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 March 31, 2022
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, 37,798,160 shares outstanding as of May 2, 2022
BYLINE BANCORP, INC.
March 31, 2022
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
42
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
71
Item 4.
Controls and Procedures
72
PART II.
OTHER INFORMATION
73
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
74
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, 2021
ASSETS
Cash and due from banks
$
48,015
35,247
Interest bearing deposits with other banks
105,564
122,684
Cash and cash equivalents
153,579
157,931
Equity and other securities, at fair value
10,677
10,578
Securities available-for-sale, at fair value
1,369,368
1,454,542
Securities held-to-maturity, at amortized cost (fair value at March 31, 2022—$3,906, December 31, 2021 —$3,992)
3,882
3,885
Restricted stock, at cost
13,977
22,002
Loans held for sale
39,520
64,460
Loans and leases:
Loans and leases
4,789,068
4,537,128
Allowance for loan and lease losses
(59,458
)
(55,012
Net loans and leases
4,729,610
4,482,116
Servicing assets, at fair value
24,497
23,744
Premises and equipment, net
62,281
62,548
Other real estate owned, net
2,221
2,112
Goodwill and other intangible assets, net
163,962
165,558
Bank-owned life insurance
80,604
80,039
Deferred tax assets, net
67,335
50,329
Accrued interest receivable and other assets
113,123
116,328
Total assets
6,834,636
6,696,172
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing demand deposits
2,281,612
2,158,420
Interest-bearing deposits
3,248,490
2,996,627
Total deposits
5,530,102
5,155,047
Other borrowings
311,450
519,723
Subordinated notes, net
73,560
73,517
Junior subordinated debentures issued to capital trusts, net
37,011
36,906
Accrued interest payable and other liabilities
93,842
74,597
Total liabilities
6,045,965
5,859,790
STOCKHOLDERS’ EQUITY
Preferred stock
—
10,438
Common stock
388
387
Additional paid-in capital
595,006
593,753
Retained earnings
290,397
271,676
Treasury stock, at cost
(40,732
(31,570
Accumulated other comprehensive loss, net of tax
(56,388
(8,302
Total stockholders’ equity
788,671
836,382
Total liabilities and stockholders’ equity
PreferredShares
CommonShares
Par value
0.01
Shares authorized
50,000
150,000,000
Shares issued
39,534,816
39,203,747
Shares outstanding
37,811,582
37,713,903
Treasury shares
1,723,234
1,489,844
See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
(dollars in thousands, except share and per share data)
2022
2021
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases
55,426
53,808
Interest on securities
6,155
6,089
Other interest and dividend income
237
262
Total interest and dividend income
61,818
60,159
INTEREST EXPENSE
Deposits
1,087
1,421
395
502
Subordinated notes and debentures
1,600
1,596
Total interest expense
3,082
3,519
Net interest income
58,736
56,640
PROVISION FOR LOAN AND LEASE LOSSES
4,995
4,367
Net interest income after provision for loan and lease losses
53,741
52,273
NON-INTEREST INCOME
Fees and service charges on deposits
1,884
1,664
Loan servicing revenue
3,380
2,769
Loan servicing asset revaluation
(1,231
(1,505
ATM and interchange fees
1,049
1,012
Net realized gains on securities available-for-sale
1,462
Change in fair value of equity securities, net
(151
(206
Net gains on sales of loans
10,827
8,319
Wealth management and trust income
1,048
768
Other non-interest income
2,620
1,459
Total non-interest income
19,426
15,742
NON-INTEREST EXPENSE
Salaries and employee benefits
28,959
21,806
Occupancy and equipment expense, net
5,128
5,779
Impairment charge on assets held for sale
604
Loan and lease related expenses
(891
951
Legal, audit and other professional fees
2,600
2,214
Data processing
3,186
2,755
Net loss recognized on other real estate owned and other related expenses
54
621
Other intangible assets amortization expense
1,749
Other non-interest expense
3,923
2,363
Total non-interest expense
44,555
38,842
INCOME BEFORE PROVISION FOR INCOME TAXES
28,612
29,173
PROVISION FOR INCOME TAXES
6,301
7,375
NET INCOME
22,311
21,798
Dividends on preferred shares
196
INCOME AVAILABLE TO COMMON STOCKHOLDERS
22,115
21,602
EARNINGS PER COMMON SHARE
Basic
0.60
0.57
Diluted
0.58
0.56
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Net income
Securities available-for-sale
Unrealized holding losses arising during the period
(83,843
(40,131
Reclassification adjustments for net gains included in net income
(1,462
Tax effect
22,747
11,582
Net of tax
(61,096
(30,011
Cash flow hedges
Unrealized holding gains arising during the period
17,643
4,992
Reclassification adjustments for net losses included in net income
210
21
(4,843
(1,396
13,010
3,617
Total other comprehensive loss
(48,086
(26,394
Comprehensive loss
(25,775
(4,596
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, 2021
38,618,054
384
587,165
191,098
(1,668
18,047
805,464
Other comprehensive loss, net of tax
Issuance of common stock upon exercise of stock options
55,908
1
750
751
Restricted stock activity, net
274,739
(244
Issuance of common stock in connection with employee stock purchase plan
25,894
515
Cash dividends declared on preferred stock
(196
Cash dividends declared on common stock ($0.06 per share)
(2,315
Repurchase of common stock
(332,744
(6,363
Share-based compensation expense
779
Balance, March 31, 2021
38,641,851
385
589,209
210,385
(8,275
(8,347
793,795
28,492
Other comprehensive income, net of tax
8,524
11,031
135
(19,166
(344
(195
(2,319
(538,744
(12,093
1,078
Balance, June 30, 2021
38,094,972
590,422
236,363
(20,712
177
817,073
25,306
(5,691
25,866
283
12,879
(1
(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
37,690,087
386
592,192
258,077
(31,161
(5,514
824,418
17,189
(2,788
23,092
187
100
287
(9,994
(509
10,718
293
294
(3,394
1,081
Balance, December 31, 2021
6
Balance, January 1, 2022
117,254
(9
(872
(881
263,283
(700
Return of common stock in connection with employee stock purchase plan
(39
Redemption of preferred stock
(10,438
(282,819
(7,590
1,264
Balance, March 31, 2022
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
Depreciation and amortization of premises and equipment
1,164
1,557
Net amortization of securities
1,254
2,439
Net change in fair value of equity securities, net
151
206
Net gains on sales and valuation adjustments of premises and equipment
(2
(88
(10,827
(8,319
Originations of U.S. government guaranteed loans
(78,643
(95,563
Proceeds from U.S. government guaranteed loans sold
97,176
88,489
Accretion of premiums and discounts on acquired loans, net
(1,476
(1,968
Net change in servicing assets
(753
(98
Net losses (gains) on sales and valuation adjustments of other real estate owned
(25
464
Net amortization of other acquisition accounting adjustments
1,732
Amortization of subordinated debt issuance cost
43
44
Accretion of junior subordinated debentures discount
105
114
Deferred tax provision, net of valuation
897
1,705
Increase in cash surrender value of bank owned life insurance
(565
(249
Changes in assets and liabilities:
19,106
12,292
34,997
(13,843
Net cash provided by operating activities
92,768
15,000
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale
(52,288
(487,027
Proceeds from maturities and calls of securities available-for-sale
9,223
14,596
Proceeds from paydowns of securities available-for-sale
44,358
112,038
Proceeds from sales of securities available-for-sale
183,413
Proceeds from maturities and calls of securities held-to-maturity
500
Redemption (purchases) of Federal Home Loan Bank stock, net
8,025
(8,550
Net change in loans and leases
(251,446
(117,788
Purchases of premises and equipment
(926
(477
Proceeds from sales of premises and equipment
26
296
Proceeds from sales of assets held for sale
832
Proceeds from sales of other real estate owned
225
370
Investment in bank owned life insurance
(50,000
Net cash used in investing activities
(242,803
(351,797
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
375,055
272,526
Proceeds from short-term borrowings
4,159,000
4,696,000
Repayments of short-term borrowings
(4,369,000
(4,601,000
Proceeds from Paycheck Protection Program Liquidity Facility ("PPPLF") advances
132,410
Repayments of PPPLF advances
(116,670
Net increase (decrease) in securities sold under agreements to repurchase
1,727
(8,922
Dividends paid on preferred stock
Dividends paid on common stock
(3,345
(2,293
Proceeds from issuance of common stock
470
1,024
Repurchases of common stock
Net cash provided by financing activities
145,683
366,516
NET CHANGE IN CASH AND CASH EQUIVALENTS
(4,352
29,719
CASH AND CASH EQUIVALENTS, beginning of period
83,420
CASH AND CASH EQUIVALENTS, end of period
113,139
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
1,584
2,568
Cash paid during the period for taxes
269
179
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to other real estate owned
309
436
Common dividend declared, not paid
49
22
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 March 31, 2022 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, 2021, 2020, and 2019.
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.
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. 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
Income Taxes (Topic 740)—On January 1, 2022, the Company adopted ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The ASU simplifies 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 change 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 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. Adoption of the provisions of ASU No. 2019-12 did not impact our financial result for the three months ended March 31, 2022.
Issued Accounting Pronouncements Pending Adoption
Financial Instruments—Credit Losses (Topic 326)—In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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. Upon adoption, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the prior methodology and the amount required under the new standard. 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 February 2022, FASB issued ASU No. 2022-02, Troubled Debt Restructurings (TDRs) and Vintage Disclosures, which eliminates the specific accounting guidance for TDRs and updates the vintage disclosure requirements to require disclosure of current period charge-offs by year of origination. This guidance will be implemented upon adoption. In November 2019, FASB issued ASU No. 2019-10, Effective Dates, which delays the effective date of the ASU for entities not classified as Public Business Entities. The Company will adopt the standard on December 31, 2022. The new guidance may result in an increase in the allowance for loan losses, which will reflect the requirement to include expected losses on purchased credit-impaired loans. The extent of the increase will depend on the composition of the loan portfolio, as well as the economic conditions and forecasts as of the adoption date.
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. 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 the London Interbank Offered Rate ("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. Banking regulators have provided guidance which prohibits new financial contracts from referencing LIBOR as the relevant index after December 31, 2021. The guidance goes on to indicate that beginning after June 2023, LIBOR can no longer be used for existing financial contracts. In December 2021, management approved the use of Term Secured Overnight Financing Rate ("SOFR") as an alternative reference rate to LIBOR. Other alternative reference rates may be considered in the future. At March 31, 2022, $1.1 billion of loans, derivatives with a notional amount of $475.8 million, and securities available for sale with a fair value of $58.3 million, include fallback provisions that define the trigger events (an occurrence that precipitates the conversion from LIBOR to a new reference rate), and allow for the selection of a benchmark replacement and a spread adjustment between LIBOR and that benchmark replacement. Junior subordinated debentures carrying value of $37.0 million were also tied to LIBOR.
11
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
24,875
(654
24,225
U.S. Government agencies
149,164
328
(9,252
140,240
Obligations of states, municipalities, and political subdivisions
83,786
512
(2,170
82,128
Residential mortgage-backed securities
Agency
758,179
(57,343
700,857
Non-agency
140,350
(9,926
130,424
Commercial mortgage-backed securities
206,203
25
(16,535
189,693
Corporate securities
65,798
488
(1,144
65,142
Asset-backed securities
36,796
(147
36,659
1,465,151
1,388
(97,171
Held-to-maturity
24
3,906
18,447
37
(8
18,476
141,096
661
(2,367
139,390
86,454
3,238
(56
89,636
756,549
2,122
(15,015
743,656
146,499
(1,267
145,236
214,417
2,795
(3,661
213,551
65,814
1,586
(54
67,346
37,206
(4
37,251
1,466,482
10,492
(22,432
107
3,992
The Company did not classify securities as trading during the three months ended March 31, 2022 or during 2021.
12
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 March 31, 2022 and December 31, 2021, are summarized as follows:
Less than 12 Months
12 Months or Longer
# ofSecurities
UnrealizedLosses
22,223
15
43,883
(1,915
74,242
(7,337
118,125
Obligations of states, municipalities and political subdivisions
42,934
93
229,246
(11,442
469,295
(45,901
698,541
19
110,832
(7,854
19,592
(2,072
45
111,241
(6,766
69,134
(9,769
180,375
16
28,709
31,961
223
621,029
(32,092
632,263
(65,079
1,253,292
9,946
64,585
(1,590
19,223
(777
83,808
9,507
51
612,280
(13,894
25,412
(1,121
637,692
14
96,372
(1,257
761
(10
97,133
64,473
(1,994
37,063
(1,667
101,536
7,502
15,978
104
880,643
(18,857
82,459
(3,575
963,102
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 223 securities available-for-sale with unrealized losses at March 31, 2022. There were no securities held-to-maturity with unrealized losses at March 31, 2022. The Company anticipates full recovery of amortized cost with respect to these securities by maturity. 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 months ended March 31, 2022 and 2021 are listed below:
13
For the Three Months Ended
Proceeds
89,301
Gross gains
1,626
Gross losses
164
There were no sales of securities during the three months ended March 31, 2022. There were $1.5 million in net gains reclassified from accumulated other comprehensive income into earnings for the three months ended March 31, 2021.
Securities posted and pledged as collateral were $463.6 million and $332.3 million at March 31, 2022 and December 31, 2021. At March 31, 2022 and December 31, 2021, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $402.0 million and $277.1 million, respectively, and for customer repurchase agreements of $39.0 million and $38.8 million, respectively. At March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, 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.
At March 31, 2022, 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
12,011
12,051
Due from one to five years
71,166
69,792
Due from five to ten years
202,902
196,070
Due after ten years
74,340
70,481
Mortgage-backed securities
1,104,732
1,020,974
1,174
1,182
2,708
2,724
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
1,776,483
1,663,256
Residential real estate
494,285
480,236
Construction, land development, and other land
354,697
327,143
Commercial and industrial
1,738,379
1,580,235
Paycheck Protection Program ("PPP")
37,248
127,184
Installment and other
1,312
1,322
Lease financing receivables
380,313
354,135
Total loans and leases
4,782,717
4,533,511
Net unamortized deferred fees and costs
1,980
(674
Initial direct costs
4,371
4,291
Net minimum lease payments
375,581
352,948
Unguaranteed residual values
32,930
27,953
Unearned income
(28,198
(26,766
Total lease financing receivables
Lease financing receivables before allowance for lease losses
384,684
358,426
Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases. At March 31, 2022 and December 31, 2021, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $156.8 million and $231.2 million, respectively. At March 31, 2022 and December 31, 2021, 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 March 31, 2022 and December 31, 2021, installment and other loans included overdraft deposits of $371,000 and $445,000, respectively, which were reclassified as loans. At March 31, 2022 and December 31, 2021, loans and leases and loans held for sale pledged as security for borrowings were $2.2 billion and $1.9 billion, respectively.
The minimum annual lease payments for lease financing receivables as of March 31, 2022 are summarized as follows:
Minimum LeasePayments
88,081
2023
110,682
2024
84,204
2025
58,757
2026
29,364
Thereafter
4,493
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 March 31, 2022 and December 31, 2021:
Originated
AcquiredImpaired
AcquiredNon-Impaired
1,527,920
67,092
184,353
1,779,365
399,638
47,347
47,735
494,720
351,519
1,357
353,072
1,698,025
3,792
37,794
1,739,611
Paycheck Protection Program
36,260
945
163
248
1,356
379,527
5,157
4,393,834
119,751
275,483
1,379,000
72,160
214,588
1,665,748
379,796
49,401
51,317
480,514
323,886
201
325,399
1,534,745
4,014
43,202
1,581,961
123,712
940
264
1,368
352,247
6,179
4,094,326
127,051
315,751
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 $3.0 million and $3.2 million, at March 31, 2022 and December 31, 2021, respectively.
UnpaidPrincipalBalance
CarryingValue
107,665
113,257
92,534
95,056
8,287
8,571
5,786
10,201
851
858
Total acquired impaired loans
215,123
227,943
The following table summarizes the changes in accretable yield for acquired impaired loans for the three months ended March 31, 2022 and 2021:
Beginning balance
18,595
27,696
Accretion to interest income
(2,313
(3,707
Reclassification from nonaccretable difference, net
319
1,273
Ending balance
16,601
25,262
Acquired non-impaired loans and leases— The unpaid principal balance and carrying value for acquired non-impaired loans and leases at March 31, 2022 and December 31, 2021 were as follows:
188,627
219,277
48,211
51,839
260
265
39,314
44,827
257
273
5,172
6,199
Total acquired non-impaired loans and leases
281,841
322,680
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 months ended March 31, 2022 and 2021 are as follows:
CommercialReal Estate
ResidentialReal Estate
Construction, Land Development,and Other Land
Commercialand Industrial
PaycheckProtectionProgram
Installmentand Other
LeaseFinancingReceivables
Three months ended
16,918
1,628
522
33,129
2,806
55,012
Provision
2,784
513
594
458
645
Charge-offs
(240
(463
(363
(1,066
Recoveries
244
120
149
517
19,706
2,145
1,116
33,244
3,237
59,458
Ending balance:
Individually evaluated for impairment
7,731
13,002
20,739
Collectively evaluated for impairment
10,320
1,138
1,115
19,855
35,673
Loans acquired with deteriorated credit quality
1,655
1,001
3,046
Total allowance for loan and lease losses
17
Loans and leases ending balance:
36,805
2,190
32,457
71,452
1,675,468
445,183
351,715
1,703,362
1,193
4,597,865
March 31, 2021
19,584
2,400
1,352
41,183
1,813
66,347
Provision/(recapture)
2,606
(302
(241
1,947
(3
360
(1,877
(11
(326
(2,888
(364
(5,466
185
60
342
20,498
2,091
785
40,302
1,902
65,590
7,409
101
18,824
26,334
10,881
1,460
780
20,066
35,101
2,208
530
1,412
4,155
54,421
1,709
43,306
99,436
1,281,188
469,287
238,332
1,312,248
617,006
1,425
254,331
4,173,817
96,059
74,283
1,992
8,842
191
181,367
1,431,668
545,279
240,324
1,364,396
1,616
4,454,620
The Company increased the allowance for loan and lease losses by $4.4 million for the three months ended March 31, 2022, and decreased it by $757,000 for the three months ended March 31, 2021. For acquired impaired loans, the Company decreased the allowance by $139,000 and increased it by $2.3 million for the three months ended March 31, 2022, and 2021, respectively.
18
For loans individually evaluated for impairment, the Company decreased the allowance for loan and lease losses for the three months ended March 31, 2022 by $299,000. The Company increased the allowance on loans individually evaluated for impairment by $2.4 million for the three months ended March 31, 2021. For loans collectively evaluated for impairment, the Company increased allowance for loan and lease losses by $4.9 million for the three months ended March 31, 2022, and recaptured $824,000 of the allowance for the three months ended March 31, 2021, respectively.
An allowance for loan and lease loss allocation has not been made for 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 losses considered impaired as of March 31, 2022 and December 31, 2021, 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
14,083
15,163
2,104
2,209
12,285
13,891
With an allowance recorded
22,722
26,515
86
108
20,172
21,472
Total impaired loans
79,358
17,233
19,252
1,802
1,919
16,624
19,148
17,818
20,117
6,538
19,446
21,198
14,500
72,923
81,634
21,038
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 three months ended:
AverageRecordedInvestment
InterestIncomeRecognized
16,068
236
2,005
17,380
123
21,252
375
29
20,611
278
77,345
34,961
311
3,080
16,568
129
22,178
161
298
31,089
108,174
894
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 March 31, 2022 and December 31, 2021:
CommercialandIndustrial
Pass
1,530,253
423,884
316,400
1,541,963
1,113
380,897
4,230,770
Watch
107,164
17,934
29,774
136,986
80
2,017
293,955
Special Mention
38,012
3,624
5,541
23,162
1,381
71,720
Substandard
36,844
1,931
33,708
329
72,812
Doubtful
Loss
1,712,273
447,373
1,735,819
4,669,317
1,397,228
406,948
286,434
1,341,826
1,123
354,380
3,911,651
123,248
19,062
31,768
177,638
81
353,789
37,340
3,118
5,885
21,586
1,609
69,538
35,772
1,985
36,897
348
75,002
97
1,593,588
431,113
324,087
1,577,947
1,204
4,410,077
20
The following tables summarize contractual delinquency information for acquired non-impaired and originated loans and leases by category at March 31, 2022 and December 31, 2021:
30-59 DaysPast Due
60-89DaysPast Due
Greaterthan 90Days andAccruing
Non-accrual
Total Past Due
Current
8,457
10,684
10,988
30,129
1,682,144
2,213
2,430
1,923
6,566
440,807
4,671
7,003
11,674
1,724,145
34
36
1,157
363
383,790
15,858
13,164
20,277
49,299
4,620,018
30-59DaysPast Due
5,185
2,361
12,751
20,297
1,573,291
14,282
852
1,450
16,584
414,529
318,202
2,479
1,097
8,600
12,176
1,565,771
35
38
1,166
1,661
251
2,241
356,185
29,495
4,596
23,130
57,221
4,352,856
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 March 31, 2022 and December 31, 2021:
NumberofLoans
Pre-ModificationOutstandingRecordedInvestment
Post-ModificationOutstandingRecordedInvestment
SpecificReserves
Accruing:
1,244
158
50
162
Total accruing
1,456
208
Non-accruing:
899
783
116
1,717
560
Total non-accruing
2,616
1,343
Total troubled debt restructurings
4,072
2,799
371
1,703
215
56
131
168
1,927
346
1,034
918
111
1,745
588
2,779
1,506
4,706
3,433
457
Loans modified as troubled debt restructurings that occurred during the three months ended March 31, 2022 and 2021 were:
2,495
Additions
281
Net payments
(471
(57
Net transfers from non-accrual
2,719
5,650
673
(163
(343
(395
Net transfers to accrual
5,585
8,304
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the three months ended March 31, 2022 or 2021. In addition, there was no commitment outstanding on troubled debt restructurings at March 31, 2022 or December 31, 2021.
At March 31, 2022 and December 31, 2021, the reserve for unfunded commitments was $2.0 million and $1.4 million, respectively. During the three months ended March 31, 2022, the increase to unfunded commitments was $599,000. During the three months ended March 31, 2021, there was a recapture for unfunded commitments of $120,000. There were no charge-offs or recoveries related to the reserve for unfunded commitments during the periods.
Note 6—Servicing Assets
Activity for servicing assets and the related changes in fair value for the three months ended March 31, 2022 and 2021 was as follows:
Three Months Ended March 31,
22,042
Additions, net
1,984
1,603
Changes in fair value
22,140
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 March 31, 2022 and December 31, 2021 were as follows:
Loan portfolios serviced for:
SBA guaranteed loans
1,514,240
1,510,375
USDA guaranteed loans
190,797
183,026
1,705,037
1,693,401
Loan servicing revenue totaled $3.4 million and $2.8 million for each of the three months ended March 31, 2022 and 2021, respectively. Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in a downward valuation adjustment of $1.2 million and $1.5 million for three months ended March 31, 2022 and 2021, 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 months ended March 31, 2022 and 2021:
6,350
Net additions to OREO
Proceeds from sales of OREO
(225
(370
Gains on sales of OREO
76
28
Valuation adjustments
(51
(492
5,952
At March 31, 2022 and December 31, 2021, the balance of real estate owned included no foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.
23
At March 31, 2022 and December 31, 2021, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $3.2 million and $2.5 million, respectively.
There were no internally financed sales of OREO for the three months ended March 31, 2022 or 2021.
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 Condensed Consolidated Statements of Financial Condition.
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 March 31, 2022:
Balance Sheet Line Item
Operating lease right-of-use asset
11,769
11,646
Operating lease liability
15,562
15,629
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 March 31, 2022, the weighted-average discount rate of operating leases was 1.19% and the weighted average remaining life of operating leases was 5.9 years, compared to 0.99% and 6.0 years as of December 31, 2021.
The following table presents components of total lease costs included as a component of occupancy expense on the Consolidated Statement of Operations for the following periods:
Operating lease cost
865
Short-term lease cost
96
Variable lease cost
469
466
Less: Sublease income
(127
(154
Total lease cost, net
1,237
The future minimum lease payments for operating leases, subsequent to March 31, 2022, as recorded on the Condensed Consolidated Statements of Financial Condition, are summarized as follows:
Operating LeaseCommitments
3,030
3,465
3,233
2,487
1,719
2,364
Total undiscounted lease payments
16,298
Less: imputed interest
(736
Net lease liabilities
The Company’s rental expenses for the three months ended March 31, 2022 and 2021 were $1.4 million. For the three months ended March 31, 2022 and 2021, the Company received $127,000 and $154,000, respectively, in sublease income. The total amount of minimum rentals to be received in the future on these subleases is approximately $1.3 million, and the leases have contractual lives extending through 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 months ended March 31, 2022 and 2021:
For the Three Months Ended March 31,
Goodwill
Core DepositIntangible
Customer RelationshipIntangible
148,353
15,004
2,201
21,809
2,469
Amortization
(1,529
(67
(1,683
(66
13,475
2,134
20,126
2,403
Accumulated amortization
N/A
41,991
1,082
33,340
813
Weighted average remaining amortization period
4.7 Years
8.0 Years
5.4 Years
9.0 Years
The following table presents the estimated amortization expense for core deposit intangible and customer relationship intangible assets remaining at March 31, 2022:
EstimatedAmortization
4,789
4,336
2,286
1,721
1,320
15,609
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 three months ended March 31, 2022 and 2021 was 22.0% and 25.3%, respectively. The decrease in the effective tax rate during the first quarter of 2022 was a result of income tax benefits related to share-based compensation. The Company recorded discrete income tax benefit of $1.1 million and $28,000 related to the exercise of stock options and vesting of restricted shares for the three months ended March 31, 2022 and 2021, respectively.
Net deferred tax assets increased to $67.3 million at March 31, 2022 compared to $50.3 million at December 31, 2021 primarily as a result of unrealized losses on available-for-sale securities.
Note 11—Deposits
The composition of deposits was as follows as of March 31, 2022 and December 31, 2021:
Interest-bearing checking accounts
596,497
572,426
Money market demand accounts
1,357,679
1,106,272
Other savings
659,218
638,218
Time deposits (below $250,000)
505,141
532,589
Time deposits ($250,000 and above)
129,955
147,122
There were no brokered deposits included in Time deposits of $250,000 or more at March 31, 2022 and December 31, 2021.
At March 31, 2022, the scheduled maturity of time deposits was:
Scheduled Maturities
493,491
97,866
23,251
7,368
2026 and thereafter
13,120
635,096
Note 12—Other Borrowings
The following is a summary of the Company’s other borrowings as of March 31, 2022 and December 31, 2021:
Federal Home Loan Bank advances
280,000
490,000
Securities sold under agreements to repurchase
31,450
29,723
Line of credit
Byline Bank has the capacity to borrow funds from the discount window of the Federal Reserve System. As of March 31, 2022 and December 31, 2021, there were no outstanding advances under the Federal Reserve Bank discount window line.
At March 31, 2022, fixed-rate Federal Home Loan Bank (“FHLB”) advances totaled $80.0 million, with interest rates ranging from 0.00% to 0.66% and maturities ranging from May 2022 to June 2022. Total variable rate advances were $200.0 million at March 31, 2022, with interest rates of 0.44% and 0.49% that may reset daily, and mature in 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 thereafter.
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.
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 7, 2022. The amended revolving line of credit bears interest at either 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 March 31, 2022 and December 31, 2021, the line of credit had no outstanding balance.
The following table presents short-term credit lines available for use as of March 31, 2022 and December 31, 2021:
Federal Home Loan Bank line
2,040,248
1,883,349
Federal Reserve Bank of Chicago discount window line
747,988
602,962
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 SOFR, 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 March 31, 2022, the net liability outstanding of the subordinated notes was $73.6 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 March 31, 2022 and December 31, 2021, the Company’s junior subordinated debentures by issuance were as follows:
Name of Trust
Aggregate Principal Amount March 31, 2022
AggregatePrincipal AmountDecember 31, 2021
StatedMaturity
Contractual Rate at March 31, 2022
Interest Rate Spread
Metropolitan Statutory Trust 1
35,000
March 17, 2034
3.71
%
Three-monthLIBOR + 2.79%
First Evanston Bancorp Trust I
10,000
March 15, 2035
2.61
Three-monthLIBOR + 1.78%
Total liability, at par
45,000
Discount
(7,989
(8,094
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
27
debentures bear interest at three-month LIBOR plus 2.79% (3.71% and 3.01% at March 31, 2022 and December 31, 2021, 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 $56,000 and $45,000 as of March 31, 2022 and December 31, 2021, 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% (2.61% and 1.98% at March 31, 2022 and December 31, 2021, 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 $12,000 and $9,000 as of March 31, 2022 and December 31, 2021, 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—Leases 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 March 31, 2022 and December 31, 2021:
Fixed Rate
Variable Rate
Commitments to extend credit
247,494
1,666,980
1,914,474
176,014
1,578,405
1,754,419
Letters of credit
579
57,745
58,324
599
58,543
59,142
248,073
1,724,725
1,972,798
176,613
1,636,948
1,813,561
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 2045. Variable rate loan commitments have interest rates ranging from 1.25% to 15.00% and maturities up to 2048.
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 2022 and 2021, 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 Condensed 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 March 31, 2022 and December 31, 2021:
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
4,872
Equity securities
5,805
5,130
675
Servicing assets
Derivative assets
29,113
Financial liabilities
Derivative liabilities
7,475
4,880
5,698
5,012
686
13,375
9,665
30
The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the three months ended March 31, 2022 and 2021.
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
685
Change in fair value
Balance, end of period
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 March 31, 2022:
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
3.2% - 6.4%
4.6
Decrease
Prepayment speeds
0.0% - 32.6%
13.5
(0.6)% - 53.1%
8.7
Expected weightedaverage loan life
0.0 - 9.2 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 Condensed 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
31
Company’s assets that were measured at fair value on a non-recurring basis, excluding acquired impaired loans, as of March 31, 2022 and December 31, 2021:
Non-recurring
Impaired loans (excluding acquired impaired loans)
29,074
2,184
19,455
Assets held for sale
9,153
Other real estate owned
28,513
21,570
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 and interest bearing deposits with other banks—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.
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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
Restricted stock
69,081
Loans and lease receivables, net (less impaired loans at fair value)
4,678,897
4,643,327
4,430,231
4,428,509
Accrued interest receivable
18,757
18,875
Non-interest-bearing deposits
3,248,063
2,997,026
Accrued interest payable
1,402
Securities sold under repurchase agreement
Subordinated notes
79,159
81,744
Junior subordinated debentures
40,389
40,901
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Note 16—Derivative Instruments and Hedge Activities
As required by ASC 815, the Company records all derivatives on the Condensed Consolidated Statements of Financial Condition 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 Condensed 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 Condensed Consolidated Statements of Financial Condition as of March 31, 2022 and December 31, 2021:
NotionalAmount
OtherAssets
OtherLiabilities
Derivatives designated as hedging instruments
Interest rate swaps designated as cash flow hedges
450,000
21,782
400,000
4,140
Derivatives not designated as hedging instruments
Other interest rate derivatives
488,064
7,331
(7,474
439,876
9,235
(9,660
Other credit derivatives
7,350
7,571
(5
Total derivatives
945,414
(7,475
847,447
(9,665
Interest rate swaps designated as cash flow hedges—Cash flow hedges of interest payments associated with certain other borrowings had notional amounts totaling $450.0 million as of March 31, 2022, and $400.0 million as of December 31, 2021. 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 March 31, 2022, the cash flow hedges aggregating $450.0 million in notional amounts are comprised of five forward starting pay fixed interest rate swaps totaling $350.0 million, of which one for $50.0 million is effective in September 2022; two totaling $200.0 million are effective in March 2023; one for $50.0 million is effective in May 2023; and one for $50.0 million is effective in September 2023.
Included in other comprehensive income is the remaining balance related to previously terminated interest rate swaps designated as cash flow hedges of $97,000 as of March 31, 2022 and $199,000 as of December 31, 2021. These are amortized over the original life of the cash flow hedge. Interest recorded on these swap transactions was $210,000 and $21,000 during the three months ended March 31, 2022, and 2021, respectively, and is reported as a component of interest expense on other borrowings. As of March 31, 2022, the Company estimates $1.2 million of the unrealized gain to be reclassified as a decrease to interest expense during the next twelve months.
The following table reflects the cash flow hedges as of March 31, 2022:
Notional amounts
Derivative assets fair value
Derivative liabilities fair value
Weighted average maturity
4.7 years
The weighted average pay rates of the swaps are 1.04% as of March 31, 2022, and weighted average receive rates are determined at the time the forward swaps become effective. The weighted average receive rate for the effective hedge of $100.0 million is 0.20% as of March 31, 2022.
The following table reflects the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Condensed Consolidated Statements of Operations relating to the cash flow derivative instruments for the three months ended:
Amount ofGain Recognized inOCI
Amount ofLossReclassifiedfrom OCI toIncome as anIncrease toInterestExpense
Amount ofGain (Loss)Recognized inOtherNon-InterestIncome
Interest rate swaps
(210
(21
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 $488.1 million as of March 31, 2022 with maturities ranging from April 2022 to March 2032. 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 March 31, 2022 and 2021, there were $1.1 million and $42,000 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 March 31, 2022:
7,474
Weighted average pay rates
4.13
Weighted average receive rates
4.33
5.9 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 $7.4 million and $7.6 million as of March 31, 2022 and December 31, 2021, respectively. The fair value of the other credit derivatives is 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 Condensed Consolidated Statements of Operations relating to derivative instruments that are not designated in a hedging relationship for the three months ended March 31, 2022 and 2021:
(282
556
(286
561
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 Condensed 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 Condensed Consolidated Statements of Financial Condition
Net amount presented in the Condensed Consolidated Statements of Financial Condition
Gross amounts not offset in the Condensed Consolidated Statements of Financial Condition
Offsetting derivative positions
(2,336
2,336
(3,253
3,253
Collateral posted
(26,777
5,138
(10,122
6,412
Net credit exposure
As of March 31, 2022, 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 $7.5 million. The Company has posted $5.1 million collateral related to these agreements as of March 31, 2022. If the Company had breached any of these provisions at March 31, 2022, it could have been required to settle its obligations under the agreements at their termination value less offsetting positions of $2.3 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's Board of Directors adopted, and the Company's stockholder approved, the 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). 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 March 31, 2022, there were 400,377 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 and 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 2022, the Company granted 289,277 shares of restricted common stock, par value $0.01 per share. Of this total, 166,290 restricted shares will vest ratably over four years on each anniversary of the grant date, 69,910 restricted shares will vest ratably over three years on each anniversary of the grant date, and 10,589 restricted shares will cliff vest on the third anniversary of the grant date. In addition, 42,488 performance-based restricted shares were included in the 2022 grant which have a period ending December 31, 2024.
The following table discloses the changes in restricted shares for the three months ended March 31, 2022:
Omnibus Plan
Number of Shares
Weighted AverageGrant Date FairValue
Beginning balance, January 1, 2022
542,520
19.04
Granted
289,277
26.97
Vested
(75,171
18.47
Forfeited
(169
18.33
Ending balance outstanding at March 31, 2022
756,457
22.13
A total of 75,171 restricted shares vested during the three months ended March 31, 2022. A total of 148,577 restricted shares vested during the year ended December 31, 2021. The fair value of restricted shares that vested during the three months ended March 31, 2022 was $2.0 million. The fair value of restricted shares that vested during the year ended December 31, 2021 was $3.4 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 Condensed Consolidated Statements of Operations.
The following table summarizes restricted stock compensation expense for the three months ended March 31, 2022 and 2021:
Total share-based compensation - restricted stock
Income tax benefit
343
218
Unrecognized compensation expense
13,525
9,720
Weighted-average amortization period remaining
2.9 years
2.7 years
The fair value of the unvested restricted stock awards at March 31, 2022 was $20.2 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. The Company granted 1,846,968 options to purchase shares under this plan. 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 1,080,554 shares remain outstanding under the BYB Plan at March 31, 2022.
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 March 31, 2022.
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 three months ended March 31, 2022:
BYB Plan
Weighted Average Exercise Price
Intrinsic Value
Weighted Average Remaining Contractual Term (in Years)
1,337,048
11.26
21,519
3.5
Exercised
(256,494
11.18
4,054
Expired
1,080,554
11.27
16,647
3.2
Exercisable at March 31, 2022
A total of 256,494 stock options were exercised during the three months ended March 31, 2022, proceeds of which were $470,000, with a related tax benefit of $1.1 million. A total of 53,531 stock options were exercised during the year ended December 31, 2021, with proceeds of $751,000 and a related tax benefit of $121,000. No stock options vested during the three months ended March 31, 2022.
The Company did not recognize any stock option compensation expense during three months ended March 31, 2022 or for the three months ended March 31, 2021.
There was no unrecognized stock option compensation expenses as of March 31, 2022.
Pursuant to the terms of the Agreement and Plan of Merger with First Evanston and its subsidiaries, dated as of November 27, 2017 (the "Merger Agreement"), 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 (b) 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 three months ended March 31, 2022:
FEB Plan
170,697
11.60
2,688
3.4
2,574
3.1
No stock options were exercised during the three months ended March 31, 2022. A total of 62,366 stock options were exercised during the year ended December 31, 2021, proceeds of which were $705,000 and a related tax benefit of $153,000. No stock options vested during the three months ended March 31, 2022.
39
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 1,251,251 and 1,568,301 shares of common stock were outstanding as of March 31, 2022 and 2021, respectively. There were 756,457 and 633,430 restricted stock awards outstanding at March 31, 2022 and 2021, respectively. For the three ended March 31, 2022 and 2021, no stock options outstanding were excluded from the calculation of diluted earnings per common share.
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)
37,123,161
38,164,201
Incremental shares
919,661
751,281
Weighted-average common stock outstanding (dilutive)
38,042,822
38,915,482
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 March 31, 2022 and December 31, 2021 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 was redeemable at the Company’s option on or after March 31, 2022. Holders of Series B Preferred Stock did 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 were entitled to receive a fixed dividend of 7.50% per annum from the original issue date through December 30, 2021.
On February 15, 2022, the Company gave notice of its intention to redeem all of its outstanding shares of the Series B Preferred Stock (the “Preferred Stock Redemption”). The Preferred Stock Redemption was in accordance with the terms of the Certificate of Designations of the Series B Preferred Stock dated as of June 16, 2017 (the “Certificate of Designation”). There were 10,438 shares of Series B Preferred Stock outstanding. The redemption date for the Series B Preferred Stock was March 31, 2022. Under the Certificate of Designations, the per share redemption price was the liquidation preference of $1,000 per share plus an amount equal to any declared and unpaid dividends thereon for any prior dividend period and totaled $10.6 million.
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For the three months ended March 31, 2022 and 2021, the Company declared and paid dividends on the Series B preferred stock of $196,000.
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 program will be in effect until December 31, 2022 unless terminated earlier.
The Company purchased 282,819 shares at a cost of $7.6 million under the stock repurchase program during the three months ended March 31, 2022. The Company purchased 332,744 shares at a cost of $6.4 million under this program during the three months ended March 31, 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 Condensed Consolidated Statements of Financial Condition.
For the three months ended March 31, 2022 and 2021, cash dividends were declared and paid to stockholders of record of the Company's common stock of $0.09 and $0.06 per share, respectively.
On April 26, 2022, the Company’s Board of Directors declared a cash dividend of $0.09 per share payable on May 23, 2022 to stockholders of record of the Company’s common stock as of May 9, 2022.
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 three months ended March 31, 2022 and 2021:
UnrealizedGains (Losses) on Cash FlowHedges
Unrealized Gains(Losses) onAvailable-for-SaleSecurities
TotalAccumulatedOtherComprehensiveIncome (Loss)
(305
18,352
Other comprehensive income (loss), net of tax
3,312
(11,659
2,817
(11,119
15,827
(72,215
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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, 2021, that was filed with the SEC on March 7, 2022, 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 offer online accounting opening to consumer customers through our website and 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, as reported by the SBA for the quarter ended March 31, 2022.
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.
We reported consolidated net income of $22.3 million for the three months ended March 31, 2022, compared to net income of $21.8 million for the three months ended March 31, 2021, an increase of $513,000. The increase in net income was attributable to a $2.1 million increase in net interest income and a $3.7 million increase in non-interest income, offset by a $5.7 million increase in non-interest expense. The increase in net interest income during the three months ended March 31, 2022 was primarily a result of an increase in average interest-earning assets. The increase in non-interest income was primarily driven by gains on the sales of loans. The increase in non-interest expense was mainly due to an increase in salaries and employee benefits as a result of new hires.
Dividends declared and paid on preferred shares were $196,000 for three months ended March 31, 2022 and 2021. Dividends declared on common shares were $3.4 million and $2.3 million for the three months ended March 31, 2022 and 2021, respectively. Dividends paid on common shares were $3.3 million and $2.3 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, net income available to common stockholders was $22.1 million, or $0.60 per basic and $0.58 per diluted common share, and $21.6 million, or $0.57 per basic and $0.56 per diluted common share, respectively. Our results of operations for the three months ended March 31, 2022 and 2021, yielded an annual return on average assets of 1.35% and 1.34% and a return on average stockholders’ equity of 10.87% and 10.96%, respectively.
As of March 31, 2022, we had consolidated total assets of $6.8 billion, total gross loans and leases outstanding of $4.8 billion, total deposits of $5.5 billion, and total stockholders’ equity of $788.7 million.
Critical Accounting Policies and Significant Estimates
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“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.
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. We will remain an emerging growth company until the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, which is December 31, 2022.
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, 2021, that we filed with the SEC on March 7, 2022.
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.
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.
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 March 31, 2022, 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 administration, 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 March 31, 2022, 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. Any losses on the sales of other real estate owned properties are recognized immediately. OREO is recorded net of participating interests sold.
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
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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 12 of the notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021, for further information on income taxes.
Recently Issued Accounting Pronouncements
Refer to Note 2 of our Unaudited Interim Condensed Consolidated Financial Statements as of March 31, 2022, 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.
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Selected Financial Data
As of or for the Three Months Ended
Common Share Data
Adjusted diluted earnings per share(1)(3)
Weighted-average common shares outstanding (basic)
Weighted-average common shares outstanding (diluted)
Common shares outstanding
Cash dividends per common share
0.09
0.06
Dividend payout ratio on common stock
15.52
10.71
Tangible book value per common share(1)
16.52
15.85
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin, fully taxable equivalent (1) (5)
3.82
3.78
Average cost of deposits
0.08
0.12
Efficiency ratio(2)
54.96
51.25
Adjusted efficiency ratio(1)(2)(3)
50.41
Non-interest expense to average assets
2.69
2.39
Adjusted non-interest expense to average assets(1)(3)
2.35
Return on average stockholders' equity
10.87
10.96
Adjusted return on average stockholders' equity(1)(3)
Return on average assets
1.35
1.34
Adjusted return on average assets(1)(3)
1.37
Non-interest income to total revenues(1)
24.85
21.75
Pre-tax pre-provision return on average assets(1)
2.03
2.06
Adjusted pre-tax pre-provision return on average assets(1)
2.10
Return on average tangible common stockholders' equity(1)
14.36
14.86
Adjusted return on average tangible common stockholders' equity(1)(3)
15.15
Non-interest-bearing deposits to total deposits
41.26
40.12
Loans and leases held for sale and loans and leases held for investment to total deposits
87.31
89.23
Deposits to total liabilities
91.47
84.36
Deposits per branch
125,684
109,229
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment
0.42
0.83
ALLL to total loans and leases held for investment
1.24
1.47
Net charge-offs to average total loans and leases held for investment
0.05
0.47
Acquisition accounting adjustments(4)
3,364
10,424
Capital Ratios
Common equity to total assets
11.54
11.61
Tangible common equity to tangible assets(1)
9.36
9.31
Leverage ratio
10.70
10.93
Common equity tier 1 capital ratio
10.75
12.09
Tier 1 capital ratio
11.49
13.20
Total capital ratio
13.72
15.96
(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%.
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We reported consolidated net income of $22.3 million for the three months ended March 31, 2022 compared to net income of $21.8 million for the three months ended March 31, 2021, an increase of $513,000. The increase in net income was primarily attributable to a $2.1 million increase in net interest income, and a $3.7 million increase in non-interest income. These were offset by a $5.7 million increase in non-interest expense and a $628,000 increase in the provision for loan and lease losses.
The increase in net interest income during the three months ended March 31, 2022 was mainly a result of increased average loan and leases balances and decrease in borrowed funds due to deposit growth. The increase in provision for loan and lease losses was mainly attributable to increases in qualitative factors and loan and lease portfolio growth. The increase in non-interest income was principally driven by higher net gains on sales of loans and increases in swap income. The increase in non-interest expense was mostly due to an increase in salaries and employee benefits.
Net income available to common stockholders was $22.1 million, or $0.60 per basic and $0.58 per diluted common share, for the three months ended March 31, 2022 compared to $21.6 million, or $0.57 per basic and $0.56 per diluted common share, for the three months ended March 31, 2021. Dividends on preferred shares were $196,000 for the three months ended March 31, 2022 and 2021.
Our annualized return on average assets was 1.35% for the three months ended March 31, 2022 compared to 1.34% for the three months ended March 31, 2021. Our annualized return on average stockholders’ equity was 10.87% for the three months ended March 31, 2022 compared to 10.96% for the three months ended March 31, 2021. Our efficiency ratio was 54.96% for the three months ended March 31, 2022 compared to 51.25% for the three months ended March 31, 2021.
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, 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 March 31, 2022, acquired loans with evidence of credit deterioration accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, represented 2.5% of our total loan portfolio compared to 2.8% at December 31, 2021.
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
74,822
0.16
55,477
0.21
Loans and leases(1)
4,670,070
4.81
4,432,246
4.92
Taxable securities
1,339,345
5,475
1.66
1,430,625
5,379
1.52
Tax-exempt securities(2)
169,652
1,124
179,364
1,194
2.70
Total interest-earning assets
6,253,889
62,054
4.02
6,097,712
60,409
(55,885
(66,989
All other assets
507,982
557,042
TOTAL ASSETS
6,705,986
6,587,765
Interest checking
579,297
178
546,730
199
0.15
Money market accounts
1,255,431
474
1,124,101
381
0.14
Savings
649,269
577,504
67
Time deposits
662,080
359
0.22
777,266
774
0.40
Total interest-bearing deposits
3,146,077
3,025,601
0.19
290,545
0.55
649,639
0.31
110,490
5.87
109,859
5.89
Total borrowings
401,035
1,995
2.02
759,498
2,098
1.12
Total interest-bearing liabilities
3,547,112
0.35
3,785,099
0.38
2,248,035
1,924,178
Other liabilities
78,678
72,036
832,161
806,452
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Net interest spread(3)
3.67
3.64
Net interest income, fully taxable equivalent
58,972
56,890
Net interest margin, fully taxable equivalent(2)(4)
Tax-equivalent adjustment
(236
(250
Net interest margin(4)
3.81
3.77
Net loan accretion impact on margin
1,476
0.10
1,968
0.13
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 March 31, 2022Compared to Three Months Ended March 31, 2021
Increase (Decrease) Due to
Volume
Rate
Interest income
(7
2,820
(1,202
1,618
(398
494
Tax-exempt securities
(70
Total interest income
(719
1,645
Interest expense
(40
66
(345
(415
(358
(334
(488
(107
(479
376
(103
(455
(437
2,819
(737
2,082
Net interest income for the three months ended March 31, 2022 was $58.7 million compared to $56.6 million during the same period in 2021, an increase of $2.1 million, or 3.7%. Interest income increased $1.7 million for the three months ended March 31, 2022 compared to the same period in 2021 primarily a result of increased average balance on loans and leases, offset by a decrease in PPP interest and fee income. Interest expense decreased by $437,000 for the three months ended March 31, 2022 compared to the same period in 2021 mostly due to decreases in the average rates paid on deposits.
The net interest margin for the three months ended March 31, 2022 was 3.81%, an increase of four basis points compared to 3.77% for the three months ended March 31, 2021. The primary drivers of the increase for the three month period was an increase in average interest earning assets.
Net loan accretion income was $1.5 million for the three months ended March 31, 2022 compared to $2.0 million for the three months ended March 31, 2021, a decrease of $492,000, or 25.0%. Total net loan accretion on acquired loans contributed 10 basis points to the net interest margin for the three months ended March 31, 2022 compared to 13 basis points for the three months ended March 31, 2021. We expect net loan accretion to continue to decline and estimate $879,000 in projected loan accretion for the remainder of 2022.
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 $5.0 million and $4.4 million for the three months ended March 31, 2022 and 2021, respectively, an increase of $628,000, or 14.4%.
The ALLL as a percentage of loans and leases increased from 1.21% at December 31, 2021 to 1.24% at March 31, 2022.
Non-Interest Income
Non-interest income was $19.4 million for the three months ended March 31, 2022 compared to $15.7 million for the three months ended March 31, 2021, an increase of $3.7 million, or 23.4%. The increase was primarily due to an increase in net gains on sales of loans and increased swap income, offset by decreases to net realized gains on securities available-for-sale.
QTD 2022Compared to 2021
$ Change
% Change
220
13.2
611
22.1
274
(18.2
)%
3.6
NM
55
(26.7
2,508
30.1
280
36.5
1,161
79.6
3,684
23.4
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 $1.7 million for the three months ended March 31, 2022 and 2021, respectively. Increases 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 $3.4 million and $2.8 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the three months ended March 31, 2022 and 2021, respectively. At March 31, 2022 and 2021, the outstanding balance of guaranteed loans serviced was $1.7 billion and $1.6 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 $1.2 million for the three months ended March 31, 2022 compared to a downward adjustment of $1.5 million for the three months ended March 31, 2021, a change of $274,000 due to changes in the fair value of the servicing asset.
Change in fair value of equity securities, net, was a decrease of $151,000 compared to a decrease of $206,000 for the three months ended March 31, 2022 and 2021, respectively. The amounts recorded during the periods were driven by market conditions.
Net gains on sales of loans were $10.8 million for the three months ended March 31, 2022 compared to $8.3 million for the three months ended March 31, 2021, an increase of $2.5 million, or 30.1%. We sold $102.3 million of U.S. government guaranteed loans during the three months ended March 31, 2022 compared to $73.9 million during the three months ended March 31, 2021.
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 administration. Wealth management and trust income was $1.0 million for the three months ended March 31, 2022 compared to $768,000 for the three months ended March 31, 2021. Assets under administration were $589.1 million and $588.8 million as of March 31, 2022 and 2021, respectively.
52
Other non-interest income was $2.6 million for the three months ended March 31, 2022 compared to $1.5 million for the three months ended March 31, 2021, an increase of $1.1 million or 79.6%. The primary driver of the increase was increased customer derivative products income and bank-owned life insurance income.
Non-Interest Expense
Non-interest expense was $44.6 million for the three months ended March 31, 2022 compared to $38.8 million for the three months ended March 31, 2021, an increase of $5.7 million, or 14.7%. 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):
7,153
32.8
(651
(11.3
(604
(1,842
17.5
431
15.7
(567
(91.2
(153
(8.7
1,560
66.0
5,713
14.7
Salaries and employee benefits, the single largest component of our non-interest expense, totaled $29.0 million for the three months ended March 31, 2022 compared to $21.8 million for the three months ended March 31, 2021, an increase of $7.2 million, or 32.8%. The increase was primarily a result of new hires.
Occupancy and equipment expense was $5.1 million for the three months ended March 31, 2022 compared to $5.8 million for the three months ended March 31, 2021, a decrease of $651,000, or 11.3%. The decreases were a result of lower maintenance and depreciation expenses.
Recapture of loan and lease related expenses was $891,000 for the three months ended March 31, 2022 compared to $951,000 expense for the three months ended March 31, 2021, a decrease of $1.8 million. The change was mainly related to the recapture of government guaranteed loan expenses.
Legal, audit, and other professional fees were $2.6 million for the three months ended March 31, 2022 compared to $2.2 million for the three months ended March 31, 2021, an increase of $386,000, or 17.5%. The increase was driven by increases in professional fees.
Data processing was $3.2 million for the three months ended March 31, 2022, compared to $2.8 million for the three months ended March 31, 2021, an increase of 431,000 or 15.7%. The increase was driven by increased software licensing costs and higher outside services.
Net loss recognized on other real estate owned and other related expenses was $54,000 for the three months ended March 31, 2022, compared to $621,000 for the three months ended March 31, 2021, a decrease of $567,000, or 91.2%. The decrease was primarily due to decreased valuation adjustments on other real estate owned assets.
Other intangible assets amortization expense was $1.6 million for the three months ended March 31, 2022 compared to $1.7 million for the three months ended March 31, 2021, a decrease of $153,000, or 8.7%.
Other non-interest expense was $3.9 million for the three months ended March 31, 2022 compared to $2.4 million for the three months ended March 31, 2021, an increase of $1.6 million or 66.0%. The increase was mostly due to higher provision for unfunded commitments.
Our efficiency ratio was 54.96% for the three months ended March 31, 2022 compared to 51.25% for the three months ended March 31, 2021. The change in our efficiency ratio for the three months ended March 31, 2022 was driven by an increase in our non-interest expense. Our adjusted efficiency ratio was 54.96% for the three months ended March 31, 2022 compared to 50.41% for the three months ended March 31, 2021.
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.
53
Our provision for income taxes for the three months ended March 31, 2022 totaled $6.3 million compared to $7.4 million for the three months ended March 31, 2021, a decrease of $1.1 million of 14.6%. The decrease in income tax expense was principally due to income tax benefits related to share-based compensation. Our effective tax rate was 22.0% for the three months ended March 31, 2022 and 25.3% for the three months ended March 31, 2021. We expect our effective tax rate for 2022 to be approximately 25-27%.
Financial Condition
Condensed Consolidated Statements of Financial Condition Analysis
Our total assets increased by $138.5 million, or 2.1%, to $6.8 billion at March 31, 2022 compared to $6.7 billion at December 31, 2021. The increase in total assets includes an increase of $251.9 million, or 5.6%, in loans and leases from $4.5 billion at December 31, 2021 to $4.8 billion at March 31, 2022. Our originated loan and lease portfolio increased by $299.5 million and our acquired loan and lease portfolio decreased by $47.6 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 $186.2 million, or 3.2%, to $6.0 billion at March 31, 2022 compared to $5.9 billion at December 31, 2021. Total deposits increased by $375.1 million, or 7.3%, driven by growth in non-interest-bearing deposits and money market accounts, partly offset by a decrease in time deposits. Other borrowings decreased by $208.3 million, or 40.1%, mainly due to a decrease in FHLB 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 March 31, 2022 or December 31, 2021. 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 $85.2 million, or 5.9%, from $1.5 billion at December 31, 2021 to $1.4 billion at March 31, 2022. The decrease was mainly attributed to decreases in the fair value of available-for-sale securities.
At March 31, 2022, 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 March 31, 2022 and at December 31, 2021.
We had no securities that were classified as having other-than-temporary-impairment (“OTTI”) as of March 31, 2022 or December 31, 2021.
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 March 31, 2022, we evaluated the securities which had an unrealized loss for OTTI and determined all declines in value to be temporary. There were 223 investment securities with unrealized losses at March 31, 2022. 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 table (dollars in thousands) set forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of March 31, 2022. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Due in One Year or Less
Due from One toFive Years
Due from Five toTen Years
Due after Ten Years
WeightedAverageYield(1)
1,998
2.78
22,877
1.38
0.00
U.S. government agencies
2,000
2.80
19,486
1.14
98,965
1.18
28,713
1.94
6,012
2.46
19,230
2.57
19,498
2.95
39,046
2.25
Residential mortgage- backed securities
8,532
1.74
109,091
1.54
640,556
1.36
2.13
Commercial mortgage- backed securities
13,157
193,046
2,001
3.53
9,573
54,224
3.99
30,215
6,581
1.71
2.75
79,698
1.79
325,150
1,048,292
1.64
2.50
2.68
As of March 31, 2022, and December 31, 2021, investment securities indexed to LIBOR were $58.3 million and $58.2 million, respectively.
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $59.1 million at March 31, 2022, a decrease of $2.6 million from December 31, 2021.
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 March 31, 2022 or December 31, 2021.
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 March 31, 2022 and December 31, 2021, we held $14.0 million and $22.0 million, respectively, in FHLB 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 March 31, 2022 and December 31, 2021.
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 March 31, 2022 and December 31, 2021 were $4.8 billion and $4.5 billion, respectively, an increase of $251.9 million, or 5.6%. Originated loans were $4.4 billion at March 31, 2022, an increase of $299.5 million, or 7.3%, compared to $4.1 billion at December 31, 2021. Acquired impaired loans and acquired non-impaired loans and leases were $395.2 million at March 31, 2022, a decrease of $47.6 million, or 10.7%, compared to $442.8 million at December 31, 2021. 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. PPP loans decreased by $87.5 million during the quarter.
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. As of March 31, 2022, the loan portfolio included $424.8 million of unguaranteed 7(a) SBA and USDA loans with exposure to the following top three industries: 16.2% accommodation and food services, 15.1% retail trade, and 12.5% 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
31.9
30.4
8.3
8.4
7.3
7.1
35.5
33.8
0.8
2.7
0.0
Leasing financing receivables
7.9
7.8
Total originated loans and leases
91.7
90.2
Acquired impaired loans
1.4
1.6
1.0
1.1
0.1
2.5
2.8
Acquired non-impaired loans and leases
3.8
4.7
5.8
7.0
100.0
Total loans and leases, net of allowance for loan and lease losses
Loans collateralized by real estate comprised 54.8% and 54.5% of the loan and lease portfolio at March 31, 2022 and December 31, 2021, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of March 31, 2022 and December 31, 2021 and totaled $1.8 billion, or 67.7% of real estate loans and 37.1% of the total loan and lease portfolio at March 31, 2022. At December 31, 2021, commercial real estate loans totaled $1.7 billion and comprised 67.4% of real estate loans and 36.7% of the total loan and lease portfolio. Acquired impaired commercial real estate loans decreased from $72.2 million as of December 31, 2021 to $67.1 million as of March 31, 2022, or 7.0%. At March 31, 2022 and December 31, 2021, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 314.7% and 302.5%, respectively. Non-owner occupied commercial real estate loans were $700.1 million and $637.1 million, or 89.9% and 84.6% of total capital, at March 31, 2022 and December 31, 2021, respectively.
Residential real estate loans totaled $494.7 million at March 31, 2022 compared to $480.5 million at December 31, 2021, an increase of $14.2 million, or 3.0%. The residential real estate loan portfolio comprised 18.8% and 19.4% of real estate loans as of March 31, 2022 and December 31, 2021, respectively, and 10.3% and 10.6% of total loans and leases at March 31, 2022 and December 31, 2021, respectively. Acquired impaired residential real estate loans decreased from $49.4 million at December 31, 2021 to $47.3 million at March 31, 2022, or 4.2%.
Construction, land development, and other land loans totaled $353.1 million at March 31, 2022 compared to $325.4 million at December 31, 2021, an increase of $27.7 million, or 8.5%. The construction, land development and other land loan portfolio comprised 13.5% and 13.2% of real estate loans at March 31, 2022 and December 31, 2021, respectively, and 7.4% and 7.2% of the total loan and lease portfolio at March 31, 2022 and December 31, 2021, respectively.
Commercial and industrial loans totaled $1.7 billion and $1.6 billion at March 31, 2022 and December 31, 2021, respectively, an increase of $157.7 million, or 10.0%. The commercial and industrial loan portfolio comprised 36.4% and 34.9% of the total loan and lease portfolio at March 31, 2022 and December 31, 2021, respectively.
Lease financing receivables comprised 8.0% and 7.9% of the loan and lease portfolio at March 31, 2022 and December 31, 2021, respectively. Total lease financing receivables were $384.7 million and $358.4 million at March 31, 2022 and December 31, 2021, respectively, an increase of $26.3 million, or 7.3%.
Loan and Lease Portfolio Maturities and Interest Rate Sensitivity
The following table shows our loan and lease portfolio by scheduled maturity at March 31, 2022 (dollars in thousands):
Due after One YearThrough Five Years
Due after Five YearsThrough Fifteen Years
Due after Fifteen Years
FloatingRate
FixedRate
60,512
113,890
478,035
270,902
280,911
143,489
9,082
171,099
9,999
15,453
74,165
56,714
75,077
99,427
64,179
4,624
9,098
57,820
13,693
242,089
19,024
9,795
23,257
312,250
183,651
760,060
121,718
254,440
33,416
9,233
654
249
11,331
332,264
35,932
114,234
499,418
1,118,722
1,329,765
532,911
507,151
106,677
184,956
27,280
1,434
32,344
2,590
2,056
688
700
8,294
327
20,198
482
8,107
636
6,696
2,607
156
433
833
77
37,175
1,994
55,454
537
10,820
7,384
3,307
16,586
74,700
15,364
22,755
15,802
4,662
34,484
3,535
12,752
14,921
5,553
2,086
1,361
806
6,721
3,731
430
11,234
15,928
1,669
4,302
140
1,027
4,130
25,101
13,192
105,125
36,917
26,510
21,465
5,468
41,705
176,510
514,604
1,279,301
1,367,219
570,241
531,696
119,529
229,968
57
At March 31, 2022, 44.8% of the loan and lease portfolio bears interest at fixed rates and 55.2% at floating rates. In addition, $1.7 billion,, of the loan and lease portfolio has interest rate floors of which $1.2 billion were at the interest rate floor or had no floor as of March 31, 2022. 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 March 31, 2022 we had $1.1 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 $59.5 million at March 31, 2022 compared to $55.0 million at December 31, 2021, an increase of $4.4 million ,or 8.1%. The increase was primarily due to an increase in general reserves driven by loan and lease growth. Total ALLL to total loans and leases held for investment, net before ALLL, was 1.24% and 1.21% of total loans and leases at March 31, 2022 and December 31, 2021, respectively. The increase was primarily driven by an increase in the provision offset by an increase in loans and leases. As of March 31, 2022, approximately $33.0 million of the ALLL was allocated to unguaranteed loans.
58
The following tables present an analysis of the allowance of the loan and lease losses for the periods presented (dollars in thousands):
ResidentialRealEstate
Construction,LandDevelopment,and OtherLand
Balance at December 31, 2021
Provision/(recapture) for acquired impaired loans
(155
(167
Provision/(recapture) for acquired non-impaired loans and leases
(1,149
-
(962
(2,121
Provision/(recapture) for originated loans
4,088
509
596
1,423
666
7,283
Total provision/(recapture)
Charge-offs for acquired impaired loans
Charge-offs for acquired non-impaired loans and leases
Charge-offs for originated loans and leases
Total charge-offs
Recoveries for acquired impaired loans
Recoveries for acquired non-impaired loans and leases
Recoveries for originated loans and leases
94
133
473
Total recoveries
Less: Net charge-offs
214
549
1,861
4,142
15,850
1,108
30,996
3,194
52,270
Balance at March 31, 2022
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 March 31, 2022, gross
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
0.03
0.02
Loans and leases ending balance as a percentage of total loans and leases, gross
1.40
0.99
0.77
0.04
0.68
1.49
34.99
9.30
7.34
35.57
0.76
8.03
96.01
59
Balance at December 31, 2020
(416
(34
(238
(635
786
(14
829
1,602
2,236
(341
(207
358
3,400
(1,255
(1,680
(1,521
(59
(1,619
(583
(1,279
(2,167
138
121
1,692
326
2,828
271
5,124
4,194
91
2,746
82
7,115
14,096
1,470
36,144
1,820
54,320
Balance at March 31, 2021
Total loans and leases at March 31, 2021, gross
0.11
0.18
2.16
1.67
0.20
4.07
1.22
0.97
2.23
28.76
10.53
5.35
29.46
13.85
5.71
93.70
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 March 31, 2022 and December 31, 2021 totaled $22.5 million and $25.2 million. The U.S. government guaranteed portion of non-performing loans totaled $1.8 million at March 31, 2022 and $3.3 million at December 31, 2021.
Total OREO increased from $2.1 million at December 31, 2021 to $2.2 million at March 31, 2022. The $109,000 increase in OREO resulted mostly from transfers to OREO.
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
22,498
25,242
Accruing troubled debt restructured loans
Total non-performing loans and leases as a percentage of total loans and leases
0.51
Total non-accrual loans and leases as a percentage of total loans and leases
Total non-performing assets as a percentage of total assets
0.33
Allowance for loan and lease losses as a percentage of non-performing loans and leases
293.23
237.84
Allowance for loan and lease losses as a percentage of non-accrual loans and leases
Non-performing assets guaranteed by U.S. government:
Non-accrual loans guaranteed
1,832
3,270
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
0.39
0.44
Total non-accrual loans and leases not guaranteed as a percentage of total loans and leases
Total non-performing assets not guaranteed as a percentage of total assets
0.30
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.
Total non-accrual loans decreased by $2.9 million between December 31, 2021 and March 31, 2022 primarily due to payoffs and continued economic improvement.
Total accruing loans past due decreased from $34.1 million at December 31, 2021 to $29.0 million at March 31, 2022. This represents a decrease of $5.1 million, or 14.9%, and can be attributed to decreases in residential real estate and construction, land development and other land, offset by increases to commercial real estate. See Note 5 of our Unaudited Interim Condensed Consolidated Financial Statements, included in this report, for further information.
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Our loan and lease growth is funded primarily through core deposits. We gather deposits primarily through each of our 37 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.
Total deposits at March 31, 2022 were $5.5 billion, representing an increase of $375.1 million, or 7.3%, compared to $5.2 billion at December 31, 2021, driven by an increase in non-interest bearing deposits. Non-interest-bearing deposits were $2.3 billion, or 41.3% of total deposits, at March 31, 2022, an increase of $123.2 million, or 5.7%, compared to $2.2 billion at December 31, 2021, or 41.9% of total deposits. Core deposits were 93.1% and 91.9% of total deposits at March 31, 2022 and December 31, 2021, 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 March 31, 2022
For the Three Months Ended March 31, 2021
AverageBalance
AverageRate
Time deposits (below $100,000)
266,921
302,554
0.62
Time deposits ($100,000 and above)
395,159
0.26
474,712
1.00
5,394,112
4,949,779
Our average cost of deposits was 0.08% during the three months ended March 31, 2022 compared to 0.12% during the three months ended March 31, 2021. 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 average deposits ratios were 41.7% during the three months ended March 31, 2022 compared to 38.9% during the three months ended March 31, 2021. We had no brokered time deposits at March 31, 2022 and December 31, 2021, respectively. Our loan and lease to deposit ratio was 87.3% at March 31, 2022 compared to 89.3% at December 31, 2021.
The following table shows time deposits and other time deposits of $250,000 or more by time remaining until maturity as of March 31, 2022 (dollars in thousands):
Less than $250,000
$250,000 or Greater
Uninsured Portion
Three months or less
193,419
46,267
239,686
18,517
Over three months through six months
151,203
32,184
183,387
13,934
Over six months through 12 months
97,316
26,806
124,122
12,556
Over 12 months
63,203
24,698
87,901
10,948
55,955
Total estimated uninsured deposits, were $1.8 billion and $1.6 billion as of March 31, 2022 and December 31, 2021, respectively.
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Borrowed Funds
During 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 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 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 March 31, 2022 and December 31, 2021, we had an available borrowing capacity from the FHLB of $2.0 billion and $1.9 billion subject to the availability of collateral, respectively. At March 31, 2022, the Company had $280.0 million of FHLB advances with a maturities ranging from May 2022 to June 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 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 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 December 31, 2021, the amounts outstanding during 2021 under the PPPLF had been repaid and there was no amount outstanding under the facility.
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 March 31, 2022 and December 31, 2021. 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
Maximum outstanding at any month-end period during the year
Balance outstanding at end of period
Weighted average interest rate during period
Weighted average interest rate at end of period
Federal Home Loan Bank advances:
260,056
230,332
355,000
329,000
0.49
Paycheck Protection Program Liquidity Facility
381,288
439,066
387,647
0.37
Line of credit:
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 increased by $1.7 million, from $29.7 million at December 31, 2021 to $31.4 million at March 31, 2022.
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 March 31, 2022, Byline Bank had maximum borrowing capacity from the FHLB of $2.3 billion and $748.0 million from the Federal Reserve Bank (“FRB”). As of March 31, 2022, Byline Bank had open FHLB advances of $280.0 million and open letters of credit of $19.7 million, leaving us with available aggregate borrowing capacity of $354.4 million. In addition, Byline Bank had uncommitted federal funds lines available of $115.0 million at March 31, 2022.
As of December 31, 2021, Byline Bank had maximum borrowing capacity from the FHLB of $2.3 billion and $603.0 million from the FRB. As of December 31, 2021, Byline Bank had open advances of $490.0 million and open letters of credit of $19.7 million, leaving us with available aggregate borrowing capacity of $715.4 million based on collateral pledged. In addition, Byline Bank had an uncommitted federal funds line available of $115.0 million at December 31, 2021.
On October 13, 2016, we 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 LIBOR plus 195 basis points or the Prime Rate minus 75 basis points, based on our election, which is required to be communicated at least three business days prior to the commencement of an interest period. If we fail to provide timely notification, the interest rate will be Prime Rate minus 75 basis points. At March 31, 2022 and December 31, 2021, 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 21 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2021 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 March 31, 2022 was $788.7 million compared to $836.4 million at December 31, 2021, a decrease of $47.7 million, or 5.7%. The decrease was primarily driven by the increase in accumulated other comprehensive loss during the three months ended March 31, 2022, reflecting the unrealized losses in our available-for-sale securities portfolio, the redemption of preferred stock and the increase of treasury shares under the share repurchase program. Offset by an increase in retained earnings.
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 March 31, 2022, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized.” There have been no conditions or events since March 31, 2022 that management believes have changed Byline Bank’s classifications.
64
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
837,188
488,018
8.00
Bank
779,153
12.81
486,427
608,034
10.00
Tier 1 capital to risk weighted assets:
700,728
366,013
6.00
717,693
11.80
364,820
Common Equity Tier 1 (CET1) to risk weighted assets:
655,728
274,510
4.50
273,615
395,222
6.50
Tier 1 capital to average assets:
261,913
4.00
10.97
261,750
327,187
5.00
830,262
14.70
451,903
753,480
13.38
450,470
563,087
698,846
12.37
338,927
697,064
12.38
337,852
643,408
11.39
254,195
253,389
366,007
10.89
256,657
256,478
320,597
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 March 31, 2022.
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 three months ended March 31, 2022 the Company received $6.0 million in cash dividends from Byline Bank. For the year ended December 31, 2021, the Company received $24.0 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.
On March 31, 2022, the Company redeemed all 10,438 outstanding shares of its 7.5% fixed-to-floating noncumulative perpetual preferred stock, Series B. The redemption totaled $10.6 million, including the quarterly dividend payment.
We purchased 282,819 shares at a cost of $7.6 million under our stock repurchase program during the three months ended March 31, 2022. We purchased 332,744 shares at a cost of $6.4 million under this program during the three months ended March 31, 2021. The program is in effect until December 31, 2022, unless terminated earlier.
65
On April 28, 2022, we announced that our Board of Directors declared a cash dividend on its common stock of $0.09 per share. The dividend will paid on May 23, 2022 to stockholders of record on May 9, 2022.
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 March 31, 2022 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
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:
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 EndedMarch 31,
(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
Tax benefit
(165
Adjusted Net Income
22,237
Reported Diluted Earnings per Share
(0.01
Adjusted Diluted Earnings per Share
68
Adjusted non-interest expense:
Non-interest expense
Less significant items:
Adjusted non-interest expense
38,238
Adjusted non-interest expense excluding amortization of intangible assets
Less: Amortization of intangible assets
42,959
36,489
Pre-tax pre-provision net income:
Pre-tax income
Add: Provision for loan and lease losses
Pre-tax pre-provision net income
33,607
33,540
Adjusted pre-tax pre-provision net income:
Adjusted pre-tax pre-provision net income
34,144
Tax Equivalent Net Interest Income
Add: Tax-equivalent adjustment
250
Total revenues:
Add: non-interest income
Total revenues
78,162
72,382
Tangible common stockholders' equity:
Total stockholders' equity
Less: Preferred stock
Less: Goodwill and other intangibles
170,882
Tangible common stockholders' equity
624,709
612,475
Tangible assets:
6,750,125
Tangible assets
6,670,674
6,579,243
Average tangible common stockholders' equity:
Average total stockholders' equity
Less: Average preferred stock
9,974
Less: Average goodwill and other intangibles
164,837
171,795
Average tangible common stockholders' equity
657,350
624,219
Average tangible assets:
Average total assets
Average tangible assets
6,541,149
6,415,970
Tangible net income available to common stockholders:
Add: After-tax intangible asset amortization
1,163
1,272
Tangible net income available to common stockholders
23,278
22,874
Adjusted Tangible net income available to common stockholders:
Tax benefit on significant items
Adjusted tangible net income available to common stockholders
23,313
69
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
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
70
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.
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 Board of Directors and management asset liability committees based on a risk management infrastructure approved by our Board of Directors that outlines reporting and measurement requirements. 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 lives based on historical analysis and the targeted investment term of capital. The committees closely monitor our interest sensitivity exposure, asset and liability allocation decisions, liquidity and capital positions, and local and national economic conditions and attempts to structure the loan and investment portfolios and funding sources to maximize earnings within acceptable risk tolerances.
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 deposits from our customers that we rely on for funding. 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 March 31, 2022, we had a notional amount of $938.1 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.
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 quarterly 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 in 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 March 31, 2022 is presented below. In the current interest rate environment, a downward shift of the yield curve of 200, and 300 basis points does not provide 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 12 months.
Immediate Shifts
Twelve Months Ending
+300 basis points
+200 basis points
+100 basis points
-100 basis points
Year 1
Percentage change
25.5
17.4
8.5
-5.2
Dollar amount
295,088
276,113
255,064
222,897
Year 2
34.8
23.6
11.7
-9.0
337,941
309,896
279,919
228,023
For dynamic balance sheet and rate shifts, a gradual shift downward of 100 basis points would result in a 0.8% decrease in net interest income, and a gradual shift upwards of 100 and 200 basis points would result in 1.6% and 3.1% increases to net interest income, respectively, over the next 12 months.
The Bank's aggregate interest rate risk exposure is monitored and managed within board-approved policy limits. The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted including the timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management 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 March 31, 2022, 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 March 31, 2022, 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, 2021 that was filed with the SEC on March 7, 2022.
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, our Board of Directors authorized an expansion of its current stock repurchase program. Under the extended program, we are 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 March 31, 2022.
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
January 1 - January 31, 2022
1,168,292
February 1 - February 28, 2022
344,493
26.88
192,019
976,273
March 1 - March 31, 2022
103,391
26.89
90,800
885,473
447,884
282,819
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
EXHIBIT
Number
Description
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)
3.3
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
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2022, 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: May 6, 2022
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)
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