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 June 30, 2023
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, 43,692,755 shares outstanding as of August 1, 2023
BYLINE BANCORP, INC.
June 30, 2023
INDEX
Page
PART I.
FINANCIAL INFORMATION
3
Item 1.
Financial Statements. The Unaudited Interim Condensed Consolidated Financial Statements of Byline Bancorp, Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
10
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
46
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
80
Item 4.
Controls and Procedures
81
PART II.
OTHER INFORMATION
82
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
83
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, 2022
ASSETS
Cash and due from banks
$
59,564
62,274
Interest bearing deposits with other banks
260,621
117,079
Cash and cash equivalents
320,185
179,353
Equity and other securities, at fair value
18,473
7,989
Securities available-for-sale, at fair value (amortized cost at June 30, 2023—$1,328,835, December 31, 2022—$1,378,343)
1,125,700
1,174,431
Securities held-to-maturity, at amortized cost (fair value at June 30, 2023—$2,132, December 31, 2022 —$2,672)
2,158
2,705
Restricted stock, at cost
24,377
28,202
Loans held for sale
25,995
47,823
Loans and leases:
Loans and leases
5,570,517
5,421,258
Allowance for credit losses - loans and leases
(92,665
)
(81,924
Net loans and leases
5,477,852
5,339,334
Servicing assets, at fair value
21,715
19,172
Premises and equipment, net
56,304
56,798
Other real estate owned, net
2,265
4,717
Goodwill and other intangible assets, net
155,977
158,887
Bank-owned life insurance
83,222
82,093
Deferred tax assets, net
66,895
68,213
Accrued interest receivable and other assets
194,572
193,224
Total assets
7,575,690
7,362,941
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing demand deposits
1,793,749
2,138,645
Interest-bearing deposits
4,123,343
3,556,476
Total deposits
5,917,092
5,695,121
Other borrowings
574,922
640,399
Subordinated notes, net
73,778
73,691
Junior subordinated debentures issued to capital trusts, net
37,557
37,338
Accrued interest payable and other liabilities
158,399
150,576
Total liabilities
6,761,748
6,597,125
STOCKHOLDERS’ EQUITY
Preferred stock
—
Common stock
391
389
Additional paid-in capital
599,718
598,297
Retained earnings
379,078
335,794
Treasury stock, at cost
(50,383
(51,114
Accumulated other comprehensive loss, net of tax
(114,862
(117,550
Total stockholders’ equity
813,942
765,816
Total liabilities and stockholders’ equity
PreferredShares
CommonShares
Par value
0.01
Shares authorized
25,000,000
150,000,000
Shares issued
39,729,369
39,518,702
Shares outstanding
37,752,002
37,492,775
Treasury shares
1,977,367
2,025,927
See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
June 30,
(dollars in thousands, except share and per share data)
2023
2022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases
99,134
59,674
191,477
115,100
Interest on securities
6,559
6,264
13,159
12,419
Other interest and dividend income
1,579
608
2,638
845
Total interest and dividend income
107,272
66,546
207,274
128,364
INTEREST EXPENSE
Deposits
24,723
2,128
41,021
3,215
4,241
1,097
10,129
1,492
Subordinated notes and debentures
2,142
1,694
4,240
3,294
Total interest expense
31,106
4,919
55,390
8,001
Net interest income
76,166
61,627
151,884
120,363
PROVISION FOR CREDIT LOSSES
5,790
5,908
15,615
10,903
Net interest income after provision for credit losses
70,376
55,719
136,269
109,460
NON-INTEREST INCOME
Fees and service charges on deposits
2,233
2,059
4,353
3,943
Loan servicing revenue
3,377
3,384
6,757
6,764
Loan servicing asset revaluation
(865
(4,636
(209
(5,867
ATM and interchange fees
1,112
1,131
2,175
2,180
Net realized gains on securities available-for-sale
52
Change in fair value of equity securities, net
193
(697
543
(732
Net gains on sales of loans
5,704
9,983
10,852
20,810
Wealth management and trust income
1,039
900
1,963
1,948
Other non-interest income
1,498
1,985
3,002
4,489
Total non-interest income
14,291
14,161
29,436
33,587
NON-INTEREST EXPENSE
Salaries and employee benefits
29,642
27,697
60,036
56,656
Occupancy and equipment expense, net
4,404
4,409
8,848
9,537
Impairment charge on assets held for sale
20
Loan and lease related expenses
488
942
1,451
51
Legal, audit and other professional fees
3,675
1,820
6,789
4,420
Data processing
4,272
3,396
8,055
6,582
Net loss recognized on other real estate owned and other related expenses
288
158
185
212
Other intangible assets amortization expense
1,455
1,868
2,910
3,464
Other non-interest expense
5,104
3,483
9,834
7,406
Total non-interest expense
49,328
43,773
98,128
88,328
INCOME BEFORE PROVISION FOR INCOME TAXES
35,339
26,107
67,577
54,719
PROVISION FOR INCOME TAXES
9,232
5,824
17,525
12,125
NET INCOME
20,283
50,052
42,594
Dividends on preferred shares
196
INCOME AVAILABLE TO COMMON STOCKHOLDERS
42,398
EARNINGS PER COMMON SHARE
Basic
0.70
0.55
1.35
1.14
Diluted
0.54
1.34
1.12
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Net income
Securities available-for-sale
Unrealized holding gains (losses) arising during the period
(13,822
(54,828
777
(138,671
Reclassification adjustments for net gains included in net income
(52
Tax effect
3,693
14,889
(207
37,636
Net of tax
(10,129
(39,991
570
(101,087
Cash flow hedges
Unrealized holding gains arising during the period
8,515
6,914
8,709
24,557
Reclassification adjustments for net (gains) losses included in net income
(3,863
109
(5,819
319
(1,243
(1,906
(772
(6,749
3,409
5,117
2,118
18,127
Total other comprehensive income (loss)
(6,720
(34,874
2,688
(82,960
Comprehensive income (loss)
19,387
(14,591
52,740
(40,366
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, March 31, 2022
37,811,582
388
595,006
290,397
(40,732
(56,388
788,671
Other comprehensive loss, net of tax
Issuance of common stock upon exercise of stock options, net
86,001
(590
(939
(1,529
Restricted stock activity, net
(19,046
(31
(518
(549
Issuance of common stock in connection with employee stock purchase plan
22,565
537
Cash dividends declared on common stock ($0.09 per share)
(3,402
Repurchase of common stock
(232,000
(5,529
Share-based compensation expense
1,553
Balance, June 30, 2022
37,669,102
595,938
307,278
(47,181
(91,262
765,161
Balance, January 1, 2022
10,438
37,713,903
387
593,753
271,676
(31,570
(8,302
836,382
203,255
(599
(1,811
(2,410
244,237
1
(32
(1,218
(1,249
Redemption of preferred stock
(10,438
22,526
(1
536
Cash dividends declared on preferred stock
(196
Cash dividends declared on common stock ($0.18 per share)
(6,796
(514,819
(13,119
2,817
6
Balance, March 31, 2023
37,713,427
390
598,103
356,365
(51,066
(108,142
795,650
(547
(92
(25
(116
39,122
708
(3,394
1,707
Balance, June 30, 2023
Balance, January 1, 2023
Other comprehensive income, net of tax
220,105
(1,796
23
(1,771
(6,768
3,217
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 credit losses
Impairment loss on assets held for sale
Depreciation and amortization of premises and equipment
1,932
2,239
Net amortization of securities
1,678
2,396
Net change in fair value of equity securities, net
(543
732
Net gains on sales and valuation adjustments of premises and equipment
(16
(10,852
(20,810
Originations of U.S. government guaranteed loans
(146,974
(176,380
Proceeds from U.S. government guaranteed loans sold
162,600
231,405
Accretion of premiums and discounts on acquired loans, net
(1,340
(2,859
Net change in servicing assets
(2,543
1,589
Net gains (losses) on sales and valuation adjustments of other real estate owned
392
Net amortization of other acquisition accounting adjustments
Amortization of subordinated debt issuance cost
87
Accretion of junior subordinated debentures discount
219
217
Deferred tax provision (benefit), net of valuation
(140
Increase in cash surrender value of bank owned life insurance
(1,118
(1,059
Changes in assets and liabilities:
6,110
(12,177
11,149
65,560
Net cash provided by operating activities
92,471
152,890
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale
(11,221
(74,561
Proceeds from maturities and calls of securities available-for-sale
4,463
19,315
Proceeds from paydowns of securities available-for-sale
44,708
83,987
Proceeds from sales of securities available-for-sale
13,006
Proceeds from maturities and calls of securities held-to-maturity
545
Redemption (purchases) of Federal Home Loan Bank stock, net
3,825
(8,000
Proceeds from other loans sold
6,750
Net change in loans and leases
(152,170
(634,619
Purchases of premises and equipment
(1,539
(2,673
Proceeds from sales of premises and equipment
28
Proceeds from sales of assets held for sale
2,268
Proceeds from sales of other real estate owned
2,559
225
Net cash used in investing activities
(102,080
(601,024
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
221,971
233,330
Proceeds from short-term borrowings
9,723,100
12,387,000
Repayments of short-term borrowings
(9,808,100
(12,182,000
Net increase in securities sold under agreements to repurchase
19,523
23,369
Dividends paid on preferred stock
Dividends paid on common stock
(6,655
(6,769
Proceeds from issuance of common stock
602
927
Repurchases of common stock
Net cash provided by financing activities
150,441
432,104
NET CHANGE IN CASH AND CASH EQUIVALENTS
140,832
(16,030
CASH AND CASH EQUIVALENTS, beginning of period
157,931
CASH AND CASH EQUIVALENTS, end of period
141,901
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
46,538
7,118
Cash paid during the period for taxes
3,031
15,156
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to other real estate owned
499
2,837
Common dividend declared, not paid
113
27
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 June 30, 2023 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, 2022, 2021, and 2020.
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 currently 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. On July 1, 2023, we closed our acquisition of Inland Bancorp, Inc. and its subsidiaries (Inland") pursuant to an Agreement and Plan of Merger. Refer to Note 3 - Acquisition for further discussion of this transaction. No other 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.
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.
Adopted Accounting Pronouncements
Financial Instruments—Credit Losses (Topic 326)—In June 2016, FASB issued Accounting Standards Update ("ASU") No. 2016‑13, Financial Instruments - Credit Losses (Topic 326) on the recognition of credit losses, otherwise known as the current expected credit loss model or "CECL", which replaces the incurred loss impairment methodology with a methodology that reflects current expected credit losses. We elected to delay the adoption of the standard in accordance with ASU No. 2019-10, Effective Dates, which delayed the effective date of the ASU for entities not classified as Public Business Entities. The Company’s EGC status expired December 31, 2022, requiring CECL adoption be reflected in our December 31, 2022 financial statements and Form 10-K. Results for reporting periods beginning after September 30, 2022 were presented under the new standard, while prior quarters were reported under, and continue to be reported under, the incurred loss method. For additional information on the new standard, see Note 1—Business and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2022.
The following table presents select financial data for the first three quarters of 2022 as reported under the incurred loss method and as recast under CECL:
For the three month period ended
March 31, 2022
June 30, 2022
September 30, 2022
As Reported
Adjustment
Recast
Interest and dividend income
61,818
(405
61,413
133
66,679
79,903
(240
79,663
Interest expense
3,082
11,028
58,736
58,331
61,760
68,875
68,635
Provision/(recapture) for credit losses
4,995
1,564
(1,622
4,286
4,176
3,032
7,208
Net interest income after provision/(recapture) for credit losses
53,741
(1,969
51,772
1,755
57,474
64,699
(3,272
61,427
Non-interest income
19,426
117
19,543
112
14,273
11,992
12,043
Non-interest expense
44,555
43,956
(188
43,585
46,178
(137
46,041
Income before provision for income taxes
28,612
(1,253
27,359
2,055
28,162
30,513
(3,084
27,429
Provision for income taxes
6,301
(340
5,961
558
6,382
7,857
(837
7,020
22,311
(913
21,398
1,497
21,780
22,656
(2,247
20,409
Income available to common stockholders
22,115
21,202
Basic earnings per common share
0.60
(0.03
0.57
0.04
0.59
0.61
(0.06
Diluted earnings per common share
0.58
(0.02
0.56
ASU 2022-02 - Financial Instruments – Credit Losses – Troubled Debt Restructurings and Vintage Disclosures (Topic 326) – The Company adopted this update effective March 31, 2023. This update eliminates the recognition and measurement guidance for troubled debt restructurings (“TDRs”) by creditors in ASC 310-40. The update also enhances disclosure requirements for certain loan restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity will apply the loan refinancing and restructuring guidance to determine whether a modification or other form of restructuring results in a new loan or a continuation of an existing loan. Additionally, the amendments in this ASU require a public business entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases in the existing vintage disclosures. Refer to Note 5—Loan and Lease Receivables and Allowance for Credit Losses for additional details regarding these disclosures.
Issued Accounting Pronouncements Pending Adoption
Reference Rate Reform (Topic 848)—In March 2020, FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting and in December 2022, FASB issued ASU 2022-06, Reference Rate Reform: Deferral of the Sunset Date of Topic 848. The amendments in these ASUs 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 these ASUs 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. These ASUs are intended to help stakeholders during the global market-wide reference rate transition period. The amendments in these ASUs will be in effect for all entities as of March 12, 2020 and sunset on December 31, 2024. Banking regulators have provided guidance that prohibits new financial contracts from referencing LIBOR as the relevant index after December 31, 2021. 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. At June 30, 2023, $252.9 million of loans, derivatives with a notional amount of $394.1 million, and securities available for sale with a fair value of $36.1 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 with a carrying value of $37.6 million were also tied to LIBOR. Those financial instruments with a LIBOR index at June 30, 2023 are anticipated to covert to an alternative reference rate at the next interest rate reset date.
Fair Value Measurement (Topic 820) - In June 2022, the FASB issued ASU No. 2022-03, Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The guidance in the ASU clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account on the equity security and, therefore, is not considered in measuring fair value. The ASU also requires additional disclosures about the restriction. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The
11
Company is evaluating the accounting and disclosure requirements of this update and does not expect them to have a material effect on the consolidated financial statements.
Note 3—Acquisition of a Business
On July 1, 2023 the Company acquired all of the outstanding common stock of Inland Bancorp, Inc. (“Inland”) and its subsidiaries pursuant to an Agreement and Plan of Merger, dated as of November 30, 2022 (the “Merger Agreement”). Inland operated a wholly owned subsidiary, Inland Bank and Trust. Inland was merged with and into Byline. As a result of the merger, Inland’s subsidiary bank, Inland Bank and Trust, was merged with and into Byline Bank, with Byline Bank as the surviving bank. The acquisition improves the Company’s footprint in the Chicagoland market, diversifies its commercial banking business, and strengthens the core deposit base.
At the effective time of the merger (the “Effective Time”), each share of Inland’s common stock was converted into the right to receive: (1) 0.19 shares of Byline’s common stock, par value $0.01 per share and (2) a cash payment in the amount of $0.68 per share, with cash paid in lieu of any fractional shares. The per share cash consideration was based on the total $21.2 million divided by the outstanding shares of Inland common stock. Based on the closing price of shares of the Company’s common stock of $18.09, as reported by the New York Stock Exchange, and 5,932,323 shares of common stock issued with respect to the outstanding shares of Inland common stock, the stock consideration was valued at $107.3 million. Options to acquire 288,200 shares of Inland common stock that were outstanding at the Effective Time were canceled, at the option holders' election, in exchange for a cash payment in accordance with the Merger Agreement of $424,000, to be paid after the closing date. The value of the total merger consideration at closing was $129.0 million.
Merger-related expenses of $1.9 million, including acquisition advisory expenses, are reflected in non-interest expense on the Consolidated Statements of Operations for the six months ended June 30, 2023.
The acquisition of Inland will be accounted for using the acquisition method of accounting in accordance with ASC Topic 805. Assets acquired, liabilities assumed and consideration exchanged will be recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities involves significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available. The fair value of the acquired assets and liabilities is in process.
On a related but separate transaction, on March 31, 2023, Byline entered into a side letter agreement with the majority shareholder of Inland in which Byline agreed to purchase 2,408,992 shares of Inland common stock. The purchase price was calculated based on the terms of the Merger Agreement. The transaction was completed on June 30, 2023, which resulted in a cash consideration of $9.9 million.
Note 4—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
42,516
(1,798
40,718
U.S. Government agencies
148,297
68
(19,847
128,518
Obligations of states, municipalities, and political subdivisions
67,922
(5,203
62,730
Residential mortgage-backed securities
Agency
673,096
(107,416
565,680
Non-agency
126,144
(24,264
101,880
Commercial mortgage-backed securities
188,308
(36,068
152,240
Corporate securities
42,767
(6,824
35,943
Asset-backed securities
39,785
(1,794
37,991
1,328,835
79
(203,214
12
Held-to-maturity
(26
2,132
42,430
(1,709
40,723
150,524
116
(20,276
130,364
68,019
(6,152
61,876
707,157
(111,361
595,796
130,654
(24,405
106,249
191,172
(34,142
157,030
45,302
(3,866
41,436
43,085
(2,128
40,957
1,378,343
127
(204,039
(33
2,672
The Company did not classify securities as trading during the six months ended June 30, 2023 or during 2022.
13
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 June 30, 2023 and December 31, 2022, are summarized as follows:
Less than 12 Months
12 Months or Longer
Number ofSecurities
UnrealizedLosses
14,318
26,400
(1,458
17
4,771
(182
110,830
(19,665
115,601
Obligations of states, municipalities and political subdivisions
61
14,969
(271
43,898
(4,932
58,867
99
24,706
(1,406
540,974
(106,010
19
49
6,799
(1,549
145,441
(34,519
3,972
(516
31,971
(6,308
3,380
(49
34,611
(1,745
283
72,915
(4,313
1,036,005
(198,901
1,108,920
597
(10
1,535
21,720
(1,078
9,339
(631
31,059
44,508
(4,782
70,609
(15,494
115,117
58
50,216
(3,858
7,185
(2,294
57,401
101
117,598
(11,045
478,198
(100,316
35,486
(7,569
70,763
(16,836
47
76,193
(11,840
74,315
(22,302
150,508
24
37,130
(3,128
4,306
(738
25,455
(503
15,502
(1,625
280
408,306
(43,803
730,217
(160,236
1,138,523
14
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The Company evaluated the securities which had unrealized losses for potential credit losses and determined there were none. There were 283 securities available-for-sale with unrealized losses at June 30, 2023. There were three securities held-to-maturity with unrealized losses at June 30, 2023. There was no allowance for credit losses for held-to-maturity debt securities at June 30, 2023 or December 31, 2022. The evaluation for potential credit losses is based upon factors such as the creditworthiness of the issuers/guarantors, the underlying collateral, if applicable, and the continuing payment performance of the securities.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security types. The Company’s held-to-maturity portfolio contains municipal bonds that are typically rated by major rating agencies as ‘Aa’ or better. The Company uses industry historical credit loss information adjusted for current conditions to establish an allowance for credit losses. Accrued interest receivable on securities available-for-sale and held-to-maturity totaled $3.9 million at both June 30, 2023 and December 31, 2022, and are excluded from the estimate of credit losses.
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 and six months ended June 30, 2023 and 2022 are listed below:
For the Three Months Ended
For the Six Months Ended
Proceeds
Gross gains
62
Gross losses
There were no sales of securities during the three and six months ended June 30, 2023, respectively. There were $52,000 in net gains reclassified from accumulated other comprehensive income into earnings for the three and six months ended June 30, 2022, respectively.
Securities posted and pledged as collateral were $351.1 million and $270.6 million at June 30, 2023 and December 31, 2022. At June 30, 2023 and December 31, 2022, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $271.2 million and $223.5 million, respectively, and for customer repurchase agreements of $40.0 million and $23.8 million, respectively. At June 30, 2023 and December 31, 2022, there were no securities pledged for advances from the Federal Home Loan Bank. Other securities were pledged for letters of credit and for purposes required or permitted by law. At June 30, 2023 and December 31, 2022, 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 June 30, 2023, 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
2,954
2,924
Due from one to five years
118,502
110,541
Due from five to ten years
174,431
152,013
Due after ten years
45,400
40,422
Mortgage-backed securities
987,548
819,800
1,551
607
15
Note 5—Loan and Lease Receivables and Allowance for Credit Losses
Loan and Lease Receivables
Outstanding loan and lease receivables as of the dates shown were categorized as follows:
December 31,
Commercial real estate
1,959,721
1,905,909
Residential real estate
504,364
489,411
Construction, land development, and other land
389,216
440,016
Commercial and industrial
2,101,638
2,055,213
Installment and other
3,686
1,709
Lease financing receivables
599,818
518,654
Total loans and leases
5,558,443
5,410,912
Net unamortized deferred fees and costs
6,197
5,014
Initial direct costs
5,877
5,332
Net minimum lease payments
587,296
509,980
Unguaranteed residual values
75,719
54,118
Unearned income
(63,197
(45,444
Total lease financing receivables
Lease financial receivables before allowance for credits losses - loans and leases
605,695
523,986
Total loans and leases consist of originated loans and leases, purchased credit deteriorated ("PCD") and acquired non-credit-deteriorated loans and leases. At June 30, 2023 and December 31, 2022, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $112.3 million and $123.2 million respectively. At June 30, 2023 and December 31, 2022, the discount on the unguaranteed portion of U.S. government guaranteed loans was $26.3 million and $26.7 million, respectively, which are included in total loans and leases. At June 30, 2023 and December 31, 2022, installment and other loans included overdraft deposits of $653,000 and $467,000, respectively, which were reclassified as loans. At June 30, 2023 and December 31, 2022, loans and leases and loans held for sale pledged as security for borrowings were $1.9 billion and $2.2 billion, respectively. Accrued interest on loans and leases were $25.5 million as of June 30, 2023 and December 31, 2022, and are included in the accrued interest receivable and other assets line item on the Condensed Consolidated Statement of Financial Condition.
The minimum annual lease payments for lease financing receivables as of June 30, 2023 are summarized as follows:
Minimum LeasePayments
88,841
2024
181,693
2025
144,991
2026
101,754
2027
55,379
Thereafter
14,638
Originated loans and leases represent originations excluding loans initially acquired in a business combination. However, once an acquired non-credit-deteriorated loan reaches its maturity date, and is re-underwritten and renewed, it is internally classified as an originated loan. PCD loans are those acquired from a business combination with evidence of credit
16
quality deterioration and are accounted for under ASC Topic 326. Acquired non-credit-deteriorated 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. The following tables summarize the balances for each respective loan and lease category as of June 30, 2023 and December 31, 2022:
Originated
Purchased Credit Deteriorated
AcquiredNon-Credit-Deteriorated
1,806,531
30,724
126,191
1,963,446
453,880
26,012
25,055
504,947
387,623
320
387,943
2,086,274
1,726
16,750
2,104,750
3,582
129
25
3,736
604,437
1,258
5,342,327
58,911
169,279
1,712,152
45,143
152,193
1,909,488
426,226
32,228
31,508
489,962
438,617
372
438,989
2,030,616
2,192
24,266
2,057,074
1,410
140
209
1,759
521,689
2,297
5,130,710
80,075
210,473
PCD loans—The unpaid principal balance and carrying amount of all PCD loans are summarized below. The balances do not include an allowance for credit losses - loans and leases of $1.1 million and $1.9 million at June 30, 2023 and December 31, 2022, respectively.
UnpaidPrincipalBalance
CarryingValue
70,284
85,089
69,803
76,270
6,993
7,042
3,427
3,902
793
807
Total purchased credit deteriorated loans
151,300
173,110
Acquired non-credit-deteriorated loans and leases—The unpaid principal balance and carrying value for acquired non-credit deteriorated loans and leases at June 30, 2023 and December 31, 2022 were as follows:
129,186
155,652
25,397
31,863
63
17,193
25,022
31
216
1,260
2,302
Total acquired non-credit-deteriorated loans and leases
173,130
215,118
The Company hedges interest rates on certain loans using interest rate swaps through which the Company pays variable amounts and receives fixed amounts. Refer to Note 16—Derivative Instruments and Hedging Activities for additional discussion.
Allowance for Credit Losses
Loans and leases considered for inclusion in the allowance for credit losses include acquired non-credit-deteriorated loans and leases, purchased credit deteriorated loans, and originated loans and leases.
The Bank’s credit risk rating methodology assigns risk ratings from 1 to 10, where a higher rating represents higher risk. Risk ratings for all loans of $1.0 million or more are reviewed annually. The risk rating categories are described by the following groupings:
Pass—1‑4, risk levels of borrowers and guarantors that offer a minimal to an acceptable level of risk.
Watch—5, credit exposure that presents higher than average risk and warrants greater than routine attention.
Special Mention—6, potential weaknesses that if left uncorrected may result in deterioration of the repayment prospects.
Substandard Accrual—7, weaknesses in cash flow and collateral coverage resulting in a distinct possibility of losses if not corrected. Used in limited cases, where the borrower is current on payments and an agreed plan for credit remediation.
Substandard Non‑Accrual—8, well‑defined weakness or weaknesses in cash flow and collateral coverage resulting in the distinct possibility of losses if not corrected.
Doubtful—9, weaknesses inherent in substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss—10, is considered uncollectible and of such little value that its continuance as a realizable asset is not warranted.
Revolving loans that are converted to term loans are treated as new originations and are presented by year of origination. Generally, existing term loans that are re-underwritten are reflected in the table in the year of renewal.
18
The following tables summarize the risk rating categories of the loans and leases considered for inclusion in the allowance for credit losses - loans and leases calculation, as of June 30, 2023 and December 31, 2022:
Term loans amortized cost by origination year
Revolving
2021
2020
2019
Prior
Loans
Commercial Real Estate
Pass
102,875
463,129
522,071
192,889
106,593
391,004
9,980
1,788,541
Watch
366
8,439
19,755
22,068
16,249
53,949
120,826
Special Mention
1,875
1,066
8,057
10,998
Substandard
233
2,081
1,099
9,097
30,571
43,081
103,241
471,801
543,907
217,931
133,005
483,581
Gross charge-offs for quarter ended June 30, 2023
60
203
2,039
1,608
3,910
Residential Real Estate
36,607
67,682
57,845
41,240
30,487
204,751
48,711
487,323
906
1,253
10,866
2,750
15,775
315
549
884
197
402
965
42,658
32,126
216,568
51,461
Construction, Land Development, & Land
29,694
65,849
181,279
65,679
16,057
24,953
1,208
384,719
3,153
3,224
29,757
19,210
24,961
Commercial & Industrial
245,662
488,522
251,286
127,415
52,016
151,605
455,930
1,772,436
12,698
25,957
46,723
12,278
35,047
28,157
58,238
219,098
19,000
7,847
289
10,016
21,508
58,660
4,902
11,523
8,142
10,854
9,783
9,352
54,556
277,360
519,381
317,379
147,835
98,206
199,561
545,028
1,077
581
664
623
3,887
Installment and Other
339
125
55
455
2,486
3,700
36
247
459
2,487
Lease Financing Receivables
179,770
250,644
119,560
40,499
9,505
3,003
602,981
1,328
21
1,429
224
480
350
307
102
22
805
251,074
121,195
40,846
9,667
3,143
400
86
37
767
Total Loans and Leases
594,947
1,336,042
1,132,166
467,746
214,713
775,771
518,315
5,039,700
13,127
34,507
67,806
35,273
55,702
92,984
60,989
360,388
2,414
1,515
18,738
71,022
5,485
13,911
9,540
20,339
40,780
99,407
627,074
1,376,034
1,221,730
514,973
292,269
928,273
610,164
1,158
1,537
870
2,740
8,573
2018
Loans (1)
471,009
510,529
207,765
111,792
84,382
324,271
28,343
1,738,091
6,422
12,723
20,583
11,004
17,269
44,462
112,463
121
1,075
1,232
10,075
12,503
1,910
915
13,042
12,685
22,915
51,467
477,431
525,162
229,384
136,913
115,568
401,723
1,914,524
68,752
59,075
41,768
31,726
48,432
170,279
49,622
469,654
1,137
682
4,098
9,026
2,586
17,529
323
32
420
876
1,651
234
381
296
2,185
660
3,756
43,462
32,821
53,246
182,366
52,868
492,590
62,310
203,672
61,895
27,189
26,489
38,186
419,926
3,064
7,473
1,845
4,199
6,044
1,530
4,012
5,546
63,740
33,128
34,700
41,254
508,664
305,056
137,335
72,486
96,304
113,965
549,431
1,783,241
16,657
20,856
15,857
32,282
19,362
9,809
47,119
161,942
13,056
697
1,162
2,958
7,831
22,320
48,024
1,156
3,415
6,671
11,949
5,434
25,275
10,738
64,638
526,477
342,383
160,560
117,879
124,058
156,880
629,608
2,057,845
332
146
65
584
429
1,650
34
73
657
296,395
148,588
53,642
14,478
7,245
934
521,282
93
1,560
26
1,679
290
182
250
745
35
77
296,523
150,230
54,038
14,737
7,501
957
1,407,462
1,227,066
502,470
257,750
262,867
648,219
628,010
4,933,844
23,206
35,139
37,603
48,377
40,731
66,434
49,705
301,195
3,276
2,451
9,059
18,805
68,967
1,191
5,407
7,900
26,979
22,433
50,379
11,398
125,687
1,431,859
1,280,668
551,249
335,557
335,090
783,837
711,433
5,429,693
(1) - Includes $8.4 million of substandard loans classified as held for sale.
The following tables summarize contractual delinquency information of the loans and leases considered for inclusion in the allowance for credit losses - loans and leases calculation at June 30, 2023 and December 31, 2022:
Revolving Loans
TotalLoans
Current
471,704
543,147
217,549
131,169
470,626
1,947,416
30-59 Days Past Due
41
60-89 Days Past Due
97
760
74
714
1,645
Greater than 90 Accruing
Non-accrual
308
1,836
12,200
14,344
Total Past Due
382
12,955
16,030
64,797
42,461
31,760
216,055
51,226
500,751
2,885
110
235
3,230
403
966
513
4,196
515,117
311,213
144,451
95,567
196,640
539,692
2,080,040
275
279
327
215
553
685
2,260
3,933
5,686
3,169
2,086
2,236
5,061
22,171
4,264
6,166
2,639
2,921
5,336
24,710
458
3,735
179,070
249,956
120,522
40,587
9,606
3,058
602,799
571
415
153
39
44
1,588
353
516
88
792
700
1,118
673
259
85
2,896
626,374
1,367,670
1,214,131
510,751
287,367
911,798
604,593
5,522,684
3,304
195
510
5,138
1,240
1,416
4,422
4,283
5,993
3,762
4,310
14,864
38,273
8,364
7,599
4,222
16,475
5,571
47,833
Total non-accrual loans without an allowance included $1.6 million of commercial real estate loans and $2.9 million of commercial and industrial loans as of June 30, 2023. The Company recognized $2.0 million of interest income on non-accrual loans and leases for the six months ended June 30, 2023.
TotalLoans(1)
477,334
525,048
229,260
132,067
112,126
387,349
1,891,527
54
471
2,060
2,682
1,016
124
4,846
2,971
11,298
19,299
114
3,442
14,374
22,997
32,440
52,950
180,128
52,146
486,222
2,497
108
122
2,727
2,130
600
3,641
2,731
2,238
722
6,368
41,250
438,985
524,341
339,915
156,713
113,350
122,523
153,039
628,747
2,038,628
980
1,371
1,717
368
922
5,749
472
647
1,089
3,376
2,725
1,167
2,447
861
12,821
2,136
2,468
3,847
4,529
3,841
19,217
294,948
149,642
53,680
14,557
7,411
955
521,193
1,461
467
295
104
2,406
76
260
1,575
588
358
180
90
2,793
1,428,051
1,277,498
544,189
325,621
329,727
763,378
709,850
5,378,314
2,538
1,892
3,183
1,821
916
3,092
13,564
1,488
1,790
1,231
3,797
8,028
4,438
15,879
36,025
3,808
3,170
7,060
9,936
5,363
20,459
1,583
51,379
Total non-accrual loans without an allowance included $10.8 million of commercial real estate loans, $4.3 million of commercial and industrial loans, and $2.6 million of residential real estate loans, as of December 31, 2022. The Company recognized $2.5 million of interest income on non-accrual loans and leases for the year ended December 31, 2022.
The following table summarize the balance and activity within the allowance for credit losses - loans and leases, the components of the allowance for credit losses - loans and leases by loans and leases individually and collectively evaluated for impairment, and corresponding loan and lease balances by type for the three and six months ended June 30, 2023 are as follows:
CommercialReal Estate
ResidentialReal Estate
Construction, Land Development,and Other Land
Commercialand Industrial
Installmentand Other
LeaseFinancingReceivables
Three months ended
Beginning balance
24,738
2,679
3,498
51,849
7,676
90,465
Provision/(recapture)
4,359
(198
(1,563
3,161
691
6,467
Charge-offs
(2,945
(2,097
(462
(5,504
Recoveries
727
221
1,237
Ending balance
26,377
2,544
1,935
53,640
43
8,126
92,665
Six months ended
26,061
3,140
3,134
41,889
81,924
Provision
3,240
(651
(1,199
13,964
810
16,179
(3,911
(9
(3,887
(766
(8,573
987
64
1,674
406
3,135
Ending balance:
Individually evaluated for impairment
8,555
17,399
25,954
Collectively evaluated for impairment
17,822
36,241
66,711
Total allowance for credit losses - loans and leases
Loans and leases ending balance:
30,750
38,485
69,235
1,932,696
2,066,265
5,501,282
The following table summarize the balance and activity within the allowance for loan and lease losses, the components of the allowance for loan and lease losses by loans and leases individually and collectively evaluated for impairment, loans acquired with deteriorated credit quality, and corresponding loan and lease balances by type for the three and six months ended June 30, 2022:
Allowance for loan and lease losses
19,706
2,145
1,116
33,244
3,237
59,458
566
676
3,852
474
(497
(2,654
(324
(3,475
293
204
19,818
2,489
1,792
34,735
3,591
62,436
16,918
1,628
522
33,129
2,806
55,012
3,350
852
1,270
1,119
(737
(3,117
(687
(4,541
287
413
1,062
6,002
11,337
17,339
12,576
1,680
1,764
23,012
42,631
Loans acquired with deteriorated credit quality
809
386
2,466
Total allowance for loan and lease losses
45,200
5,188
5,541
27,770
83,699
1,794,663
436,081
428,782
1,876,772
1,153
442,371
4,979,822
60,075
39,902
1,184
3,232
157
104,550
1,899,938
481,171
435,507
1,907,774
1,310
5,168,071
The Company increased the allowance for credit losses - loans and leases by $2.2 million and $10.7 million for the three and six months ended June 30, 2023, respectively, and increased the allowance for loan and lease losses by $3.0 million and $7.4 million for the three and six months ended June 30, 2022, respectively. For loans evaluated for impairment, the Company increased allowance for credit losses - loans and leases by $3.9 million and $10.6 million for the three and six months ended June 30, 2023, respectively. The Company recaptured $3.4 million and $3.7 million of the allowance for loan and lease losses for the three and six months ended June 30, 2022, respectively. For loans and leases collectively evaluated for impairment, the Company recaptured $1.7 million of the allowance for credit losses - loans and leases for the three months ended June 30, 2023, and increased it by $124,000 for the six months ended June 30, 2023. The Company increased the allowance for loan and lease losses by $7.0 million and $11.8 million for the three and six months ended June 30, 2022, respectively. The change in allowance for credit losses - loans and leases collectively evaluated for impairment was mainly due to changes in expected losses driven by macro-economic factors.
The following table presents loans with modified terms as of June 30, 2023:
Payment Delay
Term Modification
Combination Term Modification and Interest Rate Reduction
Total Modified by Class
% of Class of Loans and Leases
Modified loans
0.00
%
8,719
51,370
385
60,474
2.87
Total modified loans
8,829
60,584
1.1
Loans reflected as having a payment delay included a general adjustment in loan terms similar to those of pass-rated credits. Loans having term modifications included extension of term as a result of a new borrower structure and other miscellaneous term adjustments. Loans having a combination of term modification and interest rate reduction reflect a longer amortization period and a reduced weighted average contractual rate from 8.85% to 7.01%.
TDRs are granted due to borrower financial difficulty and provide for a modification of loan repayment terms. The tables below present TDRs by loan category as of December 31, 2022:
NumberofLoans
Pre-ModificationOutstandingRecordedInvestment
Post-ModificationOutstandingRecordedInvestment
Individually Evaluated
Accruing:
551
144
Total accruing
719
143
Non-accruing:
830
207
2,017
982
1,035
38
Total non-accruing
2,847
1,605
1,242
111
Total troubled debt restructurings
3,566
2,324
254
Loans modified as troubled debt restructurings that occurred during the three and six months ended June 30, 2022 were:
1,456
1,927
Additions
Net payments
(98
(569
Net transfers from non-accrual
1,358
1,343
1,506
(372
Net transfers to accrual
1,134
2,492
There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the six months ended June 30, 2022. In addition, there was no commitment outstanding on troubled debt restructurings at December 31, 2022.
The following table presents the amortized cost basis of collateral-dependent loans and leases, which are individually evaluated to determine expected credit losses as of June 30, 2023 and December 31, 2022:
Commercial Construction
Non-owner Occupied Commercial
Owner-Occupied Commercial
Multi-Family
Single Family Residence (1st Lien)
Single Family Residence (2nd Lien)
Business Assets
8,076
22,673
30,749
38,486
-
9,749
28,210
37,959
237
422
220
879
26,034
70,413
The following table presents the change in the balance of the reserve for unfunded commitments as of June 30, 2023 and 2022:
4,316
2,003
4,203
1,403
Provision for/(recapture) of unfunded commitments
(677
188
(564
788
3,639
2,191
Note 6—Servicing Assets
Activity for servicing assets and the related changes in fair value for the three and six months ended June 30, 2023 and 2022 was as follows:
Three Months Ended June 30,
Six Months Ended June 30,
20,944
24,497
23,744
Additions, net
1,636
2,294
2,752
4,278
Changes in fair value
22,155
Loans serviced for others are not included in the Condensed Consolidated Statements of Financial Condition. The unpaid principal balances of these loans serviced for others as of June 30, 2023 and December 31, 2022 were as follows:
Loan portfolios serviced for:
SBA guaranteed loans
1,516,675
1,521,014
USDA guaranteed loans
195,969
211,150
1,712,644
1,732,164
Loan servicing revenue totaled $3.4 million for each of the three months ended June 30, 2023 and 2022. Loan servicing revenue totaled $6.8 million for each of the six months ended June 30, 2023 and 2022.
Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in a downward valuation adjustment of $865,000 and $4.6 million for the three months ended June 30, 2023 and 2022, respectively. Loan servicing asset revaluation resulted in a downward valuation adjustment of $209,000 and $5.9 million for the six months ended June 30, 2023 and 2022, respectively.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in secondary market premiums and prepayment speed assumptions have the most significant impact on the fair value of servicing rights. Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which may result in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may change over time. Refer to Note 15—Fair Value Measurement for further details.
Note 7—Other Real Estate Owned
The following table presents the change in other real estate owned (“OREO”) for the three and six months ended June 30, 2023 and 2022:
3,712
2,221
2,112
Net additions to OREO
445
2,528
Proceeds from sales of OREO
(1,795
(2,559
(225
Gains (losses) on sales of OREO
(85
Valuation adjustments
(12
(343
(51
4,749
At June 30, 2023, the balance of real estate owned included $566,000 and $2.3 million in foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property as of June 30, 2023 and December 31, 2022, respectively.
At June 30, 2023 and December 31, 2022, there were no recorded investment of consumer mortgage loans secured by residential real estate properties in foreclosure.
There were no internally financed sales of OREO for the three or six months ended June 30, 2023 or 2022.
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 the periods indicated:
Balance Sheet Line Item
Operating lease right-of-use asset
10,849
11,352
Operating lease liability
13,534
14,391
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 Federal Home Loan Bank regular advance rate, adjusted for the lease term and other factors. At June 30, 2023, the weighted-average discount rate of operating leases was 2.20% and the weighted average remaining life of operating leases was 6.2 years, compared to 1.95% and 6.2 years as of December 31, 2022.
The following table presents components of total lease costs included as a component of occupancy expense on the Condensed Consolidated Statements of Operations for the following periods:
Operating lease cost
621
720
1,244
1,578
Short-term lease cost
168
Variable lease cost
357
411
769
880
Less: Sublease income
(159
(149
(315
(276
Total lease cost, net
918
1,058
1,866
2,295
Operating cash flows paid for operating lease amounts included in the measure of lease liabilities were $821,000 and $962,000 for the three months ended June 30, 2023 and 2022, respectively. Operating cash flows paid for operating lease amounts included in the measure of lease liabilities were $1.7 million and $2.1 million for the six months ended June 30, 2023 and 2022, respectively.
The Company recorded $619,000 and $64,000 of right-of-use lease assets in exchange for operating lease liabilities for the three months ended June 30, 2023 and 2022, respectively. The Company recorded $932,000 and $1.3 million of right-of-use lease assets in exchange for operating lease liabilities for the six months ended June 30, 2023 and 2022, respectively.
The future minimum lease payments for operating leases, subsequent to June 30, 2023, as recorded on the Condensed Consolidated Statements of Financial Condition, are summarized as follows:
Operating LeaseCommitments
1,677
3,331
2,759
2,154
3,691
Total undiscounted lease payments
14,724
Less: Imputed interest
(1,190
Net lease liabilities
The total amount of minimum rentals to be received in the future on these subleases is approximately $1.4 million, and the leases have contractual lives extending through 2028. In addition to the above required lease payments, the Company has contractual obligations related primarily to information technology contracts and other maintenance contracts.
Note 9—Goodwill, Core Deposit Intangible and Other Intangible Assets
The following tables summarize the changes in the Company’s goodwill, core deposit intangible assets, and customer relationship intangible assets for the three and six months ended June 30, 2023 and 2022:
For the Three Months Ended June 30,
Goodwill
Core DepositIntangible
Customer RelationshipIntangible
148,353
7,498
1,581
13,475
2,134
Amortization
(1,388
(67
(1,530
(338
1,514
11,945
1,796
Accumulated amortization
N/A
49,356
1,702
43,521
1,420
Weighted average remaining amortization period
4.8 Years
5.7 Years
4.5 Years
6.8 Years
For the Six Months Ended June 30,
8,886
1,648
15,004
2,201
(2,776
(134
(3,059
29
The following table presents the estimated amortization expense for core deposit intangible and customer relationship intangible assets remaining at June 30, 2023:
EstimatedAmortization
1,426
2,286
1,721
1,157
609
425
7,624
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 six months ended June 30, 2023 and 2022 was 25.9% and 22.2%, respectively. The Company recorded discrete income tax benefit of $140,000 and $2.1 million related to the exercise of stock options and vesting of restricted shares for the six months ended June 30, 2023 and 2022, respectively.
Net deferred tax assets decreased to $66.9 million at June 30, 2023 compared to $68.2 million at December 31, 2022 primarily as a result of the change in unrealized gains on cash flow hedges.
Note 11—Deposits
The composition of deposits was as follows as of June 30, 2023 and December 31, 2022:
Interest-bearing checking accounts
530,775
592,098
Money market demand accounts
1,600,043
1,415,653
Other savings
562,706
625,798
Time deposits (below $250,000)
1,214,717
762,250
Time deposits ($250,000 and above)
215,102
160,677
There were $551.4 million and $251.5 million of brokered deposits included in time deposits below $250,000 at June 30, 2023 and December 31, 2022, respectively.
At June 30, 2023, the scheduled maturities of time deposits were:
Scheduled Maturities
767,520
633,946
14,359
6,657
2027 and thereafter
7,337
1,429,819
The Company hedges interest rates on certain money market accounts 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.
30
Note 12—Other Borrowings
The following is a summary of the Company’s other borrowings as of the dates presented:
Federal Home Loan Bank advances
540,000
625,000
Securities sold under agreements to repurchase
34,922
15,399
Line of credit
Byline Bank has the capacity to borrow funds from the discount window of the Federal Reserve System. As of June 30, 2023 and December 31, 2022, there were no outstanding advances under the Federal Reserve Bank discount window line.
At June 30, 2023, fixed-rate Federal Home Loan Bank (“FHLB”) advances totaled $40.0 million, with an interest rate of 5.18% and maturity of July 2023. Total variable rate advances were $500.0 million at June 30, 2023, with interest rates ranging from 5.21% to 5.28%, that may reset daily, with maturities between August 2023 and September 2023. 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 4—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. The amended revolving line of credit bears interest at either SOFR plus 195 basis points or 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. On May 26, 2023, the Company amended the agreement with the lender, which provides for: i) the renewal of the revolving line-of-credit facility of up to $15,000,000, extending its maturity date to May 26, 2024; and ii) a new term loan facility in the principal amount of up to $20,000,000 with a maturity date of May 26, 2026, each subject to the existing Negative Pledge Agreement dated October 11, 2018, as amended. At June 30, 2023 and December 31, 2022, the line of credit had no outstanding balance.
The following table presents short-term credit lines available for use as of the dates presented:
Federal Home Loan Bank line
2,076,310
1,903,549
Federal Reserve Bank of Chicago discount window line
760,627
804,578
Available federal funds lines
135,000
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 is being amortized over 10 years.
As of June 30, 2023, the net liability outstanding of the subordinated notes was $73.8 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 June 30, 2023 and December 31, 2022, the Company’s junior subordinated debentures by issuance were as follows:
Name of Trust
Aggregate Principal Amount June 30, 2023
AggregatePrincipal AmountDecember 31, 2022
StatedMaturity
Contractual Rate at June 30, 2023
Interest Rate Spread
Metropolitan Statutory Trust I
35,000
March 17, 2034
8.30
Three-month LIBOR + 2.79%
First Evanston Bancorp Trust I
10,000
March 15, 2035
7.33
Three-month LIBOR + 1.78%
Total liability, at par
45,000
Discount
(7,443
(7,662
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 I, which was formed for the issuance of trust preferred securities. The debentures bear interest at three-month LIBOR plus 2.79% (8.30% and 7.53% at June 30, 2023 and December 31, 2022, 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 $92,000 and $98,000 as of June 30, 2023 and December 31, 2022, 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% (7.33% and 6.55% at June 30, 2023 and December 31, 2022, 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 $31,000 and $30,000 as of June 30, 2023 and December 31, 2022, 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 Condensed 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 June 30, 2023 and December 31, 2022:
Fixed Rate
Variable Rate
Commitments to extend credit
245,616
1,807,433
2,053,049
258,049
1,821,175
2,079,224
Letters of credit
521
66,036
66,557
61,328
61,864
246,137
1,873,469
2,119,606
258,585
1,882,503
2,141,088
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 1.00% to 18.25% and maturities up to 2050. Variable rate loan commitments have interest rates ranging from 1.75% to 14.00% 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.
33
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 2023 and 2022, all of the ratings derived by the Company were “BBB-” or better with and without comparable bond proxies. All of the ratings of non-Agency backed bonds derived by the Company were investment grade. 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 June 30, 2023 and December 31, 2022:
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
2,518
Equity securities
15,955
15,316
639
Servicing assets
Derivative assets
64,159
Financial liabilities
Derivative liabilities
18,773
5,471
4,805
666
65,342
17,817
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
686
Change in fair value
(27
(23
Balance, end of period
663
The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the six months ended June 30, 2023 and 2022.
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 June 30, 2023:
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
6.4% - 8.2%
7.4
Decrease
Prepayment speeds
(1.0)% - 30.9%
12.7
6.2% - 51.6%
13.8
Expected weightedaverage loan life
0.0 - 9.8 years
4.1 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:
Individually Evaluated Loans—The Company individually evaluates loans that do not share similar risk characteristics, including non-accrual loans. Specific allowance for credit losses is measured based on a discounted cash flow of ongoing operations, discounted at the loan's original effective interest rat, or a calculation of the fair value of the underlying collateral less estimated selling costs. Valuations of individually assessed loans that are collateral dependent are supported by third party appraisals in accordance with the Bank's credit policy. Accordingly, individually evaluated loans are classified as Level 3.
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 Company’s assets that were measured at fair value on a non-recurring basis, as of June 30, 2023 and December 31, 2022:
Non-recurring
Individually evaluated loans
22,195
21,086
Assets held for sale
8,653
Other real estate owned
47,846
8,673
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.
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
26,803
40,657
Loans and lease receivables, net (less impaired loans at fair value)
5,434,571
5,335,289
5,262,447
5,259,991
Accrued interest receivable
29,882
29,815
Non-interest-bearing deposits
4,122,535
3,554,318
Accrued interest payable
13,019
4,494
Securities sold under repurchase agreement
Subordinated notes
70,341
70,925
Junior subordinated debentures
38,479
40,131
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 June 30, 2023 and December 31, 2022:
NotionalAmount
OtherAssets
OtherLiabilities
Derivatives designated as hedging instruments
Interest rate swaps designated as cash flow hedges
550,000
45,303
47,249
Derivatives not designated as hedging instruments
Other interest rate derivatives
558,316
18,856
(18,773
545,346
18,093
(17,817
Other credit derivatives
1,206
6,678
Total derivatives
1,109,522
1,102,024
Interest rate swaps designated as cash flow hedges—Cash flow hedges of interest payments associated with certain financial instruments had notional amounts totaling $550.0 million as of June 30, 2023, and December 31, 2022. 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 June 30, 2023, the cash flow hedges aggregating $550.0 million in notional amounts are comprised of $450.0 million pay-fixed interest rate swaps associated with certain deposits and other borrowings, and $100.0 million receive-fixed interest rate swaps associated with certain variable rate loans. On July 11, 2023, the Company entered into a $50.0 million forward-starting receive-fixed interest rate swap with an effective date of March 2024.
As of June 30, 2023, pay-fixed interest rate swaps are comprised of five effective hedges totaling $400.0 million, and a $50.0 million forward-starting interest rate swap that is effective in September 2023. Receive-fixed interest rate swaps totaling $100.0 million are comprised of two effective hedges.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivatives is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income or expense in the same period during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest income or expense as interest payments are made on the hedged instruments. Interest recorded on these swap transactions included $3.9 million of interest income and $109,000 of interest expense during the three months ended June 30, 2023, and 2022, respectively, and is reported as a component of interest expense on deposits and other borrowings. Interest recorded on these swap transactions was $5.8 million interest income and $319,000 interest expense during the six months ended June 30, 2023, and 2022, respectively. As of June 30, 2023, the Company estimates $18.4 million of the unrealized gain to be reclassified as a decrease to interest expense during the next twelve months.
Accumulated other comprehensive income also includes the amortization of the remaining balance related to terminated interest rate swaps designated as cash flow hedges, which are over the original life of the cash flow hedge. In March 2023, the Company terminated interest rate swaps designated as cash flow hedges totaling $100.0 million, of which $50.0 million became effective in May 2023 and $50.0 million became effective in June 2023. The transaction resulted in a gain of $4.2 million, net of tax, which was the clean value at termination date and began amortizing as a decrease to interest expense on the effective dates. The remaining unamortized balance was $4.1 million and $15,000 as of June 30, 2023 and December 31, 2022, respectively.
The following table reflects the cash flow hedges as of June 30, 2023:
Notional amounts
Derivative assets fair value
Derivative liabilities fair value
Weighted average remaining maturity
3.4 years
Receive rates are determined at the time the swaps become effective. As of June 30, 2023, the weighted average pay rates of the five effective pay-fixed hedges for $400.0 million were 0.98% and the weighted average receive rates were 5.08%. As of June 30, 2023, the weighted average pay rates of the receive-fixed interest rate swaps of $100.0 million were 7.44% and the weighted average receive rates were 8.25%.
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 six months ended:
Amount ofGain Recognized inAOCI
Amount ofGainReclassifiedfrom AOCI toIncome as aDecrease toInterestExpense
Amount ofGain (Loss)Recognized inOtherNon-InterestIncome
Amount ofGain Recognized inOCI
Amount ofLossReclassifiedfrom OCI toIncome as anIncrease toInterestExpense
Interest rate swaps
5,819
(319
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 $558.3 million as of June 30, 2023 with maturities ranging from March 2024 to March 2033. 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 six months ended June 30, 2023, there were $472,000 of net transaction fees, included in other non-interest income, related to these derivative instruments. There were no transaction fees during the three months ended June 30, 2023. During the three and six months ended June 30, 2022, there were $533,000 and $1.6 million 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 June 30, 2023:
Weighted average pay rates
4.29
Weighted average receive rates
5.98
5.3 years
40
Other 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 derivatives is managed through the Company’s loan underwriting process. The total notional amount was $1.2 million and $6.7 million as of June 30, 2023 and December 31, 2022, respectively. Additionally, the Company enters into foreign currency contracts to manage foreign exchange risk associated with certain customer foreign currency transactions. These transactions were not material to the consolidated financial statements as of June 30, 2023 and December 31, 2022. The fair values of the credit derivatives is reflected in other assets and liabilities with corresponding gains or losses reflected in non-interest income or other comprehensive 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 and six months ended June 30, 2023 and 2022:
115
286
(193
568
573
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
(537
(43
Collateral posted
(60,520
(64,370
Net credit exposure
3,102
(18,236
929
(17,774
As of June 30, 2023, 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 $18.8 million. If the Company had breached any of these provisions at June 30, 2023, it could have been required to settle its obligations under the agreements at their termination value less offsetting positions of $537,000. 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 2,600,000 shares of our common stock have been reserved for issuance under the Omnibus Plan. As of June 30, 2023, there were 1,188,654 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 2023, the Company granted 289,676 shares of restricted common stock, par value $0.01 per share. Of this total, 3,627 restricted shares will vest in one year, 201,569 restricted shares will vest ratably over three years on each anniversary of the grant date, 33,098 restricted shares will cliff vest on the third anniversary of the grant date, all subject to continued employment. In addition, 51,382 performance-based shares were granted. The number of performance-based shares which may be earned under the award is dependent upon the Company's total stockholder return and return on average assets, weighted equally, over a three-year period ending December 31, 2025, measured against the KBW Regional Bank Index. Results will be measured cumulatively at the end of the three years and any earned shares will vest on the third anniversary of the grant date.
The following table discloses the changes in restricted shares for the six months ended June 30, 2023:
Omnibus Plan
Number of Shares
Weighted AverageGrant Date FairValue
Beginning balance, January 1, 2023
581,337
22.93
Granted
289,676
24.62
Incremental performance shares vested
1,826
Vested
(182,294
21.47
Forfeited
(14,091
24.24
Ending balance outstanding at June 30, 2023
676,454
24.00
A total of 182,294 restricted shares vested during the six months ended June 30, 2023. A total of 243,603 restricted shares vested during the year ended December 31, 2022. The fair value of restricted shares that vested during the six months ended June 30, 2023 was $4.4 million. The fair value of restricted shares that vested during the year ended December 31, 2022 was $5.9 million.
The Company recognizes share-based compensation based on the estimated fair value of the restricted stock at the grant date. The fair value of the total stock return performance-based awards granted in 2023 were calculated based on a Monte Carlo simulation, using expected volatilities between 38.11% and 39.80%, a risk-free rate of 4.42%, and a simulation term of 2.85 years. Based on the equal weighing of total stock return and return on average assets, the grant date fair value of the performance based awards was $25.20 per share. Share-based compensation expense is included in non-interest expense in the Condensed Consolidated Statements of Operations.
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The following table summarizes restricted stock compensation expense for the six months ended June 30, 2023 and 2022:
Total share-based compensation - restricted stock
2,798
Income tax benefit
866
761
Unrecognized compensation expense
12,757
12,050
2.3 years
2.7 years
The fair value of the unvested restricted stock awards at June 30, 2023 was $12.2 million.
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 930,852 and 986,757 shares of common stock were outstanding as of June 30, 2023 and 2022, respectively. There were 676,454 and 687,213 restricted stock awards outstanding at June 30, 2023 and 2022, respectively. For the three and six months ended June 30, 2023 and 2022, 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)
37,034,626
37,064,795
36,995,075
37,093,816
Incremental shares
303,280
547,473
449,306
646,866
Weighted-average common stock outstanding (dilutive)
37,337,906
37,612,268
37,444,381
37,740,682
Note 19—Stockholders’ Equity
A summary of the Company’s preferred and common stock at June 30, 2023 and December 31, 2022 is as follows:
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”). On March 31, 2022, the Company redeemed all 10,438 outstanding shares of Series B Preferred Stock. 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.
For the six months ended June 30, 2022, we declared and paid dividends on the Series B preferred stock of $196,000.
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, and on July 27, 2021, our Board of Directors authorized an expansion of the stock repurchase program. Under the extended program, we were authorized to repurchase an additional 1,250,000 shares of our outstanding common stock. This repurchase program expired on December 31, 2022.
On December 12, 2022, we announced that our Board of Directors approved a new stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of our outstanding common stock. The program is in effect from January 1, 2023 until December 31, 2023 unless terminated earlier. 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 management at its discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions and applicable legal requirements.
We did not purchase any shares under the stock repurchase program during the three or six months ended June 30, 2023. We purchased 232,000 shares at a cost of $5.5 million under this program during the three months ended June 30, 2022. We purchased 514,819 shares at a cost of $13.1 million under this program during the six months ended June 30, 2022.
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 each of the three months ended June 30, 2023 and 2022, cash dividends were declared and paid to stockholders of record of our common stock of $0.09 per share. For the six months ended June 30, 2023 and 2022, cash dividends were declared and paid to stockholders of record of our common stock of $0.18 per share.
On July 25, 2023, our Board of Directors declared a cash dividend of $0.09 per share payable on August 22, 2023 to stockholders of record of our common stock as of August 8, 2023.
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 six months ended June 30, 2023 and 2022:
Unrealized Gains on Cash Flow Hedges
Unrealized Gains (Losses) on Available-for-SaleSecurities
Total AccumulatedOther ComprehensiveIncome (Loss)
(11,119
Other comprehensive income (loss), net of tax
(112,206
34,315
(151,865
36,433
(151,295
45
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 in our Annual Report on Form 10-K for the year ended December 31, 2022, that was filed with the SEC on March 7, 2023 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 account opening to consumer and business 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, Michigan, New Jersey, and New York. We participate in U.S. government guaranteed lending programs and originate U.S. government guaranteed loans. Byline Bank is a leading originator of Small Business Administration (“SBA”) loans as of June 30, 2023.
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 provision for credit 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 $26.1 million and $50.1 million for the three and six months ended June 30, 2023, compared to net income of $20.3 million and $42.6 million for the three and six months ended June 30, 2022, an increase of $5.8 million and $7.5 million, respectively, for each comparable period. The increase in net income was attributable to a $14.5 million and $31.5 million increase in net interest income. The increase in net interest income during the three and six months ended June 30, 2023 was primarily driven by higher yields on loans and leases, and growth in the loan and lease portfolio.
Dividends declared and paid on preferred shares were $196,000 for the six months ended June 30, 2022. Dividends declared on common shares were $3.4 million for each of the three months ended June 30, 2023 and 2022. Dividends paid on common shares were $3.3 million and $3.4 million for each of the three months ended June 30, 2023 and 2022, respectively. Dividends declared on common shares were $6.8 million for each of the six months ended June 30, 2023 and 2022. Dividends paid on common shares were $6.7 million and $6.8 million for each of the six months ended June 30, 2023 and 2022, respectively.
For the three months ended June 30, 2023 and 2022, net income available to common stockholders was $26.1 million, or $0.70 per basic and diluted common share, and $20.3 million, or $0.55 per basic and $0.54 per diluted common share, respectively. For the six months ended June 30, 2023 and 2022, net income available to common stockholders was $50.1 million, or $1.35 per basic and $1.34 per diluted common share, and $42.4 million, or $1.14 per basic and $1.12 per diluted common share, respectively.
Our results of operations for the three months ended June 30, 2023 and 2022 yielded an annual return on average assets of 1.41% and 1.17% and a return on average stockholders’ equity of 12.99% and 10.42% respectively. Our results of operations for the six months ended June 30, 2023 and 2022 yielded an annual return on average assets of 1.37% and 1.26% and a return on average stockholders’ equity of 12.69% and 10.65%, respectively.
As of June 30, 2023, we had consolidated total assets of $7.6 billion, total gross loans and leases outstanding of $5.6 billion, total deposits of $5.9 billion, and total stockholders’ equity of $813.9 million.
Inland Bancorp, Inc. Acquisition
On July 1, 2023, we completed our acquisition of Inland Bancorp, Inc., ("Inland") under the terms of a definitive merger agreement. As a result of the merger, Inland's wholly owned bank subsidiary, Inland Bank and Trust, was merged with and into Byline Bank. As of June 30, 2023, Inland had approximately $1.2 billion in total assets, $861.5 million of loans, and $967.6 million of total deposits. Refer to Note 3—Acquisition of a Business for additional information.
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 judgments 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 credit 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 and (vi) the valuation of or recognition of deferred tax assets and liabilities.
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, 2022, that we filed with the SEC on March 7, 2023.
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 judgments 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. Newly originated 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 credit losses, unamortized deferred fees and costs, and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees and certain direct costs associated with the loan origination 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
48
the effective yield method. Interest income on new loans is accrued based on the unpaid principal balance outstanding. Additionally, once an acquired loan reaches its contractual maturity date, it is re-underwritten, and if renewed, it is classified as an originated loan.
Purchased credit deteriorated loans and leases
Purchased credit deteriorated ("PCD") loans are loans that have experienced more than insignificant credit deterioration since origination. PCD loans are recorded at the amount paid. An allowance for credit losses is determined using the same methodology as other loans held for investment. The initial allowance for credit losses determined on a collective basis is allocated to individual loans. The difference between the loan’s purchase price and allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan. Subsequent changes to the allowance for credit losses are recorded through credit loss expense.
Acquired non-credit-deteriorated loans and leases
For acquired non‑credit-deteriorated loans and leases, the difference between the fair value and unpaid principal balance of the loan at the acquisition date is amortized or accreted to interest income over the life of the loan. While credit discounts are included in the determination of the fair value for non-credit-deteriorated loans, since these discounts are expected to be accreted over the life of the loans, they cannot be used to offset the allowance for credit losses that must be recorded at the acquisition date. As a result, an allowance for credit losses is determined at the acquisition date using the same methodology as other loans held for investment and is recognized as a provision for credit losses in the consolidated statements of operations. Any subsequent deterioration (improvement) in credit quality is recognized by recording a provision (recapture) for credit losses.
Provision and allowance for credit losses
The provision for credit losses reflects the amount required to maintain the allowance for credit losses (“ACL”) at an appropriate level based upon management’s evaluation of the adequacy of collectively and individually evaluated loss reserves.
The ACL is maintained at a level that management believes is appropriate to provide for current expected credit 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 relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We increase our ACL by recording provisions for current expected credit losses against our income and decrease 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 ACL is maintained at a level management believes is sufficient to provide for current expected credit losses based upon an ongoing review of the loan and lease portfolios by portfolio category, which includes 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 that may affect a borrower’s ability to repay, reasonable and supportable forecasts, and evaluation of prevailing economic conditions. We use risk ratings as credit indicators to classify loans and leases into pools and to estimate loss rates for each of the loan and lease pools. Additional information about these policies can be found in Note 4 of our Unaudited Interim Condensed Consolidated Financial Statements as of June 30, 2023, included in this report.
For each portfolio, management estimates expected credit losses over the life of each loan and lease utilizing lifetime or cumulative loss rate methodology, which identifies macroeconomic factors and asset-specific characteristics that are correlated with credit loss experience including loan age, loan type, and leverage. The lifetime loss rate is applied to the amortized cost of the loan or lease. This methodology builds on default and loss probabilities by utilizing pool-specific historical loss rates to calculate expected credit losses. These pool-specific historical loss rates may be adjusted for a forecast of certain macroeconomic variables, and other factors such as differences in underwriting standards, or portfolio mix. Each time we measure expected credit losses, management assesses the relevancy of historical loss information and considers any necessary adjustments to address any differences in asset-specific characteristics.
The lifetime loss rates are estimated by analyzing a combination of internal and external data related to historical performance of each loan and lease pool over a complete economic cycle. Loss rates are based on historical averages for each loan and lease pool, adjusted to reflect the impact of a forward-looking forecast of certain macroeconomic variables such as unemployment rates, gross domestic product, or commercial property values, which management considers to be both reasonable and supportable. Various economic scenarios are considered and weighted to arrive at the forecast that most reflects management’s expectation of future conditions. After a one-year forecast period, a one-year reversion period adjusts loss experience to the historical average on a straight-line basis.
Management also considers qualitative risk factor adjustments that are intended to capture internal and external trends not reflected in historical loss history. Each risk factor is assigned an allowance level based on management’s judgment as to the expected impact of each risk factor on each loan portfolio and is monitored quarterly. All acquired loans and leases and originated loans and leases of $500,000 or greater with an internal risk rating of substandard or below, or on nonaccrual, as well as loans classified as Troubled Debt Restructurings, are reviewed individually for impairment on a quarterly basis.
The Company also maintains an allowance for credit losses on off-balance sheet credit exposures for unfunded loan commitments. This allowance is reflected as a component of other liabilities that represents management’s current estimate of expected losses in the
unfunded loan commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life based on management’s consideration of past events, current conditions, and reasonable and supportable economic forecasts. Management tracks the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for credit losses on outstanding loans. The Company also evaluates its held-to-maturity debt securities for current expected credit losses.
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 June 30, 2023, 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 June 30, 2023, included in this report, for a complete discussion of our use of fair value of financial assets and liabilities and their related measurement practices.
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.
50
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 that may impact realizability. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. We use short and long‑range business forecasts to provide additional information for its evaluation of the recoverability of deferred tax assets. It is our policy to recognize interest and penalties associated with uncertain tax positions, if applicable, as components of non‑interest expense.
A deferred tax valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some of the deferred tax asset will not be realized. See Note 11 of the notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022, for further information on income taxes.
Recently Issued Accounting Pronouncements
Refer to Note 2 of our Unaudited Interim Condensed Consolidated Financial Statements as of June 30, 2023, which are 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 financial statements 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‑credit-deteriorated and purchased credit deteriorated loans.
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 credit losses, provision for income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy and equipment expenses, and other miscellaneous operating costs.
Selected Financial Data
As of or for the Three Months Ended
As of or For the Six Months Ended
Summary of Operations
Common Share Data
Adjusted diluted earnings per share(1)(3)
0.73
1.38
Weighted-average common shares outstanding (basic)
Weighted-average common shares outstanding (diluted)
Common shares outstanding
Cash dividends per common share
0.09
0.18
Dividend payout ratio on common stock
12.86
16.67
13.43
16.07
Tangible book value per common share(1)
17.43
16.01
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin, fully taxable equivalent (1)(4)
4.33
3.77
4.36
3.80
Average cost of deposits
1.70
0.16
1.43
0.12
Efficiency ratio(2)
52.92
55.29
52.51
55.12
Adjusted efficiency ratio(1)(2)(3)
51.39
51.47
Non-interest income to total revenues(1)
15.80
18.69
16.23
21.82
Non-interest expense to average assets
2.67
2.52
2.68
2.60
Adjusted non-interest expense to average assets(1)(3)
2.63
Return on average stockholders' equity
12.99
10.42
12.69
10.65
Adjusted return on average stockholders' equity(1)(3)
13.56
13.10
Return on average assets
1.41
1.17
1.37
1.26
Adjusted return on average assets(1)(3)
1.48
Pre-tax pre-provision return on average assets(1)
2.23
1.84
2.27
1.93
Adjusted pre-tax pre-provision return on average assets(1)(3)
2.30
2.33
Return on average tangible common stockholders' equity(1)
16.78
14.06
16.50
14.21
Adjusted return on average tangible common stockholders' equity(1)(3)
17.50
17.01
Non-interest-bearing deposits to total deposits
30.31
40.47
Loans and leases held for sale and loans and leases held for investment to total deposits
94.58
96.23
Deposits to total liabilities
87.51
84.64
Deposits per branch
155,713
141,799
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment
0.69
0.66
ACL to total loans and leases held for investment, net before ACL
1.66
1.21
Net charge-offs to average total loans and leases held for investment, net before ACL - loans and leases
0.31
0.24
0.20
0.15
Capital Ratios
Common equity to total assets
10.74
10.73
Tangible common equity to tangible assets(1)
8.87
8.65
Leverage ratio
10.34
Common equity tier 1 capital ratio
10.58
10.26
Tier 1 capital ratio
11.22
10.95
Total capital ratio
13.52
13.09
(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%.
We reported consolidated net income of $26.1 million for the three months ended June 30, 2023 compared to net income of $20.3 million for the three months ended June 30, 2022, an increase of $5.8 million. The increase in net income was primarily attributable to a $14.5 million increase in net interest income, offset by an increase in non-interest expense of $5.6 million and an increase in the provision of income taxes of $3.4 million.
The increase in net interest income during the three months ended June 30, 2023 was mainly a result of higher yields and increased average loan and leases balances. The increase in non-interest expense was primarily due to increases in legal, audit and other professional fees due to merger-related activities, and other non-interest expenses due to increased general expenses. The increase in the provision for income taxes is due to higher income before taxes.
Net income available to common stockholders was $26.1 million, or $0.70 per basic and diluted common share, for the three months ended June 30, 2023 compared to $20.3 million, or $0.55 per basic and $0.54 per diluted common share, for the three months ended June 30, 2022.
Our annualized return on average assets was 1.41% for the three months ended June 30, 2023 compared to 1.17% for the three months ended June 30, 2022. Our annualized return on average stockholders’ equity was 12.99% for the three months ended June 30, 2023 compared to 10.42% for the three months ended June 30, 2022. Our efficiency ratio was 52.92% for the three months ended June 30, 2023 compared to 55.29% for the three months ended June 30, 2022.
We reported consolidated net income of $50.1 million for the six months ended June 30, 2023 compared to net income of $42.6 million for the six months ended June 30, 2022, an increase of $7.5 million. The increase in net income was primarily attributable to a $31.5 million increase in net interest income, offset by a $9.8 million increase in non-interest expense, a $5.4 million increase in the provision for income taxes, a $4.7 million increase in the provision for credit losses, and a $4.2 million decrease in non-interest income.
The increase in net interest income during the six months ended June 30, 2023 was mainly a result of higher yields on loans and leases and increased average balances. The increase in non-interest expense was mostly due to an increase in salaries and employee benefits. The increase in provision for income taxes was due to higher income before taxes. The increase in provision for credit losses was mainly attributable to increases in specific reserves on individually evaluated loans, and loan and lease portfolio growth. The decrease in non-interest income was primarily due to decrease in net gains on sales of loans due to lower volume and average premiums.
Net income available to common stockholders was $50.1 million, or $1.35 per basic and $1.34 per diluted common share, for the six months ended June 30, 2023 compared to $42.4 million, or $1.14 per basic and $1.12 per diluted common share, for the six months ended June 30, 2022. Dividends on preferred shares were $196,000 for the six months ended June 30, 2022.
Our annualized return on average assets was 1.37% for the six months ended June 30, 2023 compared to 1.26% for the six months ended June 30, 2022. Our annualized return on average stockholders’ equity was 12.69% for the six months ended June 30, 2023 compared to 10.65% for the six months ended June 30, 2022. Our efficiency ratio was 52.51% for the six months ended June 30, 2023 compared to 55.12% for the six months ended June 30, 2022.
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 acquisitions, we derive a portion of our interest income from the accretable discounts on purchase credit deteriorated and acquired non-credit-deteriorated 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 June 30, 2023, purchased credit deteriorated loans accounted for under ASC Topic 326 represented 1.1% of our total loan and lease portfolio compared to 1.4% at December 31, 2022.
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.
53
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
135,003
1,041
3.09
66,034
0.45
Loans and leases(1)
5,535,593
7.18
5,009,077
4.78
Taxable securities
1,250,780
6,324
2.03
1,330,200
5,904
1.78
Tax-exempt securities(2)
151,205
168,567
2.69
Total interest-earning assets
7,072,581
107,479
6.10
6,573,878
66,783
4.07
(92,804
(59,883
All other assets
424,122
461,730
TOTAL ASSETS
7,403,899
6,975,725
Interest checking
541,036
1.61
615,831
0.27
Money market accounts
1,534,463
10,799
2.82
1,307,320
1,194
0.37
Savings
575,254
664,954
0.05
Time deposits
1,328,679
11,529
3.48
627,199
436
0.28
Total interest-bearing deposits
3,979,432
2.49
3,215,304
509,419
3.34
497,082
1,083
0.87
Federal funds purchased
2,527
2.32
111,255
7.72
110,649
6.14
Total borrowings
620,674
6,383
4.12
610,258
2,791
1.83
Total interest-bearing liabilities
4,600,106
2.71
3,825,562
0.52
1,848,538
2,265,426
Other liabilities
148,983
104,085
806,272
780,652
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Net interest spread(3)
3.39
3.55
Net interest income, fully taxable equivalent
76,373
Net interest margin, fully taxable equivalent(2)(4)
Reconciliation to reported net interest income:
Less: Tax-equivalent adjustment
Net interest margin(4)
4.32
3.76
Net loan accretion impact on margin
611
0.03
1,383
0.08
116,394
1,483
2.57
70,404
103
0.29
5,510,124
7.01
4,840,510
4.80
1,263,010
12,755
2.04
1,334,747
11,379
1.72
151,509
1,974
169,107
2,255
7,041,037
207,689
5.95
6,414,768
128,837
4.05
(88,586
(57,895
422,236
484,728
7,374,687
6,841,601
573,342
4,669
1.64
597,665
593
1,500,260
18,527
1,281,519
1,668
0.26
594,316
447
657,155
159
1,148,545
17,378
3.05
644,543
795
0.25
3,816,463
2.17
3,180,882
541,249
10,093
394,385
1,478
0.76
1,381
5.30
1,271
111,178
7.69
110,570
6.01
653,808
14,369
4.43
506,226
4,786
1.91
4,470,271
2.50
3,687,108
0.44
1,961,945
2,256,778
147,130
91,451
795,341
806,264
3.45
3.61
152,299
120,836
473
0.02
4.35
3.78
1,340
2,859
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 June 30, 2023
Compared to Three Months Ended June 30, 2022
Increase (Decrease) Due to
Volume
Rate
Interest income
532
435
967
9,488
29,972
39,460
(409
829
Tax-exempt securities
(113
(38
(151
Total interest income
9,498
31,198
40,696
(297
2,057
1,760
1,620
7,985
9,605
(29
166
137
6,089
5,004
11,093
7,383
15,212
22,595
98
3,060
3,158
(15
(14
448
3,481
3,592
7,494
18,693
26,187
2,004
12,505
14,509
Six Months Ended June 30, 2023
Compared to Six Months Ended June 30, 2022
796
1,380
23,329
53,048
76,377
(742
1,376
(231
(50
(281
22,940
55,912
78,852
(192
4,268
4,076
14,171
16,859
326
7,634
8,949
16,583
10,092
27,714
37,806
2,747
5,868
8,615
921
946
2,775
6,808
9,583
12,867
34,522
47,389
10,073
21,390
31,463
Net interest income for the three months ended June 30, 2023 was $76.2 million compared to $61.6 million during the same period in 2022, an increase of $14.5 million, or 23.6%. Interest income increased $40.7 million for the three months ended June 30, 2023 compared to the same period in 2022 primarily a result of higher yields and increased average balances on loans and leases. Interest expense increased
56
by $26.2 million for the three months ended June 30, 2023 compared to the same period in 2022 mostly due to increases in the average rates paid on deposits, change in deposit mix, and growth of deposits.
Net interest income for the six months ended June 30, 2023 was $151.9 million compared to $120.4 million during the same period in 2022, an increase of $31.5 million, or 26.2%. Interest income increased $78.9 million for six months ended June 30, 2023 compared to the same period in 2022 primarily a result of higher yields and increased average balance on loans and leases. Interest expense increased by $47.4 million for the six months ended June 30, 2023 compared to the same period in 2022 mostly due to increases in the average rates paid on deposits, change in deposit mix, and growth of deposits.
The net interest margin for the three months ended June 30, 2023 was 4.32%, an increase of 56 basis points compared to 3.76% for the three months ended June 30, 2022. The primary drivers of the increase for the three month period was an increase yields due to the rising interest rate environment, and the increase in average interest earning assets was driven by organic loan and lease growth. The net interest margin for the six months ended June 30, 2023 and 2022 was 4.35% and 3.78%, respectively.
Provision for Credit Losses
The provision for credit losses reflects the amount required to maintain the allowance for credit losses at an appropriate level based upon management’s evaluation of the adequacy of collectively and individually evaluated loss reserves. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is appropriate to provide coverage for current expected credit losses in the loan and lease portfolio. The ACL is increased by the provision for credit losses and is decreased by charge-offs, net of recoveries on prior charge-offs.
Provision for credit losses - loans and leases was $5.8 million for the three months ended June 30, 2023, compared to $5.9 for the three months ended June 30, 2022, a decrease of $118,000. Provision for credit losses - loans and leases was $15.6 million and $10.9 million for the six months ended June 30, 2023 and 2022, respectively, an increase of $4.7 million. The increase in provision for the comparable six month periods was driven by an increase in specific reserves related to loans individually evaluated for impairment and loan and lease growth.
Non-Interest Income
Non-interest income was $14.3 million for the three months ended June 30, 2023 compared to $14.2 million for the three months ended June 30, 2022, an increase of $130,000, or 0.9%. The increase was primarily due to the change in the loan servicing asset revaluation and in the fair value of equity securities, offset by decrease in net gains on sales of loans. Non-interest income was $29.4 million for the six months ended June 30, 2023 compared to $33.6 million for the six months ended June 30, 2022, a decrease of $4.2 million or 12.4%. The decrease was primarily due to decreases in net gains on sales of loans.
QTD 2023Compared to 2022
YTD 2023Compared to 2022
$ Change
% Change
174
8.5
410
10.4
(7
(0.2
)%
(0.1
3,771
(81.3
5,658
(96.4
(19
(1.7
(5
0.0
(100.0
890
NM
1,275
(4,279
(42.9
(9,958
(47.9
139
15.4
0.8
(487
(24.5
(1,487
(33.1
130
0.9
(4,151
(12.4
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 $2.2 million and $2.1 million for the three months ended June 30, 2023 and 2022, respectively. Fees and service charges on deposits were $4.4 million and $3.9 million for the six months ended June 30, 2023 and 2022, respectively. Increases are due to increases in deposit balances and changes in fee structure.
57
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 in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the three months ended June 30, 2023 and 2022. We generated $6.8 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the six months ended June 30, 2023 and 2022. At June 30, 2023 and 2022, the outstanding balance of guaranteed loans serviced was $1.7 billion.
Loan servicing asset revaluation represents net changes in the fair value of our servicing assets. Loan servicing asset revaluation had a downward adjustment of $865,000 and $4.6 million for the three months ended June 30, 2023 and 2022, respectively, a change of $3.8 million. Loan servicing asset revaluation had a downward adjustment of $209,000, and $5.9 million for the six months ended June 30, 2023 and 2022, respectively, a change of $5.7 million. Changes in the revaluations were mainly due to decreases in discount rates prompted by current market interest rates and premiums.
Net gains on sales of loans were $5.7 million for the three months ended June 30, 2023 compared to $10.0 million for the three months ended June 30, 2022, a decrease of $4.3 million, or 42.9%, driven by lower volume and reduced premiums in the secondary market. We sold $85.9 million of U.S. government guaranteed loans during the three months ended June 30, 2023 compared to $118.5 million during the three months ended June 30, 2022. Net gains on sales of loans were $10.9 million for the six months ended June 30, 2023 compared to $20.8 million for the six months ended June 30, 2022, a decrease of $10.0 million or 47.9%, driven by reduced premiums in the secondary market. We sold $158.1 million of U.S. government guaranteed loans during the six months ended June 30, 2023 compared to $220.8 million during the six months ended June 30, 2022.
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 June 30, 2023 compared to $900,000 for the three months ended June 30, 2022, an increase of $139,000 or 15.4%. Wealth management and trust income was $2.0 million for the six months ended June 30, 2023 compared to $1.9 million for the six months ended June 30, 2022, an increase of $15,000 or 0.8%. Assets under administration were $636.0 million and $502.6 million as of June 30, 2023 and 2022, respectively.
Other non-interest income was $1.5 million for the three months ended June 30, 2023 compared to $2.0 million for the three months ended June 30, 2022, a decrease of $487,000 or 24.5%. Other non-interest income was $3.0 million for the six months ended June 30, 2023 compared to $4.5 million for the six months ended June 30, 2022, a decrease of $1.5 million or 33.1%. The primary driver of the decrease was decreased interest rate swap fee income.
Non-Interest Expense
Non-interest expense was $49.3 million for the three months ended June 30, 2023 compared to $43.8 million for the three months ended June 30, 2022, an increase of $5.6 million, or 12.7%. Non-interest expense was $98.1 million for the six months ended June 30, 2023 compared to $88.3 million for the six months ended June 30, 2022, an increase of $9.8 million, or 11.1%. These increases were primarily due to an increase in salaries and employee benefits, legal, audit and other professional fees, and other non-interest expense.
The following table presents the major components of our non-interest expense for the periods indicated (dollars in thousands):
1,945
7.0
6.0
(689
(7.2
(454
(48.2
1,400
1,855
101.9
2,369
53.6
25.8
1,473
22.4
82.3
(12.7
(413
(22.1
(554
(16.0
1,621
46.5
2,428
32.8
5,555
9,800
11.1
Salaries and employee benefits, the single largest component of our non-interest expense, totaled $29.6 million for the three months ended June 30, 2023 compared to $27.7 million for the three months ended June 30, 2022, an increase of $1.9 million, or 7.0%. Salaries and employee benefits, totaled $60.0 million for the six months ended June 30, 2023 compared to $56.7 million for the six months ended June 30, 2022, an increase of $3.4 million, or 6.0%. The increases were primarily a result of merit increases, lower deferred costs and increased incentive compensation.
Loan and lease related expenses were $488,000 for the three months ended June 30, 2023 compared to $942,000 for the three months ended June 30, 2022, a decrease of $454,000, or 48.2%. The decrease was primarily driven by lower reimbursable expenses associated with government guaranteed loan originations. Loan and lease related expenses were $1.5 million for the six months ended June 30, 2023, compared to $51,000 for the six months ended June 30, 2022, an increase of $1.4 million. The increase was mainly related to the recapture of government guaranteed loan expenses during the first six months of 2022.
Legal, audit, and other professional fees were $3.7 million for the three months ended June 30, 2023 compared to $1.8 million for the three months ended June 30, 2022, an increase of $1.9 million, or 101.9%. Legal, audit, and other professional fees were $6.8 million for the six months ended June 30, 2023 compared to $4.4 million for the six months ended June 30, 2022, an increase of $2.4 million or 53.6%. The increase was driven by increased legal fees for merger-related expenses.
Data processing was $4.3 million for the three months ended June 30, 2023, compared to $3.4 million for the three months ended June 30, 2022, an increase of $876,000 or 25.8%. Data processing was $8.1 million for the six months ended June 30, 2023, compared to $6.6 million for the six months ended June 30, 2022, an increase of $1.5 million or 22.4%. The increases were driven by increased software licensing costs and merger-related expenses.
Net loss recognized on other real estate owned and other related expenses was $288,000 for the three months ended June 30, 2023, compared to $158,000 for the three months ended June 30, 2022, an increase of $130,000. Net loss recognized on other real estate owned and other related expenses was $185,000 for the six months ended June 30, 2023, compared to $212,000 for the six months ended June 30, 2022, an increase of $27,000, or 12.7%. These changes were primarily due to sales and transfers of certain properties.
Other non-interest expense was $5.1 million for the three months ended June 30, 2023 compared to $3.5 million for the three months ended June 30, 2022, an increase of $1.6 million or 46.5%. Other non-interest expense was $9.8 million for the six months ended June 30, 2023 compared to $7.4 million for the six months ended June 30, 2022, an increase of $2.4 million or 32.8%. These increases were mostly due to increases in other general expenses.
Our efficiency ratio was 52.92% for the three months ended June 30, 2023 compared to 55.29% for the three months ended June 30, 2022. The change in our efficiency ratio for the three months ended June 30, 2023 was driven by an increase in our net interest income. Our adjusted efficiency ratio was 51.39% for the three months ended June 30, 2023 compared to 55.29% for the three months ended June 30, 2022. Our efficiency ratio was 52.51% for the six months ended June 30, 2023, compared to 55.12% for the six months ended June 30, 2022. The change in our efficiency ratio was due to higher net interest income. Our adjusted efficiency ratio was 51.47% for the six months ended June 30, 2023, compared to 55.12% for the six months ended June 30, 2022.
Please refer to the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.
Our provision for income taxes for the three months ended June 30, 2023 totaled $9.2 million compared to $5.8 million for the three months ended June 30, 2022, an increase of $3.4 million, or 58.5%. The increase in income tax expense was principally due to increases in net income before provision for income taxes. Our effective tax rate was 26.1% for the three months ended June 30, 2023 and 22.3% for the three months ended June 30, 2022.
Our provision for income taxes for the six months ended June 30, 2023 totaled $17.5 million compared to $12.1 million for the six months ended June 30, 2022, an increase of $5.4 million or 44.5%. The increase in income tax expense was principally due to increases in net income before provision for income taxes. Our effective tax rate was 25.9% for the six months ended June 30, 2023 and 22.2% for the six months ended June 30, 2022.
We expect our effective tax rate for 2023 to be approximately 25-27%.
59
Financial Condition
Condensed Consolidated Statements of Financial Condition Analysis
Our total assets increased by $212.7 million, or 2.9%, to $7.6 billion at June 30, 2023 compared to $7.4 billion at December 31, 2022. The increase in total assets includes an increase of $149.3 million in loans and leases, or 2.8%, from $5.4 billion at December 31, 2022 to $5.6 billion at June 30, 2023. Our originated loan and lease portfolio increased by $211.6 million and our our purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases portfolio decreased by $62.4 million. The increase in our originated portfolio was primarily attributed to growth in commercial real estate, leasing financing receivables and commercial and industrial loans. The decrease in our purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases portfolio was attributed to decreases in commercial real estate.
Total liabilities increased by $164.6 million, or 2.5%, to $6.8 billion at June 30, 2023 compared to $6.6 billion at December 31, 2022. Total deposits increased by $222.0 million, or 3.9%, driven by growth in time deposits and money market accounts, offset by a decrease in non-interest bearing deposits. Other borrowings decreased by $65.5 million, or 10.2%, 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 June 30, 2023 or December 31, 2022. 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 $48.7 million, or 4.1%, from $1.2 billion at December 31, 2022 to $1.1 billion at June 30, 2023. The decrease was mainly attributed to decreases in the fair value of available-for-sale securities and paydowns made during the six months ended June 30, 2023.
At June 30, 2023, 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 $2.2 million and $2.7 million at June 30, 2023 and at December 31, 2022, respectively.
We had no securities that had evidence of material credit losses as of June 30, 2023 or December 31, 2022.
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):
Total available-for-sale
Total held-to-maturity
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At June 30, 2023, we evaluated the securities which had an unrealized loss for credit losses and determined there were none. There were 286 investment securities with unrealized losses at June 30, 2023. 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 June 30, 2023. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Maturity as of June 30, 2023
Due in One Year or Less
Due from One toFive Years
Due from Five toTen Years
Due after Ten Years
WeightedAverageYield(1)
2.35
U.S. government agencies
47,623
93,627
7,047
3.97
2.55
16,650
2.85
9,965
3.17
38,353
2.28
Residential mortgage- backed securities
18,422
72,937
1.54
581,719
2.14
Commercial mortgage- backed securities
13,515
1.63
174,793
2.07
11,713
4.60
31,054
3.70
5.29
2,972
2.54
136,924
2.20
260,883
928,056
1.73
2.75
As of June 30, 2023, and December 31, 2022, investment securities indexed to LIBOR were $36.1 million and $43.5 million, respectively.
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $43.7 million at June 30, 2023, a decrease of $190,000 from December 31, 2022.
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 June 30, 2023 or December 31, 2022.
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 June 30, 2023 and December 31, 2022, we held $24.4 million and $28.2 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 June 30, 2023 and December 31, 2022.
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 June 30, 2023 and December 31, 2022 were $5.6 billion and $5.4 billion, respectively, an increase of $149.3 million, or 2.8%. Originated loans and leases were $5.3 billion at June 30, 2023, an increase of $211.6 million, or 4.1%, compared to $5.1 billion at December 31, 2022. Purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases were $228.2 million at June 30, 2023, a decrease of $62.4 million, or 21.5%, compared to $290.5 million at December 31, 2022. The increase in our originated portfolio was primarily attributed to organic loan and lease growth, and renewals of acquired non-credit-deteriorate loans and leases that are now reflected with originated loans. The decrease in the purchased credit deteriorated and acquired non-credit-deteriorated loan and lease portfolio was driven by renewals that are reflected within originated loans, payoffs, and maturities during the period.
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 June 30, 2023, the loan portfolio included $420.7 million of unguaranteed 7(a) SBA and USDA loans with exposure to the following top three industries: 17.1% retail trade, 15.4% accommodation and food services, and 11.4% manufacturing. The following table shows our allocation of originated, purchase credit deteriorated and acquired non-credit-deteriorated loans and leases as of the dates presented (dollars in thousands):
% of Total
Originated loans and leases
32.4
31.6
8.1
7.9
37.5
0.1
Leasing financing receivables
10.9
9.6
Total originated loans and leases
95.9
94.7
Purchased credit deteriorated loans
0.6
0.5
1.4
2.4
2.8
0.4
0.3
3.0
3.9
100.0
Total loans and leases, net of allowance for credit losses - loans and leases
Loans collateralized by real estate comprised 51.3% and 52.4% of the loan and lease portfolio at June 30, 2023 and December 31, 2022, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of June 30, 2023 and December 31, 2022 and totaled $2.0 billion, or 68.7% of real estate loans and 35.2% of the total loan and lease portfolio at June 30, 2023. At December 31, 2022, commercial real estate loans totaled $1.9 billion and comprised 67.3% of real estate loans and 35.2% of the total loan and lease portfolio. Purchased credit deteriorated commercial real estate loans decreased from $45.1 million as of December 31, 2022 to $30.7 million as of June 30, 2023, a decrease of $14.4 million, or 31.9%. At June 30, 2023 and December 31, 2022, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 293.3% and 313.4%, respectively. Non-owner occupied commercial real estate loans were $791.2 million and $736.7 million, or 86.8% and 86.6% of total capital, at June 30, 2023 and December 31, 2022, respectively.
Residential real estate loans totaled $504.9 million at June 30, 2023 compared to $490.0 million at December 31, 2022, an increase of $14.9 million, or 3.1%. The residential real estate loan portfolio comprised 17.7% and 17.3% of real estate loans as of June 30, 2023 and December 31, 2022, respectively, and 9.1% and 9.0% of total loans and leases at June 30, 2023 and December 31, 2022, respectively. Purchased credit deteriorated residential real estate loans decreased from $32.2 million at December 31, 2022 to $26.0 million at June 30, 2023, a decrease of $6.2 million, or 19.3%. Multifamily real estate loans were $321.5 million at and $304.2 million, or 33.5% and 35.6% of total capital, at June 30, 2023 and December 31, 2022, respectively.
Construction, land development, and other land loans totaled $387.9 million at June 30, 2023 compared to $439.0 million at December 31, 2022, an decrease of $51.0 million, or 11.6%. The construction, land development and other land loan portfolio comprised 13.6% and 15.5% of real estate loans at June 30, 2023 and December 31, 2022, respectively, and 7.0% and 8.1% of the total loan and lease portfolio at June 30, 2023 and December 31, 2022, respectively. The construction, land development and other land loan portfolio was 40.3% and 51.2% of total capital, at June 30, 2023 and December 31, 2022, respectively.
Commercial and industrial loans totaled $2.1 billion at June 30, 2023 and December 31, 2022, an increase of $47.7 million, or 2.3%. The commercial and industrial loan portfolio comprised 37.8% and 37.9% of the total loan and lease portfolio at June 30, 2023 and December 31, 2022, respectively.
Lease financing receivables comprised 10.9% and 9.7% of the loan and lease portfolio at June 30, 2023 and December 31, 2022, respectively. Total lease financing receivables were $605.7 million and $524.0 million at June 30, 2023 and December 31, 2022, respectively, an increase of $81.7 million, or 15.6%.
Loan and Lease Portfolio Maturities and Interest Rate Sensitivity
The following table shows our loan and lease portfolio by scheduled maturity at June 30, 2023 (dollars in thousands):
Due after One YearThrough Five Years
Due after Five YearsThrough Fifteen Years
Due after Fifteen Years
FloatingRate
FixedRate
73,329
194,422
670,514
265,646
301,569
122,356
10,288
168,407
13,732
34,940
122,653
69,208
42,010
105,293
63,219
2,825
132,172
11,389
205,970
28,755
5,698
30,728
380,616
312,624
908,941
155,714
256,706
32,674
8,271
304
730
1,633
15,570
522,488
66,379
137,302
742,850
1,640,398
1,451,398
594,642
490,053
106,181
179,503
11,524
15,350
2,156
721
563
135
3,323
9,939
548
5,933
470
4,329
1,422
78
1,644
105
15,130
126
26,994
2,708
6,759
1,033
4,464
1,697
5,763
65,118
13,168
12,422
8,916
2,496
18,029
6,261
2,044
6,967
737
128
4,376
729
3,813
882
107
6,025
8,315
817
316
13,330
2,430
78,969
22,220
12,838
14,109
3,225
22,158
165,762
745,406
1,746,361
1,476,326
614,239
505,195
113,870
203,358
At June 30, 2023, 47.4% of the loan and lease portfolio bears interest at fixed rates and 52.6% at floating rates. 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 June 30, 2023, we had $252.9 million in loans indexed to LIBOR and $1.4 billion in loans indexed to SOFR.
Allowance for Credit Losses - Loans and Leases
The ACL 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 ACL reflects management’s estimate of current expected credit losses inherent in the loan and lease portfolios. The computation includes elements of judgment 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 that may affect a borrower’s ability to repay, application of a reasonable and supportable forecast, and evaluation of the prevailing economic conditions. Changes in conditions may necessitate revision of the estimate in future periods.
We assess the ACL based on three categories: (i) originated loans and leases, (ii) acquired non-credit-deteriorated loans and leases, and (iii) purchased credit deteriorated loans.
Total ACL was $92.7 million at June 30, 2023 compared to $81.9 million at December 31, 2022, an increase of $10.7 million, or 13.1%. The increase was primarily due to an increase in specific reserves related to loans individually evaluated for impairment. Total ACL to total loans and leases held for investment, net before ACL, was 1.66% and 1.51% of total loans and leases at June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, approximately $38.0 million of the ACL was allocated to unguaranteed portion of SBA 7(a) and USDA loans.
The following tables present an analysis of the allowance of the loan and lease losses for the periods presented (dollars in thousands):
ResidentialRealEstate
Construction,Land Development,and Other Land
CommercialandIndustrial
Balance at March 31, 2023
Provision/(recapture) for PCD loans
142
(55
(3
Provision/(recapture) for acquired non-credit-deteriorated loans
190
(42
(199
(58
Provision/(recapture) for originated loans
4,027
(101
(1,560
3,357
698
6,438
Total provision/(recapture)
Charge-offs for PCD loans
Charge-offs for acquired non-credit deteriorated loans
Charge-offs for originated loans
Total charge-offs
Recoveries for PCD loans
Recoveries for acquired non-credit deteriorated loans
Recoveries for originated loans
Total recoveries
Net (charge-offs) recoveries
(2,720
(1,370
(241
(4,267
Balance at June 30, 2023
Ending ACL Balances
PCD loans
733
341
1,122
Acquired non-credit-deteriorated loans
3,061
96
684
3,859
Originated loans
22,583
2,107
1,928
52,917
8,109
87,684
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Loans and leases ending balance
Total loans and leases at June 30, 2023, gross
Ratio of net charge-offs to average loans outstanding during the year
0.19
0.10
Loans ending balance as a percentage of total loans, gross
1.24
34.70
9.06
6.96
37.09
0.07
10.87
98.76
66
Construction,LandDevelopment,and OtherLand
Balance at December 31, 2022
26,062
41,888
(418
(333
(6
(764
Provision/(recapture) for acquired non-credit-deteriorated loans and leases
(675
(200
(545
(17
(1,438
4,331
(118
(1,192
14,518
828
18,381
3,238
13,966
811
(3,910
(767
1,673
2,923
2,214
361
5,438
0.11
67
Balance at March 31, 2022
Provision/(recapture) for acquired impaired loans
(382
(18
(568
Provision/(recapture) for acquired non-impaired loans and leases
(740
(514
(1,272
Provision for originated loans
1,688
649
4,384
506
7,748
Total provision
Charge-offs for acquired impaired loans
(34
(35
Charge-offs for acquired non-impaired loans and leases
Charge-offs for originated loans and leases
(463
(2,653
(3,440
Recoveries for acquired impaired loans
Recoveries for acquired non-impaired loans and leases
Recoveries for originated loans and leases
183
501
Less: Net charge-offs (recoveries)
454
2,361
120
2,930
Balance at June 30, 2022
Acquired impaired loans
Acquired non-impaired loans and leases
1,347
2,891
17,117
1,630
33,002
3,559
57,079
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
Total loans and leases at June 30, 2022, gross
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Loans and leases ending balance as a percentage of total loans and leases, gross
1.16
0.77
0.06
2.02
1.62
34.73
8.44
36.31
8.56
96.36
Balance at December 31, 2021
(203
(21
(735
(1,889
(1,476
(53
(3,393
5,776
1,030
1,245
5,807
1,172
15,031
(703
(3,116
(4,506
369
974
450
2,704
334
3,479
69
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 June 30, 2023 and December 31, 2022 totaled $40.5 million and $40.7 million, with the decrease driven mainly by decreases to other real estate owned. The U.S. government guaranteed portion of non-performing loans totaled $2.4 million at June 30, 2023 and $2.2 million at December 31, 2022.
Total OREO decreased from $4.7 million at December 31, 2022 to $2.3 million at June 30, 2023. The $2.4 million decrease in OREO resulted mostly from sales.
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)
36,027
Past due loans and leases 90 days or more and still accruing interest
Total non-performing loans and leases
Total non-performing assets
40,538
40,744
Total non-performing loans and leases as a percentage of total loans and leases
Total non-accrual loans and leases as a percentage of total loans and leases
Total non-performing assets as a percentage of total assets
Allowance for credit losses - loans and leases, as a percentage of non-performing loans and leases
242.12
227.40
Allowance for credit losses - loans and leases, as a percentage of non-accrual loans and leases
Non-performing assets guaranteed by U.S. government:
Non-accrual loans guaranteed
2,472
2,225
Past due loans 90 days or more and still accruing interest guaranteed
Total non-performing loans guaranteed
Total non-performing loans and leases not guaranteed as a percentage of total loans and leases
0.64
0.62
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
0.50
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.
70
Total deposits at June 30, 2023 were $5.9 billion, representing an increase of $222.0 million, or 3.9%, compared to $5.7 billion at December 31, 2022, driven by an increase in time deposits and money market demand accounts. Non-interest-bearing deposits were $1.8 billion, or 30.3% of total deposits, at June 30, 2023, a decrease of $344.9 million, or 16.1%, compared to $2.1 billion at December 31, 2022, or 37.6% of total deposits. Core deposits were 90.3% and 92.7% of total deposits at June 30, 2023 and December 31, 2022, 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 Three Months Ended
AverageBalance
AverageRate
Time deposits (below $100,000)
797,241
3.82
254,419
0.21
Time deposits ($100,000 and above)
531,438
2.96
372,780
0.32
5,827,970
5,480,730
663,900
3.35
260,635
484,645
2.64
383,908
5,778,408
5,437,660
Our average cost of deposits was 1.70% during the three months ended June 30, 2023, compared to 0.16% for the three months ended June 30, 2022. Our average cost of deposits was 1.43% during the six months ended June 30, 2023 compared to 0.12% during the six months ended June 30, 2022. This increase was principally attributed to higher rates on interest-bearing deposits as a result of the rising interest rate environment and an increase in interest bearing deposits and corresponding decrease in non-interest bearing deposits. The ratio of our average non-interest bearing deposits to total average deposits ratios was 31.7% during the three months ended June 30, 2023, compared to 41.3% during the three months ended June 30, 2022. The ratio of our average non-interest bearing deposits to total average deposits ratios was 34.0% during the six months ended June 30, 2023 compared to 41.55% during the six months ended June 30, 2022. We had $551.4 million in brokered time deposits at June 30, 2023 and $251.5 million at December 31, 2022, which represented 9.3% and 4.4% of total deposits, respectively. The increase in brokered deposits was due to increases in funding requirements. Our loan and lease to deposit ratio was 94.6% at June 30, 2023 compared to 96.0% at December 31, 2022.
The following table shows time deposits and other time deposits of $250,000 or more by time remaining until maturity as of June 30, 2023 (dollars in thousands):
Less than $250,000
$250,000 or Greater
Uninsured Portion
Three months or less
228,848
25,904
254,752
5,903
Over three months through six months
430,216
82,552
512,768
34,552
Over six months through 12 months
529,140
94,771
623,911
27,021
Over 12 months
26,513
11,875
38,388
7,875
75,351
71
Total estimated uninsured deposits, were $1.5 billion and $1.6 billion as of June 30, 2023 and December 31, 2022, and represented 25.9% and 28.2% of total deposits, respectively.
Short Term Borrowings
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 commercial, residential and multi-family real estate loans and securities. At June 30, 2023 and December 31, 2022, we had an available borrowing capacity from the FHLB of $1.9 billion, subject to the availability of collateral.
At June 30, 2023, the Company had $540.0 million of FHLB advances outstanding with a maturities ranging from July 2023 to September 2023.
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 June 30, 2023 and December 31, 2022. 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:
511,929
358,083
675,000
735,000
650,000
3.87
0.80
5.24
1.59
Federal funds purchased:
Bank Term Funding Program:
Revolving Line of Credit:
72
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. Securities sold under agreements to repurchase increased by $19.5 million, from $15.4 million at December 31, 2022 to $34.9 million at June 30, 2023.
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 June 30, 2023, Byline Bank had maximum borrowing capacity from the FHLB of $2.6 billion and $760.6 million from the Federal Reserve Bank (“FRB”). As of June 30, 2023, Byline Bank had open FHLB advances of $540.0 million and open letters of credit of $13.5 million, leaving us with available aggregate borrowing capacity of $1.0 billion based on collateral pledged. In addition, Byline Bank had uncommitted federal funds lines available of $135.0 million and $760.6 million available under the FRB discount window line at June 30, 2023.
As of December 31, 2022, Byline Bank had maximum borrowing capacity from the FHLB of $2.5 billion and $804.6 million from the FRB. As of December 31, 2022, Byline Bank had open advances of $625.0 million and open letters of credit of $13.5 million, leaving us with available aggregate borrowing capacity of $1.0 billion based on collateral pledged. In addition, Byline Bank had an uncommitted federal funds line available of $135.0 million and $804.6 million available under the FRB discount window line at December 31, 2022.
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. The amended revolving line of credit bears interest at either the SOFR 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. On May 26, 2023, the Company amended the agreement with the lender, which provides for: i) the renewal of the revolving line-of-credit facility of up to $15.0 million extending its maturity date to May 26, 2024; and ii) a new term loan facility in the principal amount of up to $20.0 million with a maturity date of May 26, 2026. At June 30, 2023 and December 31, 2022, 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, 2022 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 June 30, 2023 was $813.9 million compared to $765.8 million at December 31, 2022, an increase of $48.1 million, or 6.3%. The decrease was primarily driven by the increase in accumulated other comprehensive loss during the six months ended June 30, 2023, 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. These were 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 June 30, 2023, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized.” There have been no conditions or events since June 30, 2023 that management believes have changed Byline Bank’s classifications.
The regulatory capital ratios for the Company and Byline Bank to meet the minimum capital adequacy standards and for Byline Bank to be considered well capitalized under the prompt corrective action framework and the Company’s and Byline Bank’s actual capital amounts and ratios are set forth in the following tables as of the periods indicated (dollars in thousands):
Actual
Minimum CapitalRequired
Required to beConsideredWell Capitalized
Ratio
Total capital to risk weighted assets:
Company
959,688
567,924
8.00
Bank
911,331
12.89
565,528
706,910
10.00
Tier 1 capital to risk weighted assets:
796,359
425,943
6.00
823,002
11.64
424,146
Common Equity Tier 1 (CET1) to risk weighted assets:
751,359
319,457
4.50
318,110
459,492
6.50
Tier 1 capital to average assets:
296,702
4.00
11.12
296,100
370,125
5.00
900,806
13.00
554,436
852,047
12.34
552,507
690,633
751,887
10.85
415,827
778,128
11.27
414,380
706,887
10.20
311,870
310,785
448,912
10.29
292,258
10.67
291,741
364,676
The ratios above reflect the Company’s election to opt into the regulators’ joint CECL transition provision, which allows the Company to phase in the capital impact of the adoption of CECL over the next three years beginning January 1, 2022. Accordingly, capital ratios as of June 30, 2023 reflect 50% of the CECL impact and December 31, 2022 reflect 25% of the CECL impact.
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 June 30, 2023.
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 six months ended June 30, 2023 the Company received $12.0 million in cash dividends from Byline Bank. For the year ended December 31, 2022, 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, redemption of 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.
On December 12, 2022, we announced that our Board of Directors approved a new stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of our common stock. The program is in effect from January 1, 2023 until December 31, 2023, unless terminated earlier. We did not purchase any shares under the stock repurchase program during the three and six months ended June 30, 2023. We purchased 232,000 shares at a cost of $5.5 million under our previously authorized stock repurchase program during the three months ended June 30, 2022, and repurchased 514,819 shares at a cost of $13.1 million during the six months ended June 30, 2022.
On July 25, 2023, the Company's Board of Directors declared a cash dividend of $0.09 per share, payable on August 22, 2023, to stockholders of record of the Company's common stock as of August 8, 2023.
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 Condensed 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 loans, money market accounts and 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 Condensed Consolidated Statements of Financial Condition within other assets and other liabilities, respectively. Because the derivative assets and liabilities recorded on the balance sheet at June 30, 2023 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
See Note 16 of our Unaudited Interim Condensed Consolidated Financial Statements as of June 30, 2023, included in this report, and Note 21 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information on derivatives.
75
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 Ended June 30,
As of or For the Six Months EndedJune 30,
(dollars in thousands, except per share data)
Net income and earnings per share excluding significant items
Reported Net Income
Significant items:
Impairment charges on assets held for sale
Merger-related expense
1,391
1,880
Tax benefit
(230
(286
Adjusted Net Income
27,268
51,666
Reported Diluted Earnings per Share
(0.01
Adjusted Diluted Earnings per Share
As of or For the Six Months Ended June 30,
Adjusted non-interest expense:
Less: Impairment charges on assets held for sale
Less: Merger-related expenses
Adjusted non-interest expense
47,937
96,228
Adjusted non-interest expense excluding amortization of intangible assets:
Less: Amortization of intangible assets
Adjusted non-interest expense excluding amortization of intangible assets
46,482
41,905
93,318
84,864
Pre-tax pre-provision net income:
Pre-tax income
Add: Provision for credit losses
Pre-tax pre-provision net income
41,129
32,015
83,192
65,622
Adjusted pre-tax pre-provision net income:
Merger-related expenses
Adjusted pre-tax pre-provision net income
42,520
85,092
Taxable equivalent net interest income:
Add: Tax-equivalent adjustment
Total revenues:
Add: non-interest income
Total revenues
90,457
75,788
181,320
153,950
Tangible common stockholders' equity:
Total stockholders' equity
Less: Preferred stock
Less: Goodwill and other intangibles
162,094
Tangible common stockholders' equity
657,965
603,067
Tangible assets:
7,131,717
Tangible assets
7,419,713
6,969,623
Average tangible common stockholders' equity:
Average total stockholders' equity
Less: Average preferred stock
4,959
Less: Average goodwill and other intangibles
156,766
163,068
157,469
163,948
Average tangible common stockholders' equity
649,506
617,584
637,872
637,357
Average tangible assets:
Average total assets
Average tangible assets
7,247,133
6,812,657
7,217,218
6,677,653
Tangible net income available to common stockholders:
Add: After-tax intangible asset amortization
1,067
1,361
2,133
2,524
Tangible net income available to common stockholders
27,174
21,644
52,185
44,922
Adjusted tangible net income available to common stockholders:
Tax benefit on significant items
Adjusted tangible net income available to common stockholders
28,335
53,799
Pre-tax pre-provision return on average assets:
Pre-tax pre-provision return on average assets
Adjusted pre-tax pre-provision return on average assets:
Net interest margin, fully taxable equivalent
Total average interest-earning assets
Non-interest income to total revenues:
Non-interest income to total revenues
Adjusted non-interest expense to average assets:
Adjusted non-interest expense to average assets
Adjusted efficiency ratio:
Adjusted efficiency ratio
Adjusted return on average assets:
Adjusted net income
Adjusted return on average assets
Adjusted return on average stockholders' equity:
Average stockholders' equity
Adjusted return on average stockholders' equity
Tangible common equity to tangible assets:
Tangible common equity
Tangible common equity to tangible assets
Return on average tangible common stockholders' equity:
Return on average tangible common stockholders' equity
Adjusted return on average tangible common stockholders' equity:
Adjusted return on average tangible common stockholders' equity
Tangible book value per share:
Tangible book value per share
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates.
We seek to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest-earning assets and interest-bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when our assets, liabilities and off-balance sheet contracts each respond differently to changes in interest rates, including as a result of explicit and implicit provisions in agreements related to such assets and liabilities and in off-balance sheet contracts that alter the applicable interest rate and cash flow characteristics as interest rates change.
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 June 30, 2023, we had a notional amount of $1.1 billion 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 June 30, 2023 is presented below (dollars in thousands). 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
-200 basis points
-300 basis points
Year 1
Percentage change
16.9
11.7
5.8
(4.1
(10.4
(16.9
Dollar amount
395,733
377,986
358,154
324,617
303,178
281,213
Year 2
19.9
13.6
6.7
(5.2
(13.2
(21.2
447,307
423,624
398,025
353,439
323,721
293,754
For dynamic balance sheet and rate shifts, a gradual shift downward of 100 basis points would result in a 3.0% decrease in net interest income, and a gradual shift upwards of 100 and 200 basis points would result in 3.3% and 6.5% 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 June 30, 2023, 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 June 30, 2023, 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, 2022 that was filed with the SEC on March 7, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On December 12, 2022, we announced that our Board of Directors approved a new stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of our outstanding common stock. The program will be in effect from January 1, 2023 until December 31, 2023 unless terminated earlier. 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 us at our discretion and will depend on a number of factors, including the market price of our stock, general market and economic conditions and applicable legal requirements.
The table below includes information regarding purchases of our common stock during the quarter ended June 30, 2023. We did not purchase any shares of our common stock during the second quarter of 2023 under our stock repurchase program.
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
April 1 - April 30, 2023
21.46
1,250,000
May 1 - May 31, 2023
June 1 - June 30, 2023
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
EXHIBIT
Number
Description
3.1
Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
3.2
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)
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.
10.1
Employment agreement with Thomas J. Bell III (filed as exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-38139) filed on April 11, 2023 and incorporated herein by reference) †
10.2
Second Amendment and Restated Term Loan and Revolving Credit Agreement dated as of May 26, 2023 between Byline Bancorp, Inc. and CIBC Bank USA (filed as exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-38139) filed May 26, 2023 and incorporated herein by reference)
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 June 30, 2023, formatted in Inline XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Statements of Condition; (ii) Condensed Consolidated Statements of Operations; (iii) Condensed Consolidated Statements of Comprehensive Income (Loss); (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements
Cover Page Interactive Data File – the cover page XBRL tags are embedded with the Inline XBRL document.
† Indicates a management contract or compensatory plan.
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: August 3, 2023
By:
/s/
Roberto R. Herencia
Chief Executive Officer
(Principal Executive Officer)
Thomas J. Bell III
Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
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