Byline Bancorp, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also reports fourth-quarter results. Byline is a Chicago-based bank holding company operating primarily through Byline Bank, with commercial banking, SBA/USDA lending, and small-ticket equipment leasing businesses. The audited consolidated financial statements received an unqualified audit opinion.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue (net interest income plus non-interest income) | $173.0 million | $116.5 million |
| Net interest income | $122.9 million | $90.6 million |
| Net interest margin | 4.11% | 3.59% |
| Net interest margin excluding acquired-loan accretion (non-GAAP) | 3.82% | 3.48% |
| Provision for loan and lease losses | $12.7 million | $10.4 million |
| Non-interest income | $50.1 million | $25.9 million |
| Non-interest expense | $119.5 million | $100.7 million |
| Net income | $21.7 million | $66.7 million |
| Net income available to common stockholders | $10.4 million | $66.7 million |
| Diluted earnings per common share | $0.38 | $3.27 |
| Total assets at year-end | $3.37 billion | $3.30 billion |
| Gross loans and leases at year-end | $2.28 billion | $2.15 billion |
| Deposits at year-end | $2.44 billion | $2.49 billion |
| Stockholders’ equity at year-end | $458.6 million | $382.7 million |
- Net income fell from 2016 largely because 2016 included a $61.9 million reversal of the deferred-tax-asset valuation allowance. Management reported adjusted net income, a non-GAAP measure, of $25.5 million in 2017 versus $7.8 million in 2016.
- 2017 gains on loan sales were $33.1 million, up from $4.3 million, primarily reflecting a full year of SBA/USDA guaranteed-loan sales following the 2016 Ridgestone acquisition. Servicing fees were $3.7 million versus $1.9 million.
- Return on average assets was 0.66% (2.42% in 2016); return on average equity was 5.08% (27.93%). The efficiency ratio was 67.32%, compared with 83.83%.
- Net cash provided by operating activities was $2.1 million, versus cash used of $26.2 million in 2016. Investing activities used $36.9 million; financing activities provided $46.6 million. Year-end cash and cash equivalents were $58.3 million.
- At year-end, the allowance for loan and lease losses was $16.7 million, or 0.73% of loans and leases, compared with $10.9 million, or 0.51%, a year earlier. Net charge-offs were 0.31% of average loans and leases.
- Nonperforming loans and leases rose to $16.8 million, or 0.74% of loans, from $7.4 million, or 0.34%. Nonperforming assets were $27.5 million, or 0.82% of assets. Non-accrual loans increased by $9.0 million; OREO declined to $10.6 million from $16.6 million.
- Core deposits were 86.1% of total deposits; non-interest-bearing deposits were $760.9 million, or 31.1% of deposits. The average cost of deposits rose to 0.31% from 0.20%.
- The bank’s regulatory capital ratios remained above “well-capitalized” thresholds: CET1 13.57%, Tier 1 risk-based 13.57%, total capital 14.28%, and leverage 10.89% at year-end. Available FHLB and Federal Reserve borrowing capacity was reported at $637.2 million, with an additional $55.0 million in uncommitted federal funds lines.
Material changes and notable items
- Net interest income increased 35.6%, supported by loan growth and the Ridgestone acquisition; the average yield on earning assets rose faster than funding costs. Average interest-bearing deposit cost increased to 0.44% from 0.28%, and borrowing expense also rose.
- Gross loans and leases grew 6.0%. Originated loans and leases rose to 69.1% of the portfolio from 59.7%; acquired impaired loans declined to 14.4% from 18.8%.
- Non-interest expense increased 18.7%, mainly due to Ridgestone-related staffing and operating costs. Salaries and benefits rose 33.0% to $67.3 million. Branch optimization continued, including one Chicago branch consolidation in December; the network stood at 56 offices.
- Deposits declined 1.9% while FHLB advances increased to $361.5 million. The company repaid its $16.2 million line-of-credit balance in 2017 using IPO proceeds; no amount was drawn at year-end.
- The June 2017 IPO generated $82.7 million in net proceeds. Byline also repurchased all Series A preferred stock for $25.5 million; the $10.5 million excess over carrying value was treated as a one-time preferred dividend. Total preferred dividends were $11.3 million, contributing to lower income available to common stockholders.
Outlook, risks and contingencies
- Management expected a 2018 effective tax rate of approximately 27%–29% following the federal corporate tax rate reduction to 21%. The 2017 remeasurement of deferred tax assets generated $7.2 million of fourth-quarter tax expense; the estimate remained subject to a measurement period for further tax-law interpretation.
- Byline expected its cash and liquidity resources to be sufficient for at least the next 12 months. It anticipated a further decline in the benefit from acquisition-accounting adjustments on time deposits during 2018.
- Byline agreed to acquire First Evanston Bancorp, which had approximately $1.2 billion of assets, $903.3 million of gross loans, and $1.0 billion of deposits at December 31, 2017. Consideration was expected to include $27 million cash and approximately 6.7 million Byline shares. Closing was expected in the first half of 2018, subject to shareholder approvals and other conditions; the filing reported federal banking approvals received.
- Principal risks include Chicago-area commercial real estate and local economic exposure; rising nonperforming loans and the seasoning of a relatively recent loan portfolio; deposit retention and rising funding costs; interest-rate sensitivity; SBA/USDA program and loan-sale premium dependence; acquisition integration; cybersecurity and third-party technology risks; and regulatory and compliance requirements.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled approximately $528 million. Management did not anticipate material losses from these commitments. Management reported no legal proceedings expected to have a material adverse effect.
- The company did not provide a management assessment or auditor attestation of internal control over financial reporting, citing its transition period as a newly public company and emerging-growth-company status. Management concluded disclosure controls and procedures were effective as of year-end. The filing also notes that its loan-loss allowance relies partly on peer and industry data given limited post-recapitalization history.
Most important facts for investors to verify
- Whether 2017 earnings growth excluding tax effects is sustainable, and how much future earnings depend on SBA/USDA loan-sale gains and acquired-loan accretion.
- Whether the rise in non-accrual loans, nonperforming assets, and credit-loss provision continues; review portfolio details, collateral values, and allowance coverage, particularly for commercial real estate and government-guaranteed lending.
- How deposit pricing, deposit balances, FHLB borrowing, and interest-rate changes affect net interest margin and liquidity.
- Whether First Evanston closes on the stated terms and whether integration, dilution, and realized cost or revenue benefits match expectations.
- Whether the deferred-tax-asset estimates and expected 2018 tax rate remain valid, given tax-law changes and limits on use of tax attributes.
- Review the full audited statements and notes for cash-flow drivers, acquired-loan valuation assumptions, capital and dividend restrictions, and the company’s evolving internal-control reporting obligations.