Byline Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Unaudited results are consolidated. Byline is a Chicago-based bank holding company operating through Byline Bank, with commercial, real estate, consumer, equipment leasing, SBA/USDA lending, and wealth-management businesses.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $54.4 million | $39.1 million | $104.5 million | $72.8 million |
| Provision for loan and lease losses | $6.4 million | $4.0 million | $10.4 million | $9.1 million |
| Non-interest income | $14.2 million | $14.2 million | $26.2 million | $25.3 million |
| Non-interest expense | $44.0 million | $45.5 million | $84.6 million | $77.1 million |
| Net income | $13.2 million | $2.8 million | $25.8 million | $9.5 million |
| Diluted EPS | $0.34 | $0.08 | $0.68 | $0.29 |
| Net interest margin | 4.51% | 4.43% | 4.47% | 4.44% |
Q2 total revenue, defined as net interest income plus non-interest income, was $68.6 million, up 28.8%. Q2 net income available to common shareholders was $13.0 million. Management-reported adjusted diluted EPS, a non-GAAP measure, was $0.41 for Q2 and $0.79 for the first half.
At June 30, 2019, total assets were $5.39 billion, gross loans and leases $3.86 billion, deposits $4.06 billion, and stockholders’ equity $717.7 million. Compared with December 31, 2018, assets increased 9.1%, loans and leases 10.3%, deposits 8.3%, and equity 10.3%. Cash and cash equivalents were $89.3 million, down from $121.9 million.
Six-month operating cash flow was negative $9.5 million; investing cash flow was negative $108.3 million and financing cash flow positive $85.2 million. Cash declined $32.5 million in the period. FHLB advances were $500 million, up from $425 million; their weighted-average cost was 2.42%. The company reported $1.2 billion of additional FHLB borrowing capacity, subject to collateral, plus $278.8 million available through the Federal Reserve discount window and $105 million in federal funds lines. Management expected liquidity to meet requirements for at least the next 12 months.
Bank regulatory capital ratios remained above minimums: CET1 12.60%, Tier 1 risk-based 12.60%, total risk-based 13.35%, and leverage 10.57%. Byline Bank was classified as well-capitalized. The company-wide CET1 ratio was 11.65%.
Material changes and management commentary
- Net interest income rose 39.4% in Q2 and 43.7% in the first half, principally from acquisitions and organic loan growth. Higher loan yields and acquired-loan accretion helped margin; higher deposit and borrowing costs partially offset these benefits. Cost of deposits rose to 0.92% in Q2 from 0.52% a year earlier.
- The April 30 acquisition of Oak Park River Forest added approximately $329.8 million of assets and $290.2 million of deposits at acquisition. Consideration was approximately $35.5 million before issuance costs, including $29.3 million in stock and $6.2 million cash; preliminary goodwill was $17.5 million. The filing says acquisition fair values remain subject to refinement.
- Q2 non-interest expense declined 3.4%, mainly because Q2 2018 included core-system termination and conversion costs. First-half expense increased 9.8%, reflecting acquisition-related staffing and intangible amortization, among other items. Q2 included $3.2 million of merger-related expense and $394,000 of core conversion expense.
- Loan and lease growth was broad, including commercial and industrial and construction lending. Non-interest income was nearly flat in Q2: lower gains on government-guaranteed loan sales offset lower servicing-asset revaluation losses, securities gains, and acquired wealth-management income. First-half gains on loan sales fell to $13.7 million from $17.2 million.
- Credit indicators weakened: non-performing assets were $44.6 million versus $33.0 million at year-end, and non-performing loans and leases were 0.95% of loans versus 0.79%. Management attributed the rise principally to defaults and downgrades in the U.S. government-guaranteed loan portfolio. The allowance was $31.1 million, or 0.81% of loans, versus $25.2 million, or 0.72%, at year-end. Q2 net charge-offs were $2.4 million.
- Management described branch consolidation as ongoing: seven branches and two other facilities were consolidated during 2018 and the first half of 2019. The network had 61 branches, including acquired locations.
Outlook, risks, and unusual items
- Management estimated a 2019 effective tax rate of approximately 27%–29%. After the Federal Reserve’s July 31, 2019 rate reduction, Byline lowered its Prime Rate to 5.25%; it estimated this change would reduce net interest income by approximately $948,000 over the remainder of 2019.
- Interest-rate simulation showed estimated net interest income increases of 5.6% to 21.5% under immediate +100 to +400 basis-point shifts for the 12 months ending June 30, 2020, and a 6.3% decline under an immediate -100 basis-point shift. Management cautioned that modeled outcomes are hypothetical and depend on assumptions about rates, deposits, repayments, growth, and hedging.
- Key disclosed risks include borrower and commercial real estate credit deterioration, funding availability and deposit pricing, interest-rate sensitivity, acquisition integration and realization of expected benefits, competition, SBA/USDA program changes, cybersecurity and third-party technology disruptions, and dependence on bank dividends. The filing reported no legal proceedings expected to have a material adverse effect and no material changes to previously disclosed risk factors.
- The company adopted revenue-recognition guidance without a material change to recognition timing or amount; certain ATM/debit-card costs are now netted against related income. It also adopted equity-security fair-value accounting, which can increase non-interest income volatility, and reclassified $94.8 million of securities from held-to-maturity to available-for-sale under hedge-accounting guidance.
- The allowance remains based on the incurred-loss model during this period. Management expects the future expected-credit-loss standard to result in earlier loss recognition but had not quantified its impact. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- How much of loan, deposit, and earnings growth is organic versus acquisition-related, and whether Oak Park River Forest integration and expected benefits are tracking plan.
- Whether deterioration in non-performing assets, particularly government-guaranteed lending exposures, leads to further charge-offs, provisions, or allowance increases.
- Whether higher deposit costs and the July rate cut pressure net interest margin and earnings beyond management’s stated estimate.
- Whether loan-sale volumes and gains, servicing-asset valuations, and acquired-loan accretion remain sustainable contributors to earnings.
- How liquidity and funding needs evolve as FHLB advances mature in July–September 2019, and whether deposit promotions affect funding costs or mix.
- The final purchase-accounting fair values for Oak Park River Forest and the eventual impact of expected-credit-loss accounting, which was not quantified in this filing.