Good morning, welcome to the Byline Bancorp acquires First Evanston Bancorp conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then 1 on your telephone keypad. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Allyson Pooley of Financial Profiles.
Thank you, Kate, good morning, everyone, and thank you for joining us today to discuss Byline Bancorp's acquisition of First Evanston Bancorp. Joining us from Byline's management team are Alberto Paracchini, President and Chief Executive Officer, and Lindsay Corby, Chief Financial Officer. Tim Hadro is also with us, Byline's Chief Credit Officer, and will be available for questions. We'll be using a slide presentation as part of our discussion this morning. If you've not done so already, please visit the Events and Presentations page of Byline's Investor Relation website to download a copy of the presentation. Alberto will provide an overview of the transaction, and then we'll open the call up for questions. Before we begin, I'd like to remind you that this conference 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 actual 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. With that, I'll turn the call over to Alberto.
Great. Thank you, Allyson, good morning, everyone. I'm going to start the call this morning. If we could switch to slide three of the presentation. As you know, last night we announced that we had entered into an agreement to acquire First Evanston. Following our IPO earlier this year, we felt that we would have opportunities to do M&A transactions that would add to the value of our franchise, fit well with our culture, and be attractive for shareholders. Although at the time of the IPO, we didn't have a set timeline in mind for what our first transaction would be. We're pleased to be able to execute on what we think is a very attractive opportunity very quickly. First Evanston is actually a company that we've had a longstanding relationship with, in Chicago.
We have been watching First Evanston's accomplishments for many years and are really thrilled to have them join our team. We've personally known Bob Yohanan, First Evanston's Chairman and CEO, for a very long time and are thrilled that he will be joining our board. Also, Jay Lytle, another one of the founders of First Evanston, I've known since 1994 when I was a young banker starting my career in Chicago. After having an introductory and preliminary discussions over the years, the management and the board of First Evanston decided that the timing was right and moved forward with us in this partnership.
As those of you who have followed our story for a while now know, we are very focused on driving growth and profitability and believe the acquisition of First Evanston enhances our position in the market and allows us to do it in a sound fashion, both strategically and financially. Skipping or moving over to slide five, I just want to go over the highlights for the transaction. During our IPO roadshow, we outlined the criteria we had for potential M&A transactions, and I'm pleased to say that First Evanston meets all of them. The merger will make us the largest local community bank in Chicago under $10 billion in assets while expanding our footprint to include new markets in the Chicago and the Greater Chicago metropolitan area, including Evanston, Winnetka, Itasca, Naperville, and Libertyville.
First Evanston operates a similar commercial banking business model that is focused on high-quality C&I lending and maintaining a low-cost core deposit funding base that fits well with our existing franchise. They also have a trust and wealth management business with approximately $500 million in assets under management that provides a source of recurring fee income and improves our revenue diversification. It also fills an important gap in our product offering for serving lower middle-market customers. The economics of the transaction are very attractive. We're projecting double-digit EPS accretion and a tangible book value earn back that is well within our stated guidelines of under four years. This is also a unique transaction given our level of familiarity with First Evanston. Most of the bankers, as I previously mentioned, currently employed by First Evanston, have previously worked with either myself or our Chairman, Roberto Herencia.
We know and understand the quality of the banking teams that we're adding in this transaction. These teams know and understand the culture they will be joining, and it was one of the key factors in making this transaction possible. Moving over to slide six, we'll take a look at First Evanston. As you can see, there are many similarities between our franchises. First Evanston has approximately $1.1 billion in assets, headquartered in Evanston, Illinois, and has 10 locations in some of the most attractive submarkets on the north and western suburbs of Chicago. It has a low-cost funding base with demand deposit accounts accounting for 36% of total deposits and a total deposit cost of roughly 42 basis points. Their focus is on C&I relationship lending and traditional commercial and owner-occupied CRE lending, which comprises 66% of the total portfolio.
They've been able to leverage their banking relationships to build a very nice client base for their trust and wealth management business, and they have strong asset quality to speak, along with good liquidity, with a loan-to-deposit ratio of approximately 90%. Moving on to slide seven. The acquisition will significantly increase our presence in the North Shore suburbs of Chicago, giving us a total of 67 branches in the market. As I previously mentioned, we will be entering new markets such as Naperville, Itasca, and Libertyville. These markets are important and provide needed coverage in industrial and manufacturing corridors in the Chicago metropolitan area that are located in the western suburbs and in Lake County. On a pro forma basis, with nearly $3.4 billion in deposits, we will have the largest deposit market share of any bank in Chicago with less than $10 billion in total assets.
Moving on to slide eight. In looking at First Evanston markets and how they will enhance our overall footprint, First Evanston is the dominant local bank in the city of Evanston with a share of about 25% that is second only to JPMorgan. City of Evanston, as some of you know, is home to Northwestern University, is a diverse community, and benefits from the influence that the university has on the surrounding areas. Evanston has been ranked the best city in Illinois for startup companies and provides a great environment for the type of small business that we target. In terms of the effect on our footprint, adding First Evanston will increase our presence in Cook and DuPage Counties while extending our footprint to include now Lake County, which has some of the most attractive demographics in the Chicago metropolitan area.
Moving on to slide number nine and looking at the deposit base. As you can see, on a pro forma basis, the combination is incredibly attractive. Combined, our two banks will have a deposit franchise that is hard to replicate organically in the Chicago area. Demand deposits will increase to nearly 32% of total deposits, and non-CD deposits will increase to 72%. First Evanston's cost of deposits is slightly higher than ours. The nine basis point difference is driven by slightly higher costs in certificates of deposits. Finally, First Evanston has a very efficient branch network with nearly $100 million in deposits per branch. Their newest branch in Libertyville was opened as of November in the fall of this year. On a pro forma basis, our branch network will now move to have deposits per branch of $52.5 million from 44.2% currently for the Byline franchise.
Turning on to slide number 10 and looking at the loan portfolio. First Evanston follows a relationship-driven commercial lending model. 66% of First Evanston's loans are C&I and owner-occupied CRE. On a pro forma basis, this will bring our commercial loan concentration to 54% of our total loans and leases. The loan portfolio is attractively structured. 50% are variable rate loans, which makes it well-positioned to capitalize on future rate increases. First Evanston's CRE concentration ratio is well below regulatory thresholds, which gives us plenty of headroom to grow this portfolio if we were to choose to do so. In addition, we're excited about adding 22 experienced, talented commercial bankers who we know well, and we anticipate that they will be strong contributors to our continued organic balance sheet growth. Moving on to slide number 11. I'm going to quickly summarize some of the key deal terms.
Aggregate consideration was approximately $169 million, with 83% being paid in stock and 17% in cash. This represents a 1.7 times tangible common equity multiple on a core deposit premium of 9%. We believe the pricing makes economic sense, particularly when pricing in the cost savings and the impact to our 2019 earnings. We expect the transaction to close in the first half of 2018, subject to regulatory and shareholder approvals that are customary in nature. Turning over to slide 12. We will take a look at some of the basic transaction assumptions. We are projecting cost saves equal to 29% of First Evanston's expense base. Approximately 75% will be phased in during the first full year, with the remainder phased in during year two of the transaction.
We have not modeled or included any revenue synergies in our model, there are certainly some good revenue enhancement opportunities available, particularly with cross-selling our new trust and wealth management capabilities to our larger client base. We expect the one-time merger and integration-related expenses to be roughly $12.5 million. We completed extensive due diligence on their loan portfolio and feel very good about the work done to get ready to announce the transaction. Given the strong credit quality of the portfolio, we expect to take a gross credit mark of just approximately 1.11%. Moving on to slide 13, in reviewing the estimated pro forma impact on our financial performance and our capital ratios. We anticipate this being a double-digit accretive transaction.
We are projecting immediate EPS accretion in 2018, that is obviously dependent on the closing date of the transaction early or by mid next year, and a 14.5% accretion in the first full year, which will be 2019, when all of the cost savings are realized. We expect a tangible book value per share dilution earn back to be 3.3 years. Importantly, this transaction will allow us to profitably deploy our excess capital while still leaving us with strong capital ratios that support the continued execution of our organic and acquisitive growth strategies. With that, I would like to thank you for your time this morning. We will now open the line for questions. Operator?
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Perito of KBW. Please go ahead.
Good morning, guys.
Hey, Mike. Good morning.
Thanks for taking the questions. I wanted to start maybe on the lending team at First Evanston. You guys are virtually doubling the size of your commercial lending team. I think you guys should have about 23 bankers adding 22. Can you maybe talk about, I know you guys didn't assume any revenue synergies or anything of that nature, but can you maybe talk about the lending limits that they were operating on previously and what the potential kind of growth opportunity is with the pro forma franchise?
Sure. I think Mike, First Evanston, I would start by saying that we're very familiar with the lending team at First Evanston, and more importantly, the lending philosophy and the target market that they go after in the market today. From a legal lending limit perspective, I really don't anticipate very similar to ours. Our legal lending limit far exceeds the typical transaction that we are looking to do on a regular basis. I think that's the same applies for First Evanston. That said, there are some opportunities with some relationships that over the years have grown, where the business has grown, credit needs have grown, and First Evanston has been essentially needed to participate in order to manage exposures better.
There are some opportunities there, Mike, but I think that the combined legal lending limit there's plenty of room for us to operate very comfortably with the legal lending limit that the combined entity would have.
Great. It looks like on slide six, you guys mentioned that the five-year CAGR on loans was about 10.5%. Any kind of color you can give us on some of the more recent performance over the past 12 to 24 months of the commercial team over there?
For year-over-year, their loan growth, Mike, was about 12%. Again, strong pipeline, strong loan growth, and great performance. We're looking forward to adding them onto our team.
Perfect. Thank you.
I would say, Mike, one thing there to give you maybe a little bit more color there. Very complimentary team. This is a team of really lower middle market focused C&I lenders. I mentioned during my remarks for example, the Itasca market, the Naperville office. Those are obviously locations that are on the western suburbs that are very near to very important industrial manufacturing corridors here in Chicago, where a lot of middle market companies are really based, headquartered, and operating out of. Those are important components to the franchise. Lastly, Libertyville, which is up in Lake County. Again, it's a newer office. It's a team that's been there now for some time, and it's another important commercial market for doing commercial business here in Chicago.
Great. Thanks, Alberto. Very helpful. Maybe if I think about, I'm trying to run my numbers over here, and it seems like, I know you guys don't give kind of specific guidance around this, but it seems like this deal will kind of boost the profitability profile, kind of get you pretty close, if not exceeding kind of double-digit ROE, 100 basis point ROA in the back half of next year. Is that generally consistent with kind of the enhancements as you guys see them on the profitability side?
Yeah. Mike, we're not giving specific guidance, but that seems reasonable.
Okay. Just a couple questions on M&A. I guess just one, in terms of this deal, I didn't see any commentary in the release, but was this kind of like a privately negotiated transaction, or was this a competitively bid open type of situation?
Negotiated transaction, Mike.
Great.
We have known Robert Yohanan and some of the principals at First Evanston for a long time. First Evanston, to give you a little bit of the history, was a bank that was essentially started as a de novo here in Chicago in the mid-'90s and operated very well for roughly about 23, 24 years until this point in time. We have a long-standing relationship not only with Bob, but with others and the team at First Evanston. This was something that over the years we have had conversations and finally the timing was right for both parties.
Thank you. Very helpful. Then just one last one for me, then I'll step back. Just on, as you mentioned, Alberto, there's still a decent amount of capital you guys have moving forward. Any sense you can kind of give us on where both the M&A and kind of lending higher pipelines are in terms of the opportunities that are still out there? I guess, are you guys comfortable do you think you'll take some time to close this before you do something else? Or do you think you have the kind of capacity and team to do something concurrent? Just curious what your thoughts are around that.
Obviously, Mike, this is an important transaction for us in a number of ways. We're going to be very focused on making sure that we do an outstanding job in integrating both companies. First and foremost, that's the first priority. That said, we're opportunistic and we like to think that if we could schedule and plan for when we want to do things, they probably wouldn't be called opportunities. We're opportunistic. I think we've been pretty open about what we think the opportunity is, both organically and for potential incremental M&A here. I think that there are still some opportunities out there that would certainly be of interest to us. We think we have the capacity to be able to do more. That said, as I said earlier executing this is really priority number 1.
Great. Thank you guys very much. I appreciate all the color.
All right. Thank you, Mike.
Again, if you have a question, please press star then one. The next question is from Nathan Race of Piper Jaffray. Please go ahead.
Hey, everyone. Good morning.
Morning, Nate.
Just a question on the wealth management and trust side of things. Obviously, you're picking up a nice portfolio from First Evanston here. I'm just curious how you guys are thinking about kind of expanding their product set across the broader portfolio and footprint that you guys have. Just kind of curious how you would look to layer on RMs going forward and kind of what the appetite to add individuals in that space going forward is.
Yeah, I think, Nate, I would say clearly it's a product and a capability that any time that you're serving middle market commercial customers you want to have because it's a natural cross-sell opportunity to sell particularly to the principals and/or employees of those companies. It's something that we did not have. It was certainly a product gap that we had that we knew at some point we would've had to either build from scratch or try to go out and fill. The fact that First Evanston has that business was something that was really attractive and something that they're used to selling. They're used to having a wealth management capability, and have it at the disposal of a relationship manager when they're talking to customers.
I think that's something, in terms of how we're thinking about it, we're thinking about it in the same exact way as they currently execute it. We clearly have businesses where that would be an opportunity, and we want to make sure that we integrate that into what we do going forward as a combined company.
Got it. That's helpful. Just changing gears and thinking about the deposit franchise at First Evanston. Just curious, given that they were de novo back in the 1990s, just kind of curious how their deposit pricing trended over the course of a Fed tightening cycle in the 2000s. Obviously, your deposit base performed well below peers from a repricing standpoint. Just kind of curious how you would expect their deposits to behave as this tightening cycle continues to play out.
I think overall, I would say, Nate, probably a little bit more slightly, the betas are slightly more sensitive, I think would be a fair statement. I think that just simply has to do with the fact that their DDA concentration is obviously high. Offsetting that, it's primarily just CDs or accounts that are a little bit more sensitive to rates than our book, which still has a component that is savings related that tends to be a little bit less sensitive. Having said that, the sensitivity is still really attractive. This is from our perspective, a very complimentary deposit base that fits very nicely with our core franchise.
Indeed. I appreciate all the color, guys. Congrats on the transaction.
Great. Thank you, Nate.
The next question comes from Brian Martin of FIG Partners. Please go ahead.
Good morning. Congratulations.
Thank you, Brian. Good morning.
Alberto, can you talk a little bit about just the impact on the margin as you kind of go forward? It sounded as though you said that, and maybe I misheard it, the First Evanston book was largely, or if it was a 50% variable rate. I missed what you said there, but just how you're thinking about the margin and the combined organization going forward, and what assumptions have you put in based on their variable rate portfolio and what you expect rates to do here? How much of that is baked into your EPS accretion?
Yeah. I think, Brian, a couple of things just to clarify. In terms of the commentary earlier on the structure of the portfolio, it is 50% variable. The rest of it is, I would say, just typical C&I, owner-occupied CRE, which you typically have term loans that range somewhere between three and five years. That's the essential nature of the book. As far as rate sensitivity, I think our guidance in terms of what we model as far as rate increases are concerned. We have one additional increase, obviously, this year, which we won't really see the effect until 2018. Then we have one rate hike assumed in 2018 and one rate hike assumed in 2019. That's how we model the transaction as well as our base business.
Okay, perfect. Just the combined impact, the combined margin impact with First Evanston layered in. Can you talk a little bit about that or what your expectations are?
Yeah. Probably, I think if you look at First Evanston's just margin is probably going to be, it is slightly lower than ours. That's just really a function of the type of businesses that they finance, number one. Two, the fact that it's 50% of the portfolio is floating rate in nature. They don't have, for instance, we obviously have our SBA business. We obviously have our leasing business. They're not in those businesses, so their margin is reflective of essentially the C&I business that they do. On a combined basis, I think it's fair to say we would expect the combined margin to be a bit lower than our standalone margin today.
Okay. All right. Maybe just two other things. Just as far as the cost savings go, can you just talk about what is a good expense, kind of an annual expense base for First Evanston today? Just when would you expect based on the closing, what would you expect to be the first clean quarter with all of the cost savings baked in?
I think just to answer the latter question first. Brian, I think probably 2019 will be the first full year where it's clean. We're expecting the transaction will close sometime in the first half of 2018. Obviously, first half, given where we are in terms of end of year, we're almost at December. You have the holidays coming up. I would be very surprised if the first quarter is really realistic. We're talking probably about at some point in the second quarter being more realistic as far as the actual closing of the transaction. The guidance that we provided, 75% fully phased in during the first year with 100% fully phased in on year two. I think it's fair to say, looking at 2019 really as the first really clean quarter and year of cost saves.
Okay. First quarter of 2019 would be the first clean quarter. I guess the good expense number for them is it kind of a $28 million type of number? Is that kind of the annual expense for First Evanston? Is that a reasonable number? I guess I don't know what your assumption was when you talked about the 29% expected cost savings. Just trying to understand that.
I think the guidance that I would give you on that, just make sure I would pay attention to their most recent quarter as being a good proxy for that.
Okay, fair enough. Just the last two things. I think you talked about the deal being 14% accretive to 2019 based on consensus. Your number for the consensus, is that somewhere around $1.25? I'm just not sure what you guys were using as your consensus number.
It was $1.32, Brian.
$1.32. Okay, fair enough. Just the last thing was, you talked Alberto about the M&A market in Chicago. In your appetite to be opportunistic, how would you characterize the market today as far as the conversations that are occurring? Is it still pretty active? Is there not a lot of activity currently being tossed around, if you will? I guess, just how you'd characterize the temperature of it today.
I would say conversations are always happening. Every transaction and every situation, as you well know Brian, each and every one is different. There's different motivations that are going to really drive the sellers to want to do a transaction. In the case of First Evanston, I think they had been an independent company for a very long time. The management team had great continuity, and I think they just got to a point where they felt that they had taken the franchise to a level where partnering with another institution was really going to be the natural next step, and what was going to propel their business forward. Other transactions are always situation specific, and when you're dealing primarily with private companies, there's just different motivations.
In general, if I was to try to generalize something that it's really hard to generalize, I think conversations are still happening. I think people are wanting to know where the value of their franchise is in the eyes of a potential buyer. I think if I were to compare it with a year ago or two years ago, I think people are generally a bit more constructive than they were 12 months ago or 18 months ago.
Okay. That's helpful, Alberto. Just maybe one thing I didn't ask on the expenses, just kind of the 29% cost saves. Given it doesn't sound like you guys will be closing any branches, I guess where do the majority of the cost savings coming from?
You bring up a good point with branches, and I think we've been pretty clear in terms of our guidance on that. We evaluate our branch network continuously. In this case, for example, you can see it from the map, or you can see it from a table when you look at the branch network and the overlap, or lack of overlap, I should say, compared to ours today. Clearly we didn't have anything in Evanston. It's great continuity of the franchise to go from the city to Evanston to then Wilmette, where we do have a presence today, to then have a branch presence in Winnetka, and then go all the way up to Libertyville. From that regard, it's very good continuity. We do have some locations in Skokie where we do have a presence. First Evanston also has a presence.
That's something that we'll certainly evaluate as we will evaluate and continue to look at opportunities within our own footprint. I think the one thing on that is consumer behavior is definitely changing. Branch usage is definitely changing, and it's not something that we think you can kind of put away and not go back to it. It's something that we have to continue to evaluate and continue to find ways to better put the resources that we have assigned to that business to use.
Okay. All right. I appreciate all the color and congrats.
Okay. Thank you, Brian.
There are no other questions at this time. This concludes our question and answer session. I would like to turn the conference back over to management for closing remarks.
I think I just want to end the call by thanking you for your time, thanking you for your interest in Byline, and again, we look forward to talking again soon at our upcoming earnings call after the end of the year. With that, I'll pass it on to the operator. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.