Byline Bancorp, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Byline is a Chicago-based bank holding company serving businesses and consumers through Byline Bank and related businesses, including small-ticket equipment leasing and government-guaranteed lending. Results include First Evanston for June 1–30, 2018 only; balance-sheet comparisons are with December 31, 2017. Unless stated otherwise, dollar figures below are in millions.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $39.1 | $29.8 | $72.8 | $59.3 |
| Provision for loan and lease losses | $4.0 | $3.5 | $9.1 | $5.4 |
| Non-interest income | $14.5 | $13.2 | $25.9 | $25.5 |
| Non-interest expense | $45.8 | $29.2 | $77.7 | $58.1 |
| Net income | $2.8 | $6.1 | $9.5 | $12.7 |
| Income available to common shareholders | $2.6 | $(4.6) | $9.1 | $1.8 |
| Diluted EPS | $0.08 | $(0.18) | $0.29 | $0.07 |
| Net interest margin | 4.43% | 4.02% | 4.44% | 4.01% |
- Scale and balance sheet: At June 30, assets were $4.81 billion, gross loans and leases $3.35 billion, deposits $3.64 billion, and stockholders’ equity $616.4 million. Since year-end 2017, assets grew 42.8%, gross loans and leases 47.0%, deposits 49.2%, and equity 34.4%—largely reflecting the First Evanston acquisition.
- Revenue and margins: Q2 total revenue (net interest income plus non-interest income) was $53.6 million, up 24.5% from $43.0 million. Management attributed higher net interest income to acquired balances, loan growth, higher loan yields and rising rates. Loan accretion on acquired loans contributed 41 basis points to Q2 margin; margin excluding accretion was 4.02%.
- Expense and returns: Q2 GAAP efficiency ratio was 83.35%, versus 66.23%; adjusted efficiency ratio, excluding specified significant items, was 63.48%, versus 66.23%. Q2 return on average assets was 0.29% and return on average equity 2.14%; adjusted figures were 1.10% and 8.18%, respectively.
- Cash flow: For the first six months, operating cash flow was $46.1 million, investing cash flow was $(183.8) million, and financing cash flow was $232.1 million. Cash and cash equivalents increased $94.4 million to $152.7 million.
- Funding and liquidity: Deposits were 87.0% of total liabilities. FHLB advances were $420.0 million at a 2.01% weighted-average cost; customer repurchase agreements were $24.7 million. The company reported $633.9 million in unpledged securities and $994.7 million in available aggregate borrowing capacity, plus $55 million in uncommitted federal funds lines. The $30 million corporate line of credit was undrawn.
- Credit and capital: Allowance for loan and lease losses was $19.7 million, or 0.59% of loans and leases. Nonperforming loans and leases were $27.2 million (0.81% of loans), versus $16.8 million (0.74%) at year-end; nonperforming assets were $33.6 million. Net charge-offs were 0.29% of average loans and leases in Q2 and 0.50% for the six-month period. The bank was reported well-capitalized; company CET1, Tier 1 and total capital ratios were 10.88%, 12.36% and 12.92%, respectively.
Material changes versus comparable periods
- Q2 net income declined $3.3 million year over year despite higher net interest income and non-interest income. Non-interest expense rose $16.5 million, led by data-processing costs, acquisition-related professional fees, and higher staffing; provision expense also increased.
- Q2 data-processing expense rose to $10.4 million from $2.4 million, including an $8.1 million accrual for termination of the existing core-processing contract in anticipation of conversion. Q2 merger-related expense was $1.5 million; the company also recorded $9.0 million in core-system conversion expense.
- For the six-month period, net income fell $3.2 million. Net interest income increased $13.4 million, but non-interest expense rose $19.6 million and credit-loss provision increased $3.7 million. Lower income taxes partly offset these increases.
- First Evanston was acquired May 31 for approximately $179.1 million in total consideration, including $27.0 million cash and 6.68 million shares. The acquisition added preliminary goodwill of $73.0 million and substantially expanded loans and deposits. Acquisition fair values remain preliminary and may be refined during the measurement period.
- Unrealized losses on available-for-sale securities increased: accumulated other comprehensive loss was $10.3 million at June 30, compared with $5.1 million at year-end. Management considered security declines temporary and reported no securities with other-than-temporary impairment.
Outlook, commentary and risks
- Management stated that the core banking system conversion to FIS Integrated Banking Services is anticipated in 2019. The filing provides no specific earnings or growth guidance. Management expects the 2018 effective tax rate to be approximately 27%–29%; the six-month effective rate was 20.0%, including a $724,000 discrete tax benefit in Q1.
- Management cited First Evanston as expanding the Chicago-area footprint, diversifying commercial banking and strengthening core deposits. Six branches and two other facilities were consolidated in June; the company said customer-service impact was minimal and will continue evaluating locations.
- Key risks include borrower deterioration and increased credit losses, Chicago-area and southern Wisconsin commercial real estate conditions, funding availability and deposit pricing, interest-rate and prepayment changes, acquisition integration, and core-system migration cost, execution and customer disruption. A 100-basis-point immediate rate decline was modeled to reduce net interest income by 7.0% over the following 12 months; a 100-basis-point increase was modeled to raise it by 3.4%. These are simulations, not forecasts.
- Off-balance-sheet commitments to extend credit totaled $1.03 billion, with standby letters of credit included; management did not anticipate material losses. Management said ordinary-course legal matters were not expected to have a material adverse effect. The company disclosed that SIGTARP closed its inquiry relating to Ridgestone during Q2.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Track credit performance, especially rising nonaccrual loans, the commercial loan relationship cited by management, charge-offs, troubled debt restructurings and allowance adequacy.
- Separate recurring results from the acquisition, merger, and $9.0 million core-conversion costs; assess whether stated cost savings and adjusted metrics are realized.
- Monitor First Evanston integration, final purchase accounting, deposit retention and funding costs, and the contribution of acquired assets to earnings.
- Verify progress, final costs and operational/customer impacts of the planned 2019 core-system conversion.
- Assess margin durability as deposit costs rise and acquired-loan accretion changes; compare actual interest-rate outcomes with the sensitivity simulations.
- Review capital and tangible book value after acquisition-related share issuance and goodwill growth, alongside liquidity capacity and off-balance-sheet commitments.