Byline Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Byline is a Chicago-based bank holding company serving businesses and consumers, with commercial banking, equipment leasing, government-guaranteed lending, and wealth management operations. Amounts below are in millions of dollars unless otherwise noted.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable / prior period |
|---|---|---|
| Net interest income | $50.1 | $33.7 in Q1 2018 |
| Net interest margin | 4.43% | 4.45% in Q1 2018 |
| Non-interest income | $12.0 | $11.1 in Q1 2018 |
| Non-interest expense | $40.7 | $31.6 in Q1 2018 |
| Provision for loan and lease losses | $4.0 | $5.1 in Q1 2018 |
| Net income | $12.6 | $6.8 in Q1 2018 |
| Net income available to common stockholders; diluted EPS | $12.4; $0.34 | $6.6; $0.22 in Q1 2018 |
| Total assets | $5,009.9 | $4,942.6 at December 31, 2018 |
| Gross loans and leases | $3,567.6 | $3,501.6 at December 31, 2018 |
| Total deposits | $3,808.5 | $3,749.9 at December 31, 2018 |
| Stockholders’ equity | $668.7 | $650.7 at December 31, 2018 |
| Cash and cash equivalents | $82.0 | $121.9 at December 31, 2018 |
| Allowance for loan and lease losses | $27.1; 0.76% of loans and leases | $25.2; 0.72% at December 31, 2018 |
Operating cash flow was $13.9 million, versus $25.5 million in Q1 2018. Investing activities used $113.4 million, while financing activities provided $59.6 million; cash and cash equivalents declined by $39.9 million during the quarter. The company reported an efficiency ratio of 62.68% (59.55% adjusted, a non-GAAP measure), return on average assets of 1.03%, and return on average equity of 7.75%.
At quarter-end, borrowings included $425.0 million of Federal Home Loan Bank advances, $34.4 million of customer repurchase agreements, and $36.9 million carrying value of junior subordinated debentures. The credit line was undrawn at March 31; the company disclosed a $5.7 million draw on April 30. The Bank reported regulatory capital ratios above minimums and was considered well-capitalized. Available borrowing capacity included approximately $1.3 billion from the FHLB and $85 million in federal funds lines, subject to collateral and other conditions.
Changes versus comparable periods
- Net interest income increased 48.6% year over year, mainly reflecting First Evanston acquisition effects and organic loan growth. Interest expense rose $6.6 million, and the cost of deposits increased to 0.87% from 0.41%.
- Net interest margin edged down two basis points; excluding acquired-loan accretion, it was 3.97% versus 4.14%. Acquired-loan accretion contributed $5.2 million, or 46 basis points, to Q1 2019 margin.
- Non-interest expense rose 28.7%, driven in part by acquisition-related scale, higher salaries, intangible amortization, and the core system conversion. The company identified $1.5 million of conversion expense and $392,000 of impairment charges on assets held for sale in Q1 2019.
- Net gains on loan sales declined to $6.2 million from $7.5 million as government-guaranteed loan sales volume fell. Trust and wealth management income of $595,000 was new relative to Q1 2018 following the First Evanston acquisition.
- Loans and leases grew 1.9% from year-end. Originated balances increased while acquired non-impaired balances declined, partly due to payoffs, maturities, and renewals reclassified as originated loans. Deposits increased 1.6%, with time-deposit promotions contributing to growth.
- The year-over-year comparison is affected by acquisitions: First Evanston was acquired in May 2018, so Q1 2019 includes its operations while Q1 2018 does not.
Outlook, management commentary, risks, and unusual items
- Management said the core system conversion was completed during Q1 and expected it to contribute to increased efficiencies by the end of 2019. The filing provides no formal earnings or revenue guidance; it states an expected 2019 effective tax rate of approximately 27% to 29%.
- Byline completed its Oak Park River Forest acquisition on April 30, 2019, after quarter-end. The target had $323.5 million of assets, including $269.5 million of loans and $285.7 million of deposits as of March 31; disclosed closing consideration was approximately $39.6 million.
- Credit quality indicators were mixed: non-performing loans and leases were 0.85% of loans, up from 0.79% at year-end, and non-performing assets were 0.70% of total assets. Accruing past-due loans rose to $46.7 million from $24.5 million. Annualized net charge-offs were 0.24%, compared with 0.75% in Q1 2018.
- Management cited sensitivity to borrower credit quality, Chicago-area commercial real estate conditions, interest rates, funding costs and availability, competition, loan prepayments, acquisition integration, and SBA/USDA program changes. The company’s interest-rate simulation projected higher net interest income under immediate rate increases and lower income under rate decreases, but management cautioned that actual results may differ materially from model assumptions.
- Unrealized losses remained on securities; management assessed declines as temporary, stated it did not intend to sell the affected securities, and said it was not more likely than not that it would be required to sell them before recovery. Securities available-for-sale included $13.4 million of gross unrealized losses at quarter-end.
- Management said pending or ordinary-course legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported, and disclosure controls were considered effective.
- Accounting changes included adoption of equity-security fair-value accounting, with changes recognized in earnings, and reclassification of $94.8 million of securities from held-to-maturity to available-for-sale. Management expects the future credit-loss standard to result in earlier recognition of losses but had not quantified its impact.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable organic growth versus First Evanston acquisition effects and acquired-loan accretion.
- Whether deposit pricing and funding costs continue to pressure net interest margin, particularly as time deposits reprice or mature.
- Trends in past-due and non-performing loans, charge-offs, reserves, and commercial real estate and government-guaranteed loan exposures.
- Oak Park River Forest integration costs, realized synergies, and the resulting effects on capital, asset quality, and per-share results.
- The sustainability of loan-sale gains and servicing-asset valuations, which depend on sales volume, prepayment assumptions, and interest rates.
- Near-term FHLB advance maturities, liquidity and collateral availability, and the implications of the post-quarter credit-line draw.
- Reconciliation of reported GAAP results with management’s adjusted, non-GAAP measures and the specific exclusions used.