Good day, and welcome to the Byline Bancorp, Inc. 4th Quarter 2017 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Alison Pooley of Financial Profiles.
Profiles. Please go ahead.
Thank you, Nicole. Good morning, everyone, and thank you for joining us today for the Byline Bancorp 4th quarter 2017 earnings call. Joining us from Byline's management team are Alberto Paracini, President and Chief Executive Officer Lindsay Corby, Chief Financial Officer and also Tim Hadro, Filing's Chief Credit Officer is here and will participate in the Q and A. We will be using a slide presentation as part of the discussion this morning. If you've not done so already, please visit the Events and Presentations page of Byline's Investor Relations website to download a copy of the presentation.
Alberto and Lindsey will discuss the Q4 results, and then we'll open the call for questions. Before we begin, I'd like to remind you that this call contains forward looking statements with respect to the future performance and financial condition of Byline Bancorp that involve risks and uncertainties. Various factors could cause results to be materially different from any future results expressed or implied by such forward looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website. The company disclaims any obligation to update any forward looking statements made during the call.
Additionally, management may refer to non GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains the financial and other quantitative information to be discussed today, as well as a reconciliation of the GAAP to non GAAP measures. And with that, I'll turn the call over to Alberto.
Thank you, Alison, and good morning to everyone on the call. As is our practice, I'll start by providing you with the highlights for the quarter year and pass the call over to Lindsay for more detail on our financial results. Turning to the presentation on Slide 3. Overall, we saw positive trends across most of our key metrics during the Q4 and continue to execute on our strategies to drive both higher earnings and returns. Loan growth for the quarter was solid and we continued deploying our liquidity into higher yielding assets.
This drove net interest income higher, helping us improve operating leverage. As with other financial institutions, the quarter was a bit noisy in large parts of the tax reform bill enacted into law at the end of the year. The reduction in the stated federal rate caused a revaluation of our deferred tax asset in order to reflect the rate at which future benefits will be realized. If you recall last quarter, we saw the opposite effect when we revalued certain tax assets tied to the statutory state tax rate in the state of Illinois. Going forward, earnings will benefit from having a lower effective tax rate.
For the quarter, including the impact of these changes and expenses related to the First Evansons transaction, we reported a loss of $766,000 or $0.03 per share. Excluding these items, our earnings for the quarter came in at $7,300,000 or $0.24 per share. On a pre tax pre provision basis, the positive trends impacting our operating performance become more evident. Pre tax pre provision ROA came in at 173 basis points, up 26 basis points from the 3rd quarter. Business development activity remains strong and the positive momentum built throughout the year continued into the 4th quarter.
We had total loan production of 120 $700,000 net of loans sold. This equates to an annualized growth rate of 10.9% for the 4th quarter. Production was balanced across all of our major lending areas. Commercial real estate, which includes both owner occupied and non owner occupied properties were up nearly 11%. Construction loans 14%, commercial and industrial loans 7% and leases up 5% for the quarter.
Solid business development activity helped drive revenue to $44,800,000 which was 3.3% higher than last quarter. Growth in loans and an expansion in our net interest margin drove an increase in net interest income of about 2.3%. Our small business capital team also delivered a strong quarter, which helped drive a 20.5% increase in our gain on sale income relative to the prior quarter. After a number of non recurring items impacted our expense levels last quarter, it was nice to see our efficiency ratio come down to 66% during the 4th quarter. Over the longer term, we continue to see opportunities to improve that metric while continuing to invest in the business.
Credit quality remained stable during the quarter with NPLs coming down slightly and NPAs declining by about 11 basis points, driven by the disposition of REO Properties. For the full year, we reported net income of $21,700,000 excluding significant items, net income came in at $25,500,000 On a year over year basis, our margin increased by 52 basis points to 4.11 percent, while our efficiency ratio declined from 84% to 67%. Loan originations net of sales were $422,500,000 which translated into net growth of about $129,000,000 We had 2 significant developments in 2017. The first obviously being the IPO, which was a significant milestone for our company. The second, which occurred in the Q4 was the signing of our definitive agreement to acquire First Evanston Bancorp.
From both a strategic and financial perspective, we believe this is a highly attractive transaction for our franchise and shareholders. First Evanston provides us with improved scale and allows us to expand our presence into attractive markets. This enhances both our overall market position and ability to continue to generate organic growth in the future. With a similar approach to small and middle market commercial banking and our familiarity with the company, we feel confident that we will have the strong cultural fit that is critical for a successful combination. We continue to be on track to close the acquisition during the first half of the year with the integration completed during the second half, putting us in a good position to begin realizing the benefits of the transaction and setting us up well for the start of 2019.
With that, I'd like to pass on the call to Lindsay to cover the financials in more detail.
Thanks, Alberto. I will start on Slide 4 with a review of our loan and lease portfolio. Our total loans and leases were $2,300,000,000 at December 31, an increase of $61,000,000 from the end of the prior quarter. Our originated loan and lease portfolio increased $99,000,000 with all of our major lending areas increasing during the quarter. This was partially offset by a $38,000,000 decline in our acquired loan.
Total payoffs in the quarter were approximately $74,000,000 which is flat versus the 3rd quarter and lower than what we experienced during the first half of twenty seventeen. Moving on to deposits. On Slide 5, our total deposits declined $78,000,000 from the end of the prior quarter, with most of the decline coming in our money market and time deposits. The decrease in money markets was a result of variability in a public deposit relationship during the Q4, while the drop in time deposits was due to the non renewal of prior promotional rate time deposits. From past history, the outflow from public funds in the Q4 comes back to the bank by the end of the Q1.
Our business development efforts are also having a positive impact on commercial deposit gathering as our average balances of non interest bearing deposits trended higher throughout the year. Our average balance was over $50,000,000 higher in the Q4 than it was in the Q1 of 2017. Our overall cost of deposits increased 2 basis points from the prior quarter with a 4 basis point increase in our cost of interest bearing deposits being partially offset by the increase in non interest bearing deposits and the drop in the dollar volume of time deposits held during the quarter. Moving to Slide 6, I'll discuss our net interest income and the expansion of our net interest margins. Our net interest income increased by approximately 737,000 dollars to $32,200,000 The increase was largely driven by higher average loan balances as well as higher average loan yields and a slight increase in accretion income.
Our net interest margin improved 8 basis points to 4.26 or 7 basis points when you exclude accretion income. With the increase we have seen in loan growth, we continue to see the benefit of a more favorable mix of earning assets as we fund our new loan originations with liquidity from our cash balances and the securities portfolio. As the Fed continues to raise interest rates, we would expect to see a slight continuation of our expansion in our loan yields, although we anticipate seeing continued upward pressure on our funding costs. Turning to Slide 7 and our non interest income. Compared to the prior quarter, our non interest income increased by 6% to $12,600,000 The increase was due to higher net gains on sales of loans, which offset the decrease of $255,000 in servicing fees, primarily due to the change in the fair value of the servicing asset as a result of increases in prepayment fees on government guaranteed loans.
Our net gain on loan sales increased to $9,000,000 from $7,500,000 last quarter. We sold $87,900,000 of government guaranteed loans during the quarter, which was 22% higher than the dollar amount sold in the prior quarter. The average premium on loan sales was relatively consistent with the prior quarter. The loan type, term, size and pricing may fluctuate in the gain recognized on each loan. So even if the average premium is relatively consistent, the increase or decrease in the amount of loans sold won't always sync up with the increase or decrease in the dollar amount of the net gain on sale.
Moving to Slide 8, let's look at our non interest expense. Our 4th quarter non interest expense included 1,300,000 in merger related expenses for the First Evanston transaction, which was recognized in our professional fees line during the 4th quarter. We had a number of other significant variations in other line items compared to the prior quarter, both positive and negative. On the positive side, our OREO expenses decreased by approximately $1,000,000 due to higher net gains on sales of OREO and lower real estate tax expense. And our other non interest expenses decreased by approximately $2,000,000 primarily due to the asset impairment charge we recorded last quarter on the sale of the former headquarters, as well as a lower provision requirement this quarter for unfunded commitment.
On the other side, our salaries and benefits expenses increased by approximately 800,000 due to higher commissions and the impact of the new hires we have made to expand our banking team. The longer term trend for our efficiency ratio continues to be positive as the increases we are seeing in revenues continue to outpace the increase in our expenses. We also closed one branch during the 4th quarter, bringing our footprint to 56 branches. The lease had expired and we took the opportunity to consolidate it with another branch less than a half mile away. We expect this consolidation to result in approximately $300,000 in expense savings annually.
Turning to Slide 9, we'll take a look at asset quality. We saw generally positive credit trends during the Q4. Our non performing loans declined 2 basis points and our non performing assets declined 11 basis points from the end of the prior quarter with the NPA decline due to dispositions of OREO. Our net charge offs were $2,600,000 or 46 basis points of average loans and leases for the quarter. Charge offs were primarily related to the unguaranteed portion of SBA loans.
Provision expense for the Q4 was $3,300,000 Our provision expense this quarter was driven by the growth in total loans as well as the charge offs in our SBA portfolio, which is consistent with our expectations given the higher level of risk that we expect to see in those loans. Our allowance for loan and lease losses increased slightly to 73 basis points at December 31. In addition to their traditional allowance as a percentage of loan and lease metric, we also analyzed the allowance in conjunction with the acquisition accounting adjustments impacting the acquired portfolio. At December 31, the acquisition accounting adjustments plus the allowance for loan and lease losses represented 213 basis points of total loans and leases. With that, I would like to pass the call back to Alberto for closing remarks.
Thank you, Lindsay. As we wrap up, I want to spend a few minutes talking about our priorities and expectations for 2018 on Slide 10. We're excited about the year ahead and the opportunities in front of us. Our top priority is completing the acquisition of First Evanston and providing a smooth transition for our new customers and colleagues. We have a comprehensive plan in place to manage the integration and ensure that customers continue receiving the same superior level of customer service they have come to expect from their engaged and locally managed community bank.
Our second priority is to continue executing on our loan growth strategies. On that point, we have excellent momentum as we start the year. We expect loan growth to come in the low to mid double digit range for the year. Traditionally, we experienced a softer level of activity during the Q1 with activity picking up over the course of the year. We expect the same for 2018.
We have made significant progress in moving our loan to deposit ratio higher while managing our overall funding costs. As all of you know and have seen, competition for deposits has increased with short term rates trending higher. We expect to see that throughout the year and be reflected in higher deposit costs as we continue to grow our balance sheet. From a profitability standpoint, we want to see further improvement in our level of efficiency. On the expense front, we're constantly evaluating opportunities to reduce expenses, so we can continue to invest in the business.
During 2017, aside from infrastructure and technology, we made significant investments in our people. We invested in benefit programs, training and other related several of our banking teams. Given the 1st Evanston transaction, we anticipate our hiring activity will be lower as we focus on the integration and on capitalizing on the benefits of the transaction. That said, we'll remain opportunistic on attractive hiring opportunities. On the M and A front, the market remains active and we're open to evaluating additional opportunities.
In summary, we feel very good about how we are positioned as we start 2018. We believe it will be a year in which we see solid organic growth as well as the initial benefits from a transaction that should result in additional value created for our shareholders in the years ahead. With that, operator, I'd like to open up the call questions.
Thank you. We will now begin the question and answer session. Our first question comes from Nathan Race of Piper Jaffray. Please go ahead.
Hey, guys. Good morning.
Good morning, Nate.
Good morning, Nate.
I just wanted to start on expenses. Obviously, you consolidated that branch, so you'll get some benefits from that as we go through the year. But just curious how we're thinking about kind of the core operating expense run rate ex the acquisition early in 2018?
Sure. Nate, in terms of expenses, obviously, as Alberto said, we remain focused in terms of doing our best to maintain and find ways to decrease expenses. But what you'll typically see is in the Q1 expenses will trend a little bit higher from payroll and things like that. You'll see them slightly higher in Q1 and then as the year goes down we'll continue to manage expenses to the best of our abilities. But we do anticipate to continue investing in the business and growing expenses in that mid to low single digit range.
Got it. That's helpful. So I guess it doesn't sound like with tax reform coming online for 2018, it doesn't sound like that's going to kind of change your investment into the franchise and so forth?
I think, Nate, just I would add to what Lindsay stated by we continue to remain we have a plan, we continue to remain focused and want to remain disciplined in executing that plan. And obviously, we have an important transaction that we want to ensure we not only complete, but we do a solid integration of that franchise into ours. And so I think those are the 2 main priorities. So I think you can expect to see us remain consistent across that front.
Got it. And then just kind of thinking about deposit growth and pricing, I appreciate your comments, Alberto, in terms of the outlook. But it sounds like we'll have some deposit flows coming back into the bank early this year, but just kind of thinking about the success you guys are having on the commercial deposit gathering front and how that could impact pricing, assuming we get a couple more assuming we get some other rate hikes in 2018?
Yes, I mean, just I don't know that we're seeing out of our kind of traditional commercial lending, commercial relationships, I think we remain call it constructive on that front. We're not really seeing pressure there. We're really seeing and that's just simply a function of the type of companies that we're targeting as to be clients or that are our clients today. We're in the kind of the lower end of the middle market, small business end. So we're not really in the kind of upper middle market range which is where you start really, really seeing CFOs at those companies really start to sharpen their pencils and wanting to get really focused on shaving basis points and getting paid more for their idle funds.
We do see clearly competition in the market is evident. I think you probably have seen and heard other institutions talk about it. And I think we've been discussing this I think over the last few calls. And I think my comments were geared towards saying as we're seeing that and as our loan to deposit ratio starts to is basically approaching our targeted levels, obviously, growth in the balance sheet will start seeing the impact of higher deposit costs going forward. So it's a competitive market and we obviously are in competition with other institutions and we intend to again just be disciplined but continue to pursue our strategies going forward.
Got it. That's great color. Thanks Alberto. And just lastly, housekeeping question on the other non interest income line. It was down pretty significantly quarter over quarter.
So just any thoughts on that specific item going forward?
Yes, it's got some noise in there, Nate. So I think it's cleaner this quarter and you should be able to see that fluctuate a little bit. But I think it's pretty good for a run rate purpose.
Our next question comes from Terry McEvoy of Stephens.
Good morning, Terry.
I heard a couple of times just your commentary on deposit pricing in 2018 and some risk that it moves higher. Did you discuss or can you discuss kind of that margin outlook ex accretion assuming we get a couple of rate hikes throughout 'eighteen and what that trajectory would be when taking into consideration your comments on deposit yields and pricing?
Sure. Do
you want to take it, Lynn?
Yes. So, Teri, in terms of the margin, like I said in my comments, we will continue to see that expansion on the loan side as we move forward here and especially with the proposed 3 rate hikes next year. So you'll see that expand as we've seen in the past. And then in terms of the deposits, you obviously will see that muted on the NIM. So it's pretty flat in our view going forward with the 2 competing pressures.
Thank you. And then the SBA loan sales, could you maybe discuss the pipeline heading into 2018? And then tax reform, how does that impact potentially just the SBA government guaranteed loans in terms of demand and then any type of premium that you receive when you sell those loans?
Sure. And those are great questions, Terry. So I think activity remains I would say it's pretty good. I think in terms of obviously the Q4 of the business and that team had a pretty good quarter in terms of both originations and obviously fundings and obviously you saw the you heard the comments in terms of the loans that we sold. I think pipelines are, I would say very good.
So I think we're starting the year off on pretty good footing as far as the SBA business is concerned. Your question on tax reform and the impact that that may have is a good one. I think that will play itself out. Obviously, you have some changes there that you would think would accelerate demand for certain things. You have the accelerated depreciation that in the past has pulled forward purchases of equipment.
We haven't seen that yet. I think in general, what I would say is sentiment in terms of business owners, this is certainly a net positive. So I think it remains to be seen how much of that we see whether it be on the SBA side or whether it be in our more traditional commercial banking business. As far as premiums are concerned, I think as Lindsay commented, it is from a quarter on a quarter to quarter basis volumes and not only volumes but the mix of loans that are sold can change from quarter over quarter. So I think what we're seeing generally is premiums are stable.
We haven't seen anything at this point that would cause us to be to kind of change our outlook on where kind of where premium levels are both on the SBA side as well as on the USDA side. So hopefully that answers your questions.
It did. Thank you. And then just a last quick one. What are the remaining merger charges? What quarters will they be booked in?
And I guess was there was an incentive probably to book a higher merger charge in the Q4 just given the reduced tax outlook?
No, there's a lot of uncertainty in terms of when we actually close here, Terry. So I struggle to give you an exact timing here, but no, there really was no incentive. We just incur them as they come for GAAP in terms of the charges. But I can't give a whole lot of guidance until I have better clarity in terms of timing.
Yes. And adding a little bit to that, Terry, we remain on track in terms of the timing. So we're still expecting the transaction to close in the first half of the year and then obviously the integration to be completed after that. But things remain on target and we'll continue to move forward accordingly on the transaction.
Thanks everyone.
Thank you.
Our next question comes from Michael Perito of KBW. Please go ahead.
Hey, good morning everybody.
Good morning, Mike.
Thanks for taking the questions. I just had a couple, and I apologize, I've been jumping back with a couple of calls. But on the provision, I know that it's a little hard with the SBA side, but you've seen a few quarters here kind of firmly above $3,000,000 on the provision. Just curious if you can maybe give us any thoughts as we head into next year about what your kind of initial expectations are on the credit costs?
In terms of the provision, Mike, it's not perfect and it's not scientific. We want to make sure that we're in a position where our reserves are at an appropriate level and that we're taking our charge offs on a timely manner and we'll take it as it comes. But the credit quality has been really pretty good and it's been within our expectations and nothing to us has really been that big of a surprise. We'll continue to monitor and we'll see where everything heads. But it'll be interesting to see what happens with tax reform here and our customer base and we'll see how things perform.
Okay. Thank you. And then on expenses, just you made the comment in the prepared remarks about how you're constantly looking at things. I'm just curious how maybe you can give us some updated thoughts on just generally speaking the branch network and how you guys are thinking about that. Obviously, you closed 1 in the quarter.
It sounds like the opportunity came up and you guys just took advantage. But just I mean, just any more specific commentary you can give us in terms of what's on your radar and what potential things you could look at this year?
Sure. So Mike, obviously we did we mentioned the consolidation that we did in the Q4 and then certainly you're familiar obviously with the disposition of an older headquarters facility that we announced in the Q3, which even though it was a large building and a much kind of larger piece of real estate, obviously it had a similar effect in the sense that going forward, our carrying cost of a property like that is has a positive impact on expenses. But to answer your question in terms of outlook, I think as we have stated in the past, we look at our network and we look at opportunities with the network. I mean we evaluate that and we are we pay a lot of attention to that because customer behavior is changing and also to the degree that there are opportunities where we can optimize and end up in a better facility, in a better location, that's something that we continue to do and we'll continue to do that over the course of this year. In light of the first Evanston transaction, obviously, we're taking this also as an opportunity to look at overall the entire network and the offices and the branch overlap that we have.
There is not a lot. So I just want to add that there. As you well know, in terms of that transaction is very, very complementary. They are in places where we just don't operate. We don't have locations in Evanston.
That said, it's a network and we want to look at it as a network and be mindful of the convenience that we offer our customers. But it's something that we constantly look at and constantly evaluate and I think we'll continue to do that throughout 2018.
Our next question comes from Ebrahim Poonawala of Bank of America Merrill Lynch. Please go ahead.
Good morning, guys.
Good morning, Eby.
So I'm sorry if I missed this. I jumped on late, but I think when I look at sort of your loan growth guide, give or take, it's about $300,000,000 for the year. And if we think about how much of that will get funded with deposits versus the loan to deposit moving higher, like how do you think about that? Like should most of it get funded or like do you expect half of that get funded and the loan to deposit ratio move closer to 100% just would appreciate your thoughts on that?
I think, Eby, we want to see the vast majority of our growth be funded with deposits. So I think we can I think it's fair to assume that we want to continue to remain very, very much a deposit funded institution? And during short term periods, we do manage fluctuations and we do have facilities to help us manage short term fluctuations. But I think over time short to medium and long term, we definitely want to remain consistent with BOSFET ratio. And given where it is, I think it's fair to say we want to see continue to see the process really be the primary funding vehicle for loan growth.
Understood. And as we think about so you mentioned about M and A and looking at that remains sort of strategic priority. Is there a likelihood that you could announce a deal before even closing for Sevinston or that's a stretch that you want to get that closed, integrated before you get into something else?
Eby, we're opportunistic in terms of looking at M and A. I mean, so I'm not going to comment on anything specific, but I would I guess in general, I would say priorities are obviously completing the transaction with First Evanston, integrating that company, continuing to execute on our strategies for organic growth. And certainly if M and A opportunities were to present themselves and it fits into the kind of the box in terms of what we're looking for and what fits within our strategy. I mean we'd be very much open to pursuing those in the normal course of business.
Got it. And one last one for Lindsay. So the core margin, $396,000,000 looks like it's relatively stable. In terms of the accretion income, about 30 basis points this year, should we expect that to drift lower? Like what's the outlook on that?
So I think I sound like a broken record saying, ultimately we all know it's got to come down, right, Evie? But we do anticipate that it will come down. You can see the acquired loans are running off and that will be a trend that you'll continue to see. It definitely slowed down versus when we started the recap back in 2013, but you will see a trend down. We've just been extremely fortunate.
The loan portfolios performed well and I think the credit environment has helped that and you've just seen that more accretion come through and it's kind of held in there.
Fair enough. And all I'm trying to understand, Lindsay, was just to make sure there's no surprise reset lower. I mean, I get
it, it should continue to trend
lower just to avoid hiccup tied to that?
Yes, there was nothing really noisy in there, Eby, that would have made it jump up like that. So it's just normal course.
And what's the mix of loans that are coming on books like what's the new yield on those loans and what's the mix fixed versus variable of the new loans we are putting on the
balance sheet?
So you want to take a question?
No. It's right now more heavily weighted in the floating. I'd say 75, 25 floating. And in terms of yields, high 5 in terms of the average loan yields right now for kind of blended rate, that's everything that came on. Perfect.
Thank you very much. Yes, Eby, and that's just to add some additional color, that's obviously dependent on which line of business it's coming from. So obviously SBA is higher, it's definitely is a higher risk business. So you obviously get compensated with higher yields. So it's I just wanted to add that color.
It's not a uniform thing. It's coming from different pockets and different risk profiles.
Understood. And just what's the update in terms of I think we had talked about last year in terms of some of the sponsors where you've had historical relationships going back to previous banks and doing some financing through that with some private equity shops? How is that sort of coming along?
Our team had a very good year in 2017. So if you recall, that's a team that joined us in 2015, in the fall of 2015, hit the ground running in 2016, had a good year again in 2017 and we're very, very pleased with the performance. So that's worked out very well and we remain optimistic as far as that line of business is concerned in 2018. I mean we developed a number of good, very good to add some additional color there, very good sponsor mix and we're starting to see the fruits of in certain cases being able to support them by doing add on acquisitions on some of those initial projects that we finance for them.
Got it. Have you quantified what that book was at the end of the year?
We have not issued that guidance, Eby, but it's definitely north of, I'm going to say general, definitely north of $140,000,000 $150,000,000 somewhere in there.
Understood. Thank you so much.
We have no further questions. I would like to turn the conference back over to management for any closing remarks.
Great. Thank you, operator. And I want to thank you for participating in the call this morning and thank you for your interest in Byline. And we will we look forward to seeing you again and speaking to you again next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.