62.2 million. Available-for-sale securities were $584.7 million and held-to-maturity securities were $121.5 million; management reported $480.9 million of unpledged securities. The bank reported approximately $1.0 billion of available aggregate borrowing capacity, subject to collateral and facility terms.
- Deposits were the principal funding source. Non-interest-bearing deposits were $753.7 million, or 29.9% of deposits; core deposits were 86.2%. The cost of deposits increased to 0.33% in Q3 from 0.19% a year earlier. Brokered time deposits were zero at quarter-end.
- FHLB advances were $234.6 million, down from $313.7 million at December 31, 2016, with a 1.32% weighted-average cost. The maturity schedule lists $225 million due in 2017 and $9.6 million in 2018; the filing says maturities range from December 2017 to February 2018. Securities sold under repurchase agreements were $30.8 million. The line of credit had no quarter-end balance; its maturity was extended after quarter-end to October 2018.
- For the first nine months, operating cash flow was $12.4 million, investing cash flow was $6.3 million and financing cash flow was negative $3.0 million; cash increased $15.7 million. IPO proceeds included $76.8 million net to the company. The bank was reported as “well-capitalized”; its CET1 ratio was 13.59% and total capital ratio 14.30% at September 30.
Material changes, outlook and risks
- Asset quality: Non-performing assets increased to $30.6 million from $24.0 million at year-end 2016. Non-accrual loans and leases rose to $15.1 million from $6.8 million, primarily due to the government-guaranteed loan portfolio; non-performing loans were 0.76% of loans, versus 0.34%. OREO declined to $13.9 million. The allowance was $16.0 million, or 0.72% of loans, versus $10.9 million, or 0.51%, at year-end.
- Management commentary: Management attributed improved margins and efficiency to favorable earning-asset mix, portfolio growth, acquisition effects and loan accretion. It anticipated a further decline in the deposit fair-value accounting benefit in Q4, but expected the effect to be less than in Q3. The filing provides no specific earnings or revenue guidance.
- Interest-rate sensitivity: Management’s 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 6.4%. These are hypothetical estimates and depend on deposit repricing, loan prepayments, balance-sheet mix and other assumptions.
- Other risks and contingencies: Key risks include credit deterioration, Chicago-area commercial real estate conditions, interest-rate and funding changes, SBA program or lender-status changes, integration and operating costs, and cybersecurity or third-party technology disruptions. The company reported no legal proceedings expected to have a material adverse effect and no material change to previously disclosed risk factors. The allowance for credit losses depends on management estimates; the company expected the forthcoming expected-loss accounting standard to result in earlier loss recognition, but had not quantified the impact.
Most important facts for investors to verify
- How much future earnings depend on government-guaranteed loan-sale gains and acquired-loan accretion, rather than recurring spread and fee income.
- Whether rising non-accrual loans, provision expense and the allowance adequately reflect credit risk, particularly in the government-guaranteed and commercial real estate portfolios.
- How the $225 million of near-term FHLB maturities will be refinanced or repaid, and the effect of higher funding costs on margins and liquidity.
- The sustainability of reported profitability after the one-time Illinois tax benefit, Series A preferred repurchase dividend and acquisition/public-company expenses.
- The assumptions behind the interest-rate sensitivity estimates, capital ratios and management’s expected reduction in the time-deposit acquisition-accounting benefit.