UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to ______
Commission File Number 001-38139
Byline Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
36-3012593
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification Number)
180 North LaSalle Street, Suite 300
Chicago, Illinois 60601
(Address of Principal Executive Offices)
(773) 244-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock
BY
New York Stock Exchange
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common Stock, $0.01 par value, 37,711,380 shares outstanding as of November 2, 2021
BYLINE BANCORP, INC.
September 30, 2021
INDEX
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements. The Unaudited Interim Condensed Consolidated Financial Statements of Byline Bancorp, Inc. filed as part of the report:
Notes to Unaudited Interim Condensed Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
43
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
78
Item 4.
Controls and Procedures
79
PART II.
OTHER INFORMATION
80
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
81
2
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(dollars in thousands, except share data)
December 31, 2020
ASSETS
Cash and due from banks
$
46,900
41,432
Interest bearing deposits with other banks
95,978
41,988
Cash and cash equivalents
142,878
83,420
Equity and other securities, at fair value
10,299
8,764
Securities available-for-sale, at fair value
1,427,605
1,447,230
Securities held-to-maturity, at amortized cost (fair value at September 30, 2021—$4,033, December 31, 2020 —$4,573)
3,887
4,395
Restricted stock, at cost
15,927
10,507
Loans held for sale
48,372
7,924
Loans and leases:
Loans and leases
4,609,228
4,340,535
Allowance for loan and lease losses
(60,598
)
(66,347
Net loans and leases
4,548,630
4,274,188
Servicing assets, at fair value
23,597
22,042
Premises and equipment, net
76,995
86,728
Other real estate owned, net
3,033
6,350
Goodwill and other intangible assets, net
167,296
172,631
Bank-owned life insurance
60,992
10,009
Deferred tax assets, net
45,165
40,181
Accrued interest receivable and other assets
129,775
216,283
Total assets
6,704,451
6,390,652
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing demand deposits
2,117,749
1,762,676
Interest-bearing deposits
3,040,529
2,989,355
Total deposits
5,158,278
4,752,031
Other borrowings
539,119
647,901
Subordinated notes, net
73,473
73,342
Junior subordinated debentures issued to capital trusts, net
36,796
36,451
Accrued interest payable and other liabilities
72,367
75,463
Total liabilities
5,880,033
5,585,188
STOCKHOLDERS’ EQUITY
Preferred stock
10,438
Common stock
386
384
Additional paid-in capital
592,192
587,165
Retained earnings
258,077
191,098
Treasury stock, at cost
(31,161
(1,668
Accumulated other comprehensive income (loss), net of tax
(5,514
18,047
Total stockholders’ equity
824,418
805,464
Total liabilities and stockholders’ equity
PreferredShares
CommonShares
Par value
0.01
Shares authorized
50,000
150,000,000
Shares issued
39,170,541
38,736,540
Shares outstanding
37,690,087
38,618,054
Treasury shares
—
1,480,454
118,486
See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
September 30,
(dollars in thousands, except share and per share data)
2021
2020
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases
56,291
51,036
164,423
155,347
Interest on securities
5,534
7,070
17,982
22,616
Other interest and dividend income
947
128
1,837
1,342
Total interest and dividend income
62,772
58,234
184,242
179,305
INTEREST EXPENSE
Deposits
986
2,760
3,465
14,810
349
465
1,333
2,838
Subordinated notes and debentures
1,592
1,485
4,785
2,699
Total interest expense
2,927
4,710
9,583
20,347
Net interest income
59,845
53,524
174,659
158,958
PROVISION FOR LOAN AND LEASE LOSSES
352
15,740
2,750
45,713
Net interest income after provision for loan and lease losses
59,493
37,784
171,909
113,245
NON-INTEREST INCOME
Fees and service charges on deposits
1,867
1,603
5,299
4,731
Loan servicing revenue
3,344
2,936
9,301
8,674
Loan servicing asset revaluation
(2,650
1,122
(4,148
(2,653
ATM and interchange fees
1,201
1,028
3,257
3,089
Net realized gains on securities available-for-sale
130
1,037
1,456
2,412
Change in fair value of equity securities, net
(275
154
36
301
Net gains on sales of loans
12,761
12,671
33,350
23,900
Wealth management and trust income
815
693
2,305
1,970
Other non-interest income
1,302
990
4,383
1,946
Total non-interest income
18,495
22,234
55,239
44,370
NON-INTEREST EXPENSE
Salaries and employee benefits
25,978
23,126
72,372
67,197
Occupancy and equipment expense, net
4,982
5,220
15,617
16,103
Loan and lease related expenses
1,175
2,053
3,629
4,631
Legal, audit and other professional fees
2,710
2,390
7,822
6,802
Data processing
3,108
2,661
8,710
8,152
Net loss recognized on other real estate owned and other related expenses
42
1,052
1,324
Other intangible assets amortization expense
1,738
1,947
5,335
5,732
Other non-interest expense
4,447
3,941
11,466
12,460
Total non-interest expense
44,180
41,687
126,003
122,401
INCOME BEFORE PROVISION FOR INCOME TAXES
33,808
18,331
101,145
35,214
PROVISION FOR INCOME TAXES
8,502
5,260
25,549
10,038
NET INCOME
25,306
13,071
75,596
25,176
Dividends on preferred shares
196
587
INCOME AVAILABLE TO COMMON STOCKHOLDERS
25,110
12,875
75,009
24,589
EARNINGS PER COMMON SHARE
Basic
0.68
0.34
1.99
0.65
Diluted
0.66
1.95
0.64
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Net income
Securities available-for-sale
Unrealized holding gains (losses) arising during the period
(8,439
33
(32,876
30,100
Reclassification adjustments for net gains included in net income
(130
(1,037
(1,456
(2,412
Tax effect
2,387
280
9,560
(7,710
Net of tax
(6,182
(724
(24,772
19,978
Cash flow hedges
Unrealized holding gains arising during the period
651
1,606
Reclassification adjustments for net losses included in net income
29
22
71
64
(189
(7
(466
(18
491
15
1,211
46
Total other comprehensive income (loss)
(5,691
(709
(23,561
20,024
Comprehensive income
19,615
12,362
52,035
45,200
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Additional
AccumulatedOther
Total
(dollars in thousands,
Preferred Stock
Paid-In
Retained
Treasury
Comprehensive
Stockholders’
except share data)
Shares
Amount
Capital
Earnings
Stock
Income (Loss)
Equity
Balance, January 1, 2020
38,256,500
379
580,965
159,033
(700
750,115
2,966
Other comprehensive income, net of tax
11,048
Issuance of common stock upon exercise of stock options
55,402
1
676
677
Restricted stock activity
174,036
Issuance of common stock in connection with employee stock purchase plan
15,569
268
Cash dividends declared on preferred stock
(196
Cash dividends declared on common stock ($0.03 per share)
(1,151
Repurchase of common stock
(118,486
Share-based compensation expense
608
Balance, March 31, 2020
38,383,021
380
582,517
160,652
10,348
762,667
9,139
9,685
5,196
56
(1
(195
(1,152
735
Balance, June 30, 2020
38,388,217
381
583,307
168,444
20,033
780,935
Other comprehensive loss, net of tax
165,375
1,814
1,815
(5,886
21,210
269
(1,157
668
Balance, September 30, 2020
38,568,916
383
586,057
180,162
19,324
794,696
12,291
(1,277
49,138
540
541
(1,159
568
Balance, December 31, 2020
6
Balance, January 1, 2021
21,798
(26,394
55,908
750
751
Restricted stock activity, net
274,739
(244
25,894
515
Cash dividends declared on common stock ($0.06 per share)
(2,315
(332,744
(6,363
779
Balance, March 31, 2021
38,641,851
385
589,209
210,385
(8,275
(8,347
793,795
28,492
8,524
11,031
135
(19,166
(344
(2,319
(538,744
(12,093
1,078
Balance, June 30, 2021
38,094,972
590,422
236,363
(20,712
177
817,073
25,866
283
12,879
(38
16,590
408
Cash dividends declared on common stock ($0.09 per share)
(3,396
(460,220
(10,411
1,080
Balance, September 30, 2021
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan and lease losses
Impairment loss on assets held for sale
3,981
747
Depreciation and amortization of premises and equipment
4,603
4,849
Net amortization of securities
6,649
5,445
Net change in fair value of equity securities, net
(36
(301
Net losses (gains) on sales and valuation adjustments of premises and equipment
(497
156
(33,350
(23,900
Originations of U.S. government guaranteed loans
(323,010
(301,177
Proceeds from U.S. government guaranteed loans sold
312,733
232,251
Accretion of premiums and discounts on acquired loans, net
(5,001
(10,754
Net change in servicing assets
(1,555
(1,796
Net losses on sales and valuation adjustments of other real estate owned
755
999
Net amortization of other acquisition accounting adjustments
5,261
5,676
Amortization of subordinated debt issuance cost
131
41
Accretion of junior subordinated debentures discount
345
2,937
2,011
Deferred tax provision, net of valuation
4,108
2,643
Increase in cash surrender value of bank owned life insurance
(983
(202
Loss on redemption of junior subordinated debentures
112
Changes in assets and liabilities:
9,706
(3,161
(17,565
20,552
Net cash provided by operating activities
46,102
3,053
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale
(514,506
(742,303
Proceeds from maturities and calls of securities available-for-sale
37,108
173,581
Proceeds from paydowns of securities available-for-sale
269,286
189,913
Proceeds from sales of securities available-for-sale
280,962
80,509
Proceeds from maturities and calls of securities held-to-maturity
500
Redemption (purchases) of Federal Home Loan Bank stock, net
(5,420
12,475
Net change in loans and leases
(272,913
(596,536
Purchases of premises and equipment
(1,762
Proceeds from sales of premises and equipment
296
32
Proceeds from sales of assets held for sale
4,919
Proceeds from sales of other real estate owned
2,998
874
Investment in bank owned life insurance
(50,000
Proceeds from bank owned life insurance death benefit
69
Net cash used in investing activities
(248,532
(885,534
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
406,321
662,724
Proceeds from short-term borrowings
11,953,000
6,407,800
Repayments of short-term borrowings
(11,832,000
(6,682,800
Proceeds from Paycheck Protection Program Liquidity Facility (PPPLF) advances
196,679
449,889
Repayments of PPPLF advances
(412,182
(279
Proceeds from subordinated notes, net
73,258
Repayments of junior subordinated debentures
(1,500
Net decrease in securities sold under agreements to repurchase
(14,279
(3,688
Dividends paid on preferred stock
(587
Dividends paid on common stock
(7,928
(3,412
Proceeds from issuance of common stock
1,731
3,085
Repurchases of common stock
(28,867
Net cash provided by financing activities
261,888
902,822
NET INCREASE IN CASH AND CASH EQUIVALENTS
59,458
20,341
CASH AND CASH EQUIVALENTS, beginning of period
80,737
CASH AND CASH EQUIVALENTS, end of period
101,078
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
8,901
21,130
Cash paid during the period for taxes
25,525
7,697
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common dividend declared, not paid
102
1,196
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 1—Basis of Presentation
These unaudited interim condensed consolidated financial statements include the accounts of Byline Bancorp, Inc., a Delaware corporation (the “Company,” “Byline,” “we,” “us,” “our”), a bank holding company whose principal activity is the ownership and management of its Illinois state chartered subsidiary bank, Byline Bank (the “Bank”), based in Chicago, Illinois.
These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2021 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information in footnote disclosures normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Consolidated Financial Statements for the years ended December 31, 2020, 2019, and 2018.
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events,” the Company’s management has evaluated subsequent events for potential recognition or disclosure through the date of the issuance of these condensed consolidated financial statements.
The Company has one reportable segment. The Company’s chief operating decision maker evaluates the operations of the Company using consolidated information for purposes of allocating resources and assessing performance. Therefore, segments disclosures are not required.
No subsequent events were identified that would have required a change to the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.
Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.
Note 2—Accounting Pronouncements Recently Adopted or Issued
The following reflect recent accounting pronouncements that have been adopted or are pending adoption by the Company. As the Company qualifies as an emerging growth company and has elected the extended transition period for complying with new or revised accounting pronouncements, it is not subject to new or revised accounting standards applicable to public companies during the extended transition period. The accounting pronouncements pending adoption below reflect effective dates for the Company as an emerging growth company with the extended transition period.
Adopted Accounting Pronouncement
Leases (Topic 842)— On January 1, 2021, the Company adopted ASU No. 2016-02 Leases and subsequent amendments thereto, which requires the Company to recognize most leases on the balance sheet. We adopted the standard under a modified retrospective approach as of the date of adoption and elected to apply several of the available practical expedients, including:
Adoption of the leasing standard resulted in the recognition of operating right-of-use assets of $10.5 million and operating lease liabilities of $11.7 million as of January 1, 2021. These amounts were determined based on the present value of remaining minimum lease payments, discounted using the Company’s incremental borrowing rate as of the date of adoption. This guidance also applies to the Company’s investment in direct financing leases, which are included in loans, but did not have a material impact. There was no material impact to the timing of expense or income recognition in the Company’s Consolidated Statements of Operations. Prior periods were not restated and continue to be presented under legacy GAAP. Refer to Note 8—Leases for further details.
Issued Accounting Pronouncements Pending Adoption
Financial Instruments—Credit Losses (Topic 326)—In June 2016, FASB issued ASU No. 2016‑13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more useful to users of the financial statements. In November 2019, FASB issued ASU No. 2019-10, Effective Dates, which delays the effective date of the ASU for entities not classified as a public business entity. Assuming the Company remains an emerging growth company, the Company anticipates adopting the standard on December 31, 2022. The Company is in the process of implementation and determining the impact that this ASU will have on the Company’s Consolidated Financial Statements.
Income Taxes (Topic 740)—In December 2019, FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU simplify the accounting for income taxes by removing the following: the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; the exception to the requirement to or not to recognize a deferred tax liability for a foreign entity when it becomes an equity method investment or it becomes a subsidiary, respectively; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in the ASU changes current authoritative guidance by requiring the recognition of franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring an evaluation when a step up in the tax basis of goodwill should be considered part the of business combination; specifying that it is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is
11
not subject to tax in its separate financial statements; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date. The amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. Early adoption is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2022. The Company is currently evaluating the provisions of ASU No. 2019-12 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
Reference Rate Reform (Topic 848)—In March 2020, FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform. The amendments in the ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in the ASU provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments in the ASU will be in effect for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of reference rate reform to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.
Note 3—Securities
The following tables summarize the amortized cost and fair values of securities available-for-sale and securities held-to-maturity as of the dates shown and the corresponding amounts of gross unrealized gains and losses:
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
FairValue
Available-for-sale
U.S. Treasury Notes
8,487
91
8,578
U.S. Government agencies
124,244
885
(1,865
123,264
Obligations of states, municipalities, and political subdivisions
101,499
3,725
(164
105,060
Residential mortgage-backed securities
Agency
794,856
3,303
(12,986
785,173
Non-agency
64,645
86
(722
64,009
Commercial mortgage-backed securities
237,376
3,179
(3,146
237,409
Corporate securities
64,842
2,002
(17
66,827
Asset-backed securities
37,203
83
37,285
1,433,152
13,354
(18,901
Held-to-maturity
146
4,033
12
23,468
344
23,812
113,088
600
(137
113,551
135,513
6,991
(85
142,419
764,951
13,645
(205
778,391
32,654
332
(5
32,981
244,496
6,046
(390
250,152
59,020
1,850
(102
60,768
45,255
26
(125
45,156
1,418,445
29,834
(1,049
178
4,573
The Company did not classify securities as trading during the nine months ended September 30, 2021 or during 2020.
Gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2021 and December 31, 2020, are summarized as follows:
Less than 12 Months
12 Months or Longer
# ofSecurities
UnrealizedLosses
74,687
(1,506
9,641
(359
84,328
Obligations of states, municipalities and political subdivisions
8,097
51
620,325
(12,626
11,805
(360
632,130
34,310
21
75,001
(2,369
26,823
(777
101,824
5,041
4,997
97
822,458
(17,405
48,269
(1,496
870,727
13
30,639
210
45,253
(198
472
45,725
3,963
55,554
10,916
24,436
(99
4,952
(26
29,388
37
170,971
(1,016
5,424
(33
176,395
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The Company evaluated the securities that had an unrealized loss for other than temporary impairment and determined all declines in value to be temporary. There were 97 securities available-for-sale with unrealized losses at September 30, 2021. There were no securities held-to-maturity with unrealized losses at September 30, 2021. The Company anticipates full recovery of amortized cost with respect to these securities by maturity, or sooner, in the event of a more favorable market interest rate environment. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
The proceeds from all sales of securities available-for-sale, and the associated gains and losses on sales and calls of securities, for the three and nine months ended September 30, 2021 and 2020 are listed below:
For the Three Months Ended
For the Nine Months Ended
Proceeds
35,092
186,850
Gross gains
2,525
2,494
Gross losses
1,069
82
There were $130,000 and $1.5 million in net gains reclassified from accumulated other comprehensive income into earnings for the three and nine months ended September 30, 2021, respectively. There were $1.0 million and $2.4 million in net gains reclassified from accumulated other comprehensive income into earnings for the three and nine months ended September 30, 2020, respectively.
Securities posted as collateral were $361.0 million and $731.8 million at September 30, 2021 and December 31, 2020, respectively, of which carrying amounts of $361.0 million and $323.9 million were pledged at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021 and December 31, 2020, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $311.3 million and $245.1 million, respectively, and for customer repurchase agreements of $38.7 million and $64.1 million, respectively. At September 30, 2021 and December 31, 2020, there were no securities pledged for advances from the Federal Home Loan Bank. Other securities were pledged for derivative positions, letters of credit and for purposes required or permitted by law. At September 30, 2021 and December 31, 2020, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
14
At September 30, 2021, the amortized cost and fair value of debt securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
Due in one year or less
23,201
23,402
Due from one to five years
26,476
27,466
Due from five to ten years
209,435
211,691
Due after ten years
77,163
78,455
Mortgage-backed securities
1,096,877
1,086,591
Note 4—Loan and Lease Receivables
Outstanding loan and lease receivables as of the dates shown were categorized as follows:
December 31,
Commercial real estate
1,615,875
1,416,731
Residential real estate
507,226
569,387
Construction, land development, and other land
340,428
231,602
Commercial and industrial
1,535,412
1,372,452
Paycheck Protection Program ("PPP")
275,619
527,044
Installment and other
1,396
1,942
Lease financing receivables
334,484
223,295
Total loans and leases
4,610,440
4,342,453
Net unamortized deferred fees and costs
(5,484
(5,764
Initial direct costs
4,272
3,846
Net minimum lease payments
337,512
234,472
Unguaranteed residual values
22,338
8,690
Unearned income
(25,366
(19,867
Total lease financing receivables
Lease financial receivables before allowance for lease losses
338,756
227,141
Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases. At September 30, 2021 and December 31, 2020, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $396.6 million and $635.0 million, respectively. At September 30, 2021 and December 31, 2020, the discount on the unguaranteed portion of U.S. government guaranteed loans was $27.9 million and $28.3 million, respectively, which are included in total loans and leases. At September 30, 2021 and December 31, 2020, installment and other loans included overdraft deposits of $477,000 and $496,000, respectively, which were reclassified as loans. At September 30, 2021 and December 31, 2020, loans and leases and loans held for sale pledged as security for borrowings were $2.0 billion and $2.3 billion, respectively.
The minimum annual lease payments for lease financing receivables as of September 30, 2021 are summarized as follows:
Minimum LeasePayments
27,875
2022
110,733
2023
85,005
2024
59,682
2025
39,328
Thereafter
14,889
Originated loans and leases represent originations excluding loans initially acquired in a business combination. However, once an acquired non-impaired loan reaches its maturity date, and is re-underwritten and renewed, it is internally classified as an originated loan. Acquired impaired loans are loans acquired from a business combination with evidence of credit quality deterioration and are accounted for under ASC Topic 310-30. Acquired non-impaired loans and leases represent loans and leases acquired from a business combination without more than insignificant evidence of credit quality deterioration and are accounted for under ASC Topic 310-20. Acquired leases and revolving loans having evidence of credit quality deterioration do not qualify to be accounted for as acquired impaired loans and are accounted for under ASC Topic 310-20. The following tables summarize the balances for each respective loan and lease category as of September 30, 2021 and December 31, 2020:
Originated
AcquiredImpaired
AcquiredNon-Impaired
1,298,454
84,821
235,103
1,618,378
387,578
61,893
58,283
507,754
336,460
1,746
206
338,412
1,480,076
6,651
49,678
1,536,405
Paycheck Protection Program
268,081
998
169
275
1,442
331,149
7,607
4,102,796
155,280
351,152
16
1,017,587
108,484
295,599
1,421,670
414,220
78,840
79,211
572,271
226,408
4,113
212
230,733
1,276,527
10,178
82,195
1,368,900
517,815
1,267
202
536
2,005
214,636
12,505
3,668,460
201,817
470,258
Acquired impaired loans—The unpaid principal balance and carrying amount of all acquired impaired loans are summarized below. The balances do not include an allowance for loan and lease losses of $4.3 million and $6.5 million, at September 30, 2021 and December 31, 2020, respectively.
UnpaidPrincipalBalance
CarryingValue
126,738
154,233
108,560
126,086
12,677
12,115
15,925
866
917
Total acquired impaired loans
257,580
309,838
The following table summarizes the changes in accretable yield for acquired impaired loans for the three and nine months ended September 30, 2021 and 2020:
Beginning balance
24,474
31,868
27,696
40,009
Accretion to interest income
(3,080
(5,763
(9,896
(15,420
Reclassification from nonaccretable difference, net
1,217
5,727
4,811
7,243
Ending balance
22,611
31,832
17
Acquired non-impaired loans and leases— The unpaid principal balance and carrying value for acquired non-impaired loans and leases at September 30, 2021 and December 31, 2020 were as follows:
240,271
302,091
58,858
80,104
271
278
51,468
84,608
286
553
7,638
13,978
Total acquired non-impaired loans and leases
358,792
481,612
Note 5—Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments
Loans and leases considered for inclusion in the allowance for loan and lease losses include acquired non-impaired loans and leases, those acquired impaired loans with credit deterioration after acquisition, and originated loans and leases. Although all acquired loans and leases are included in the following table, only those with credit deterioration subsequent to acquisition date are included in the allowance for loan and lease losses.
The following tables summarize the balance and activity within the allowance for loan and lease losses, the components of the allowance for loan and lease losses in terms of loans and leases individually and collectively evaluated for impairment, and corresponding loan and lease balances by type for the three and nine months ended September 30, 2021 and 2020 are as follows:
CommercialReal Estate
ResidentialReal Estate
Construction, Land Development,and Other Land
Commercialand Industrial
PaycheckProtectionProgram
Installmentand Other
LeaseFinancingReceivables
Three months ended
19,541
1,364
619
38,284
1,902
61,719
Provision/(recapture)
1,108
(225
(61
(1,218
(2
Charge-offs
(564
(65
(399
(2,484
Recoveries
287
342
1,011
20,372
1,076
558
35,990
2,595
60,598
Nine months ended
19,584
2,400
1,352
41,183
1,813
66,347
2,891
(1,257
(468
226
(8
1,366
(2,644
(76
(326
(6,172
(1,148
(10,366
753
564
Ending balance:
Individually evaluated for impairment
8,420
16,142
24,562
Collectively evaluated for impairment
9,314
723
550
18,572
31,761
Loans acquired with deteriorated credit quality
2,638
353
1,276
4,275
Total allowance for loan and lease losses
18
Loans and leases ending balance:
45,563
3,946
37,689
87,198
1,487,994
441,915
336,666
1,492,065
1,273
4,366,750
September 30, 2020
14,110
3,741
1,491
30,108
51,300
Provision
6,421
291
1,029
7,603
395
(1,566
(250
(701
(3,254
(374
(6,145
19
53
200
363
18,984
3,790
1,872
34,540
2,035
61,258
7,965
1,990
610
19,377
50
1,944
31,936
14,149
2,031
1,910
26,844
(13
792
(3,206
(259
(12,057
(1,392
(17,615
76
28
376
691
1,224
4,516
77
10,189
14,782
11,825
3,413
1,685
22,450
41,445
300
187
1,901
5,031
39,001
1,636
37,253
77,890
1,191,740
547,563
234,230
1,281,067
622,191
2,929
200,089
4,079,809
117,114
84,197
4,804
10,489
214
216,818
1,347,855
633,396
239,034
1,328,809
3,143
4,374,517
The Company recaptured $1.1 million and $5.7 million of the allowance for loan and lease losses for the three and nine months ended September 30, 2021, respectively, and increased the allowance by $10.0 million and $29.3 million for the three and nine months ended September 30, 2020, respectively. For acquired impaired loans, the Company increased the allowance for loan and lease losses by $405,000 and recaptured $2.2 million of allowance for the three and nine months ended September 30, 2021, respectively. The Company increased the allowance for loan and lease losses by $295,000 and $2.3 million for the three and nine months ended September 30, 2020, respectively for acquired impaired loans.
For loans individually evaluated for impairment, the Company recaptured $1.0 million of the allowance for loan and lease losses and increased the allowance by $602,000 for the three and nine months ended September 30, 2021, respectively. The Company increased the allowance on loans individually evaluated for impairment by $768,000 and $4.1 million for the three and nine months ended September 30, 2020, respectively. For loans collectively evaluated for impairment, the Company decreased the allowance for loan and lease losses by $498,000 and $4.2 million for the three and nine months ended September 30, 2021, and increased the allowance for loan and lease losses by $8.9 million and $23.0 million for the three and nine months ended September 30, 2020, respectively.
An allowance for loan and lease loss allocation has not been made for Paycheck Protection Program (“PPP”) loans as these loans are fully guaranteed by the Small Business Association ("SBA"). On a quarterly basis, the Company assesses the collectability of its government guarantee loan and lease portfolio using historical loss experience in its small business lending unit.
The following tables summarize the recorded investment, unpaid principal balance, and related allowance for loans and leases considered impaired as of September 30, 2021 and December 31, 2020, which exclude acquired impaired loans. For purposes of these tables, the unpaid principal balance represents the outstanding contractual balance. Impaired loans include loans that are individually evaluated for impairment as well as troubled debt restructurings for all loan categories. The sum of non-accrual loans and loans past due 90 days still on accrual will differ from the total impaired loan amount.
RecordedInvestment
RelatedAllowance
With no related allowance recorded
20,432
25,512
3,850
3,901
14,212
15,999
With an allowance recorded
25,131
26,569
96
152
23,477
25,614
Total impaired loans
97,747
32,473
34,792
1,558
1,644
17,944
19,917
13,696
14,919
5,034
272
274
29,412
32,018
18,848
95,355
103,564
23,960
20
The following tables summarize the average recorded investment and interest income recognized for loans and leases considered impaired, which excludes acquired impaired loans, for the nine months ended:
AverageRecordedInvestment
InterestIncomeRecognized
28,480
920
2,788
109
16,668
481
27,620
1,185
207
28,785
1,666
104,548
4,363
22,511
927
1,615
2,984
220
16,991
493
13,329
526
460
21,352
79,242
3,291
The following tables summarize the risk rating categories of the loans and leases considered for inclusion in the allowance for loan and lease losses calculation, excluding acquired impaired loans, as of September 30, 2021 and December 31, 2020:
CommercialandIndustrial
Pass
1,297,981
422,843
291,496
1,261,335
1,190
335,475
3,878,401
Watch
143,047
16,862
37,795
196,288
264
394,339
Special Mention
48,605
3,036
7,375
30,841
1,934
91,791
Substandard
43,924
3,120
41,290
786
89,120
Doubtful
297
Loss
1,533,557
445,861
1,529,754
4,453,948
1,064,623
463,103
180,458
1,027,399
1,706
222,818
3,477,922
134,381
22,086
46,162
225,930
47
428,702
60,022
3,795
56,784
2,721
123,322
54,160
48,609
955
108,172
1,313,186
493,431
226,620
1,358,722
1,803
4,138,718
The following tables summarize contractual delinquency information for acquired non-impaired and originated loans and leases by category at September 30, 2021 and December 31, 2020:
30-59 DaysPast Due
60-89DaysPast Due
Greaterthan 90Days andAccruing
Non-accrual
Total Past Due
Current
330
1,426
17,082
18,838
1,514,719
1,087
2,127
3,214
442,647
334,631
1,653
594
14,272
16,519
1,513,235
39
1,234
973
98
984
2,055
336,701
6,117
2,118
34,465
42,700
4,411,248
30-59DaysPast Due
1,544
4,194
15,969
21,707
1,291,479
1,686
1,929
3,615
489,816
4,521
1,290
21,936
27,747
1,330,975
1,796
996
1,268
2,640
224,501
8,753
5,860
41,103
55,716
4,083,002
Trouble debt restructurings (“TDRs”) are granted due to borrower financial difficulty and provide for a modification of loan repayment terms. TDRs are treated in the same manner as impaired loans for purposes of calculating the allowance for loan and lease losses. The tables below present TDRs by loan category as of September 30, 2021 and December 31, 2020:
NumberofLoans
Pre-ModificationOutstandingRecordedInvestment
Post-ModificationOutstandingRecordedInvestment
SpecificReserves
Accruing:
2,130
209
63
173
Total accruing
2,366
Non-accruing:
856
740
116
311
1,730
1,107
623
508
Total non-accruing
2,586
1,847
739
819
Total troubled debt restructurings
4,213
1,091
2,187
104
230
2,495
182
1,609
1,362
247
4,420
4,288
132
3,157
6,029
5,650
3,259
30
8,145
3,441
In addition, there was no commitment outstanding on troubled debt restructurings at September 30, 2021 or December 31, 2020.
Loans modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2021 and 2020 were:
2,395
3,151
1,771
Additions
604
281
Net payments
(29
(1,462
(410
(1,538
Net transfers from non-accrual
2,293
4,441
7,449
8,800
673
5,633
(2,584
(302
(3,568
(1,688
(10
(852
(908
(4,994
Net transfers to accrual
6,295
8,588
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the three and nine months ended September 30, 2021 or 2020.
At September 30, 2021 and December 31, 2020, the reserve for unfunded commitments was $1.5 million and $1.9 million, respectively. During the three and nine months ended September 30, 2021, there was a recapture for unfunded commitments of $79,000 and $363,000, respectively. During the three and nine months ended September 30, 2020, the provision for unfunded commitments was $519,000 and $1.2 million, respectively. There were no charge-offs or recoveries related to the reserve for unfunded commitments during the periods.
23
Note 6—Servicing Assets
Activity for servicing assets and the related changes in fair value for the three and nine months ended September 30, 2021 and 2020 was as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
24,683
18,351
19,471
Additions, net
1,564
1,794
5,703
4,449
Changes in fair value
21,267
Loans serviced for others are not included in the Consolidated Statements of Financial Condition. The unpaid principal balances of these loans serviced for others as of September 30, 2021 and December 31, 2020 were as follows:
Loan portfolios serviced for:
SBA guaranteed loans
1,471,367
1,395,713
USDA guaranteed loans
143,847
135,543
1,615,214
1,531,256
Loan servicing revenue totaled $3.3 million and $2.9 million for each of the three months ended September 30, 2021 and 2020, respectively. Loan servicing revenue totaled $9.3 million and $8.7 million for each of the nine months ended September 30, 2021 and 2020, respectively. Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in a downward valuation adjustment of $2.7 million and an upward valuation adjustment of $1.1 million for three months ended September 30, 2021 and 2020, respectively. Loan servicing asset revaluations resulted in downward valuation adjustments of $4.1 million and $2.7 million for the nine months ended September 30, 2021 and 2020, respectively.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in secondary market premiums and prepayment speed assumptions have the most significant impact on the fair value of servicing rights.
Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which may result in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may change over time. Refer to Note 15—Fair Value Measurement for further details.
Note 7—Other Real Estate Owned
The following table presents the change in other real estate owned (“OREO”) for the three and nine months ended September 30, 2021 and 2020:
4,417
8,652
9,896
Net additions to OREO
436
127
Proceeds from sales of OREO
(1,498
(224
(2,998
(874
Gains (losses) on sales of OREO
114
(41
133
44
Valuation adjustments
(278
(888
(1,043
8,150
At September 30, 2021 and December 31, 2020, the balance of real estate owned included no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.
24
At September 30, 2021 and December 31, 2020, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $3.1 million and $3.3 million, respectively.
There were no internally financed sales of OREO for the three and nine months ended September 30, 2021 or 2020.
Note 8—Leases
The Company enters into leases in the normal course of business primarily for its banking facilities and branches. The Company’s operating leases have varying maturity dates through year end 2042, some of which include renewal or termination options to extend the lease. In addition, the Company leases or subleases real estate to third parties. The Company includes lease extension and termination options in the lease term if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. In addition, the Company has elected to account for any non-lease components in its real estate leases as part of the associated lease component. The Company has also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on the Company’s balance sheet.
Leases are classified at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The following table summarizes the amount and balance sheet line item for our operating lease right-of-use asset and liability as of September 30, 2021:
Balance Sheet Line Item
Operating lease right-of-use asset
11,580
Operating lease liability
13,744
The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB regular advance rate, adjusted for the lease term and other factors. At September 30, 2021, the weighted-average discount rate of operating leases was 0.85% and the weighted average remaining life of operating leases was 6.0 years.
The future minimum lease payments for operating leases, subsequent to September 30, 2021, as recorded on the balance sheet, are summarized as follows:
Operating LeaseCommitments
1,515
3,618
2,194
1,505
Total undiscounted lease payments
14,352
Less: imputed interest
(608
Net lease liabilities
The Company’s rental expenses for the three months ended September 30, 2021 and 2020 were $1.2 million and $1.6 million, respectively. The Company’s rental expenses for the nine months ended September 30, 2021 and 2020 were $4.0 million and $4.9 million, respectively. For the three months ended September 30, 2021 and 2020, the Company received $166,000 and $184,000, respectively, in sublease income. For the nine months ended September 30, 2021 and 2020, the Company received $479,000 and $549,000, respectively, in sublease income. The total amount of minimum rentals to be received in the future on these subleases is approximately $1.5 million, and the leases have contractual lives extending through
25
2026. In addition to the above required lease payments, the Company has contractual obligations related primarily to information technology contracts and other maintenance contracts.
Note 9—Goodwill, Core Deposit Intangible and Other Intangible Assets
The following tables summarize the changes in the Company’s goodwill, core deposit intangible assets, and customer relationship intangible assets for the three and nine months ended September 30, 2021 and 2020:
For the Three Months Ended September 30,
Goodwill
Core DepositIntangible
Customer RelationshipIntangible
148,353
18,346
2,335
25,459
2,658
Amortization
(1,672
(66
(1,825
(122
16,674
2,269
23,634
2,536
Accumulated amortization
N/A
38,792
680
Weighted average remaining amortization period
5.0 Years
8.5 Years
5.8 Years
9.7 Years
21,809
2,469
29,111
2,791
(5,135
(200
(5,477
(255
The following table presents the estimated amortization expense for core deposit intangible and customer relationship intangible assets remaining at September 30, 2021:
EstimatedAmortization
1,737
6,386
4,336
2,286
1,721
2,477
18,943
Note 10—Income Taxes
The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates.
The effective tax rate for the nine months ended September 30, 2021 and 2020 was 25.3% and 28.5%, respectively. The Company recorded discrete income tax benefit of $166,000 and a provision of $231,000 related to the exercise of stock options and vesting of restricted shares for the nine months ended September 30, 2021 and 2020, respectively.
Net deferred tax assets increased to $45.2 million at September 30, 2021 compared to $40.2 million at December 31, 2020 primarily a result of unrealized losses on available-for-sale securities.
During the second quarter 2021, Illinois Senate Bill 2017 was passed which created a temporary limitation on Net Loss Deduction ("NLD") usage. For tax years 2021, 2022, and 2023, C Corporations are limited to applying a maximum of $100,000 of NLD to taxable income. NLDs that are limited during these years have an extended expiration date for the years in which they are limited. The extended expiration of the Company’s NLD carryforwards are from December 31, 2026 to December 31, 2033.
Note 11—Deposits
The composition of deposits was as follows as of September 30, 2021 and December 31, 2020:
Interest-bearing checking accounts
652,824
494,424
Money market demand accounts
1,057,419
1,142,709
Other savings
627,294
564,700
Time deposits (below $250,000)
553,364
600,810
Time deposits ($250,000 and above)
149,628
186,712
There were no brokered deposits included in Time deposits of $250,000 or more at September 30, 2021, and $35.0 million at December 31, 2020, respectively.
Note 12—Other Borrowings
The following is a summary of the Company’s other borrowings as of September 30, 2021 and December 31, 2020:
Paycheck Protection Program Liquidity Facility
156,404
371,907
Federal Home Loan Bank advances
355,000
234,000
Securities sold under agreements to repurchase
27,715
41,994
Line of credit
On April 21, 2020, the Bank entered into a Letter Agreement with the Federal Reserve Bank of Chicago that allows the Bank to access the Paycheck Protection Program Liquidity Facility (the “PPPLF”). Under the terms of the PPPLF, the Bank pledges loans originated under the PPP to the Federal Reserve Bank of Chicago as collateral for available advances under the PPPLF. Advances under the PPPLF are in an amount equal to the aggregate principal amount of PPP loans pledged by Byline Bank, carry an interest rate of 35 basis points and mature on the maturity date of the PPP loans pledged as collateral for the advance. As of September 30, 2021, the PPPLF balance was $156.4 million with an interest rate of 0.35% with various maturity dates from April 2022 to February 2026.
Byline Bank has the capacity to borrow funds from the discount window of the Federal Reserve System. As of September 30, 2021 and December 31, 2020, there were no outstanding advances under the Federal Reserve Bank discount window line.
At September 30, 2021, fixed-rate Federal Home Loan Bank (“FHLB”) advances totaled $355.0 million, with interest rates ranging from 0.00% to 0.22% and maturities ranging from November 2021 to May 2022. Advances from the FHLB are collateralized by residential real estate loans, commercial real estate loans, and securities. The Bank’s maximum borrowing capacity is limited to 35% of total assets. Required investment in FHLB stock is $4.50 for every $100 in advances.
Securities sold under agreements to repurchase represent a demand deposit product offered to customers that sweep balances in excess of the FDIC insurance limit into overnight repurchase agreements. The Company pledges securities as collateral for the repurchase agreements. Refer to Note 3—Securities for additional discussion.
27
On October 13, 2016, the Company entered into a $30.0 million revolving credit agreement with a correspondent bank. Through subsequent amendments, the revolving credit agreement was reduced to $15.0 million and the maturity of the credit facility was extended to October 9, 2020. The amended revolving line of credit bears interest at either the London Interbank Offered Rate (“LIBOR”) plus 195 basis points or the Prime Rate minus 75 basis points, not to be less than 2.00%, based on the Company’s election, which is required to be communicated at least three business days prior to the commencement of an interest period. If the Company fails to provide timely notification, the interest rate will be Prime Rate minus 75 basis points. At September 30, 2021 and December 31, 2020, the line of credit had no outstanding balance. On October 8, 2021, the Company extended the maturity of the credit facility to October 7, 2022.
The following table presents short-term credit lines available for use as of September 30, 2021 and December 31, 2020:
Federal Home Loan Bank line
1,910,295
2,016,212
Federal Reserve Bank of Chicago discount window line
622,306
874,677
Available federal funds lines
115,000
The Company hedges interest rates on borrowed funds using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. Refer to Note 16—Derivative Instruments and Hedging Activities for additional discussion.
Note 13—Subordinated Notes and Junior Subordinated Debentures
In 2020, the Company issued $75.0 million in fixed-to-floating subordinated notes that mature on July 1, 2030. The subordinated notes bear a fixed interest rate of 6.00% until July 1, 2025 and a floating interest rate equal to a benchmark rate, which is expected to be the three-month Secured Overnight Financing Rate, plus 588 basis points thereafter until maturity. The transaction resulted in debt issuance costs of approximately $1.7 million that will be amortized over 10 years.
As of September 30, 2021, the net liability outstanding of the subordinated notes was $73.5 million. The Company may, at its option, redeem the notes, in whole or in part, on a semi-annual basis beginning on July 1, 2025, subject to obtaining the prior approval of the Federal Reserve to the extent such approval is then required. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
At September 30, 2021 and December 31, 2020, the Company’s junior subordinated debentures by issuance were as follows:
Name of Trust
Aggregate Principal Amount September 30, 2021
AggregatePrincipal AmountDecember 31, 2020
StatedMaturity
Contractual Rate at September 30, 2021
Interest Rate Spread
Metropolitan Statutory Trust 1
35,000
March 17, 2034
2.91
%
Three-monthLIBOR + 2.79%
First Evanston Bancorp Trust I
10,000
March 15, 2035
1.90
Three-monthLIBOR + 1.78%
Total liability, at par
45,000
Discount
(8,204
(8,549
Total liability, at carrying value
In 2004, the Company’s predecessor, Metropolitan Bank Group, Inc., issued $35.0 million floating rate junior subordinated debentures to Metropolitan Statutory Trust 1, which was formed for the issuance of trust preferred securities. The debentures bear interest at three-month LIBOR plus 2.79% (2.91% and 3.02% at September 30, 2021 and December 31, 2020, respectively). Interest is paid on a quarterly basis. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after March 2009. Accrued interest payable was $41,000 and $45,000 as of September 30, 2021 and December 31, 2020, respectively.
As part of the First Evanston acquisition, the Company assumed the obligations to First Evanston Bancorp Trust I of $10.0 million in principal amount, which was formed for the issuance of trust preferred securities. Beginning on March 15, 2010, the interest rate reset to the three-month LIBOR plus 1.78% (1.90% and 2.00% at September 30, 2021 and December 31,
2020, respectively), which is in effect until the debentures mature in 2035. Interest is paid on a quarterly basis. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after March 2010. The Company has the option to defer interest payments on the debentures from time to time for a period not to exceed five consecutive years. Accrued interest payable was $8,000 and $9,000 as of September 30, 2021 and December 31, 2020, respectively.
The Trusts are not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trusts as liabilities. The Company owns all of the common securities of each trust. The junior subordinated debentures qualify, and are treated as, Tier 1 regulatory capital of the Company subject to regulatory limitations. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
Note 14—Commitments and Contingent Liabilities
Legal contingencies—In the ordinary course of business, the Company and Bank have various outstanding commitments and contingent liabilities that are not recognized in the accompanying consolidated financial statements. In addition, the Company may be a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is currently not expected to have a material adverse effect on the Company’s Consolidated Financial Statements.
Operating lease commitments—Refer to Note 8—Lease for discussion of operating lease commitments.
Commitments to extend credit—The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for funded instruments. The Company does not anticipate any material losses as a result of the commitments and letters of credit.
The following table summarizes the contract or notional amount of outstanding loan and lease commitments at September 30, 2021 and December 31, 2020:
Fixed Rate
Variable Rate
Commitments to extend credit
173,848
1,520,986
1,694,834
106,183
1,261,872
1,368,055
Letters of credit
653
58,479
59,132
652
58,120
58,772
174,501
1,579,465
1,753,966
106,835
1,319,992
1,426,827
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).
Letters of credit are conditional commitments issued by the Company to guarantee to a third-party the performance of a customer. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 1.25% to 18.00% and maturities up to 2050. Variable rate loan commitments have interest rates ranging from 1.25% to 8.25% and maturities up to 2044.
Note 15—Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In addition, the Company has the ability to obtain fair values for markets that are not accessible.
These types of inputs create the following fair value hierarchy:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available. The Company’s own data used to develop unobservable inputs may be adjusted for market considerations when reasonably available.
The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to assets and liabilities.
The Company used the following methods and significant assumptions to estimate fair value for certain assets measured and carried at fair value on a recurring basis:
Securities available-for-sale—The Company obtains fair value measurements from an independent pricing service. Management reviews the procedures used by the third party, including significant inputs used in the fair value calculations. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. When market quotes are not readily accessible or available, alternative approaches are utilized, such as matrix or model pricing.
The Company’s methodology for pricing non-rated bonds focuses on three distinct inputs: equivalent rating, yield and other pricing terms. To determine the rating for a given non-rated municipal bond, the Company references a publicly issued bond by the same issuer if available as well as other additional key metrics to support the credit worthiness. Typically, pricing for these types of bonds would require a higher yield than a similar rated bond from the same issuer. A reduction in price is applied to the rating obtained from the comparable bond, as the Company believes if liquidated, a non-rated bond would be valued less than a similar bond with a verifiable rating. The reduction applied by the Company is one notch lower (i.e. a “AA” rating for a comparable bond would be reduced to “AA-” for the Company’s valuation). In 2021 and 2020, all of the ratings derived by the Company were “BBB” or better with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined, the Company obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets.
Equity and other securities—The Company utilizes the same fair value measurement methodology for equity and other securities as detailed in the securities available-sale portfolio above.
Servicing assets—Fair value is based on a loan-by-loan basis taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating estimated future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds and costs to service. The present value of the future cash flows are then calculated utilizing market-based discount rate assumptions.
Derivative instruments—Interest rate derivatives are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective
counterparties. Derivative financial instruments are included in other assets and other liabilities in the Consolidated Statements of Financial Condition.
The following tables summarize the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2021 and December 31, 2020:
Fair Value Measurements Using
Fair Value
Level 1
Level 2
Level 3
Financial assets
Mortgage-backed securities; residential
Non-Agency
Mortgage-backed securities; commercial
Mutual funds
4,424
Equity securities
5,875
5,189
686
Servicing assets
Derivative assets
13,463
Financial liabilities
Derivative liabilities
12,348
2,983
5,781
5,096
685
17,149
18,133
The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the nine months ended September 30, 2021 and 2020.
31
The following table presents additional information about financial assets measured at fair value on recurring basis for which the Company used significant unobservable inputs (Level 3):
Investment Securities
Servicing Assets
Balance, beginning of period
700
Change in fair value
(16
Balance, end of period
684
The following table presents additional information about the unobservable inputs used in the fair value measurements on recurring basis that were categorized within Level 3 of the fair value hierarchy as of September 30, 2021:
Financial Instruments
Valuation Technique
Unobservable Inputs
Range ofInputs
WeightedAverageRange
Impact toValuation from anIncreased orHigher Input Value
Single issuer trust preferred
Discounted cash flow
Discount rate
3.1% - 6.4%
4.5
Decrease
Prepayment speeds
0.5% - 31.8%
14.3
(3.0)% - 50.0%
8.1
Expected weightedaverage loan life
0.2 - 8.5 years
3.9 years
Increase
The Company used the following methods and significant assumptions to estimate fair value for certain assets measured and carried at fair value on a non-recurring basis:
Impaired loans (excluding acquired impaired loans)—Impaired loans, other than those existing on the date of a business acquisition, are primarily carried at the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent. Valuations of impaired loans that are collateral dependent are supported by third party appraisals in accordance with the Bank’s credit policy. Other valuation methods include analysis of discounted cash flows, which measures the present value of expected future cash flows discounted at the loan’s effective interest rate. Impaired loans that are not collateral dependent are not material.
Assets held for sale—Assets held for sale consist of former branch locations and real estate previously purchased for expansion. Assets are considered held for sale when management has approved to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based on the lower of carrying value or its fair value, less estimated costs to sell. The Company records assets held for sale on the Consolidated Statements of Financial Condition within accrued interest receivable and other assets.
Other real estate owned—Certain assets held within other real estate owned represent real estate or other collateral that has been adjusted to its estimated fair value, less cost to sell, as a result of transferring from the loan portfolio at the time of foreclosure or repossession and based on management’s periodic impairment evaluation. From time to time, non-recurring fair value adjustments to other real estate owned are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.
Adjustments to fair value based on such non-recurring transactions generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. The following tables summarize the
Company’s assets that were measured at fair value on a non-recurring basis, excluding acquired impaired loans, as of September 30, 2021 and December 31, 2020:
Non-recurring
Impaired loans (excluding acquired impaired loans)
37,143
21,547
Assets held for sale
10,982
Other real estate owned
41,135
1,752
28,508
13,023
The following methods and assumptions were used by the Company in estimating fair values of other assets and liabilities for disclosure purposes:
Cash and cash equivalents—For these short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities held-to-maturity—The Company obtains fair value measurements from an independent pricing service. Management reviews the procedures used by the third party, including significant inputs used in the fair value calculations. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. When market quotes are not readily accessible or available, alternative approaches are utilized, such as matrix or model pricing.
Restricted stock—The fair value has been determined to approximate cost.
Loans held for sale—The fair value of loans held for sale are based on quoted market prices, where available, and determined by discounted estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.
Loan and lease receivables, net—For certain variable rate loans that reprice frequently and with no significant changes in credit risk, fair value is estimated at carrying value. The fair value of other types of loans is estimated using an exit price notion. It is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits—The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows, using rates currently offered for deposits of similar remaining maturities.
Paycheck Protection Program Liquidity Facility—The carrying amount approximates fair value.
Federal Home Loan Bank advances—The fair value of FHLB advances is estimated by discounting the agreements based on maturities using rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date.
Securities sold under agreements to repurchase—The carrying amount approximates fair value due to maturities of less than ninety days.
Subordinated notes—The fair value is based on available market prices.
Junior subordinated debentures—The fair value of junior subordinated debentures, in the form of trust preferred securities, is determined using rates currently available to the Company for debt with similar terms and remaining maturities.
Accrued interest receivable and payable—The carrying amount approximates fair value.
Commitments to extend credit and letters of credit—The fair values of these off-balance sheet commitments to extend credit and commercial and letters of credit are not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.
The estimated fair values of financial instruments not carried at fair value and levels within the fair value hierarchy are as follows:
HierarchyLevel
CarryingAmount
EstimatedFair Value
Securities held-to-maturity
Other restricted stock
54,739
8,848
Loans and lease receivables, net (less impaired loans at fair value)
4,485,994
4,478,323
4,202,793
4,205,906
Accrued interest receivable
18,857
20,678
Non-interest-bearing deposits
3,041,101
2,990,735
Accrued interest payable
1,687
1,478
Securities sold under repurchase agreement
Subordinated notes
83,291
76,627
Junior subordinated debentures
40,777
40,543
34
Note 16—Derivative Instruments and Hedge Activities
As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. The following tables present the fair value of the Company’s derivative financial instruments and classification on the Consolidated Statements of Financial Condition as of September 30, 2021 and December 31, 2020:
NotionalAmount
OtherAssets
OtherLiabilities
Derivatives designated as hedging instruments
Interest rate swaps designated as cash flow hedges
400,000
1,799
(192
Derivatives not designated as hedging instruments
Other interest rate derivatives
458,698
11,664
(12,148
383,410
(18,116
Other credit derivatives
7,788
8,437
Total derivatives
866,486
(12,348
391,847
(18,133
Interest rate swaps designated as cash flow hedges—Cash flow hedges of interest payments associated with certain other borrowings had notional amounts totaling $400.0 million as of September 30, 2021. There were no cash flow hedges outstanding at December 31, 2020. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value of the derivatives hedging instrument with the fair value of the designated hedged transactions. As of September 30, 2021, the cash flow hedges aggregating $400.0 million in notional amounts are comprised of five forward starting pay fixed interest rate swaps, of which one for $100.0 million is effective in March 2022; one for $50.0 million is effective in September 2022; two totaling $200.0 million are effective in March 2023; and one for $50.0 million is effective May 2023.
Included in other comprehensive income is the remaining balance related to previously terminated interest rate swaps designated as cash flow hedges of $253,000 as of September 30, 2021 and $304,000 as of December 31, 2020. These are amortized over the original life of the cash flow hedge. Interest recorded on these swap transactions was $29,000 and $22,000 during the three months ended September 30, 2021, and 2020, respectively, and is reported as a component of interest expense on other borrowings. Interest recorded on these swap transactions was $71,000 and $64,000 during the nine months ended September 30, 2021, and 2020, respectively, and is reported as a component of interest expense on other borrowings. As of September 30, 2021, the Company estimates $868,000 of the unrealized loss to be reclassified as an increase to interest expense during the next twelve months.
The following table reflects the cash flow hedges as of September 30, 2021:
Notional amounts
Derivative assets fair value
Derivative liabilities fair value
192
Weighted average maturity
5.2 years
The weighted average pay rates of the forward swaps are 0.98% and weighted average receive rates will be determined at the time the forward swaps become effective.
35
The following table reflects the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the nine months ended:
Amount ofLoss Recognized inOCI
Amount ofLossReclassifiedfrom OCI toIncome as anIncrease toInterestExpense
Amount ofGain (Loss)Recognized inOtherNon-InterestIncome
Interest rate swaps
(71
(64
Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements and/or the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
Other interest rate derivatives—The total combined notional amount was $458.7 million as of September 30, 2021 with maturities ranging from January 2022 to September 2031. The fair values of the interest rate derivative agreements are reflected in other assets and other liabilities with corresponding gains or losses reflected in non-interest income. During the three months ended September 30, 2021 and 2020, there were $134,000 and $41,000 of net transaction fees, respectively, included in other non-interest income, related to these derivative instruments. During the nine months ended September 30, 2021 and 2020, there were $840,000 and $700,000 of net transaction fees, respectively, included in other non-interest income, related to these derivative instruments.
These instruments are inherently subject to market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the Company’s risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Market and credit risks are managed and monitored as part of the Company’s overall asset-liability management process. The credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company’s loan underwriting process. The Company’s loan underwriting process also approves the Bank’s swap counterparty used to mirror the borrowers’ swap. The Company has a bilateral agreement with each swap counterparty that provides that fluctuations in derivative values are to be fully collateralized with either cash or securities.
The following table reflects other interest rate derivatives as of September 30, 2021:
12,148
Weighted average pay rates
4.23
Weighted average receive rates
3.03
5.6 years
Other credit derivatives— The Company has entered into risk participation agreements with counterparty banks to assume a portion of the credit risk related to borrower transactions. The credit risk related to these other credit derivatives is managed through the Company’s loan underwriting process. The total notional amount was $7.8 million and $8.4 million as of September 30, 2021 and December 31, 2020, respectively. The fair value of the other credit derivatives are reflected in other liabilities with corresponding gains or losses reflected in non-interest income.
The Company has agreements with its derivative counterparties that contain a cross-default provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain derivative counterparties that contain a provision where if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations resulted in a net asset position.
The following table reflects amounts included in non-interest income in the Consolidated Statements of Operations relating to derivative instruments that are not designated in a hedging relationship for the nine months ended September 30, 2021 and 2020:
113
482
(627
100
(635
The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative asset and liabilities on the Consolidated Statements of Financial Condition. The table below summarizes the Company’s interest rate derivatives and offsetting positions as of:
DerivativeAssetsFair Value
DerivativeLiabilitiesFair Value
Gross amounts recognized
Less: Amounts offset in the Consolidated Statements of Financial Condition
Net amount presented in the Consolidated Statements of Financial Condition
Gross amounts not offset in the Consolidated Statements of Financial Condition
Offsetting derivative positions
(1,814
Collateral posted
(11,649
9,740
(17,149
Net credit exposure
(794
As of September 30, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $12.3 million. The Company has posted $9.7 million collateral related to these agreements as of September 30, 2021. If the Company had breached any of these provisions at September 30, 2021, it could have been required to settle its obligations under the agreements at their termination value less offsetting positions of $1.8 million. For purposes of this disclosure, the amount of posted collateral by the Company and counterparties is limited to the amount offsetting the derivative asset and derivative liability.
Note 17 – Share-Based Compensation
In June 2017, the Company adopted the 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) in connection with our IPO. The Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other equity-based, equity-related or cash-based awards. A total of 1,550,000 shares of our common stock have been reserved for issuance under the Omnibus Plan. As of September 30, 2021, there were 698,331 shares available for future grants under the Omnibus Plan.
The Company primarily grants time-based restricted share awards that vest over a one to four year period, subject to continued employment. The Company also grants performance-based restricted share awards. The number of shares which may be earned under the award is dependent upon the Company’s return on average assets, weighted equally, over a three-year period, measured against a peer group consisting of publicly-traded bank holding companies. Results will be measured cumulatively at the end of the three years. Any earned shares will vest on the third anniversary of the grant date.
During 2021, the Company granted 308,452 shares of restricted common stock, par value $0.01 per share. Of this total, 119,344 restricted shares will vest ratably over four years on each anniversary of the grant date, 109,475 restricted shares will vest ratably on the last business day of 2021, 2022 and 2023, 38,279 restricted shares will vest ratably over three years on each anniversary of the grant date, 9,141 restricted shares will cliff vest on the third anniversary of the grant date, and 130 shares have vested, all subject to continued employment.
In addition, 32,083 performance-based restricted shares were included in the February 2021 grant. The number of shares which may be earned under the award is dependent upon the Company’s return on average assets, weighted equally, over a three-year period ending December 31, 2023, measured against a peer group consisting of publicly-traded bank holding companies. Results will be measured cumulatively at the end of the three years. Any earned shares will vest on the third anniversary of the grant date.
The following table discloses the changes in restricted shares for the nine months ended September 30, 2021:
Omnibus Plan
Number of Shares
Weighted AverageGrant Date FairValue
Beginning balance, January 1, 2021
383,539
18.75
Granted
308,452
19.38
Vested
(103,187
19.52
Forfeited
(9,740
20.58
Ending balance outstanding at September 30, 2021
579,064
18.92
A total of 103,187 restricted shares vested during the nine months ended September 30, 2021. A total of 113,264 restricted shares vested during the year ended December 31, 2020. The fair value of restricted shares that vested during the nine months ended September 30, 2021 was $2.2 million. The fair value of restricted shares that vested during the year ended December 31, 2020 was $1.4 million.
The Company recognizes share-based compensation based on the estimated fair value of the restricted stock at the grant date. Share-based compensation expense is included in non-interest expense in the Consolidated Statements of Operations.
38
The following table summarizes restricted stock compensation expense for the nine months ended September 30, 2021 and 2020:
Total share-based compensation - restricted stock
2,019
Income tax benefit
826
562
Unrecognized compensation expense
7,840
5,566
Weighted-average amortization period remaining
2.4 years
The fair value of the unvested restricted stock awards at September 30, 2021 was $14.2 million.
In October 2014, the Company adopted the Byline Bancorp, Inc. Equity Incentive Plan (“BYB Plan”). The maximum number of shares available for grants under this plan was 2,476,122 shares. During 2016 and 2015, the Company granted options to purchase 212,400 and 1,634,568 shares, respectively; the Company did not grant any stock options during 2017. In June 2017, the Board of Directors terminated the BYB Plan and no future grants can be made under this plan. Options to purchase a total of 1,344,548 shares remain outstanding under the BYB Plan at September 30, 2021.
The types of stock options granted under the BYB Plan were Time Options and Performance Options. The exercise price of each option is equal to the fair value of the stock as of the date of grant. These option awards have vesting periods ranging from one to five years and have 10-year contractual terms. Stock volatility was computed as the average of the volatilities of peer group companies. All outstanding stock options were fully vested and exercisable at September 30, 2021.
The fair values of the stock options were determined using the Black-Scholes-Merton model for Time Options and a Monte Carlo simulation model for Performance Options.
The following table discloses the activity in shares subject to options and the weighted average exercise prices, in actual dollars, for the nine months ended September 30, 2021:
BYB Plan
Weighted Average Exercise Price
Intrinsic Value
Weighted Average Remaining Contractual Term (in Years)
1,390,579
11.36
5,724
4.4
Exercised
(46,031
13.66
359
Expired
1,344,548
11.28
17,851
3.7
Exercisable at September 30, 2021
A total of 46,031 stock options were exercised during the nine months ended September 30, 2021, proceeds of which were $629,000, with a related tax benefit of $100,000. A total of 19,496 stock options were exercised during the year ended December 31, 2020. During the year ended December 31, 2020, with proceeds of $253,000 and a related tax benefit of $39,000. No stock options vested during the three or nine months ended September 30, 2021.
The Company recognizes share-based compensation based on the estimated fair value of the option at the grant date. Forfeitures are estimated based upon industry standards. Share-based compensation expense is included in non-interest expense in the Consolidated Statements of Operations. The following table summarizes stock option compensation expense for the nine months ended September 30, 2021 and 2020:
Total share-based compensation - stock options
Unrecognized compensation expense - stock options
0.0 years
There was no unrecognized stock option compensation expenses as of September 30, 2021.
Pursuant to the terms of the Merger Agreement, upon the Effective Time, each outstanding First Evanston Option held by a participant in the First Evanston Bancorp, Inc. Stock Incentive Plan (the “FEB Plan”) ceased to represent a right to acquire shares of First Evanston common stock and was assumed and converted automatically into a fully vested and exercisable adjusted option to purchase shares of Byline common stock (each an “Adjusted Option”). In accordance with the Merger Agreement, the number of shares of Byline common stock to which each such Adjusted Option relates is equal to the product (rounded down to the nearest whole share of Byline common stock) of: (a) the number of shares of First Evanston common stock subject to the First Evanston Option immediately prior to May 31, 2018, multiplied by (ii) 4.725. Each Adjusted Option has an exercise price per share of Byline common stock equal to the quotient (rounded up to the nearest whole cent) of (x) the per share exercise price of such First Evanston Option immediately prior to May 31, 2018, divided by (y) 4.725. The description of the conversion process is based on, and qualified by, the Merger Agreement.
The following table discloses the activity in shares subject to options under the FEB Plan and the weighted average exercise prices, in actual dollars, for the nine months ended September 30, 2021:
FEB Plan
233,630
11.52
918
3.3
(46,774
11.55
313
186,856
2,437
A total of 46,774 stock options were exercised during the nine months ended September 30, 2021, proceeds of which were $540,000 and a related tax benefit of $87,000. A total of 255,615 stock options were exercised during the year ended December 31, 2020, proceeds of which were $2.8 million and a related tax benefit of $219,000. No stock options vested during the three or nine months ended September 30, 2021.
40
Note 18—Earnings per Share
A reconciliation of the numerators and denominators for earnings per common share computations is presented below. Incremental shares represent outstanding stock options for which the exercise price is less than the average market price of the Company’s common stock during the periods presented. Options to purchase 1,531,404 and 1,676,371 shares of common stock were outstanding as of September 30, 2021 and 2020, respectively. There were 579,064 and 392,439 restricted stock awards outstanding at September 30, 2021 and 2020, respectively. For the three and nine months ended September 30, 2021, no stock options outstanding were excluded from the calculation of diluted earnings per common share. For the three and nine months ended September 30, 2020, 105,657 and 50,000 stock options outstanding were excluded from the calculation of diluted earnings per common share, as their effect would have been anti-dilutive.
The following represent the calculation of basic and diluted earnings per share for the periods presented:
Less: Dividends on preferred shares
Net income available to common stockholders
Weighted-average common stock outstanding:
Weighted-average common stock outstanding (basic)
37,200,778
38,057,350
37,773,350
37,973,694
Incremental shares
817,523
191,985
749,762
278,269
Weighted-average common stock outstanding (dilutive)
38,018,301
38,249,335
38,523,112
38,251,963
Basic earnings per common share
Diluted earnings per common share
Note 19—Stockholders’ Equity
A summary of the Company’s preferred and common stock at September 30, 2021 and December 31, 2020 is as follows:
Series B 7.5% fixed to floating non-cumulative perpetual preferred stock
Common stock, voting
During 2016, the Company authorized and issued Series B 7.50% fixed-to-floating non-voting, noncumulative perpetual preferred stock with a liquidation preference of $1,000 per share, plus the amount of unpaid dividends, if any, which is redeemable at the Company’s option on or after March 31, 2022. Holders of Series B Preferred Stock do not have any rights to convert such stock into shares of any other class of capital stock of the Company. Holders of Series B Preferred Stock are entitled to receive a fixed dividend of 7.50% per annum from the original issue date through December 30, 2021, after which the dividend is paid at a floating rate of three-month LIBOR plus 5.41% per annum.
The Company Series B Preferred Stock is included in Tier 1 capital for regulatory capital purposes and is redeemable at the option of the Company at a redemption price of $1,000 per share, plus any declared and unpaid dividends (i) in whole or part on any dividend payment date on or after March 31, 2022, and (ii) in whole but not in part prior to March 31, 2022, within 90 days following a regulatory event, as defined in the Certificate of Designations of the Company Series B Preferred Stock. The Company must receive approval of the Federal Reserve Board prior to any redemption of the Company Series B Preferred Stock.
For the three months ended September 30, 2021 and 2020, the Company declared and paid dividends on the Series B preferred stock of $196,000. For the nine months ended September 30, 2021 and 2020, the Company declared and paid dividends on the Series B preferred stock of $587,000.
On December 10, 2020, the Company announced that its Board of Directors approved a stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of the Company’s outstanding common stock, and on July 27, 2021, the Company's Board of Directors authorized an expansion of its current stock repurchase program. Under the extended program, the Company is authorized to repurchase an additional 1,250,000 shares of the Company's outstanding common stock. The shares may, at the discretion of management, be repurchased from time to time in open market purchases as market conditions warrant or in privately negotiated transactions. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase program will be determined by the Company at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market and economic conditions and applicable legal requirements. The shares authorized to be repurchased represent approximately 3.0% of the Company’s outstanding common stock at September 30, 2021. The program will be in effect until December 31, 2022 unless terminated earlier.
The Company purchased 460,220 shares at a cost of $10.4 million under this program during the three months ended September 30, 2021. The Company purchased 1,331,708 shares at a cost of $28.9 million under this program during the nine months ended September 30, 2021. Repurchased shares are recorded as treasury shares on the trade date using the treasury stock method, and the cash paid is recorded as treasury stock. Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders’ equity in the Consolidated Statement of Financial Condition.
For the three and nine months ended September 30, 2021, cash dividends were declared and paid to stockholders of record of the Company's common stock of $0.09 per share and $0.21 per share, respectively. For the three and nine months ended September 30, 2020, cash dividends were declared and paid to stockholders of record of the Company's common stock of $0.03 per share and $0.09 per share, respectively.
On October 26, 2021, the Company’s Board of Directors declared a cash dividend of $0.09 per share payable on November 23, 2021 to stockholders of record of the Company’s common stock as of November 9, 2021.
Note 20—Consolidated Statements of Changes in Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and 2020:
UnrealizedGains (Losses) on Cash FlowHedges
Unrealized Gains(Losses) onAvailable-for-SaleSecurities
TotalAccumulatedOtherComprehensiveIncome (Loss)
(366
(334
(320
19,644
(305
18,352
Other comprehensive income (loss), net of tax
906
(6,420
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of Byline Bancorp, Inc.’s financial condition and results of operations and should be read in conjunction with our Unaudited Interim Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report. The words “the Company,” “we,” “Byline,” “management,” “our” and “us” refer to Byline Bancorp, Inc. and its consolidated subsidiaries, unless we indicate otherwise. In addition to historical information, this discussion contains forward looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled “Special Note Regarding Forward Looking Statements” and “Risk Factors”. Byline assumes no obligation to update any of these forward looking statements.
Forward-Looking Statements
Statements contained in this report and in other documents we file with or furnish to the Securities and Exchange Commission (“SEC”) that are not historical facts may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, strategies, predictions, forecasts, objectives or assumptions of future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “expects,” “can,” “could,” “may,” “predicts,” “potential,” “opportunity,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “seeks,” “intends” and similar words or phrases. Accordingly, these statements involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual strategies, actions or results to differ materially from those expressed in such statements, and are not guarantees of future results or other events or performance. Because forward-looking statements are necessarily only estimates of future strategies, actions or results, based on management’s current expectations, assumptions and estimates on the date hereof, and there can be no assurance that actual strategies, actions or results will not differ materially from expectations, readers are cautioned not to place undue reliance on such statements.
Our ability to predict results or the actual effects of future plans, strategies or events is inherently uncertain. Factors which could cause actual results or conditions to differ materially from those reflected in forward-looking statements include:
These risks and uncertainties should be considered in evaluating any forward-looking statements, and undue reliance should not be placed on such statements. Forward looking statements speak only as of the date they are made. You should also consider the risks, assumptions and uncertainties set forth in the “Risk Factors” section of this Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2020, that was filed with the SEC on March 4, 2021, as well as those set forth in the reports we file with the SEC. 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.
Overview
Our business
We are a bank holding company headquartered in Chicago, Illinois and conduct all our business activities through our subsidiary, Byline Bank, a full service commercial bank, and Byline Bank’s subsidiaries. Through Byline Bank, we offer a broad range of banking products and services to small and medium sized businesses, commercial real estate and financial sponsors and to consumers who generally live or work near our branches. We also provide trust and wealth management services to our customers. In addition to our traditional commercial banking business, we provide small ticket equipment leasing solutions through Byline Financial Group, a wholly-owned subsidiary of Byline Bank, headquartered in Bannockburn, Illinois, with sales offices in Illinois, and sales representatives in Illinois, Florida, Michigan, New Jersey, and New York. We also participate in U.S. government guaranteed lending programs and originate U.S. government guaranteed loans. Byline Bank was the fifth most active originator of Small Business Administration (“SBA”) loans in the country and the most active SBA lender in Illinois and Wisconsin, as reported by the SBA for the quarter ended September 30, 2021. During the third quarter of 2021 we began offering online account opening to consumer customers through our website. As of September 30, 2021, we had consolidated total assets of $6.7 billion, total gross loans and leases outstanding of $4.6 billion, total deposits of $5.2 billion, and total stockholders’ equity of $824.4 million.
Response to COVID-19 Pandemic
The coronavirus (“COVID-19”) pandemic has caused health and economic concerns in the United States and globally. In response to this economic disruption, federal and state governments enacted laws intending to stimulate the economy during this time, including the $2.0 trillion Coronavirus Relief and Economic Security Act (the “CARES Act”), from which the PPP under the SBA was created. PPP loans
originated before June 5, 2020 have a two-year term and bear an interest rate of 1.0%, however borrowers can request an extension to five years. PPP loans originated after June 5, 2020 have a five-year term and bear an interest rate of 1.0%.
The following table presents net PPP loans as of September 30, 2021:
PPP Loan Size
First Round
Second Round
Principal outstanding
12,561
263,058
Unearned processing fee
(176
(9,503
(9,679
Deferred cost
2,094
2,141
PPP loans, net
12,432
255,649
Number of loans outstanding
1,624
Forgiven
95.9
22.3
70.7
In review or submission process
0.9
10.9
4.3
Not applied for forgiveness
3.2
66.8
25.0
The CARES Act also temporarily eases the guidance applicable to loan modifications and the effect on assessing TDRs related to the COVID-19 pandemic. Modifications within the scope of this relief include arrangements that defer or delay payments of principal and/or interest and extend until the earlier of the following: 1) 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated; or 2) January 1, 2022. At September 30, 2021, we had $2.0 million in active COVID-19 related payment deferrals, or 0.05% of loans and leases, excluding PPP loans.
Critical Accounting Policies and Significant Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the Banking industry. To prepare financial statements and interim financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes; and are based on information available as of the date of the financial statements. As this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgements inherent in those policies, are critical in understanding our financial statements.
These critical accounting policies and estimates include (i) acquisition‑related fair value computations, (ii) the carrying value of loans and leases, (iii) determining the provision and allowance for loan and lease losses, (iv) the valuation of intangible assets such as goodwill, servicing assets and core deposit intangibles, (v) the determination of fair value for financial instruments, including other-than-temporary-impairment losses, (vi) the valuation of real estate held for sale, and (vii) the valuation of or recognition of deferred tax assets and liabilities. An increase was made to the provision for loan and lease losses as a result of increases in qualitative factors relative to the COVID-19 pandemic.
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period provided for under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, that we filed with the Securities and Exchange Commission (“SEC”) on March 4, 2021.
Business Combinations
We account for business combinations under the acquisition method of accounting in accordance with ASC 805. We recognize the fair value of the assets acquired and liabilities assumed as of the date of acquisition, with any excess of the fair value of consideration provided over the fair value of the identifiable net tangible and intangible assets acquired recorded as goodwill. Transaction costs are expensed as incurred. Application of the acquisition method requires extensive use of accounting estimates and judgements to determine the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date.
In accordance with ASC 805, the acquiring company retains the right to make appropriate adjustments to the assets and liabilities of the acquired entity for information obtained during the measurement period about facts and circumstances that existed as of the acquisition date. The measurement period ends as of the earlier of (i) one year from the acquisition date or (ii) the date when the acquirer receives the information necessary to complete the business combination accounting.
45
Carrying Value of Loans and Leases
Our accounting methods for loans and leases differ depending on whether they are new or acquired loans and leases; and for acquired loans, whether the loans were acquired at a discount as a result of credit deterioration since the date of origination.
Originated Loans and Leases
We account for originated loans and leases and purchased loans and leases not acquired through business combinations as originated loans and leases. The new loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any allowance for loan and lease losses, unamortized deferred fees and costs and unamortized premiums or discounts. The net amount of non-refundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the new loans using methods that approximate the level yield method. Discounts and premiums are amortized or accreted to interest income over the estimated term of the new loans using methods that approximate the effective yield method. Interest income on new loans is accrued based on the unpaid principal balance outstanding. Additionally, once an acquired non-impaired loan reaches its contractual maturity date, it is re-underwritten, and if renewed, it is classified as an originated loan.
Acquired Loans and Leases
Acquired loans and leases are recorded at fair value as of the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either acquired impaired or acquired non‑impaired. Acquired impaired loans reflect evidence of credit deterioration since origination for which it is probable that all contractually required principal and interest will not be collected by us. Subsequent to acquisition, we periodically update for changes in cash flow expectations, which are reflected in interest income over the life of the loan as accretable yield. Any subsequent decreases in expected cash flow attributable to credit deterioration are recognized by recording a provision for loan losses.
For acquired non‑impaired loans and leases, the excess or deficit of the loan and lease principal balance over the fair value is recorded as a discount or premium at acquisition and is accreted through interest income over the life of the loan or lease. Subsequent to acquisition, these loans and leases are evaluated for credit deterioration and a provision for loan and lease losses would be recorded when probable loss is incurred. These loans and leases are evaluated for impairment consistent with originated loans and leases.
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses reflects the amount required to maintain the allowance for loan and lease losses (“ALLL”) at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves.
The ALLL is maintained at a level that management believes is appropriate to provide for known and inherent incurred loan and lease losses as of the dates of the Consolidated Statements of Financial Condition, and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are determined on an individual loan basis. We increase our ALLL by charging provisions for probable losses against our income and decreased by charge‑offs, net of recoveries.
The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses available information to recognize losses on loans and leases, changes in economic or other conditions may necessitate revision of the estimate in future periods.
The ALLL is maintained at a level management believes is sufficient to provide for probable losses based upon an ongoing review of the originated and acquired non‑impaired loan and lease portfolios by portfolio category, which include consideration of actual loss experience, peer loss experience, changes in the size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrower’s ability to repay, and evaluation of prevailing economic conditions.
For acquired impaired loans, a specific valuation allowance is established when it is probable that we will be unable to collect all of the cash flows expected at acquisition, plus the additional cash flows expected to be collected arising from changes in estimates after acquisition.
The originated and non‑impaired acquired loans have limited delinquency and credit loss history and have not yet exhibited an observable loss trend. The credit quality of loans in these loan portfolios are impacted by delinquency status and debt service coverage generated by the borrowers’ businesses and fluctuations in the value of real estate collateral.
Acquired non‑impaired loans and originated loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements. All acquired non‑impaired loans and originated loans of $100,000 or greater with an internal risk rating of substandard or below and on non-accrual, as well as loans classified as troubled debt restructurings (“TDR”), are reviewed individually for impairment on a quarterly basis.
In March 2020, CARES Act was signed into law. Section 4013 of the CARES Act temporarily eases the guidance applicable to loan modifications and the effect on assessing TDRs related to the COVID-19 pandemic. Modifications within the scope of this relief include
arrangements that defer or delay payments of principal or interest and extend until the earlier of the following: 1) 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated; or 2) January 1, 2022.
Goodwill and Other Intangible Assets
Goodwill. Goodwill represents the excess of the purchase consideration over the fair value of net assets acquired in connection with our recapitalization and acquisitions using the acquisition method of accounting. Goodwill is not amortized but is periodically evaluated for impairment under the provisions of ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”).
Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. Our goodwill is allocated to Byline Bank, which is our only applicable reporting unit for the purposes of testing goodwill for impairment. We have selected November 30 as the date to perform the annual goodwill impairment test. Additionally, we perform a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists.
Servicing Assets. Servicing assets are recognized separately when they are acquired through sales of loans or when the rights to service loans are purchased. When loans are sold with servicing rights retained, servicing assets are recorded at fair value in accordance with ASC Topic 860, Transfers and Servicing (“ASC 860”). Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in secondary market premiums and prepayment speed assumptions have the most significant impact on the fair value of servicing rights. See Note 6 and Note 15 of our Unaudited Interim Condensed Consolidated Financial Statements as of September 30, 2021, included in this report, for additional information.
Core Deposit Intangible Assets. Other intangible assets primarily consist of core deposit intangible assets. In valuing core deposit intangibles, we consider variables such as deposit servicing costs, attrition rates and market discount rates. Core deposit intangibles are reviewed annually, or more frequently when events or changes in circumstances occur that indicate that their carrying values may not be recoverable. If the recoverable amount of the core deposit intangibles is determined to be less than its carrying value, we would then measure the amount of impairment based on an estimate of the fair value at that time. We also evaluate whether the events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life. Core deposit intangibles are currently amortized over an approximate ten-year period.
Customer Relationship Intangible. Other intangible assets also include our customer relationship intangible asset. In valuing our customer relationship intangibles, we consider variables such as assets under management, attrition rates, and fee structure. Customer relationship intangibles are currently amortized over a 12-year period.
Fair value of Financial Instruments
ASC Topic 820, Fair Value Measurement defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.
The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.
See Note 15 of our Unaudited Interim Condensed Consolidated Financial Statements as of September 30, 2021, included in this report, for a complete discussion of our use of fair value of financial assets and liabilities and their related measurement practices.
Valuation of Real Estate Held for Sale
Other Real Estate Owned (“OREO”). OREO includes real estate assets that have been acquired through, or in lieu of, loan foreclosure or repossession and are to be sold. OREO assets are initially recorded at fair value, less estimated costs to sell, of the collateral of the loan, on the date of foreclosure or repossession, establishing a new cost basis. Adjustments that reduce loan balances to fair value at the time of foreclosure or repossession are recognized as charge‑offs in the allowance for loan and lease losses. Positive adjustments, if any, at the time of foreclosure or repossession are recognized in non‑interest expense. After foreclosure or repossession, management periodically obtains new valuations and real estate or other assets may be adjusted to a lower carrying amount, determined by the fair value of the asset, less estimated costs to sell. Any subsequent write‑downs are recorded as a decrease in the asset and charged against other real estate owned valuation adjustments, included within non-interest expense. Operating expenses of such properties, net of related income, are included in non‑interest expense, and gains and losses on their disposition are included in non‑interest expense. Gains on internally financed other real estate owned sales are accounted for in accordance with the methods stated in ASC Topic 360‑20, Real Estate Sales (“ASC 360‑20”). Any losses on the sales of other real estate owned properties are recognized immediately.
Assets Held for Sale. Assets held for sale consist of former branch locations and real estate purchased for expansion. Assets are considered held for sale when management has approved a plan to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based at the lower of its carrying value or its fair value, less estimated costs
to sell. Adjustments to reduce the asset balances to fair value are recorded at the time of transfer and are recognized through a charge against income. An assessment of the recoverability of other long-lived assets associated with all branches is periodically performed, resulting in impairment losses which are reflected in other non-interest expense.
Income Taxes
We use the asset and liability method to account for income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Our annual tax rate is based on our income, statutory tax rates and available tax planning opportunities. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties.
Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss carryforwards. We review our deferred tax positions quarterly for changes which may impact realizability. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. We use short and long‑range business forecasts to provide additional information for its evaluation of the recoverability of deferred tax assets. It is our policy to recognize interest and penalties associated with uncertain tax positions, if applicable, as components of non‑interest expense.
A deferred tax valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some of the deferred tax asset will not be realized. See Note 11 of the notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, for further information on income taxes.
Recently Issued Accounting Pronouncements
Refer to Note 2 of our Unaudited Interim Condensed Consolidated Financial Statements as of September 30, 2021, included in this report, for a description of recent accounting pronouncements, including the effective dates of adoption and anticipated effects on our results of operations and financial condition.
Primary Factors Used to Evaluate Our Business
As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our consolidated balance sheet and income statement as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the final condition and performance of comparable financial institutions in our region. Comparison of our financial performance against other financial institutions is impacted by the accounting for acquired non‑impaired and acquired impaired loans.
These factors and metrics described in this report may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of other financial services companies, given our limited operating history and strategic acquisitions since our recapitalization.
Results of Operations
Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and lease receivables, including accretion income on loans, investment securities and other short-term investments, and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent upon our generation of non-interest income, consisting primarily of income from fees and service charges on deposits, loan servicing revenue, wealth management and trust income, ATM and interchange fees, and net gains on sales of investment securities and loans. Other factors contributing to our results of operations include our provisions for loan and lease losses, provision for income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy and equipment expenses, and other miscellaneous operating costs.
Selected Financial Data
As of or For the Three Months Ended
As of or For the Nine Months Ended
Summary of Operations
Non-interest income
Non-interest expense
Income before provision for income taxes
Provision for income taxes
48
Income available to common stockholders
Common Share Data
Adjusted diluted earnings per share(1)(3)
0.69
2.02
Weighted-average common shares outstanding (basic)
Weighted-average common shares outstanding (diluted)
Common shares outstanding
Cash dividends per common share
0.09
0.03
0.21
Dividend payout ratio on common stock
13.64
8.82
10.77
14.06
Tangible book value per common share(1)
17.16
15.81
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin, fully taxable equivalent (1) (5)
3.92
3.61
3.82
Average cost of deposits
0.08
0.22
0.43
Efficiency ratio(2)
54.18
52.46
52.49
57.38
Adjusted efficiency ratio(1)(2)(3)
52.35
52.42
50.76
57.01
Non-interest expense to average assets
2.67
2.59
2.54
2.70
Adjusted non-interest expense to average assets(1)(3)
2.58
2.46
2.68
Return on average stockholders' equity
12.19
6.57
12.42
4.33
Adjusted return on average stockholders' equity(1)(3)
12.69
6.58
12.90
4.42
Return on average assets
1.53
0.81
0.56
Adjusted return on average assets(1)(3)
1.59
1.58
0.57
Non-interest income to total revenues(1)
23.61
29.35
24.03
21.82
Pre-tax pre-provision return on average assets(1)
2.07
2.12
2.10
1.79
Adjusted pre-tax pre-provision return on average assets(1)
2.15
2.18
1.80
Return on average tangible common stockholders' equity(1)
16.22
9.39
16.66
6.51
Adjusted return on average tangible common stockholders' equity(1)(3)
16.86
9.40
17.27
6.63
Non-interest-bearing deposits to total deposits
41.06
35.73
Loans and leases held for sale and loans and leases held for investment to total deposits
90.29
91.96
Deposits to total liabilities
87.73
84.36
Deposits per branch
117,234
84,390
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment
0.75
0.99
ALLL to total loans and leases held for investment
1.31
1.40
Net charge-offs to average total loans and leases held for investment
0.13
0.53
0.32
Acquisition accounting adjustments(4)
6,327
17,133
Capital Ratios
Common equity to total assets
12.14
12.07
Tangible common equity to tangible assets(1)
9.89
9.64
Leverage ratio
11.21
10.93
Common equity tier 1 capital ratio
11.32
12.55
Tier 1 capital ratio
12.32
13.77
Total capital ratio
14.78
16.67
(1) Represents a non-GAAP financial measure. See “Reconciliations of non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.
(2) Represents non-interest expense less amortization of intangible assets divided by net interest income and non-interest income.
(3) Calculation excludes impairment charges on assets held for sale.
(4) Represents the remaining net unaccreted discount as a result of applying the fair value acquisition accounting adjustment at the time of the business combination on acquired loans.
(5) Interest income and rates include the effects of a tax equivalent adjustment to adjust tax-exempt investment income on tax-exempt investment securities to a fully taxable basis, assuming a federal income tax rate of 21%.
49
We reported consolidated net income of $25.3 million for the three months ended September 30, 2021 compared to net income of $13.1 million for the three months ended September 30, 2020, an increase of $12.2 million. The increase in net income was primarily attributable to a $15.4 million decrease in provision for loan and lease losses and a $6.3 million increase in net interest income. These were offset by a $3.7 million decrease in non-interest income, a $2.5 million increase in non-interest expense, and a $3.2 million increase in provision for income taxes.
The increase in net interest income during the three months ended September 30, 2021 was mainly a result of increased average loan and leases balances and decreased cost of funds. The decrease in provision for loan and lease losses reflects improving qualitative factors from the continued recovery from the COVID-19 pandemic. The decrease in non-interest income was principally driven by a downward revaluation adjustments to the servicing asset. The increase in non-interest expense was mostly due to an increase in salaries and employee benefits. The increase in provision for income taxes was driven by an increase in net income before provision for income taxes during the period.
Net income available to common stockholders was $25.1 million, or $0.68 per basic and $0.66 per diluted common share, for the three months ended September 30, 2021 compared to $12.9 million, or $0.34 per basic and diluted common share, for the three months ended September 30, 2020. Dividends on preferred shares were $196,000 for the three months ended September 30, 2021 and 2020.
Our annualized return on average assets was 1.53% for the three months ended September 30, 2021 compared to 0.81% for the three months ended September 30, 2020. Our annualized return on average stockholders’ equity was 12.19% for the three months ended September 30, 2021 compared to 6.57% for the three months ended September 30, 2020. Our efficiency ratio was 54.18% for the three months ended September 30, 2021 compared to 52.46% for the three months ended September 30, 2020.
We reported consolidated net income of $75.6 million for the nine months ended September 30, 2021 compared to net income of $25.2 million for the nine months ended September 30, 2020, an increase of $50.4 million. The increase in net income was primarily attributable to a $43.0 million decrease in provision for loan and lease losses, a $15.7 million increase in net interest income, and a $10.9 million increase in non-interest income. These increases were offset by a $3.6 million increase in non-interest expense, and a $15.5 million increase in provision for income taxes.
The increase in net interest income during the nine months ended September 30, 2021 was mainly a result of increased average loan and leases balances and decreased cost of funds. The decrease in provision for loan and lease losses reflects improving qualitative factors from the continued recovery from the COVID-19 pandemic. The increase in non-interest income was principally driven by an increase in net gains on sale of loans. The increase in non-interest expense was mostly due to an increase in salaries and employee benefits. The increase in provision for income taxes was driven by an increase in net income before provision for income taxes during the period.
Net income available to common stockholders was $75.0 million, or $1.99 per basic common share and $1.95 per diluted common share, for the nine months ended September 30, 2021 compared to $24.6 million, or $0.65 per basic and $0.64 per diluted common share, for the nine months ended September 30, 2020. Dividends on preferred shares were $587,000 for the nine months ended September 30, 2021 and 2020.
Our annualized return on average assets was 1.53% for the nine months ended September 30, 2021 compared to 0.56% for the nine months ended September 30, 2020. Our annualized return on average stockholders’ equity was 12.42% for the nine months ended September 30, 2021 compared to 4.33% for the nine months ended September 30, 2020. Our efficiency ratio was 52.49% for the nine months ended September 30, 2021 compared to 57.38% for the nine months ended September 30, 2020
Net Interest Income
Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which include loans, leases and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, which include interest-bearing deposits, subordinated debt, Federal Home Loan Bank advances, Paycheck Protection Program Liquidity Facility, junior subordinated debentures and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and other funding sources, (iii) our net interest spread, and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources.
We also recognize income from the accretable discounts associated with the purchase of interest-earning assets. Because of our recapitalization and bank acquisitions, we derive a portion of our interest income from the accretable discounts on acquired loans. The accretion is generally recognized over the life of the loan and is impacted by changes in expected cash flows on the loan. This accretion will continue to have an impact on our net interest income as long as loans acquired with a discount at acquisition represent a meaningful portion of our interest-earning assets. As of September 30, 2021, acquired loans with evidence of credit deterioration accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, represented 3.3% of our total loan portfolio compared to 4.7% at December 31, 2020.
Changes in the market interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. In addition, our interest income includes the accretion of the discounts on our acquired loans, which will also affect our net interest spread, net interest margin and net interest income.
The following tables present, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis (dollars in thousands).
AverageBalance(5)
InterestInc / Exp
AverageYield /Rate
40,088
0.19
48,678
0.20
Loans and leases(1)
4,539,111
4.92
4,360,203
4.66
Taxable securities
1,309,802
5,472
1.66
1,364,516
6,341
1.85
Tax-exempt securities(2)
187,064
1,254
2.66
143,157
1,054
2.93
Total interest-earning assets
6,076,065
63,036
4.12
5,916,554
58,456
3.93
(61,528
(53,964
All other assets
546,331
538,700
TOTAL ASSETS
6,560,868
6,401,290
Interest checking
653,543
228
0.14
565,917
0.16
Money market accounts
1,031,009
0.11
1,202,016
634
Savings
625,037
75
0.05
535,396
Time deposits
709,805
403
0.23
870,227
1,836
0.84
Total interest-bearing deposits
3,019,394
3,173,556
0.35
426,284
0.33
538,237
110,195
5.73
100,756
5.86
Total borrowings
536,479
1,941
1.44
638,993
1,950
1.21
Total interest-bearing liabilities
3,555,873
3,812,549
0.49
2,106,189
1,742,787
Other liabilities
75,052
54,843
823,754
791,111
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Net interest spread(3)
3.79
3.44
Net interest income, fully taxable equivalent
60,109
53,746
Net interest margin, fully taxable equivalent(2)(4)
Tax-equivalent adjustment
(264
(222
Net interest margin(4)
3.91
3.60
Net loan accretion impact on margin
1,638
3,911
0.26
56,926
0.18
48,861
4,487,909
4.90
4,148,465
5.00
1,405,390
16,798
1.60
1,261,458
21,678
2.30
184,826
3,729
115,161
2,625
3.04
6,135,051
185,025
4.03
5,573,945
179,857
4.31
(64,768
(43,584
552,660
522,321
6,622,943
6,052,682
609,444
647
432,785
1,068,770
940
0.12
1,126,588
3,794
0.45
603,366
509,001
186
734,708
1,664
0.30
986,419
10,179
1.38
3,016,288
0.15
3,054,793
572,018
0.31
531,395
0.71
110,029
5.81
59,591
6.05
682,047
6,118
1.20
590,986
5,537
1.25
3,698,335
3,645,779
2,039,242
1,578,704
71,737
50,677
813,629
777,522
3.68
3.56
175,442
159,510
(783
(552
3.81
5,001
10,754
52
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis. The table below is a summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates (dollars in thousands):
Three Months Ended September 30, 2021compared to Three Months Ended September 30, 2020
Increase (Decrease) Due to
Volume
Rate
Interest income
(6
2,398
2,857
5,255
(216
(653
(869
Tax-exempt securities
(97
Total interest income
2,474
2,106
4,580
Interest expense
(51
(303
(354
(95
(1,338
(1,433
(104
(1,670
(1,774
(153
(116
(45
107
(9
(105
(1,678
(1,783
2,579
3,784
6,363
Net interest income for the three months ended September 30, 2021 was $59.8 million compared to $53.5 million during the same period in 2020, an increase of $6.3 million, or 11.8%. Interest income increased $4.5 million for the three months ended September 30, 2021 compared to the same period in 2020 primarily a result of increased average balance on loans and leases, higher market interest rates, and higher fees related to PPP loan forgiveness. Interest expense decreased by $1.8 million for the three months ended September 30, 2021 compared to the same period in 2020 mostly due to decreases in the average rates paid on deposits and other borrowings.
Nine Months Ended September 30, 2021compared to Nine Months Ended September 30, 2020
(143
(132
12,179
(3,103
9,076
1,725
(6,605
(4,880
1,397
(293
1,104
15,312
(10,144
5,168
190
(194
(4
(73
(2,781
(2,854
(547
(7,968
(8,515
(402
(10,943
(11,345
(1,900
(1,505
2,086
2,807
(2,226
581
2,405
(13,169
(10,764
12,907
3,025
15,932
Net interest income for the nine months ended September 30, 2021 was $174.7 million compared to $159.0 million during the same period in 2020, an increase of $15.7 million, or 9.9%. Interest income increased $4.9 million for the nine months ended September 30, 2021 compared to the same period in 2020 primarily a result of loan and lease growth through originations. Interest expense decreased by $10.8 million for the nine months ended September 30, 2021 compared to the same period in 2020 mostly due to decreases in the average rates paid on deposits and other borrowings as well as a change in deposit mix.
The net interest margin for the three months ended September 30, 2021 was 3.91%, an increase of 31 basis points compared to 3.60% for the three months ended September 30, 2020. The primary drivers of the increase for the three month period was an increase in average loan and lease yields.
The net interest margin for the nine months ended September 30, 2021 and 2020 was 3.81%, driven by an increase in average interest earning assets and decreases in cost of funds, offset by lower average yields on loans and leases.
54
Net loan accretion income was $1.6 million for the three months ended September 30, 2021 compared to $3.9 million for the three months ended September 30, 2020, a decrease of $2.3 million, or 58.1%. Net loan accretion income was $5.0 million for the nine months ended September 30, 2021 compared to $10.8 million for the nine months ended September 30, 2020, a decrease of $5.8 million or 53.5%. Total net loan accretion on acquired loans contributed 11 basis points to the net interest margin for the three months ended September 30, 2021 compared to 26 basis points for the three months ended September 30, 2020. Total net loan accretion on acquired loans contributed 11 basis points to the net interest margin for the nine months ended September 30, 2021 compared to 26 basis points for the nine months ended September 30, 2020. Projected accretion income as of September 30, 2021 is summarized as follows:
EstimatedProjectedAccretion(1)(2)
Last three months of 2021
2,105
1,410
633
5,903
Provision for Loan and Lease Losses
The provision for loan and lease losses represents a charge to earnings necessary to establish an allowance for loan and lease losses that, in management’s evaluation, is appropriate to provide coverage for probable losses incurred in the loan and lease portfolio. The allowance for loan and lease losses is increased by the provision for loan and lease losses and is decreased by charge-offs, net of recoveries on prior charge-offs.
Provisions for loan and lease losses was $352,000 and $15.7 million for the three months ended September 30, 2021 and 2020, respectively, a decrease of $15.4 million, or 97.8%. Provisions for loan and lease losses was $2.8 million and $45.7 million for the nine months ended September 30, 2021 and 2020, respectively, a decrease of $42.9 million, or 94.0%.
The ALLL as a percentage of loans and leases decreased from 1.53% at December 31, 2020 to 1.31% at September 30, 2021. The ALLL as a percentage of loans and leases excluding PPP loans was 1.40% and 1.74% at September 30, 2021 and December 31, 2020, respectively.
Non-Interest Income
Non-interest income was $18.5 million for the three months ended September 30, 2021 compared to $22.2 million for the three months ended September 30, 2020, a decrease of $3.7 million, or 16.8%. The decrease was primarily due to a downward revaluation of loan servicing assets.
QTD 2021Compared to 2020
YTD 2021 Compared to 2020
$ Change
% Change
16.4
12.0
13.9
627
7.2
(3,772
NM
(1,495
56.4
16.7
168
5.4
(907
(87.4
)%
(956
(39.6
(429
(265
(88.0
90
0.7
9,450
39.5
122
17.7
335
17.0
312
31.7
125.3
(3,739
(16.8
10,869
24.5
55
Fees and service charges on deposits represent amounts charged to customers for banking services, such as fees on deposit accounts, and include, but are not limited to, maintenance fees, insufficient fund fees, overdraft protection fees, wire transfer fees, and other charges. Fees and service charges on deposits were $1.9 million and $1.6 million for the three months ended September 30, 2021 and 2020, respectively. Fees and service charges on deposits were $5.3 million and $4.7 million for the nine months ended September 30, 2021 and 2020, respectively. Increases in both periods are due to increases in deposits.
While portions of the loans that we originate are sold and generate gains on sale revenue, servicing rights for the majority of loans that we sell are retained by us. In exchange for continuing to service loans that have been sold, we receive servicing revenue from a portion of the interest cash flow of the loan. We generated $3.3 million and $2.9 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the three months ended September 30, 2021 and 2020, respectively. We generated $9.3 million and $8.7 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and 2020, the outstanding balance of guaranteed loans serviced was $1.6 billion and $1.5 billion, respectively.
Loan servicing asset revaluation represents net changes in the fair value of our servicing assets. Loan servicing asset revaluation had a downward adjustment of $2.7 million for the three months ended September 30, 2021 compared to an upward adjustment of $1.1 million for the three months ended September 30, 2020, a change of $3.8 million due to changes in the fair value of the servicing asset. Loan servicing asset revaluation had a downward adjustment of $4.1 million for the nine months ended September 30, 2021 compared to a downward adjustment of $2.7 million for the nine months ended September 30, 2020, an increase of $1.5 million, or 56.4%, due to changes in market premiums and prepayment speeds.
ATM and interchange fees were $1.2 million for the three months ended September 30, 2021 compared to $1.0 million for the three months ended September 30, 2020, an increase of $173,000, or 16.7%. The increase was primarily driven by increased transactional account volume and higher interchange income.
Change in fair value of equity securities, net, were a decrease of $275,000 compared to an increase of $154,000 for the three months ended September 30, 2021 and 2020, respectively. Changes in fair value of equity securities, net, were increases of $36,000 and $301,000 for the nine months ended September 30, 2021 and 2020, respectively. The amounts recorded during the periods were driven by market conditions.
Net gains on sales of loans were $12.8 million for the three months ended September 30, 2021 compared to $12.7 million for the three months ended September 30, 2020, an increase of $90,000, or 0.7%. We sold $104.2 million of U.S. government guaranteed loans during the three months ended September 30, 2021 compared to $121.2 million during the three months ended September 30, 2020. Net gains on sales of loans were $33.4 million for the nine months ended September 30, 2021 compared to $23.9 million for the nine months ended September 30, 2020, an increase of $9.5 million, or 39.5%. We sold $278.7 million of U.S. government guaranteed loans during the nine months ended September 30, 2021 compared to $260.9 million during the nine months ended September 30, 2020.
Wealth management and trust income represents fees charged to customers for investment, trust, or wealth management services and are primarily determined by total assets under management. Wealth management and trust income was $815,000 for the three months ended September 30, 2021 compared to $693,000 for the three months ended September 30, 2020. Wealth management and trust income was $2.3 million for the nine months ended September 30, 2021 compared to $2.0 million for the nine months ended September 30, 2020. The variances were mostly driven by market conditions. Assets under management were $626.0 million and $557.9 million as of September 30, 2021 and 2020, respectively.
Other non-interest income was $1.3 million for the three months ended September 30, 2021 compared to $990,000 for the three months ended September 30, 2020, an increase of $312,000 or 31.7%. Other non-interest income was $4.4 million for the nine months ended September 30, 2021 compared to $1.9 million for the nine months ended September 30, 2020, an increase of $2.4 million or 125.2%. The primary driver of the increase in both periods was increased customer derivative products income and bank-owned life insurance income.
Non-Interest Expense
Non-interest expense was $44.2 million for the three months ended September 30, 2021 compared to $41.7 million for the three months ended September 30, 2020, an increase of $2.5 million, or 6.0%. The increase was primarily due to an increase in salaries and employee benefits.
Non-interest expense was $126.0 million for the nine months ended September 30, 2021 compared to $122.4 million for the nine months ended September 30, 2020, an increase of $3.6 million, or 2.9%. The increase was primarily due to an increase in salaries and employee benefits.
The following table presents the major components of our non-interest expense for the periods indicated (dollars in thousands):
2,852
12.3
5,175
7.7
(238
(4.6
(486
(3.0
(878
(42.7
(1,002
(21.6
320
13.4
1,020
15.0
447
16.8
6.8
(307
(87.8
(272
(20.5
(209
(10.7
(397
(6.9
506
12.8
(994
(8.0
2,493
6.0
3,602
2.9
Salaries and employee benefits, the single largest component of our non-interest expense, totaled $26.0 million for the three months ended September 30, 2021 compared to $23.1 million for the three months ended September 30, 2020, an increase of $2.9 million, or 12.3%. The increase was primarily a result of new hires. Salaries and employee benefits, totaled $72.4 million for the nine months ended September 30, 2021, compared to $67.2 million for the nine months ended September 30, 2020, an increase of $5.2 million, or 7.7%. The increase resulted from an increase in incentive compensation.
Occupancy and equipment expense was $5.0 million for the three months ended September 30, 2021 compared to $5.2 million for the three months ended September 30, 2020, a decrease of $238,000, or 4.6%. Occupancy and equipment expense was $15.6 million for the nine months ended September 30, 2021 compared to $16.1 million for the nine months ended September 30, 2020, a decrease of $486,000, or 3.0%. The decreases were a result of lower lease obligation expense due to branch consolidations.
Loan and lease related expenses were $1.2 million for the three months ended September 30, 2021 compared to $2.1 million for the three months ended September 30, 2020, a decrease of $878,000, or 42.7%. Loan and lease related expenses were $3.6 million for the nine months ended September 30, 2021 compared to $4.6 million for the nine months ended September 30, 2020, a decrease of $1.0 million, or 21.6%. The decreases were principally driven by lower broker fees.
Legal, audit, and other professional fees were $2.7 million for the three months ended September 30, 2021 compared to $2.4 million for the three months ended September 30, 2020, an increase of $320,000, or 13.4%. Legal, audit, and other professional fees were $7.8 million for the nine months ended September 30, 2021 compared to $6.8 million for the nine months ended September 30, 2020, an increase of $1.0 million, or 15.0%. The increase in both periods was driven by increases in consulting fees.
Net loss recognized on other real estate owned and other related expenses was $42,000 for the three months ended September 30, 2021 compared to $349,000 for the three months ended September 30, 2020, a decrease of $307,000, or 87.8%. Net loss recognized on other real estate owned and other related expenses was $1.1 million for the nine months ended September 30, 2021 compared to $1.3 million for the nine months ended September 30, 2020, a decrease of $272,000, or 20.5%. These decreases were primarily due to impairments of other real estate owned made during the prior year.
Other intangible assets amortization expense was $1.7 million for the three months ended September 30, 2021 compared to $1.9 million for the three months ended September 30, 2020, a decrease of $209,000, or 10.7%. Other intangible assets amortization expense was $5.3 million for the nine months ended September 30, 2021 compared to $5.7 million for the nine months ended September 30, 2020, a decrease of $397,000, or 6.9%.
Other non-interest expense was $4.4 million for the three months ended September 30, 2021 compared to $3.9 million for the three months ended September 30, 2020, an increase of $506,000 or 12.8%. The increase was mostly due to higher impairment charges on assets held for sale. Other non-interest expense was $11.5 million for the nine months ended September 30, 2021 compared to $12.5 million for the
57
nine months ended September 30, 2020, a decrease of $994,000 or 8.0%. The decrease was driven by lower provision for unfunded commitments and lower regulatory and director expenses, offset by higher impairment charges on assets held for sale.
Our efficiency ratio was 54.18% for the three months ended September 30, 2021 compared to 52.46% for the three months ended September 30, 2020. The change in our efficiency ratio for the three months ended September 30, 2021 was driven by both an increase in our non-interest expense and a decrease in our non-interest income. Our adjusted efficiency ratio was 52.35% for the three months ended September 30, 2021 compared to 52.42% for the three months ended September 30, 2020.
Our efficiency ratio was 52.49% for the nine months ended September 30, 2021 compared to 57.38% for the nine months ended September 30, 2020. The change in our efficiency ratio for the nine months ended September 30, 2021 was driven by both an increase in our net interest income and an increase in our non-interest income. Our adjusted efficiency ratio was 50.76% for the nine months ended September 30, 2021 compared to 57.01% for the nine months ended September 30, 2020.
Please refer to the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.
Our provision for income taxes for the three months ended September 30, 2021 totaled $8.5 million compared to $5.3 million for the three months ended September 30, 2020. The increase in income tax expense was principally due to increased income before provision for income taxes during the period. Our effective tax rate was 25.1% for the three months ended September 30, 2021 and 28.7% for the three months ended September 30, 2020.
Our provision for income taxes for the nine months ended September 30, 2021 totaled $25.5 million compared to $10.0 million for the nine months ended September 30, 2020. The increase in income tax expense was principally due to increased income before provision for income taxes during the period. Our effective tax rate was 25.3% for the nine months ended September 30, 2021 and 28.5% for the nine months ended September 30, 2020.
Financial Condition
Balance Sheet Analysis
Our total assets increased by $313.8 million, or 4.9%, to $6.7 billion at September 30, 2021 compared to $6.4 billion at December 31, 2020. The increase in total assets includes an increase of $268.7 million, or 6.2%, in loans and leases from $4.3 billion at December 31, 2020 to $4.6 billion at September 30, 2021. Our originated loan and lease portfolio increased by $434.3 million and our acquired loan and lease portfolio decreased by $165.6 million. The increase in our originated portfolio was primarily attributed to organic loan and lease growth, and renewals of acquired non-impaired loans that are now reflected with originated loans, offset by decrease in PPP loans. The decrease in our acquired portfolio was attributed to renewals reflected in originated loans, payoffs, and pay downs during the period.
Total liabilities increased by $294.8 million, or 5.3%, to $5.9 billion at September 30, 2021 compared to $5.6 billion at December 31, 2020. Total deposits increased by $406.2 million, or 8.5%, driven by growth in non-interest-bearing deposits and interest-bearing checking accounts, partly offset by a decrease in time deposits. Other borrowings decreased by $108.8 million, or 16.8%, mainly due to a decrease in PPPLF advances.
Investment Portfolio
Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no securities classified as trading in our investment portfolio as of September 30, 2021 or December 31, 2020. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest. Securities available-for-sale consist primarily of residential mortgage-backed securities, commercial mortgage-backed securities and U.S. government agencies securities.
Securities available-for-sale decreased by $19.6 million, or 1.4%, from $1.4 billion at December 31, 2020 to $1.4 billion at September 30, 2021. The decrease was mainly attributed to decreases in the fair value of available-for-sale securities.
At September 30, 2021, our held-to-maturity securities portfolio consists of obligations of states, municipalities and political subdivisions. We carry these securities at amortized cost. Securities held-to-maturity were $3.9 million at September 30, 2021 and $4.4 million at December 31, 2020.
We had no securities that were classified as having other-than-temporary-impairment (“OTTI”) as of September 30, 2021 or December 31, 2020.
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The following table summarizes the fair value of the available-for-sale and held-to-maturity securities portfolio as of the dates presented (dollars in thousands):
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2021, we evaluated the securities which had an unrealized loss for OTTI and determined all declines in value to be temporary. There were 97 investment securities with unrealized losses at September 30, 2021. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
The following tables (dollars in thousands) set forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity as of September 30, 2021
Due in One Year or Less
Due from One toFive Years
Due from Five toTen Years
Due after Ten Years
WeightedAverageYield(1)
2.51
0.00
U.S. government agencies
1,991
2.80
103,215
1.16
19,038
1.32
10,720
2.37
19,518
2.47
19,716
2.88
51,545
2.34
Residential mortgage- backed securities
100,635
1.47
693,659
1.15
Commercial mortgage- backed securities
7,560
2.06
13,172
216,644
2.01
2,003
3.53
6,958
55,881
4.04
30,622
6,581
2.56
34,598
323,241
1.92
1,052,112
59
2.62
Maturity as of December 31, 2020
14,998
2.52
8,470
498
2.42
1,977
91,430
1.26
19,183
8,944
22,208
2.45
22,101
2.79
82,260
2.39
975
1.35
85,519
1.37
678,457
2.72
7,504
3.35
13,198
1.56
223,794
2,500
3.25
8,703
3.08
47,817
4.05
10,753
2.28
34,502
1.42
26,940
2.57
49,837
270,818
1.97
1,070,850
1.64
501
1.50
3,894
As of September 30, 2021, investment securities indexed to LIBOR were $60.7 million.
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $76.2 million at September 30, 2021, a decrease of $1.2 million from December 31, 2020.
There were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, with total outstanding balances greater than 10% of our stockholders’ equity as of September 30, 2021 or December 31, 2020.
Restricted Stock
As a member of the Federal Home Loan Bank system, Byline Bank is required to maintain an investment in the capital stock of the FHLB. No market exists for this stock, and it has no quoted market value. The stock is redeemable at par by the FHLB and is, therefore, carried at cost. In addition, Byline Bank owns stock of Bankers’ Bank that was acquired as part of a bank acquisition. The stock is redeemable at par and carried at cost. As of September 30, 2021 and December 31, 2020, we held $15.9 million and $10.5 million, respectively, in FHLB
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and Bankers’ Bank stock. We evaluate impairment of our investment in FHLB and Bankers’ Bank based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We did not identify any indicators of impairment of FHLB and Bankers’ Bank stock as of September 30, 2021 and December 31, 2020.
Loan and Lease Portfolio
Lending-related income is the most important component of our net interest income and is the main driver of the results of our operations. Total loans and leases at September 30, 2021 and December 31, 2020 were $4.6 billion and $4.3 billion, respectively, an increase of $268.7 million, or 6.2%. Originated loans were $4.1 billion at September 30, 2021, an increase of $434.3 million, or 11.8%, compared to $3.7 billion at December 31, 2020. Acquired impaired loans and acquired non-impaired loans and leases were $506.4 million at September 30, 2021, a decrease of $165.6 million, or 24.6%, compared to $672.1 million at December 31, 2020. The increase in our originated portfolio was primarily attributed to organic loan and lease growth, and renewals of acquired non-impaired loans that are now reflected with originated loans. The decrease in our acquired portfolio is attributed to renewals reflected in originated loans, payoffs, and pay downs during the period, offset by a decrease in PPP loans of $249.7 million.
We strive to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. Loans, excluding leases, are typically made to real estate, manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and operations. The Company's exposure to certain industries as of September 30, 2021 represents the following percentages of the portfolio: 32.3% real estate, 14.5% manufacturing, 7.4% wholesale trade, 6.6% retail trade, 5.0% accommodation and food service, 5.0% consumer, and all other industries individually represent less than 5% of the portfolio or 23.7% of the total loan portfolio. As of September 30, 2021, the loan portfolio included $426.5 million of unguaranteed 7(a) SBA and USDA loans with exposure to the following top three industries: 14.1% food services, 14.0% retail trade, and 13.3% manufacturing. The following table shows our allocation of originated, acquired impaired and acquired non-impaired loans and leases as of the dates presented (dollars in thousands):
% of Total
Originated loans and leases
28.2
23.5
8.4
9.6
7.3
5.2
32.1
29.4
5.8
11.9
0.0
Leasing financing receivables
4.9
Total originated loans and leases
89.0
84.5
Acquired impaired loans
1.8
2.5
1.3
1.9
0.1
0.2
4.7
Acquired non-impaired loans and leases
5.1
1.1
0.3
10.8
100.0
Total loans and leases, net of allowance for loan and lease losses
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Loans collateralized by real estate comprised 53.5% and 51.4% of the loan and lease portfolio at September 30, 2021 and December 31, 2020, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of September 30, 2021 and December 31, 2020 and totaled $1.6 billion, or 65.7% of real estate loans and 35.1% of the total loan and lease portfolio at September 30, 2021. At December 31, 2020, commercial real estate loans totaled $1.4 billion and comprised 63.9% of real estate loans and 32.8% of the total loan and lease portfolio. Acquired impaired commercial real estate loans decreased from $108.5 million as of December 31, 2020 to $84.8 million as of September 30, 2021, or 21.8%. At September 30, 2021 and December 31, 2020, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 302.3% and 282.5%, respectively. Non-owner occupied commercial real estate loans were $623.9 million and $533.9 million, or 83.6% and 79.0% of total capital, at September 30, 2021 and December 31, 2020, respectively.
Residential real estate loans totaled $507.8 million at September 30, 2021 compared to $572.3 million at December 31, 2020, a decrease of $64.5 million, or 11.3%. The residential real estate loan portfolio comprised 20.6% and 25.7% of real estate loans as of September 30, 2021 and December 31, 2020, respectively, and 11.0% and 13.3% of total loans and leases at September 30, 2021 and December 31, 2020, respectively. Acquired impaired residential real estate loans decreased from $78.8 million at December 31, 2020 to $61.9 million at September 30, 2021, or 21.5%.
Construction, land development, and other land loans totaled $338.4 million at September 30, 2021 compared to $230.7 million at December 31, 2020, an increase of $107.7 million, or 46.7%. The construction, land development and other land loan portfolio comprised 13.7% and 10.4% of real estate loans at September 30, 2021 and December 31, 2020, respectively, and 7.4% and 5.3% of the total loan and lease portfolio at September 30, 2021 and December 31, 2020, respectively.
Commercial and industrial loans totaled $1.5 billion and $1.4 billion at September 30, 2021 and December 31, 2020, respectively, an increase of $167.5 million, or 12.2%. The commercial and industrial loan portfolio comprised 33.3% and 31.5% of the total loan and lease portfolio at September 30, 2021 and December 31, 2020, respectively.
Lease financing receivables comprised 7.4% and 5.2% of the loan and lease portfolio at September 30, 2021 and December 31, 2020, respectively. Total lease financing receivables were $338.8 million and $227.1 million at September 30, 2021 and December 31, 2020, respectively, an increase of $111.6 million, or 49.1%.
In support of our customers impacted by the COVID-19 pandemic and keeping with regulatory guidance, we began offering relief through payment deferrals during the first quarter of 2020. As of September 30, 2021, we had $2.0 million in active deferrals, or 0.05% of loans and leases excluding PPP loans.
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Loan and Lease Portfolio Maturities and Interest Rate Sensitivity
The following table shows our loan and lease portfolio by scheduled maturity at September 30, 2021 (dollars in thousands):
Due after One YearThrough Five Years
Due after Five Years
FloatingRate
FixedRate
66,603
107,306
387,802
219,452
215,323
301,968
13,146
15,590
69,192
68,563
131,097
89,990
1,999
95,753
20,292
205,285
6,987
6,144
26,753
261,748
142,937
619,128
118,416
311,094
110
596
279
14,727
281,935
34,487
123,338
480,410
1,170,835
1,112,428
506,589
709,196
30,939
2,354
43,352
1,157
3,644
3,375
20,871
23,343
12,775
3,309
588
117
1,041
2,159
105
2,828
85
1,077
397
126
54,557
4,067
70,607
1,346
17,622
7,081
26,659
20,361
88,725
10,154
32,768
56,436
5,542
12,097
16,077
13,219
2,969
8,379
4,551
15,873
19,640
1,953
7,027
6,960
37,622
33,103
127,804
43,091
37,690
71,842
215,517
517,580
1,369,246
1,156,865
561,901
788,119
At September 30, 2021, 46.6% of the loan and lease portfolio bears interest at fixed rates and 53.4% at floating rates. In addition, $1.5 billion, or 32.7%, of the loan and lease portfolio has interest rate floors of which $1.3 billion were at the interest rate floor as of September 30, 2021. The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Because a portion of the portfolio is accounted for under ASC 310-30, the carrying value is significantly affected by estimates and it is impracticable to allocate scheduled payments for those loans based on those estimates. Consequently, the tables presented include information limited to contractual maturities of the underlying loans. As of September 30, 2021 we had $1.4 billion in loans indexed to LIBOR.
Allowance for Loan and Lease Losses
The ALLL is determined by us on a quarterly basis, although we are engaged in monitoring the appropriate level of the allowance on a more frequent basis. The ALLL reflects management’s estimate of probable incurred credit losses inherent in the loan and lease portfolios. The computation includes elements of judgement and high levels of subjectivity.
Factors considered by us include, but are not limited to, actual loss experience, peer loss experience, changes in size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrower’s ability to repay, and evaluation of the prevailing economic conditions. Changes in conditions may necessitate revision of the estimate in future periods.
We assess the ALLL based on three categories: (i) originated loans and leases, (ii) acquired non-impaired loans and leases, and (iii) acquired impaired loans with further credit deterioration after the acquisitions or our recapitalization.
Total ALLL was $60.6 million at September 30, 2021 compared to $66.3 million at December 31, 2020, a decrease of $5.7, or 8.7%. The decrease was primarily due to net charge-offs during the year.
Total ALLL to total loans and leases held for investment, net before ALLL, was 1.31% and 1.53% of total loans and leases at September 30, 2021 and December 31, 2020, respectively. The decrease was primarily driven by an increase in loans and leases, and net charge-offs exceeding provision during the year.
The following tables present an analysis of the allowance of the loan and lease losses for the periods presented (dollars in thousands):
ResidentialRealEstate
Construction,Land Development,and Other Land
Balance at June 30, 2021
Provision/(recapture) for acquired impaired loans
414
(63
369
Provision/(recapture) for acquired non-impaired loans and leases
(932
(1,600
Provision/(recapture) for originated loans
1,626
(178
(591
788
1,583
Total provision/(recapture)
Charge-offs for acquired impaired loans
Charge-offs for acquired non-impaired loans and leases
(50
(98
(158
Charge-offs for originated loans and leases
(510
(1,358
(389
(2,322
Total charge-offs
Recoveries for acquired impaired loans
Recoveries for acquired non-impaired loans and leases
234
304
Recoveries for originated loans and leases
225
145
298
Total recoveries
Less: Net charge-offs
277
1,473
3,333
2,772
6,191
14,401
696
31,942
2,537
50,132
Balance at September 30, 2021
Ending ALLL balance
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment
Loans and leases ending balance
Total loans and leases at September 30, 2021, gross
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
(0.01
0.02
Loans and leases ending balance as a percentage of total loans and leases, gross
1.84
1.34
0.04
3.37
0.82
1.89
32.28
9.59
7.30
32.37
5.82
7.35
94.74
Construction,LandDevelopment,and OtherLand
Balance at December 31, 2020
(24
(127
(31
(398
(580
(69
(79
849
(86
613
(1,051
(437
1,452
2,717
(1,259
(11
(88
(1,684
(1,846
(2,045
(1,255
(4,238
(1,079
(6,637
-
144
629
350
360
451
1,162
2,103
67
326
5,419
584
8,499
65
Balance at June 30, 2020
(465
1,170
(43
(1,214
(118
Provision for originated loans
4,304
736
972
8,345
446
14,804
Total provision
(314
(460
(774
(32
(169
(82
(283
(1,220
(2,625
(292
(5,088
1,547
242
648
3,171
174
5,782
2,009
763
87
1,877
4,736
2,411
106
3,902
165
6,630
9,690
2,872
1,361
24,329
1,649
39,934
Balance at September 30, 2020
Total loans and leases at September 30, 2020, gross
0.07
0.06
0.24
4.96
0.89
0.85
1.78
27.24
12.52
5.35
29.28
14.22
4.57
93.26
66
Balance at December 31, 2019
2,013
(382
161
1,255
3,047
2,662
111
563
3,127
9,474
2,302
1,765
25,026
(14
39,539
(328
(539
(867
(1,059
(714
(145
(1,918
(1,819
(10,804
(1,247
(14,830
319
546
3,130
231
11,681
701
16,391
3,549
2,519
6,343
12,792
3,364
30,120
1,889
49,884
Total loans and leases at September 30,2020, gross
Non-Performing Assets
Non-performing loans and leases include loans and leases 90 days past due and still accruing and loans and leases accounted for on a non-accrual basis. Non-performing assets consist of non-performing loans and leases plus other real estate owned. Non-performing assets at September 30, 2021 and December 31, 2020 totaled $37.5 million and $47.5 million, respectively, a decrease of $10.0 million, or 21.0%, due to the decrease in non-accrual loans and a decrease in other real estate owned of $3.3 million. Total non-accrual loans and leases decreased by $6.6 million, or 16.1%, between December 31, 2020 and September 30, 2021. The U.S. government guaranteed portion of non-performing loans totaled $6.3 million at September 30, 2021 and $3.6 million at December 31, 2020.
Total OREO decreased from $6.3 million at December 31, 2020 to $3.0 million at September 30, 2021. The $3.3 decrease in OREO resulted mostly from sales and valuation adjustments.
Total accruing loans past due decreased from $14.6 million at December 31, 2020 to $8.2 million at September 30, 2021. This represents a decrease of $6.4 million, or 43.6%, and can be attributed to decreases in commercial and industrial loans. See Note 5 of our Unaudited Interim Condensed Consolidated Financial Statements, included in this report, for further information.
The following table sets forth the amounts of non-performing loans and leases, non-performing assets, and OREO at the dates indicated (dollars in thousands):
Non-performing assets:
Non-accrual loans and leases(1)(2)(3)
Past due loans and leases 90 days or more and still accruing interest
Total non-performing loans and leases
Total non-performing assets
37,498
47,453
Accruing troubled debt restructured loans
Total non-performing loans and leases as a percentage of total loans and leases
0.95
Total non-performing assets as a percentage of total assets
0.74
Allowance for loan and lease losses as a percentage of non-performing loans and leases
175.82
161.42
Non-performing assets guaranteed by U.S. government:
Non-accrual loans guaranteed
6,326
3,645
Past due loans 90 days or more and still accruing interest guaranteed
Total non-performing loans guaranteed
Accruing troubled debt restructured loans guaranteed
Total non-performing loans and leases not guaranteed as a percentage of total loans and leases
0.61
0.86
Total non-performing assets not guaranteed as a percentage of total assets
0.46
Acquired impaired loans (accounted for under ASC 310-30) that are delinquent and/or on non-accrual status continue to accrue income provided the respective pool in which those assets reside maintains a discount and recognizes accretion income. The aforementioned loans are characterized as performing loans based on contractual delinquency. If the pool no longer has a discount and accretion income can no longer be recognized, any loan within that pool on non-accrual status will be classified as non-accrual for presentation purposes.
Our loan and lease growth is funded primarily through core deposits. We gather deposits primarily through each of our 45 branch locations in the Chicago metropolitan area and one branch in Brookfield, Wisconsin. Through our branch network, online, mobile and direct banking channels, we offer a variety of deposit products including demand deposit accounts, interest-bearing products, savings accounts, and certificates of deposit. We offer competitive online, mobile, and direct banking channels. Small businesses are a significant source of low cost deposits as they value convenience, flexibility, and access to local decision makers that are responsive to their needs.
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Total deposits at September 30, 2021 were $5.2 billion, representing an increase of $406.2 million, or 8.5%, compared to $4.8 billion at December 31, 2020, driven by an increase in non-interest bearing deposits. Non-interest-bearing deposits were $2.1 billion, or 41.1% of total deposits, at September 30, 2021, an increase of $355.1 million, or 20.1%, compared to $1.8 billion at December 31, 2020, or 37.1% of total deposits. Core deposits were 91.6% and 89.9% of total deposits at September 30, 2021 and December 31, 2020, respectively.
The following table shows the average balance amounts and the average contractual rates paid on our deposits for the periods indicated (dollars in thousands):
For the Three Months Ended September 30, 2021
For the Three Months Ended September 30, 2020
AverageBalance
AverageRate
Time deposits (below $100,000)
276,486
0.17
363,956
0.62
Time deposits ($100,000 and above)
433,319
506,271
1.00
5,125,583
4,916,343
For the Nine Months Ended September 30, 2021
For the Nine Months Ended September 30, 2020
288,622
405,889
1.17
446,086
0.37
580,530
5,055,530
4,633,497
Our average cost of deposits was 0.08% during the three months ended September 30, 2021 compared to 0.22% during the three months ended September 30, 2020. Our average cost of deposits was 0.09% during the nine months ended September 30, 2021 compared to 0.43% during the nine months ended September 30, 2020. These decreases were principally attributed to lower rates on interest-bearing deposits as a result the interest rate environment and an improved deposit mix. Our average non-interest bearing deposits to total deposits ratios were 41.1% during the third quarter of 2021 compared to 35.4% during the third quarter of 2020. Our average non-interest bearing deposits to total deposits ratios were 40.3% during the nine months ended September 30, 2021 compared to 34.1% during the nine months ended September 30, 2020. We had no brokered time deposits and $35.0 million of brokered time deposits at September 30, 2021 and December 31, 2020, respectively. Our loan and lease to deposit ratio was 90.29% at September 30, 2021 compared to 91.51% at December 31, 2020.
The following table shows time deposits and other time deposits of $100,000 or more by time remaining until maturity (dollars in thousands):
At September 30,2021
Time Deposits
Three months or less
142,218
Over three months through six months
140,180
Over six months through 12 months
98,946
Over 12 months
50,398
431,742
Borrowed Funds
In 2020, the Company issued $75.0 million in 6.00% fixed-to-floating subordinated notes that mature on July 1, 2030. The subordinated notes bear a fixed interest rate of 6.00% until July 1, 2025 and a floating interest rate equal to a benchmark rate, which is expected to be three-month Secured Overnight Financing Rate plus 588 basis points thereafter until maturity (or earlier redemption). The transaction resulted in debt issuance costs of approximately $1.7 million that are currently amortized over 10 years.
In addition to deposits, we also utilize FHLB advances as a supplementary funding source to finance our operations. The bank’s advances from the FHLB are collateralized by residential and multi-family real estate loans and securities. At September 30, 2021 and December 31, 2020, we had maximum borrowing capacity from the FHLB of $1.9 billion and $2.0 billion subject to the availability of collateral, respectively. At September 30, 2021, the Company had $355.0 million of FHLB advances with a maturities ranging from November 2021 to May 2022.
On April 21, 2020, the Bank entered into a Letter Agreement with the Federal Reserve Bank of Chicago that allows the Bank to access the PPPLF. Under the terms of the PPPLF, the Bank will pledge loans originated under the PPP to the Federal Reserve Bank of Chicago as collateral for available advances under the PPPLF. Advances under the PPPLF will be an amount equal to the aggregate principal amount of PPP loans pledged by Byline Bank, carry an interest rate of 35 basis points and mature on the maturity date of the PPP loans pledged as collateral for the advance. As of September 30, 2021, the PPPLF balance was $156.4 million with an interest rate of 0.35% with various maturity dates from April 2022 to February 2026.
The Company has the capacity to borrow funds from the discount window of the Federal Reserve System. There were no borrowings outstanding under the Federal Reserve Bank discount window line as of September 30, 2021 and December 31, 2020. The Company pledges loans as collateral for any borrowings under the Federal Reserve Bank discount window.
The following table sets forth certain information regarding our short-term borrowings at the dates and for the periods indicated (dollars in thousands):
Federal Reserve Bank discount window borrowing:
Average balance outstanding
65,839
Maximum outstanding at any month-end period during the year
350,000
Balance outstanding at end of period
Weighted average interest rate during period
0.25
Weighted average interest rate at end of period
Federal Home Loan Bank advances:
216,088
244,518
356,000
499,000
215,000
323,063
167,227
439,066
449,610
0.38
Line of credit:
1,550
51.11
Weighted average interest rate at end of period(1)
Customer Repurchase Agreements (Sweeps)
Securities sold under agreements to repurchase represent a demand deposit product offered to customers that sweep balances in excess of the FDIC insurance limit into overnight repurchase agreements. We pledge securities as collateral for the repurchase agreements.
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Securities sold under agreements to repurchase decreased by $14.3 million, from $42.0 million at December 31, 2020 to $27.7 million at September 30, 2021.
Liquidity
We manage liquidity based upon factors that include the amount of core deposits as a percentage of total deposits, the level of diversification of our funding sources, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities, the ability to securitize and sell certain pools of assets and other factors.
Our liquidity needs are primarily met by cash and investment securities positions, growth in deposits, cash flow from amortizing loan portfolios, and borrowings from the FHLB. For additional information regarding our operating, investing, and financing cash flows, see Consolidated Statements of Cash Flows in our Unaudited Interim Condensed Consolidated Financial Statements included elsewhere in this report.
As of September 30, 2021, Byline Bank had maximum borrowing capacity from the FHLB of $1.9 billion and $622.3 million from the Federal Reserve Bank (“FRB”). As of September 30, 2021, Byline Bank had open FHLB advances of $355.0 million and open letters of credit of $20.6 million, leaving us with available aggregate borrowing capacity of $232.8 million. In addition, Byline Bank had uncommitted federal funds lines available of $115.0 million at September 30, 2021.
As of December 31, 2020, Byline Bank had maximum borrowing capacity from the FHLB of $2.0 billion and $874.7 million from the FRB. As of December 31, 2020, Byline Bank had open advances of $234.0 million and open letters of credit of $21.3 million, leaving us with available aggregate borrowing capacity of $751.9 million based on collateral pledged. In addition, Byline Bank had an uncommitted federal funds line available of $115.0 million at December 31, 2020.
On October 13, 2016, the Company entered into a $30.0 million revolving credit agreement with a correspondent bank. Through subsequent amendments, the revolving credit agreement was reduced to $15.0 million and the maturity was extended to October 7, 2022. The amended revolving line of credit bears interest at either the London Interbank Offered Rate (“LIBOR”) plus 195 basis points or the Prime Rate minus 75 basis points, based on the Company’s election, which is required to be communicated at least three business days prior to the commencement of an interest period. If the Company fails to provide timely notification, the interest rate will be Prime Rate minus 75 basis points. At September 30, 2021 and December 31, 2020, the line of credit had no outstanding balance.
There are regulatory limitations that affect the ability of Byline Bank to pay dividends to the Company. See Note 20 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2020 for additional information. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.
We expect that our cash and liquidity resources will be generated by the operations of Byline Bank, which we expect to be sufficient to satisfy our liquidity and capital requirements for at least the next twelve months.
Capital Resources
Stockholders’ equity at September 30, 2021 was $824.4 million compared to $805.5 million at December 31, 2020, an increase of $19.0 million, or 2.4%. The increase was primarily driven by the increase in net income generated during the nine months ended September 30, 2021, offset by a decrease in accumulated other comprehensive income reflecting the unrealized losses in our available-for-sale securities portfolio and the increase of treasury shares under the share repurchase program.
The Company and Byline Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on our financial statements.
Under applicable bank regulatory capital requirements, each of the Company and Byline Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Byline Bank must also meet certain specific capital guidelines under the prompt corrective action framework. The capital amounts and classification are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Byline Bank to maintain minimum amounts and ratios of CET1 Capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, (referred to as the “leverage ratio”), as defined under these capital requirements.
As of September 30, 2021, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized.” There have been no conditions or events since September 30, 2021 that management believes have changed Byline Bank’s classifications.
The regulatory capital ratios for the Company and Byline Bank to meet the minimum capital adequacy standards and for Byline Bank to be considered well capitalized under the prompt corrective action framework and the Company’s and Byline Bank’s actual capital amounts and ratios are set forth in the following tables as of the periods indicated (dollars in thousands):
Actual
Minimum CapitalRequired
Required to beConsideredWell Capitalized
Ratio
Total capital to risk weighted assets:
Company
821,646
444,596
8.00
Bank
747,862
13.50
443,176
553,971
10.00
Tier 1 capital to risk weighted assets:
684,523
333,447
6.00
685,739
12.38
332,382
Common Equity Tier 1 (CET1) to risk weighted assets:
629,085
250,085
4.50
249,287
360,081
6.50
Tier 1 capital to average assets:
244,268
4.00
11.24
244,138
305,173
774,522
16.18
383,069
675,977
14.16
381,775
477,219
639,564
13.36
287,302
616,219
12.91
286,331
584,126
12.20
215,476
214,748
310,192
11.12
230,056
10.72
229,870
287,337
The Company and Byline Bank must maintain a capital conservation buffer consisting of CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The conservation buffers for the Company and Byline Bank exceed the minimum capital requirement as of September 30, 2021.
Provisions of state and federal banking regulations may limit, by statute, the amount of dividends that may be paid to the Company by Byline Bank without prior approval of Byline Bank’s regulatory agencies. The Company is economically dependent on the cash dividends received from Byline Bank. These dividends represent the primary cash flow from operating activities used to service obligations. For the nine months ended September 30, 2021 the Company received $16.0 million in cash dividends from Byline Bank. For the year ended December 31, 2020, the Company received $7.5 million in cash dividends from Byline Bank in order to pay the required interest on its outstanding junior subordinated debentures in connection with its trust preferred securities interest, dividends on the Series B preferred stock outstanding, and to fund other Company-related activities.
Under the Company’s board approved stock repurchase program, the Company repurchased an aggregate of 460,220 shares at an average price per share of $22.62 for the three months ended September 30, 2021 and 1,331,708 shares at an average price per share of $21.68 for the nine months ended September 30, 2021. The Company is authorized to purchase up to an aggregate of 2.5 million shares of the Company’s outstanding common stock. The program is in effect until December 31, 2022, unless terminated earlier.
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On October 28, 2021, the Company announced that its Board of Directors declared a cash dividend on its common stock of $0.09 per share. The dividend will paid on November 23, 2021 to stockholders of record on November 9, 2021.
Contractual Obligations
FHLB and PPPLF advances are fully described in Note 12 of our Unaudited Interim Condensed Consolidated Financial Statements, included elsewhere in this report. Operating lease obligations are in place for facilities and land on which banking facilities are located. See Note 8 of our Unaudited Interim Condensed Consolidated Financial Statements, included elsewhere in this report for additional information.
Off-Balance Sheet Items and Other Financing Arrangements
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Byline Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).
Letters of credit are conditional commitments issued by Byline Bank to guarantee the performance of a customer to a third-party. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as for funded instruments. We do not anticipate any material losses as a result of the commitments and standby letters of credit.
We enter into interest rate swaps that are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. We also enter into interest rate swaps with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently entered into mirror-image derivatives with a third party counterparty.
We recognize derivative financial instruments at fair value regardless of the purpose or intent for holding the instrument. We record derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition within other assets and other liabilities, respectively. Because the derivative assets and liabilities recorded on the balance sheet at September 30, 2021 do not represent the amounts that may ultimately be paid under these contracts, these assets and liabilities are listed in the table below (dollars in thousands):
Notional
Asset
Liability
Interest rate swaps designated as cash flow hedges—pay fixed, receive floating
Other interest rate swaps—pay fixed, receive floating
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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
Some of the financial measures included in our “Selected Financial Data” are not measures of financial performance in accordance with GAAP. Our management uses the non‑GAAP financial measures set forth below in its analysis of our performance:
74
We believe that these non‑GAAP financial measures provide useful information to its management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non‑GAAP financial measures have a number of limitations. As such, you should not view these disclosures 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.
Reconciliations of Non-GAAP Financial Measures
As of or For the Three Months EndedSeptember 30,
As of or For the Nine Months EndedSeptember 30,
(dollars in thousands, except per share data)
Net income and earnings per share excluding significant items
Reported Net Income
Significant items:
Impairment charges on assets held for sale
1,435
Tax benefit
(391
(1,085
(208
Adjusted Net Income
26,350
13,094
78,492
25,715
Reported Diluted Earnings per Share
0.10
(0.03
Adjusted Diluted Earnings per Share
As of or For the Nine Months Ended September 30,
Adjusted non-interest expense:
Less significant items:
Adjusted non-interest expense
42,745
41,655
122,022
121,654
Adjusted non-interest expense excluding amortization of intangible assets
Less: Amortization of intangible assets
41,007
39,708
116,687
115,922
Pre-tax pre-provision net income:
Pre-tax income
Add: Provision for loan and lease losses
Pre-tax pre-provision net income
34,160
34,071
103,895
80,927
Adjusted pre-tax pre-provision net income:
Adjusted pre-tax pre-provision net income
35,595
34,103
107,876
81,674
Tax Equivalent Net Interest Income
Add: Tax-equivalent adjustment
222
783
552
Total revenues:
Add: non-interest income
Total revenues
78,340
75,758
229,898
203,328
Tangible common stockholders' equity:
Total stockholders' equity
Less: Preferred stock
Less: Goodwill and other intangibles
174,523
Tangible common stockholders' equity
646,684
609,735
Tangible assets:
6,496,513
Tangible assets
6,537,155
6,321,990
Average tangible common stockholders' equity:
Average total stockholders' equity
Less: Average preferred stock
Less: Average goodwill and other intangibles
168,140
175,443
169,934
177,426
Average tangible common stockholders' equity
645,176
605,230
633,257
589,658
Average tangible assets:
Average total assets
Average tangible assets
6,392,728
6,225,847
6,453,009
5,875,256
Tangible net income available to common stockholders:
Add: After-tax intangible asset amortization
1,265
1,405
3,881
4,136
Tangible net income available to common stockholders
26,375
14,280
78,890
28,725
Adjusted Tangible net income available to common stockholders:
Tax benefit on significant items
Adjusted tangible net income available to common stockholders
27,419
14,303
81,786
29,264
Pre-tax pre-provision return on average assets:
Pre-tax pre-provision return on average assets
Adjusted pre-tax pre-provision return on average assets:
Net interest margin, fully taxable equivalent
Total average interest-earning assets
Non-interest income to total revenues:
Non-interest income to total revenues
Adjusted non-interest expense to average assets:
Adjusted non-interest expense to average assets
Adjusted efficiency ratio:
Adjusted efficiency ratio
Adjusted return on average assets:
Adjusted net income
Adjusted return on average assets
Adjusted return on average stockholders' equity:
Average stockholders' equity
Adjusted return on average stockholders' equity
Tangible common equity to tangible assets:
Tangible common equity
Tangible common equity to tangible assets
Return on average tangible common stockholders' equity:
Return on average tangible common stockholders' equity
Adjusted return on average tangible common stockholders' equity:
Adjusted return on average tangible common stockholders' equity
Tangible book value per share:
Tangible book value per share
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates.
We seek to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest-earning assets and interest-bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when our assets, liabilities and off-balance sheet contracts each respond differently to changes in interest rates, including as a result of explicit and implicit provisions in agreements related to such assets and liabilities and in off-balance sheet contracts that alter the applicable interest rate and cash flow characteristics as interest rates change. The two primary examples of such provisions that we are exposed to are the duration and rate sensitivity associated with indeterminate-maturity deposits (e.g., non-interest-bearing checking accounts, negotiable order of withdrawal accounts, savings accounts and money market deposits accounts) and the rate of prepayment associated with fixed-rate lending and mortgage-backed securities. Interest rates may also affect loan demand, credit losses, and other items affecting earnings.
We are also exposed to interest rate risk through the retained portion of the U.S. government guaranteed loans we make and the related servicing rights. Our U.S. government guaranteed loan portfolio is comprised primarily of SBA 7(a) loans, virtually all of which are quarterly or monthly adjustable with the prime rate. The SBA portfolio reacts differently in a rising rate environment than our other non-guaranteed portfolios. Generally, when interest rates rise, the prepayments in the SBA portfolio tend to increase.
Our management of interest rate risk is overseen by our bank’s asset liability committee based on a risk management infrastructure approved by our board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets, calculated monthly, for various metrics, including our economic value sensitivity, our economic value of equity and net interest income simulations involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. Our risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, non-interest-bearing and interest-bearing demand deposit durations based on historical analysis and the targeted investment term of capital.
We manage the interest rate risk associated with our interest-bearing liabilities by managing the interest rates and tenors associated with our borrowings from the FHLB and PPPLF sources and deposits from our customers that we rely on for funding. In particular, from time to time we use special offers on deposits to alter the interest rates and tenors associated with our interest-bearing liabilities. We manage the interest rate risk associated with our interest-earning assets by managing the interest rates and tenors associated with our investment and loan portfolios, from time to time purchasing and selling investment securities.
We utilize interest rate derivatives to hedge our interest rate exposure on commercial loans when it meets our clients’ and Byline Bank’s needs. Typically, customer interest rate swaps are for terms of more than five years. As of September 30, 2021, we had a notional amount of $858.7 million of interest rate swaps outstanding, which includes customer swaps and those on Byline Bank’s balance sheet. The overall effectiveness of our hedging strategies is subject to market conditions, the quality of our execution, the accuracy of our valuation assumptions, the associated counterparty credit risk and changes in interest rates.
We do not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.
We are also subject to credit risk. Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent credit review process that assesses compliance with commercial, real estate and other credit policies, risk ratings, and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We understand and evaluate our customers’ borrowing needs and capacity to repay, in conjunction with their character and history.
Evaluation of Interest Rate Risk
We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least monthly and compare these results against a scenario with no changes in interest rates. Our net interest income simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments on and off balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) the effect of interest rate limitations on our assets, such as floors and caps, (6) the effect of our interest rate swaps and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.
Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2021 is presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200 and 300 basis points and (2) gradual shift downward of 100 basis points over 12 months and gradual shifts upward of 100 and 200 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, and 300 basis points does not provide us with meaningful results. In a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than 0%. For the dynamic balance sheet and rate shift scenarios, we assume interest rates follow a forward yield curve and then increase it by 1/12th of the total change in rates each month for twelve months.
Immediate Shifts
Twelve Months Ending
+300 basis points
+200 basis points
+100 basis points
-100 basis points
As of September 30, 2022
Percentage change
23.7
15.1
5.7
-3.2
Dollar amount
250,614
233,319
214,164
196,190
As of September 30, 2023
34.7
22.8
9.7
-6.8
276,160
251,626
224,746
191,116
For dynamic balance sheet and rate shifts, a gradual shift downward of 100 basis points would result in a 1.8% decrease in net interest income, and a gradual shift upwards of 100 and 200 basis points would result in 2.9% and 7.5% increases to net interest income, respectively, over the next 12 months.
The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads, would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes.
These simulation results do not contemplate all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.
Item 4. Controls and Procedures.
The Company’s management, including our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2021, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the quarter ended September 30, 2021, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
PART II-OTHER INFORMATION
Item 1. Legal Proceedings.
We operate in a highly regulated environment. From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
Item 1A. Risk Factors.
There have been no material changes to the risk factors previously disclosed in the “Risk Factors” section included in our Form 10-K for our fiscal year ended December 31, 2020 that was filed with the SEC on March 4, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On December 10, 2020, we announced that our Board of Directors approved a stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of our outstanding common stock. On July 27, 2021, the Company's Board of Directors authorized an expansion of its current stock repurchase program. Under the extended program, the Company is authorized to repurchase an additional 1,250,000 shares of the Company's outstanding common stock. The shares may, at the discretion of management, be repurchased from time to time in open market purchases as market conditions warrant or in privately negotiated transactions. We are not obligated to purchase any shares under the program, and the program may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase program will be determined by the Company at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market and economic conditions and applicable legal requirements. The program will be in effect until December 31, 2022 unless terminated earlier. The table below includes information regarding purchases of our common stock pursuant to the repurchase program during the quarter ended September 30, 2021.
Issuer Purchases of Equity Securities
Maximum Number of
Average
Total Number of Shares
Shares that
Number of
Price
Purchased as Part of a
May Yet Be
Paid per
Publicly Announced
Purchased Under the
Purchased(1)
Share
Plan or Program
July 1 - July 31, 2021
378,512
22.56
1,250,000
August 1 - August 31, 2021
25.17
September 1 - September 30, 2021
81,948
22.92
81,708
1,168,292
461,728
22.63
460,220
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
EXHIBIT
Number
Description
3.1
Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
Certificate of Designations of 7.50% Fixed-to-Floating Noncumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.4 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
4.1
Certain instruments defining the rights of holders of long-term debt securities of the registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
31.1
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1(a)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021, formatted in Inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements
Cover Page Interactive Data File – the cover page XBRL tags are embedded with the Inline XBRL document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 5, 2021
By:
/s/
Roberto R. Herencia
Chief Executive Officer
(Principal Executive Officer)
Lindsay Corby
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)