BY - Byline Bancorp Inc. Reports First Quarter 2018 Financial Results

Byline Bancorp, Inc. (the “Company”)(NYSE: BY), the parent company of Byline Bank (the “Bank”), today reported net income of $6.8 million, or $0.22 per diluted share, for the first quarter of 2018, compared with a net loss of $766,000, or $0.03 per diluted share, for the fourth quarter of 2017, and net income of $6.6 million, or $0.25 per diluted share, for the first quarter of 2017.

“Our first quarter results reflect solid growth in net interest income and an expanding net interest margin, offset by higher credit costs primarily related to a single commercial relationship,” said Alberto J. Paracchini, President and Chief Executive Officer of Byline Bancorp, Inc. “We continue to see solid loan growth in our originated portfolio, driven by strong increases in the commercial and industrial and construction portfolios, although payoffs and seasonal fluctuations moderated our overall net loan growth in the quarter. Our loan pipeline remains healthy, which we believe will result in higher levels of loan growth later in 2018.

“We continually evaluate all areas of the organization for opportunities to increase efficiencies. We have identified six branch and two other facilities within our current network that we believe can be consolidated with minimal impact on our customer service levels, convenience, and business development capabilities. We anticipate these consolidations to occur during June 2018. We estimate that the consolidations will result in approximately $1.4 million in one-time charges and approximately $2.0 million in annual cost savings that will be re-invested over time into our infrastructure.

“Completing the First Evanston Bancorp, Inc. acquisition and ensuring a smooth transition for customers and colleagues remains our top priority for 2018. To that end, we have received all required approvals and expect the transaction to close by the end of May 2018. The addition of First Evanston will solidify our position as the largest community bank in Chicago under $10 billion in assets and we believe sets forth a strong foundation for continued growth,” said Mr. Paracchini.

STATEMENTS OF OPERATIONS

Net Interest Income

The following table presents net interest income for the periods indicated:

The following table presents the quarter-to-date schedule of average interest-earning assets and average interest-bearing liabilities for the periods indicated:

Net interest income for the first quarter of 2018 was $33.7 million, an increase of $1.5 million, or 4.8%, from $32.2 million for the fourth quarter of 2017.

The increase in net interest income was primarily due to:

• An increase of $1.8 million in interest and fees on loans and leases, primarily due to the increase in average yield on loans and leases of 24 basis points to 6.00% for the first quarter of 2018 compared to 5.66% for the fourth quarter of 2017; and
• An increase of $374,000 in interest income on securities, primarily due to additional purchases during the quarter.

Partially offset by:

• An increase of $349,000 in interest expense on Federal Home Loan Bank advances, primarily due to an increase in advances outstanding during the quarter; and
• An increase of $280,000 in interest expense on deposits, primarily due to increases in time deposits resulting from promotions during the quarter.

Net interest margin for the first quarter of 2018 was 4.45%, an increase of 19 basis points from the fourth quarter of 2017. The net interest margin increase was primarily driven by the increased loan and lease yields during the quarter. Total net loan accretion on acquired loans contributed 31 basis points to the net interest margin for the first quarter of 2018 and 30 basis points for the fourth quarter of 2017. Net interest margin excluding loan accretion expanded 18 basis points to 4.14% during the first quarter of 2018, compared to 3.96% for the fourth quarter of 2017.

The cost of average total deposits was 0.41% for the first quarter of 2018, an increase of six basis points from the fourth quarter of 2017 due to slightly higher rates on interest bearing deposits, growth in average time deposits of $24.7 million, and a decrease in average non-interest bearing demand deposits of $24.2 million.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $5.1 million for the first quarter of 2018, an increase of $1.8 million compared to $3.3 million for the fourth quarter of 2017. The first quarter provision included allocations of $1.0 million for acquired non-impaired loans, $3.7 million for originated loans and leases and a $451,000 provision for acquired impaired loans. The increased provision during the first quarter of 2018 was mainly due to an increase in a specific reserve on a commercial loan relationship, slight credit deterioration in the government guaranteed acquired non-credit impaired portfolio, and an increase to the general reserve driven by new loan originations.

Non-interest Income

The following table presents the components of non-interest income for the periods indicated:

Non-interest income for the first quarter of 2018 was $11.4 million, a decrease of $1.2 million from $12.6 million for the fourth quarter of 2017.

The decrease in total non-interest income was primarily due to:

• A decrease of $1.6 million in net gains on sales of loans, primarily due to lower volumes of loans sold;
• A decrease of $280,000 in ATM and interchange fees, primarily due to the revision of our assessment schedule; and
• A decrease of $141,000 in net servicing fees, primarily due to the change in fair value of the servicing asset as a result of increases in prepayment speed assumptions on government guaranteed loans.

Partially offset by:

• An increase of $762,000 in other non-interest income, primarily due to a $189,000 gain on sale of an asset held for sale during the first quarter of 2018, compared to a $384,000 loss on sale of assets held for sale during the fourth quarter of 2017.

During the first quarter of 2018, the Company sold $78.6 million of government guaranteed loans compared to $87.9 million during the fourth quarter of 2017, contributing to the decrease in net gains on sale of loans for the quarter.

Non-interest Expense

The following table presents the components of non-interest expense for the periods indicated:

Non-interest expense for the first quarter of 2018 was $31.9 million, an increase of $1.6 million from $30.4 million for the fourth quarter of 2017.

The increase in total non-interest expense was primarily due to:

• An increase of $1.2 million in salaries and employee benefits, primarily due to merit increases, organizational growth, higher payroll taxes, and increased employer costs related to benefits;
• A decrease of $429,000 in net gain recognized on other real estate owned and other related expenses, primarily due to a decreased number of sales of other real estate owned properties during the quarter;
• An increase of $387,000 in other non-interest expense, primarily due to a $223,000 increase in the reserve for unfunded loan commitments; and
• An increase of $284,000 in loan and lease related expenses, primarily due to further loan originations during the quarter.

Partially offset by:

• A decrease of $807,000 in legal, audit and other professional fees, primarily due to professional services incurred related to the First Evanston Bancorp, Inc. acquisition compared to the fourth quarter of 2017.

The Company’s efficiency ratio was 69.04% for the first quarter of 2018, compared with 66.06% for the fourth quarter of 2017.

INCOME TAXES

The Company recorded income tax expense of $1.3 million during the first quarter of 2018, an effective tax rate of 16.3%, compared to $11.9 million during the fourth quarter of 2017, a decrease of $10.5 million. The decrease was primarily due to the “H.R. 1”, commonly known as the “Tax Cuts and Jobs Act,” which President Donald Trump signed into law on December 22, 2017. Among other items, the law reduced the federal corporate income tax rate to 21% effective January 1, 2018. As a result of the new 21% corporate federal tax rate, the Company expects its effective tax rate for 2018 to be approximately 27% to 29%.

Also on December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (SAB 118), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, not to extend beyond one year from the date of enactment during which a company, acting in good faith, may complete the accounting for the impacts of the Tax Act. At March 31, 2018, the Company’s accounting for the impact of the Tax Act on its net deferred tax assets is based upon reasonable estimates of the tax effects of the Tax Act; however, these estimates may change as additional information and interpretive guidance regarding the provisions of the Tax Act become available. As a result of the rate change, the Company’s net deferred tax assets were required to be revalued during the period in which the new legislation was enacted, and we recorded net income tax expense of $7.2 million during the fourth quarter of 2017, and net income tax benefit of $724,000 during the first quarter of 2018.

STATEMENTS OF FINANCIAL CONDITION

Total assets were $3.5 billion at March 31, 2018, an increase of $96.2 million from $3.4 billion at December 31, 2017, and an increase of $177.7 million compared to $3.3 billion at March 31, 2017.

The increase was primarily due to:

• An increase in interest bearing deposits with other banks of $71.7 million, primarily due to an increase in deposits with the Federal Reserve Bank at March 31, 2018, due to timing of public funds returning on the last day of the quarter;
• An increase in securities of $37.9 million due to additional purchases of agency, mortgage-backed, and U.S. Treasury securities during the first quarter of 2018; and
• An increase in loans and leases of $2.9 million due to an increase of $45.3 million in our originated loan portfolio counteracted by a decrease of $42.4 in our acquired loan portfolio primarily from payoffs.

Partially offset by:

• A decrease in due from counterparty of $19.8 million due to a decrease in loans sold and not settled at March 31, 2018.

The following table shows our allocation of the originated, acquired impaired and acquired non-impaired loans and leases at the dates indicated:

ASSET QUALITY

Non-Performing Assets

The following table sets forth the amounts of non-performing loans and leases, non-performing assets, and other real estate owned at the dates indicated:

Variances in non-performing assets:

• Non-performing loans and leases were $24.7 million at March 31, 2018, an increase of $7.8 million from $16.8 million at December 31, 2017, driven mainly by one downgraded commercial loan relationship and one downgraded Small Business Administration (“SBA”) loan, of which approximately $3.3 million is government guaranteed; and
• Other real estate owned was $10.5 million at March 31, 2018, a decrease of $160,000 from $10.6 million at December 31, 2017.

Non-performing assets consisted of $6.3 million of government guaranteed loans at March 31, 2018.

Allowance for Loan and Lease Losses

The following table presents the balance and activity within the allowance for loan and lease losses for the periods indicated:

The allowance for loan and lease losses as a percentage of total loans and leases held for investment increased from 0.73% at December 31, 2017 to 0.77% at March 31, 2018.

Net Charge-Offs

Net charge-offs during the first quarter of 2018 were $4.2 million, or 0.75% of average loans and leases, on an annualized basis, an increase of $1.6 million compared to $2.6 million, or 0.46% of average loans, during the fourth quarter of 2017, and 0.19% for the first quarter of 2017. The increase was primarily due to a charge-off related to one commercial loan relationship that was downgraded to non-accrual status during the first quarter.

Net charge-offs for the first quarter of 2018 included $1.9 million in the unguaranteed portion an SBA loans and $2.0 million for commercial banking while net charge-offs for the fourth quarter of 2017 included $2.1 million in the unguaranteed portion of SBA loans and $84,000 for commercial banking.

Deposits and Other Liabilities

The following table presents the composition of deposits at the dates indicated:

Total deposits were $2.5 billion at March 31, 2018, an increase of $81.2 million compared to the previous quarter and a decrease of $51.3 million compared to March 31, 2017.

The increase in the current quarter was primarily due to:

• An increase in time deposits of $47.5 million, from $708.8 million at December 31, 2017 to $756.3 million at March 31, 2018, primarily driven by promotional campaigns implemented for time deposits; and
• An increase in money market demand deposits of $32.4 million, from $349.9 million at December 31, 2017 to $382.3 million at March 31, 2018.

Partially offset by:

• A decrease in non-interest bearing demand deposits of $11.0 million, from $760.9 million at December 31, 2017 to $749.9 million at March 31, 2018.

Total borrowings and other liabilities were $474.9 million at March 31, 2018, an increase of $10.7 million from $464.2 million at December 31, 2017.

The increase was primarily due to an increase in Federal Home Loan Bank advances of $18.5 million, from $361.5 million at December 31, 2017 to $380.0 million at March 31, 2018, primarily due to the Bank’s ongoing funding needs. The increase was partially offset by a decrease in accrued expenses and other liabilities of $4.9 million, from $42.6 million at December 31, 2017 to $37.7 million at March 31, 2018, primarily due to loan purchases not yet settled of $9.8 million during the fourth quarter of 2017.

Stockholders’ Equity

Total stockholders’ equity was $462.9 million at March 31, 2018, an increase of $4.4 million from $458.6 million at December 31, 2017, and an increase of $70.9 million from $389.7 million at March 31, 2017.

The following table presents the actual regulatory capital dollar amounts and ratios of the Company and Byline Bank as of March 31, 2018:

Capital ratios for the period presented are based on the Basel III regulatory capital framework as applied to the Company’s current business and operations, and are subject to, among other things, completion and filing of the Company’s regulatory reports and ongoing regulatory review and implementation guidance.

Conference Call, Webcast and Slide Presentation

The Company will host a conference call and webcast at 9:00 a.m. Central Time (10:00 a.m. Eastern Time) on Friday, April 27, 2018 to discuss its quarterly financial results. Analysts and investors may participate in the question-and-answer session. The call can be accessed via telephone at (888) 317-6016. A recorded replay can be accessed through May 11, 2018 by dialing (877) 344-7529; passcode: 10118917.

A slide presentation relating to the first quarter 2018 results will be accessible prior to the scheduled conference call. The slide presentation and webcast of the conference call can be accessed on the News and Events page of the Company’s investor relations website at www.bylinebancorp.com.

About Byline Bancorp, Inc.

Headquartered in Chicago, Byline Bancorp, Inc. is the parent company for Byline Bank, a full service commercial bank serving small- and medium-sized businesses, financial sponsors, and consumers. Byline Bank has approximately $3.5 billion in assets and operates more than 50 full service branch locations throughout the Chicago and Milwaukee metropolitan areas. Byline Bank offers a broad range of commercial and retail banking products and services including small ticket equipment leasing solutions and is one of the top 10 Small Business Administration lenders in the United States.

Non-GAAP Financial Measures

This release contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). These measures include adjusted net income, non-interest income to total revenues, pre-tax pre-provision return on average assets, tangible book value per share, tangible common equity to tangible assets, and net interest margin excluding loan accretion. Management believes that these non-GAAP financial measures provide useful information to management and investors that is supplementary to the Company’s financial condition, results of operations and cash flows computed in accordance with GAAP; however, management acknowledges that our non-GAAP financial measures have a number of limitations. As such, these disclosures should not be viewed as a substitute for results determined in accordance with GAAP financial measures that we and other companies use. Management also uses these measures for peer comparison. See “Reconciliation of Non-GAAP Financial Measures” in the financial schedules included in this press release for a reconciliation of the non-GAAP financial measures to the comparable GAAP financial measures.

Adjusted net income and earnings per share exclude certain significant items, which include dividends on preferred shares, incremental income tax benefit related to Illinois corporate income tax rate increase, incremental income tax expense or benefit related to federal corporate income tax reduction, impairment charges on assets held for sale, and merger related expense, adjusted for applicable income tax. Management believes the significant items are not indicative of or useful to measure the Company’s operating performance on an ongoing basis.

Non-interest income to total revenues is non-interest income divided by net interest income plus non-interest income. Management believes that it is standard practice in the industry to present non-interest income as a percentage of total revenue. Accordingly, management believes providing these measures may be useful for peer comparison.

Pre-tax pre-provision income is pre-tax income plus the provision for loan and lease losses. Management believes this metric is important due to the tax benefit resulting from the reversal of the deferred tax asset valuation allowance, the decrease in the federal corporate income tax rate, and the increase in the Illinois state corporate income tax rate.

Pre-tax pre-provision return on average assets is pre-tax income plus the provision for loan and lease losses, divided by average assets. Management believes this metric is important due to the change in tax expense or benefit resulting from the decrease in the federal corporate income tax rate and the increase in the Illinois state income tax rate. The ratio demonstrates profitability excluding the tax provision or benefit and excludes the provision for loan and lease losses.

Tangible common equity is defined as total stockholders’ equity reduced by preferred stock and goodwill and other intangible assets. Management does not consider servicing assets as an intangible asset for purposes of this calculation.

Tangible assets is defined as total assets reduced by goodwill and other intangible assets. Management does not consider servicing assets as an intangible asset for purposes of this calculation.

Tangible book value per share is calculated as tangible common equity, which is stockholders’ equity reduced by preferred stock and goodwill and other intangible assets, divided by total shares of common stock outstanding. Management believes this metric is important due to the relative changes in the book value per share exclusive of changes in intangible assets.

Tangible common equity to tangible assets is calculated as tangible common equity divided by tangible assets, which is total assets reduced by goodwill and other intangible assets. Management believes this measure is important to investors and analysts interested in relative changes in the ratio of total stockholders’ equity to total assets, each exclusive of changes in intangible assets.

Net interest margin excluding loan accretion is calculated as reported net interest margin less the effect of accretion income net of contractual interest collected on acquired loans. Management believes that this metric is important as it illustrates the impact of net accretion income from acquired loans on the net interest margin.

Forward-Looking Statements

This communication contains forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements include, without limitation, statements concerning plans, estimates, calculations, forecasts and projections with respect to the anticipated future performance of the Company and its business. These statements are often, but not always, made through the use of words or phrases such as ‘‘may’’, ‘‘might’’, ‘‘should’’, ‘‘could’’, ‘‘predict’’, ‘‘potential’’, ‘‘believe’’, ‘‘expect’’, ‘‘continue’’, ‘‘will’’, ‘‘anticipate’’, ‘‘seek’’, ‘‘estimate’’, ‘‘intend’’, ‘‘plan’’, ‘‘projection’’, ‘‘would’’, ‘‘annualized’’, “target” and ‘‘outlook’’, or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. Forward-looking statements reflect various assumptions and involve elements of subjective judgement and analysis, which may or may not prove to be correct, and which are subject to uncertainties and contingencies outside the control of Byline and its respective affiliates, directors, employees and other representatives, which could cause actual results to differ materially from those presented in this communication. No representations, warranties or guarantees are or will be made by Byline as to the reliability, accuracy or completeness of any forward-looking statements contained in this communication or that such forward-looking statements are or will remain based on reasonable assumptions. You should not place undue reliance on any forward-looking statements contained in this communication. Forward-looking statements speak only as of the date they are made, and we assume no obligation to update any of these statements in light of new information, future events or otherwise unless required under the federal securities laws.

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