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

Byline Bancorp, Inc. (the “Company”) (NYSE: BY), the parent company of Byline Bank (the “Bank”), today reported net income of $2.8 million, or $0.08 per diluted share, for the second quarter of 2018, compared with net income of $6.8 million, or $0.22 per diluted share, for the first quarter of 2018, and net income of $6.1 million, or $(0.18) per diluted share, for the second quarter of 2017. The Company’s financial results for the second quarter of 2018 include certain costs associated with its acquisition and integration of First Evanston Bancorp, Inc. (“First Evanston”) and its bank subsidiary First Bank & Trust, including merger-related and core system conversion expenses. Excluding these costs and impairment charges on assets held for sale, adjusted net income was $10.6 million, or $0.32 per diluted share, for the second quarter of 2018. A reconciliation of adjusted net income and adjusted diluted earnings per share to net income and diluted earnings per share, respectively, according to accounting principles generally accepted in the United States of America (“GAAP”) is provided in the financial tables at the end of this release.

Alberto J. Paracchini, President and Chief Executive Officer of Byline, commented, “Byline Bank had a solid quarter highlighted by strong loan growth with contributions coming from our diversified commercial lending platform. Our government guaranteed lending business contributed nicely to both loan production and revenue for the quarter. Strong revenue growth along with continued gains in operating leverage resulted in a significant increase in our adjusted earnings.

During the quarter we completed the acquisition of First Evanston. This was an important milestone for our Company and we remain focused on ensuring a smooth transition for customers and colleagues. As part of our integration project we had the opportunity to evaluate our technology platform and made the decision to convert our core platform to FIS IBS which First Evanston utilized. We believe this platform will further enhance our product capabilities, provide for tighter integration and allow us to operate more efficiently going forward. We expect to see continued benefits on our financial performance as we execute on our integration plan and fully capture all of the synergies projected for this combination.

We continually evaluate all areas of the organization for opportunities to increase efficiencies. During the second quarter, we consolidated six branches and two other facilities within our network that had a minimal impact on our customer service levels, convenience, and business development capabilities. These consolidations resulted in approximately $891,000, or $0.03 per diluted share, in one-time charges and will provide an estimated $2.0 million in annual cost savings that will be re-invested over time into our infrastructure,” said Mr. Paracchini.

⁽¹⁾ Represents a non-GAAP financial measure. See “Reconciliation of non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

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:

The Company completed its acquisition of First Evanston on May 31, 2018. All references to this transaction in the following narrative are referred to as “the acquisition” or “our recent acquisition.”

Net interest income for the second quarter of 2018 was $39.1 million, an increase of $5.4 million, or 15.9%, from $33.7 million for the first quarter of 2018.

The increase in net interest income was primarily due to:

• An increase of $6.0 million in interest and fees on loans and leases, primarily due to loans acquired from the acquisition, growth from loan and lease originations, and an increase in interest rates on variable rate loans during the quarter; and
• An increase of $572,000 in interest income on securities, primarily due to additional purchases and securities acquired during the quarter.

Partially offset by:

• An increase of $1.2 million in interest expense on deposits, primarily due to deposits assumed as a result of the acquisition, an increase in time deposits and money market demand deposits driven by promotional campaigns during the quarter, and an increase in average rates on deposits; and
• An increase of $89,000 in interest expense on subordinated debentures and other borrowings, partially due to junior subordinated debentures relating to trust preferred securities assumed as a result of the acquisition.

Net interest margin for the second quarter of 2018 was 4.43%, a decrease of 2 basis points from the first quarter of 2018. Total net loan accretion on acquired loans contributed 41 basis points to the net interest margin for the second quarter of 2018 and 31 basis points for the first quarter of 2018. Net interest margin excluding loan accretion decreased 12 basis points to 4.02% during the second quarter of 2018, compared to 4.14% for the first quarter of 2018. The net interest margin decrease was primarily driven by increased interest-bearing deposit rates during the quarter.

The cost of average total deposits was 0.52% for the second quarter of 2018, an increase of 11 basis points from the first quarter of 2018, due to higher rates on interest bearing deposits and growth in average time deposits of $130.6 million, partially offset by growth in average non-interest bearing demand deposits of $147.3 million. While we believe the acquisition provides a solid additional deposit base to help support future growth, the acquired interest-bearing demand deposits have a slightly higher overall cost than the Company’s existing deposit base, which contributed to the overall increase in the cost of average total deposits during the second quarter.

Provision for Loan and Lease Losses

The provision for loan and lease losses was $4.0 million for the second quarter of 2018, a decrease of $1.1 million compared to $5.1 million for the first quarter of 2018. The second quarter provision included allocations of $4.5 million for originated loans and leases, partially offset by a $528,000 credit to the provision for acquired impaired loans. The decreased provision during the second quarter of 2018 was mainly due to recording a specific reserve on a commercial loan relationship during the previous quarter, offset by increases to the general reserve driven by originated loan and lease portfolio growth.

Non-interest Income

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

Non-interest income for the second quarter of 2018 was $14.5 million, an increase of $3.1 million compared to $11.4 million for the first quarter of 2018.

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

• An increase of $2.2 million in net gains on sales of loans, primarily due to an increase in loans sold;
• An increase of $668,000 in other non-interest income, primarily due to a $985,000 increase in customer derivative products fee income partially offset by a net loss on sale of an asset held for sale of $27,000 during the second quarter of 2018; and
• An increase of $192,000 in wealth management and trust income, a new business line added as a result of the acquisition.

Partially offset by:

• A decrease of $104,000 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.

During the second quarter of 2018, the Company sold $95.0 million of government guaranteed loans compared to $78.6 million during the first quarter of 2018, contributing to the increase 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 second quarter of 2018 was $45.8 million, an increase of $13.9 million from $31.9 million for the first quarter of 2018.

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

• An increase of $8.1 million in data processing expense, primarily due to contract termination expenses relating to the Bank’s anticipated core system conversion;
• An increase of $2.6 million in legal, audit and other professional fees, primarily due to professional services incurred related to the acquisition;
• An increase of $1.0 million in salaries and employee benefits, primarily due to additional salary and employee benefit expenses subsequent to the acquisition closing, partially offset by a $523,000 decrease in payroll taxes; and
• An increase of $744,000 in occupancy expense, primarily due to $738,000 of expenses associated with branch consolidations.

The Company’s efficiency ratio was 83.35% for the second quarter of 2018, compared with 69.04% for the first quarter of 2018. Approximately $9.0 million of expenses were recognized during the quarter relating to the Bank’s anticipated core system conversion, including consulting fees and contract termination expense. Excluding merger-related expenses, core system conversion expenses, and impairment charges on assets held for sale, the Company’s adjusted efficiency ratio was 63.48% for the second quarter of 2018.

INCOME TAXES

The Company recorded income tax expense of $1.1 million during the second quarter of 2018, an effective tax rate of 27.8%, compared to $1.3 million during the first quarter of 2018, a decrease of $257,000.

STATEMENTS OF FINANCIAL CONDITION

Total assets were $4.8 billion at June 30, 2018, an increase of $1.3 billion from $3.5 billion at March 31, 2018, and an increase of $1.4 billion compared to $3.4 billion at June 30, 2017.

The increase was primarily due to:

• An increase in loans and leases of $1.1 billion, primarily due to an increase of $882.3 million in our acquired loan portfolio largely from the acquisition and an increase of $186.0 million in our originated loan portfolio;
• An increase in securities of $126.1 million mainly due to the acquisition of the First Evanston securities portfolio, which included agency, municipal, and U.S. Treasury securities; and
• An increase in goodwill of $73.0 million due to the premium value associated with the acquisition.

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 $27.2 million at June 30, 2018, an increase of $2.5 million from $24.7 million at March 31, 2018, partially consisting of government guaranteed loans; and
• Other real estate owned was $6.4 million at June 30, 2018, a decrease of $4.1 million from $10.5 million at March 31, 2018, primarily due to sales of other real estate owned properties during the second quarter of 2018.

Non-performing assets consisted of $7.3 million and $6.7 million of government guaranteed balances at June 30, 2018 and March 31, 2018, respectively.

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 decreased from 0.77% at March 31, 2018 to 0.59% at June 30, 2018, primarily due to the acquisition.

Net Charge-Offs

Net charge-offs during the second quarter of 2018 were $1.9 million, or 0.29% of average loans and leases, on an annualized basis, a decrease of $2.3 million compared to $4.2 million, or 0.75% of average loans, during the first quarter of 2018, and a slight increase from 0.26% for the second quarter of 2017. The decrease 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 second quarter of 2018 included $1.7 million in the unguaranteed portion of government guaranteed loans while net charge-offs for the first quarter of 2018 included $1.9 million in the unguaranteed portion of government guaranteed loans and $2.0 million for commercial banking.

Deposits and Other Liabilities

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

Total deposits were $3.6 billion at June 30, 2018, an increase of $1.1 billion compared to both the previous quarter and June 30, 2017, primarily due to assumed deposits from the acquisition. Non-interest bearing deposits to total deposits increased from 29.7% at March 31, 2018 to 32.7% at June 30, 2018.

The increase in the current quarter was primarily due to:

• An increase in non-interest bearing demand deposits of $443.2 million, from $749.9 million at March 31, 2018 to $1.2 billion at June 30, 2018, primarily driven by the assumption of the First Evanston deposits;
• An increase in time deposits of $304.0 million, from $756.3 million at March 31, 2018 to $1.1 billion at June 30, 2018, primarily driven by the assumption of First Evanston time deposits as well continuing promotional campaigns; and
• An increase in money market demand deposits of $234.8 million, from $382.3 million at March 31, 2018 to $617.1 million at June 30, 2018, primarily driven by the First Evanston deposits as well as an ongoing promotional campaign.

Total borrowings and other liabilities were $544.0 million at June 30, 2018, an increase of $69.1 million from $474.9 million at March 31, 2018.

The increase in the current quarter was primarily due to:

• An increase in Federal Home Loan Bank advances of $40.0 million, from $380.0 million at March 31, 2018 to $420.0 million at June 30, 2018, primarily due to the Bank’s ongoing funding needs;
• An increase in accrued expenses and other liabilities of $22.7 million, from $37.7 million at March 31, 2018 to $60.3 million at June 30, 2018, partially due to additional accrued expenses and other liabilities resulting from the core system conversion and acquisition and loan purchases of $10.0 million not yet settled during the quarter; and
• An increase in junior subordinated debentures of $8.7 million, from $27.8 million at March 31, 2018 to $36.5 million at June 30, 2018, partially due to an additional contractual $10.0 million of junior subordinated debentures assumed as a result of the acquisition.

Partially offset by:

• A decrease of $3.2 million in securities sold under agreements to repurchase, from $27.8 million at March 31, 2018 to $24.7 million at June 30, 2018, primarily due to net repurchases during the quarter.

Stockholders’ Equity

Total stockholders’ equity was $616.4 million at June 30, 2018, an increase of $153.5 million from $462.9 million at March 31, 2018, and an increase of $168.7 million from $447.7 million at June 30, 2017, primarily due to a $151.1 million increase from the acquisition.

The following table presents the actual regulatory capital dollar amounts and ratios of the Company and Byline Bank as of June 30, 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, July 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 August 10, 2018 by dialing (877) 344-7529; passcode: 10121933.

A slide presentation relating to the second 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 $4.8 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, adjusted diluted earnings per share, adjusted efficiency ratio, adjusted non-interest expense to average assets, non-interest income to total revenues, adjusted return on average stockholders’ equity, adjusted return on average assets, pre-tax pre-provision return on average assets, adjusted 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 adjusted diluted earnings per share exclude certain significant items, which include incremental income tax benefit related to Illinois corporate income tax rate increases, incremental income tax expense or benefit related to federal corporate income tax reductions, impairment charges on assets held for sale, merger related expenses, and core system conversion expenses 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.

Adjusted non-interest expense is non-interest expense excluding certain significant items, which include impairment charges on assets held for sale, merger-related expenses, and core system conversion expenses.

Adjusted efficiency ratio is adjusted non-interest expense less amortization of intangible assets divided by net interest income and non-interest income. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

Adjusted non-interest expense to average assets is adjusted non-interest expense divided by average assets. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

Adjusted return on average stockholders’ equity is adjusted net income divided by average stockholders’ equity. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

Adjusted return on average assets is adjusted net income divided by average assets. Management believes the metric is an important measure of 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 recent decrease in the federal corporate income tax rate and the recent 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. Adjusted pre-tax pre-provision return on average assets excludes certain significant items, which include impairment charges on assets held for sale, merger related expenses, and core system conversion expenses.

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 reliable, accurate or complete based on current 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.

View source version on businesswire.com: https://www.businesswire.com/news/home/20180726005908/en/