UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
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, 44,124,124 shares outstanding as of April 30, 2024
BYLINE BANCORP, INC.
March 31, 2024
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
9
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
44
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
72
Item 4.
Controls and Procedures
73
PART II.
OTHER INFORMATION
74
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
75
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, 2023
ASSETS
Cash and due from banks
$
58,640
60,431
Interest bearing deposits with other banks
578,197
165,705
Cash and cash equivalents
636,837
226,136
Equity and other securities, at fair value
9,135
8,743
Securities available-for-sale, at fair value (amortized cost at March 31, 2024—$1,562,427, December 31, 2023—$1,516,801)
1,379,147
1,342,480
Securities held-to-maturity, at amortized cost (fair value at March 31, 2024—$1,149, December 31, 2023 —$1,149)
1,156
1,157
Restricted stock, at cost
22,793
16,304
Loans held for sale
23,568
18,005
Loans and leases:
Loans and leases
6,778,214
6,684,306
Allowance for credit losses - loans and leases
(102,366
)
(101,686
Net loans and leases
6,675,848
6,582,620
Servicing assets, at fair value
20,992
19,844
Premises and equipment, net
64,466
66,627
Goodwill and other intangible assets, net
202,133
203,478
Bank-owned life insurance
97,748
96,900
Deferred tax assets, net
53,029
50,058
Accrued interest receivable and other assets
223,651
249,615
Total assets
9,410,503
8,881,967
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing demand deposits
1,851,727
1,905,876
Interest-bearing deposits
5,498,475
5,271,123
Total deposits
7,350,202
7,176,999
Other borrowings
721,173
395,190
Subordinated notes, net
73,909
73,866
Junior subordinated debentures issued to capital trusts, net
70,567
70,452
Accrued interest payable and other liabilities
185,603
175,309
Total liabilities
8,401,454
7,891,816
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
STOCKHOLDERS’ EQUITY
Preferred stock
—
Common stock
452
451
Additional paid-in capital
708,844
710,488
Retained earnings
455,532
429,036
Treasury stock, at cost
(48,869
(49,707
Accumulated other comprehensive loss, net of tax
(106,910
(100,117
Total stockholders’ equity
1,009,049
990,151
Total liabilities and stockholders’ equity
PreferredShares
CommonShares
Par value
0.01
Shares authorized
25,000,000
150,000,000
Shares issued
45,946,804
45,714,241
Shares outstanding
44,108,387
43,764,056
Treasury shares
1,838,417
1,950,185
See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
(dollars in thousands, except share and per share data)
2024
2023
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases
123,792
92,343
Interest on securities
9,734
6,600
Other interest and dividend income
4,795
1,059
Total interest and dividend income
138,321
100,002
INTEREST EXPENSE
Deposits
45,962
16,298
3,824
5,888
Subordinated notes and debentures
2,994
2,098
Total interest expense
52,780
24,284
Net interest income
85,541
75,718
PROVISION FOR CREDIT LOSSES
6,643
9,825
Net interest income after provision for credit losses
78,898
65,893
NON-INTEREST INCOME
Fees and service charges on deposits
2,427
2,120
Loan servicing revenue
3,364
3,380
Loan servicing asset revaluation
(703
656
ATM and interchange fees
1,075
1,063
Change in fair value of equity securities, net
392
350
Net gains on sales of loans
5,533
5,148
Wealth management and trust income
924
Other non-interest income
2,228
1,504
Total non-interest income
15,473
15,145
NON-INTEREST EXPENSE
Salaries and employee benefits
33,953
30,394
Occupancy and equipment expense, net
5,284
4,444
Impairment charge on assets held for sale
20
Loan and lease related expenses
685
963
Legal, audit and other professional fees
2,719
3,114
Data processing
4,145
3,783
Net gain recognized on other real estate owned and other related expenses
(98
(103
Other intangible assets amortization expense
1,345
1,455
Other non-interest expense
5,776
4,730
Total non-interest expense
53,809
48,800
INCOME BEFORE PROVISION FOR INCOME TAXES
40,562
32,238
PROVISION FOR INCOME TAXES
10,122
8,293
NET INCOME
30,440
23,945
EARNINGS PER COMMON SHARE
Basic
0.70
0.65
Diluted
0.64
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Net income
Securities available-for-sale
Unrealized holding gains (losses) arising during the period
(8,959
14,599
Tax effect
2,389
(3,900
Net of tax
(6,570
10,699
Cash flow hedges
Unrealized holding gains arising during the period
4,531
194
Reclassification adjustments for net gains included in net income
(4,836
(1,956
82
471
(223
(1,291
Total other comprehensive income (loss)
(6,793
9,408
Comprehensive income
23,647
33,353
5
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Additional
AccumulatedOther
Total
(dollars in thousands,
Paid-In
Retained
Treasury
Comprehensive
Stockholders’
except share data)
Shares
Amount
Capital
Earnings
Stock
Income (Loss)
Equity
Balance, January 1, 2023
37,492,775
389
598,297
335,794
(51,114
(117,550
765,816
Other comprehensive income, net of tax
Restricted stock activity, net
220,652
1
(1,704
48
(1,655
Cash dividends declared on common stock ($0.09 per share)
(3,374
Share-based compensation expense
1,510
Balance, March 31, 2023
37,713,427
390
598,103
356,365
(51,066
(108,142
795,650
Balance, January 1, 2024
Other comprehensive loss, net of tax
Issuance of common stock upon exercise of stock options, net
68,186
(331
(671
(1,002
276,145
(3,159
1,509
(1,649
(3,944
1,846
Balance, March 31, 2024
6
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 premises and equipment
1,069
Impairment loss on operating lease right-of-use asset
Impairment loss on assets held for sale
Depreciation and amortization of premises and equipment
1,307
981
Net amortization (accretion) of securities
(481
856
Net change in fair value of equity securities
(392
(350
Net gains on sales and disposal of premises and equipment
(482
(5,533
(5,148
Originations of U.S. government guaranteed loans
(79,089
(53,602
Proceeds from U.S. government guaranteed loans sold
35,005
46,824
Accretion of premiums and discounts on acquired loans, net
(4,284
(729
Net change in servicing assets
(1,148
(1,772
Net losses on sales and valuation adjustments of other real estate owned
18
296
Net amortization of other acquisition accounting adjustments
1,626
Amortization of subordinated debt issuance cost
43
Accretion of junior subordinated debentures discount
115
104
Deferred tax benefit
(501
(134
Increase in cash surrender value of bank owned life insurance
(848
(588
Changes in assets and liabilities:
(374
10,214
77,162
15,384
Net cash provided by operating activities
62,336
49,135
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale
(106,623
(1,280
Proceeds from maturities and calls of securities available-for-sale
31,953
3,784
Proceeds from paydowns of securities available-for-sale
28,916
21,262
Purchases of Federal Home Loan Bank stock, net
(6,489
(10,575
Net change in loans and leases
(95,840
(94,571
Purchases of premises and equipment
(512
(281
Proceeds from sales of premises and equipment
363
Proceeds from sales of assets held for sale
1,178
Proceeds from sales of other real estate owned
402
764
Net cash used in investing activities
(146,652
(80,897
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
172,922
117,531
Repayments of line of credit
(11,250
Repayments of term loan
(1,666
Proceeds from short-term borrowings
570,000
6,100,100
Repayments of short-term borrowings
(425,000
(6,100,100
Proceeds from BTFP advances
200,000
Net increase (decrease) in securities sold under agreements to repurchase
(6,101
22,411
Dividends paid on common stock
(3,888
(3,322
Net cash provided by financing activities
495,017
136,620
NET CHANGE IN CASH AND CASH EQUIVALENTS
410,701
104,858
CASH AND CASH EQUIVALENTS, beginning of period
179,353
CASH AND CASH EQUIVALENTS, end of period
284,211
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
52,724
19,483
Cash paid during the period for taxes
406
309
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to other real estate owned
55
Right-of-use assets exchanged for operating lease liabilities
422
313
Common share withholding
2,651
1,655
Common dividend declared, not paid
56
52
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 1—Basis of Presentation
These unaudited interim condensed consolidated financial statements include the accounts of Byline Bancorp, Inc., a Delaware corporation (the “Company,” “Byline,” “we,” “us,” “our”), a bank holding company whose principal activity is the ownership and management of its Illinois state chartered subsidiary bank, Byline Bank (the “Bank”), based in Chicago, Illinois.
These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2024 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, 2023 and 2022.
The Company has one reportable segment. The Company’s chief operating decision makers evaluate 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. No subsequent events were identified that would have required a change to the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.
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
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 Company evaluated the accounting and disclosure requirements of this update and they did not have a material effect on the consolidated financial statements.
Issued Accounting Pronouncements Pending Adoption
Business Combinations (Topic 805) - In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (JV) Formations: Recognition and Initial Measurement. The guidance requires newly-formed JVs to apply a new basis of accounting to all of its contributed net assets, which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would be applied prospectively and is effective for all newly-formed joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements.
Segment Reporting – Improvements to Reportable Segment Disclosures (Topic 280) – In November 2023, the FASB issued ASU 2023-07 to enhance disclosures about significant segment expenses for public entities reporting segment information under Topic 280. It requires that a public entity disclose, on an annual and interim basis, significant expense categories for each reportable segment. Significant expense categories are derived from expenses that are 1) regularly reported to an entity’s chief operating decision-maker ("CODM"), and 2) included in a segment’s reported measure of profit or loss. The disclosures should include an amount for "other segment items," reflecting the difference between 1) segment revenue less significant segment expenses, and 2) the reportable segment’s profit or loss measures. It requires that a public entity disclose the title and position of the CODM and how the CODM uses the reported measure of profit or loss to assess segment
performance and to allocate resources. Further it clarifies that entities with a single reportable segment must disclose both new and existing segment reporting requirements. The amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Entities must adopt the guidance on a retrospective basis. The Company is evaluating the internal control and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements.
Income Taxes – Improvements to Income Tax Disclosures (Topic 740) –In December 2023, the FASB issued ASU 2023-09 to provide additional transparency into an entity’s income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The standard requires that public business entities disclose, on an annual basis, specific categories in the rate reconciliation and additional information for reconciling items meeting a certain quantitative threshold. The amendments also require that entities disclose on an annual basis: 1) income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and 2) the income taxes paid (net of refunds received) disaggregated by individual jurisdictions exceeding 5% of total income taxes paid (net of refunds received). The amendments are effective for public business entities for annual periods beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance 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 was merged with and into Byline. As a result of the merger, Inland’s wholly owned 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.
In 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 the payment of cash in the amount of $9.9 million.
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. In addition, the 2,408,992 shares of Inland common stock purchased on June 30, 2023 were canceled as of the effective time of the transaction. The value of the total merger consideration at closing was $138.9 million. Stock issuance costs were $299,000.
The transaction resulted in goodwill of $33.4 million, which is nondeductible for tax purposes, as this acquisition was a nontaxable transaction. Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired and reflects related synergies expected from the combined operations.
Merger-related expenses, including acquisition advisory expenses of $256,000, core system conversion expenses of $199,000, salaries and employee benefits of $18,000, and other non-interest expenses of $16,000 related to the Inland acquisition, are reflected in non-interest expense on the Consolidated Statements of Operations for the three months ended March 31, 2023.
The acquisition of Inland was accounted for using the acquisition method of accounting in accordance with ASC Topic 805. Assets acquired, liabilities assumed, and consideration exchanged were 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 preliminary and 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.
10
The following table presents a summary of the preliminary estimates of fair values of assets acquired and liabilities assumed as of the acquisition date:
Assets
39,731
239,602
Restricted stock
3,058
Loans
808,000
Allowance for credit losses
(10,596
Premises and equipment
11,307
Operating lease right-of-use asset
3,813
Other intangible assets
17,250
12,455
14,848
Other assets
21,023
Total assets acquired
1,160,491
Liabilities
964,491
Federal Home Loan Bank advances
40,000
Securities sold under agreements to repurchase
455
Junior subordinated debentures
32,661
Operating lease liability
4,034
Accrued expenses and other liabilities
13,288
Total liabilities assumed
1,054,929
Net assets acquired
105,562
Consideration paid
Common stock (5,932,323 shares issued at $18.09 per share)
107,017
Cash paid
31,897
Total consideration paid
138,914
Goodwill
33,352
The following table presents the fair value and gross contractual amounts receivable of acquired non-credit-deteriorated loans from the Inland acquisition, and their respective expected contractual cash flows as of the acquisition date:
Fair value
582,831
Gross contractual amounts receivable
699,918
Estimate of contractual cash flows not expected to be collected(1)
4,239
Estimate of contractual cash flows expected to be collected
695,679
(1) Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default.
The following table provides the unaudited pro forma information for the results of operations for the three months ended March 31, 2023, as if the acquisition had occurred on January 1, 2023. The pro forma results combine the historical results of Inland into the Company’s Consolidated Statements of Operations, including the impact of certain acquisition accounting adjustments, which includes loan discount accretion, intangible assets amortization, deposit premium accretion, fixed assets amortization, and borrowing discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2023. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for credit losses, expense efficiencies or asset dispositions. Recognized acquisition-related expenses and other adjustments related to the timing of expenses, are included in net income in the following table:
11
For the Three Months Ended
Total revenues (net interest income and non-interest income)
107,807
22,153
Earnings per share—basic
0.52
Earnings per share—diluted
0.51
Revenues and earnings of the acquired company since the acquisition date have not been disclosed as it is not practicable as Inland was merged into the Company and separate financial information is not readily available.
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
87,147
(1,044
86,112
U.S. Government agencies
155,659
22
(17,627
138,054
Obligations of states, municipalities, and political subdivisions
86,160
264
(4,715
81,709
Residential mortgage-backed securities
Agency
825,180
2,060
(100,653
726,587
Non-agency
136,561
(22,852
113,709
Commercial mortgage-backed securities
197,171
(33,625
163,546
Corporate securities
40,667
(3,920
36,752
Asset-backed securities
33,882
30
(1,234
32,678
1,562,427
2,390
(185,670
Held-to-maturity
(7
1,149
116,398
61
(1,025
115,434
147,062
37
(16,404
130,695
86,022
396
(4,143
82,275
786,970
4,247
(95,414
695,803
122,359
(22,099
100,260
181,452
(34,248
147,204
40,681
(4,510
36,171
35,857
(1,221
34,638
1,516,801
4,743
(179,064
12
(8
The Company did not classify securities as trading during the three months ended March 31, 2024 or during 2023.
Gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2024 and December 31, 2023, are summarized as follows:
Less than 12 Months
12 Months or Longer
Number ofSecurities
UnrealizedLosses
19,532
(95
31,939
(949
51,471
19
10,517
(30
117,934
(17,597
128,451
Obligations of states, municipalities and political subdivisions
76
19,232
(295
49,261
(4,420
68,493
122
88,634
(808
526,201
(99,845
614,835
21
16,710
(62
96,999
(22,790
49
19,677
(114
143,869
(33,511
35,256
6,586
6,608
13,194
319
180,888
(1,404
1,008,067
(184,266
1,188,955
599
13
5,018
(4
31,843
(1,021
36,861
535
(9
119,109
(16,395
119,644
12,267
(156
49,617
(3,987
61,884
102
8,332
(49
543,648
(95,365
551,980
636
99,624
6,765
(1,517
140,439
(32,731
25,653
283
33,553
(1,735
1,046,104
(177,329
1,079,657
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 319 securities available-for-sale with unrealized losses at March 31, 2024. There was one security held-to-maturity with unrealized losses at March 31, 2024. There was no allowance for credit losses for held-to-maturity debt securities at March 31, 2024 or December 31, 2023. 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 $4.9 million and $4.5 million at March 31, 2024 and December 31, 2023, respectively, 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.
There were no proceeds from sales of securities available-for-sale, nor associated gains and losses on sales and calls of securities, for the three months ended March 31, 2024 and 2023, respectively.
Securities posted and pledged as collateral were $659.9 million and $464.5 million at March 31, 2024 and December 31, 2023. At March 31, 2024 and December 31, 2023, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $388.6 million and $390.3 million, respectively, and for customer repurchase agreements of $50.2 million and $47.8 million, respectively. At March 31, 2024, there were $194.3 million of securities pledged to the Federal Reserve Bank ("FRB"). At December 31, 2023 no securities were pledged to the FRB. At March 31, 2024 and December 31, 2023, 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 March 31, 2024 and December 31, 2023, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.
14
At March 31, 2024, 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
75,272
74,486
Due from one to five years
118,834
113,034
Due from five to ten years
163,174
146,082
Due after ten years
46,235
41,703
Mortgage-backed securities
1,158,912
1,003,842
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
2,265,195
2,317,289
Residential real estate
732,230
718,733
Construction, land development, and other land
530,320
528,275
Commercial and industrial
2,548,442
2,444,405
Installment and other
3,076
3,138
Lease financing receivables
685,763
659,686
Total loans and leases
6,765,026
6,671,526
Net unamortized deferred fees and costs
6,908
Initial direct costs
6,280
6,180
Net minimum lease payments
666,340
644,507
Unguaranteed residual values
101,536
92,127
Unearned income
(82,113
(76,948
Total lease financing receivables
Lease financial receivables before allowance for credits losses - loans and leases
692,043
665,866
15
Total loans and leases consist of originated loans and leases, purchased credit deteriorated ("PCD") and acquired non-credit-deteriorated loans and leases. At March 31, 2024 and December 31, 2023, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $101.0 million and $93.3 million, respectively. At March 31, 2024 and December 31, 2023, the discount on the unguaranteed portion of U.S. government guaranteed loans was $25.9 million and $26.2 million, respectively, which are included in total loans and leases. At March 31, 2024 and December 31, 2023, installment and other loans included overdraft deposits of $1.2 million and $754,000, respectively, which were reclassified as loans. At March 31, 2024 and December 31, 2023, loans and leases and loans held for sale pledged as security for borrowings were $2.1 billion and $2.2 billion, respectively. Accrued interest on loans and leases were $37.8 million and $38.9 million as of March 31, 2024 and December 31, 2023, respectively, 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 March 31, 2024 are summarized as follows:
Minimum LeasePayments
164,051
2025
202,138
2026
154,408
2027
96,119
2028
43,021
Thereafter
6,603
Originated loans and leases represent originations excluding loans initially acquired in a business combination. However, once an acquired 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 quality deterioration and are accounted for under ASC Topic 326. Acquired non-credit-deteriorated loans and leases represent loans and leases acquired with an outstanding balance 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 March 31, 2024 and December 31, 2023:
Originated
Purchased Credit Deteriorated
AcquiredNon-Credit-Deteriorated
1,879,149
117,460
271,720
2,268,329
488,887
39,535
204,589
733,011
416,996
26,418
85,553
528,967
2,420,952
18,100
113,673
2,552,725
2,855
118
166
3,139
691,617
426
5,900,456
201,631
676,127
1,907,029
137,807
275,476
2,320,312
465,133
42,510
211,887
719,530
415,162
25,331
86,344
526,837
2,311,563
19,460
117,538
2,448,561
2,919
125
156
3,200
665,239
627
5,767,045
225,233
692,028
16
PCD loans—The unpaid principal balance and carrying amount of PCD loans excluding an allowance for credit losses - loans and leases of $10.1 million and $10.0 million at March 31, 2024 and December 31, 2023, were as follows:
UnpaidPrincipalBalance
CarryingValue
162,977
185,007
84,559
88,036
33,140
32,140
20,400
21,870
783
789
Total purchased credit deteriorated loans
301,859
327,842
The following table is a reconciliation of acquired Inland PCD loans between their purchase price and their par value at the time of the acquisition. Refer to Note 3—Acquisition of a Business for further information.
Fair value of loans at acquisition
214,573
Allowance for credit losses - loans and leases, at acquisition
10,596
Non-credit discount/premium at acquisition
17,909
Par value of acquired PCD loans at acquisition
243,078
Acquired non-credit-deteriorated loans and leases—The unpaid principal balance and carrying value for acquired non-credit deteriorated loans and leases, excluding an allowance for credit losses of $4.6 million and $4.7 million at March 31, 2024 and December 31, 2023, were as follows:
280,291
284,819
209,952
227,392
86,168
87,143
119,197
123,540
179
170
427
628
Total acquired non-credit-deteriorated loans and leases
696,214
723,692
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.
17
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.
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 March 31, 2024 and December 31, 2023:
Term loans amortized cost by origination year
Revolving
2022
2021
2020
Prior
Commercial Real Estate
Pass
49,831
249,142
438,366
497,715
236,622
514,023
14,124
1,999,823
Watch
975
13,665
19,734
16,039
37,322
72,490
160,225
Special Mention
7,635
1,836
10,432
2,595
34,684
57,182
Substandard
638
3,808
4,852
1,194
40,607
51,099
50,806
271,080
463,744
529,038
277,733
661,804
Gross charge-offs for the three months ended March 31, 2024
286
88
575
2,108
3,057
Residential Real Estate
6,795
49,973
135,135
119,107
51,950
263,998
56,965
683,923
5,389
16,848
12,933
2,392
37,968
3,767
480
200
29
105
1,077
4,516
946
6,873
6,995
140,553
119,618
73,642
281,927
60,303
Construction, Land Development, & Land
114,072
124,789
179,184
37,041
11,126
826
467,038
1,391
14,408
24,777
8,805
3,110
52,491
9,438
115,463
139,197
213,399
45,846
14,236
Commercial & Industrial
127,262
472,634
488,279
282,042
103,274
206,107
540,979
2,220,577
80
55,427
21,754
46,969
2,478
20,120
40,803
187,631
366
20,531
10,589
2,326
6,418
40,738
80,968
541
9,390
9,867
5,785
25,346
12,620
63,549
127,342
528,968
539,954
349,467
113,863
257,991
635,140
909
735
398
1,577
3,619
Installment and Other
145
408
116
130
430
1,830
3,115
23
24
79
1,831
Lease Financing Receivables
87,748
303,606
187,907
81,700
24,808
4,149
689,918
912
987
155
99
254
173
141
523
884
303,779
188,109
83,135
25,021
4,251
95
175
373
Total Loans and Leases
271,781
1,189,835
1,374,592
1,159,804
453,825
999,833
614,724
6,064,394
1,055
70,483
61,346
89,126
65,467
108,653
43,196
439,326
8,001
22,367
30,459
8,843
41,681
152,089
1,352
13,368
15,347
8,100
70,472
13,566
122,405
273,036
1,269,671
1,471,673
1,294,736
536,235
1,220,639
712,224
1,370
903
996
3,685
7,049
2019
247,856
452,127
516,624
229,053
143,283
388,872
28,360
2,006,175
12,501
22,094
26,408
46,713
20,364
68,003
196,083
799
10,752
2,618
12,751
25,790
52,710
2,888
5,841
1,771
7,483
46,532
829
65,344
260,357
477,908
559,625
280,155
183,881
529,197
29,189
Gross charge-offs, year ended December 31, 2023
193
60
1,511
4,054
3,911
9,729
55,178
135,477
104,005
54,651
37,806
225,593
57,865
670,575
4,811
17,417
7,167
8,708
1,597
39,700
3,594
127
413
4,135
107
189
349
3,523
952
5,120
140,288
104,112
75,851
45,449
237,825
60,827
82,449
145,174
184,544
35,466
9,772
1,429
174
459,008
1,392
13,990
21,313
18,716
3,125
58,536
9,279
83,841
159,164
215,136
54,182
12,897
1,443
475,720
514,902
288,392
109,430
73,059
147,168
524,348
2,133,019
41,027
33,080
50,407
1,385
6,951
18,180
39,531
190,561
6,164
10,595
2,631
1,112
36,354
63,499
7,332
6,067
6,431
10,116
18,381
13,155
61,482
516,747
561,478
355,461
119,877
91,238
190,372
613,388
1,518
1,938
5,372
4,451
1,087
1,045
15,411
564
132
133
28
424
1,814
3,174
25
26
425
327,099
207,640
93,242
29,343
5,443
663,623
67
1,008
1,091
101
36
316
259
138
384
836
327,358
207,845
94,634
29,593
5,544
892
734
886
549
139
54
2,437
1,188,866
1,455,452
1,186,886
458,076
269,391
764,342
612,561
5,935,574
54,920
74,042
99,161
84,247
37,607
94,892
41,128
485,997
6,963
30,626
9,022
14,091
32,470
36,767
129,939
10,358
12,399
8,446
17,948
68,450
14,936
132,796
1,244,045
1,546,815
1,329,072
559,791
339,037
960,154
705,392
2,252
3,017
5,981
6,101
5,216
5,034
27,601
At March 31, 2024 and at December 31, 2023 there were no loans or leases which were risk rated Doubtful or Loss. As of March 31, 2024 and December 31, 2023, respectively, there were $51.9 million and $52.2 million of term loans that had been converted from revolving loans.
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 March 31, 2024 and December 31, 2023:
Revolving Loans
TotalLoans
Current
270,638
459,995
524,429
276,731
635,489
2,232,212
30-59 Days Past Due
442
1,043
3,809
595
2,791
8,680
60-89 Days Past Due
Greater than 90 Accruing
Non-accrual
2,706
800
407
23,524
27,437
Total Past Due
3,749
4,609
1,002
26,315
36,117
140,035
72,402
276,374
59,007
723,893
489
578
1,997
461
1,066
4,514
6,660
518
511
1,240
5,553
1,296
9,118
525,182
530,704
346,250
108,120
238,084
632,383
2,508,065
3,246
1,697
1,454
3,729
576
11,605
128
7,552
2,314
4,289
16,178
2,181
32,927
3,786
9,250
3,217
5,743
19,907
2,757
44,660
3,116
87,703
301,476
185,879
81,572
24,672
4,138
685,440
45
1,602
577
206
71
3,290
528
1,512
251
108
39
2,438
35
875
2,303
2,230
1,563
113
272,991
1,263,140
1,455,926
1,284,813
527,901
1,168,751
708,171
6,681,693
5,290
3,806
5,930
2,429
7,169
926
25,595
655
1,513
500
3,027
586
10,428
3,742
5,797
44,219
3,127
67,899
6,531
15,747
9,923
8,334
51,888
4,053
96,521
Total non-accrual loans without an allowance included $8.4 million of commercial real estate loans, $3.6 million of residential real estate, and $3.4 million of commercial and industrial loans as of March 31, 2024. The Company recognized $255,000 of interest income on non-accrual loans and leases for the three months ended March 31, 2024.
259,998
474,878
558,236
279,098
178,729
501,620
2,281,748
359
648
3,176
484
5,379
1,208
2,320
1,556
751
697
1,976
25,885
30,865
3,030
1,389
1,057
5,152
27,577
38,564
136,448
102,973
75,125
45,050
230,102
59,476
704,352
3,840
1,032
537
4,122
399
9,959
148
3,474
5,071
1,139
726
7,723
1,351
15,178
156,815
524,488
2,349
552,251
351,534
114,859
83,780
177,239
611,766
2,408,176
1,545
1,099
238
2,513
400
6,250
1,505
234
3,416
496
6,790
6,177
2,828
4,546
1,529
11,594
671
27,345
9,227
3,927
7,458
13,133
1,622
40,385
325,833
206,800
93,795
29,292
5,537
889
662,146
153
38
1,349
540
481
302
218
1,525
839
301
3,720
1,242,161
1,527,324
1,321,778
552,689
326,021
911,718
702,419
6,584,110
1,085
6,459
2,922
887
5,722
5,008
854
22,937
5,161
738
3,440
2,475
13,152
7,871
4,070
5,477
3,854
40,953
1,623
64,107
1,884
19,491
7,294
7,102
13,016
48,436
2,973
100,196
Total non-accrual loans without an allowance included $1.6 million of commercial real estate loans, $3.6 million of residential real estate loans, and $2.3 million of commercial and industrial loans, as of December 31, 2023. The Company recognized $970,000 of interest income on non-accrual loans and leases for the three months ended March 31, 2023.
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 months ended March 31, 2024 are as follows:
CommercialReal Estate
ResidentialReal Estate
Construction, Land Development,and Other Land
Commercialand Industrial
Installmentand Other
LeaseFinancingReceivables
Three months ended
Beginning balance
33,237
3,495
2,906
53,782
8,230
101,686
Provision/(recapture)
824
(148
5,836
(3
358
6,891
Charge-offs
(3,057
(3,619
(373
(7,049
Recoveries
436
232
169
838
Ending balance
31,440
3,348
2,930
56,231
33
8,384
102,366
Ending balance:
Individually evaluated for impairment
8,905
12,772
21,677
Collectively evaluated for impairment
22,535
43,459
80,689
Total allowance for credit losses - loans and leases
Loans and leases ending balance:
40,778
4,658
39,889
85,325
2,227,551
728,353
2,512,836
6,692,889
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, loans acquired with deteriorated credit quality, and corresponding loan and lease balances by type for the three months ended March 31, 2023:
March 31, 2023
26,061
3,140
3,134
41,889
7,676
81,924
(1,119
(453
364
10,803
(2
119
9,712
(966
(1,790
(304
(3,069
762
947
185
1,898
24,738
2,679
3,498
51,849
90,465
6,302
1,198
14,518
22,018
18,436
2,300
37,331
68,447
31,622
5,541
34,245
71,408
1,897,762
499,336
441,567
2,049,560
1,822
553,877
5,443,924
1,929,384
447,108
2,083,805
5,515,332
The Company increased the allowance for credit losses - loans and leases by $680,000 and $8.5 million for the three months ended March 31, 2024 and 2023, respectively. For loans individually evaluated for impairment, the Company decreased allowance for credit losses - loans and leases by $5.6 million for the three months ended March 31, 2024, and increased the allowance for loans individually evaluated by $6.7 million for the three months ended March 31, 2023. For loans and leases collectively evaluated for impairment, the Company increased the allowance by $6.2 million and $1.9 million for the three months ended March 31, 2024 and 2023, 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, as well as growth in the loan and lease portfolio and through acquisition.
There were no borrowers receiving loan modifications during the three months ended March 31, 2024. The following table presents loans with modified terms as of March 31, 2023:
Payment Delay
Term Modification
Combination Term Modification and Interest Rate Reduction
Total Modified by Class
% of Class of Loans and Leases
9,405
40,420
395
50,220
2.4
%
Total modified loans
0.9
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%.
The following table presents the amortized cost basis of loans that had a payment default as of March 31, 2024 and were modified in the twelve months prior to default.
2,842
0.13
353
0.02
3,238
0.05
As of December 31, 2023, the amortized cost of commercial and industrial loans that had a payment default and were modified in the twelve months prior to default was $406,000, which represented 0.02% of outstanding commercial and industrial loans.
Modified loans are either collectively assessed based on portfolio risk segment and risk rating or individually assessed for loans exceeding $500,000. Upon the Company’s determination that a modified loan has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the allowance for credit losses is adjusted by the same amount.
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 March 31, 2024 and December 31, 2023:
Commercial Construction
Non-owner Occupied Commercial
Owner-Occupied Commercial
Multi-Family
Single Family Residence (1st Lien)
Single Family Residence (2nd Lien)
Business Assets
11,590
29,188
2,792
1,866
28,767
35,572
64,339
2,793
3,593
813
44,749
113,494
The following table presents the change in the balance of the allowance for credit losses - unfunded commitments as of March 31, 2024 and 2023:
3,636
4,203
Provision/(recapture) for unfunded commitments
(248
3,388
4,316
Note 6—Servicing Assets
Activity for servicing assets and the related changes in fair value for the three months ended March 31, 2024 and 2023 was as follows:
Three Months Ended March 31,
19,172
Additions, net
1,851
1,116
Changes in fair value
20,944
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 March 31, 2024 and December 31, 2023 were as follows:
Loan portfolios serviced for:
SBA guaranteed loans
1,524,421
1,530,401
USDA guaranteed loans
207,701
197,942
1,732,122
1,728,343
Loan servicing revenue totaled $3.4 million for each of the three months ended March 31, 2024 and 2023.
Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in a downward valuation adjustment of $703,000 and an upward valuation of $656,000 for the three months ended March 31, 2024 and 2023, 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
Other real estate owned ("OREO") is included in accrued interest receivable and other assets in the Company's Condensed Consolidated Statements of Financial Condition. The following table presents the change in OREO for the three months ended March 31, 2024 and 2023:
1,200
4,717
Net additions to OREO
Proceeds from sales of OREO
(402
(764
Gains (losses) on sales of OREO
(18
Valuation adjustments
785
3,712
At March 31, 2024, and December 31, 2023, the balance of real estate owned did not include any foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.
At March 31, 2024, and December 31, 2023, there was a $27,000 of consumer mortgage loan secured by residential real estate properties in foreclosure.
There were no internally financed sales of OREO for the three months ended March 31, 2024 or 2023.
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 2036, 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
10,352
12,474
12,205
14,268
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 March 31, 2024, the weighted average discount rate of operating leases was 2.75% and the weighted average remaining life of operating leases was 5.0 years, compared to 2.90% and 6.1 years as of December 31, 2023.
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
727
623
Short-term lease cost
87
69
Variable lease cost
423
412
Less: Sublease income
(130
Total lease cost, net
1,107
948
Operating cash flows paid for operating lease amounts included in the measure of lease liabilities were $953,000 and $855,000 for the three months ended March 31, 2024 and 2023, respectively.
The Company recorded $422,000 and $313,000 of right-of-use lease assets in exchange for operating lease liabilities for the three months ended March 31, 2024 and 2023, respectively.
During the quarter ended March 31, 2024, the Company recorded $194,000 of impairment related to two branch facilities to be closed at the end of the second quarter of 2024. Impairments were recognized on operating lease right-of-use assets and are reflected in other non-interest expense.
The future minimum lease payments for operating leases, subsequent to March 31, 2024, as recorded on the Condensed Consolidated Statements of Financial Condition, are summarized as follows:
Operating LeaseCommitments
3,266
2,359
1,313
986
2,529
Total undiscounted lease payments
13,359
Less: Imputed interest
(1,154
Net lease liabilities
The total amount of minimum rentals to be received in the future on these subleases is approximately $1.0 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 months ended March 31, 2024 and 2023:
For the Three Months Ended March 31,
Core DepositIntangible
Customer RelationshipIntangible
181,705
20,393
1,380
148,353
8,886
1,648
Amortization
(1,278
(67
(1,388
19,115
7,498
1,581
Accumulated amortization
N/A
53,601
1,903
47,968
1,635
Weighted average remaining amortization period
8.1 Years
4.9 Years
4.5 Years
5.9 Years
The following table presents the estimated amortization expense for core deposit intangible and customer relationship intangible assets remaining at March 31, 2024:
EstimatedAmortization
4,035
4,473
3,566
2,676
2,101
3,577
20,428
Note 10—Income Taxes
The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates.
The effective tax rate for the three months ended March 31, 2024 and 2023 was 25.0% and 25.7%, respectively. The Company recorded discrete income tax benefit of $501,000 and $134,000 related to the exercise of stock options and vesting of restricted shares for the three months ended March 31, 2024 and 2023, respectively.
Net deferred tax assets increased to $53.0 million at March 31, 2024 compared to $50.1 million at December 31, 2023, primarily as a result of the change in unrealized losses on available-for-sale securities.
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Note 11—Deposits
The composition of deposits was as follows as of March 31, 2024 and December 31, 2023:
Interest-bearing checking accounts
687,142
577,609
Money market demand accounts
2,263,819
2,266,030
Other savings
524,890
542,532
Time deposits (below $250,000)
1,594,290
1,520,082
Time deposits ($250,000 and above)
428,334
364,870
There were $436.3 million and $480.0 million of brokered deposits included in time deposits below $250,000 at March 31, 2024 and December 31, 2023, respectively.
At March 31, 2024, the scheduled maturities of time deposits were:
Scheduled Maturities
1,653,993
354,598
8,126
4,689
1,092
126
2,022,624
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.
Note 12—Other Borrowings
The following is a summary of the Company’s other borrowings as of the dates presented:
470,000
325,000
Bank Term Funding Program
34,506
Term Loan
16,667
18,333
Line of credit
11,250
Byline Bank has the capacity to borrow funds from the discount window of the Federal Reserve System. As of March 31, 2024 and December 31, 2023, there were no outstanding advances under the Federal Reserve Bank discount window line. The Company pledges loans and leases as collateral for the FRB discount window borrowing. Refer to Note 5—Loan and Lease Receivables and Allowance for Credit Losses for additional discussion.
On January 17, 2024, the Company entered into a Letter Agreement with the Federal Reserve Bank of Chicago that allows the Bank to access the Bank Term Funding Program ("BTFP"). On January 22, 2024, the Company opened an advance of $200.0 million from the FRB as part of the BTFP. Under the terms of the BTFP, the Bank pledges securities to FBR Chicago as collateral for available advances. The advance carries a fixed interest rate of 4.91%, and matures on January 22, 2025. Advances under the BTFP are prepayable at any time without a prepayment penalty.
At March 31, 2024, fixed-rate Federal Home Loan Bank (“FHLB”) advances totaled $220.0 million, with an interest rate of 5.45% and matured in April 2024. Total variable rate advances were $250.0 million at March 31, 2024, with an interest rate of 5.49% that may reset daily and a maturity date of June 2024. 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 the Secured Overnight Financing Rate ("SOFR") plus 205 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 $15.0 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, each subject to the existing Negative Pledge Agreement dated October 11, 2018, as amended.
At March 31, 2024, the variable term loan had an interest rate of 7.62% and an outstanding balance of $16.7 million. At December 31, 2023, the variable term loan had an interest rate of 7.64% and an outstanding balance of $18.3 million. At March 31, 2024, the line of credit had a no outstanding balance. At December 31, 2023, the line of credit had a $11.3 million outstanding balance and an interest rate of 7.39%
The following table presents short-term credit lines available for use as of the dates presented:
Federal Home Loan Bank line
2,614,959
2,781,747
Federal Reserve Bank of Chicago discount window line
841,104
866,490
Available federal funds lines
135,000
123,750
27,715
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 March 31, 2024, the net liability outstanding of the subordinated notes was $73.9 million. The Company may, at its option, redeem the notes, in whole or in part, on a semi-annual basis beginning on July 1, 2025, subject to obtaining the prior approval of the Federal Reserve to the extent such approval is then required. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
At March 31, 2024 and December 31, 2023, the Company’s junior subordinated debentures by issuance were as follows:
Aggregate Principal Amount
Name of Trust
StatedMaturity
Contractual Rate March 31, 2024
Interest Rate Spread(1)
Metropolitan Statutory Trust I
March 17, 2034
35,000
8.38%
SOFR + spread adjustment + 2.79%
First Evanston Bancorp Trust I
March 15, 2035
10,000
7.37%
SOFR + spread adjustment + 1.78%
AmeriMark Capital Trust I
April 23, 2034
5,000
8.33%
SOFR + spread adjustment + 2.75%
Inland Bancorp Trust II
September 15, 2035
7.19%
SOFR + spread adjustment + 1.60%
Inland Bancorp Trust III
December 15, 2036
7.24%
SOFR + spread adjustment + 1.65%
Inland Bancorp Trust IV
June 6, 2037
7,000
7.21%
SOFR + spread adjustment + 1.62%
Inland Bancorp Trust V
September 15, 2037
7.01%
SOFR + spread adjustment + 1.42%
Total liability, at par
87,000
Discount
(16,433
(16,548
Total liability, at carrying value
(1) SOFR is three month SOFR and the spread adjustment is 0.26161%
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. Beginning on September 14, 2023, the interest rate reset to the three-month SOFR plus a tenor spread adjustment of 0.26161% plus 2.79% (8.38% and 8.43% at March 31, 2024 and December 31, 2023, 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.
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 September 15, 2023, the interest rate reset to the three-month SOFR plus a tenor spread adjustment of 0.26161% plus 1.78% (7.37% and 7.43% at March 31, 2024 and December 31, 2023, 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.
As part of the Inland acquisition, the Company assumed the obligations to several trust preferred securities. Refer to Note 3—Acquisition of a Business for further details. Interest rates are calculated as the three-month SOFR plus a tenor spread adjustment of 0.26161% plus negotiated additional basis points. Refer to table above for contractual rates and interest rate spread calculation. Interest is paid on a quarterly basis.
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 March 31, 2024 and December 31, 2023:
Fixed Rate
Variable Rate
Commitments to extend credit
258,617
1,954,869
2,213,486
269,325
2,013,819
2,283,144
Letters of credit
640
65,808
66,448
612
67,443
68,055
259,257
2,020,677
2,279,934
269,937
2,081,262
2,351,199
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 15.00% and maturities up to 2052. Variable rate loan commitments have interest rates ranging from 4.00% to 18.50% and maturities up to 2053.
Note 15—Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In addition, the Company has the ability to obtain fair values for markets that are not accessible.
These types of inputs create the following fair value hierarchy:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
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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 2024 and 2023, 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 accrued interest receivable and other assets, and accrued interest payable and other liabilities in the Condensed Consolidated Statements of Financial Condition.
32
The following tables summarize the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2024 and December 31, 2023:
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
2,517
Equity securities
6,618
6,333
285
Servicing assets
Derivative assets
60,103
Financial liabilities
Derivative liabilities
22,531
2,554
6,189
5,908
281
56,923
19,345
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
666
Change in fair value
(36
Balance, end of period
630
The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the three months ended March 31, 2024 and 2023.
The following table presents additional information about the unobservable inputs used in the fair value measurements on recurring basis that were categorized within Level 3 of the fair value hierarchy as of March 31, 2024:
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
7.9%
7.9
Decrease
Prepayment speeds
0.0% - 38.9%
15.6
0.0% - 52.8%
10.6
Expected weightedaverage loan life
0.0 - 9.6 Years
3.7 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.
34
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 March 31, 2024 and December 31, 2023:
Non-recurring
Individually evaluated loans
31,873
27,117
Assets held for sale
3,722
Other real estate owned
51,978
29,869
4,484
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.
Term Loan—The carrying amount approximates fair value given the variable interest rate and repricing of interest.
Bank Term Funding Program—The carrying amount approximates fair value given the short-term nature of the instrument.
Line of credit—The carrying amount approximates fair value given the variable interest rate and repricing of interest.
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
23,983
19,136
Loans and lease receivables, net (less impaired loans at fair value)
6,612,199
6,371,967
6,496,367
6,326,413
Accrued interest receivable
43,728
43,922
Non-interest-bearing deposits
5,493,494
5,268,926
Accrued interest payable
21,713
22,233
Securities sold under repurchase agreement
Subordinated notes
72,194
76,063
73,772
72,701
Note 16—Derivative Instruments and Hedge Activities
As required by ASC 815, the Company records all derivatives on the Condensed Consolidated Statements of Financial Condition at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company records derivative assets and derivative liabilities on the Condensed Consolidated Statements of Financial Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. The following tables present the fair value of the Company’s derivative financial instruments and classification on the Condensed Consolidated Statements of Financial Condition as of March 31, 2024 and December 31, 2023:
NotionalAmount
OtherAssets
OtherLiabilities
Derivatives designated as hedging instruments
Interest rate swaps designated as cash flow hedges
650,000
37,976
(582
37,475
Derivatives not designated as hedging instruments
Other interest rate derivatives
691,612
22,124
(21,949
706,126
19,447
(19,345
Other credit derivatives
3,545
3,602
Total derivatives
1,345,157
(22,531
1,359,728
As of the effective time of the transaction reported in Note 3—Acquisition of a Business, Byline acquired and assumed two types of derivative instruments. Interest rate swap agreements previously designated as cash flow hedges of certain junior subordinated debentures issued to capital trusts had notional amounts of $42.0 million and had a fair value of $3.5 million included in accrued interest receivable and other assets. In July 2023, the Company terminated the interest rate swap agreements that resulted in a net gain of $6,000. Other interest rate swap agreements not designated as hedging instruments had notional amounts of $67.7 million and fair values of $6.2 million reported in accrued interest receivable and other assets and accrued interest payable and other liabilities.
Interest rate swaps designated as cash flow hedges—Cash flow hedges of interest payments associated with certain financial instruments had notional amounts totaling $650.0 million as of March 31, 2024 and December 31, 2023, respectively. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value of the derivatives hedging instrument with the fair value of the designated hedged transactions. As of March 31, 2024, the cash flow hedges aggregating $650.0 million in notional amounts are comprised of $450.0 million pay-fixed interest rate swaps associated with certain deposits and other borrowings, and $200.0 million receive-fixed interest rate swaps associated with certain variable rate loans.
As of March 31, 2024, pay-fixed interest rate swaps are comprised of six effective hedges. Receive-fixed interest rate swaps totaling $200.0 million are comprised of three effective hedges totaling $150.0 million, and one $50.0 million forward-starting swaps that is effective in August of 2024.
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 $4.8 million and $2.0 million of interest income recorded during the three months ended March 31, 2024, and 2023, respectively, and is reported as a component of interest expense on deposits and other borrowings. As of March 31, 2024, the Company estimates $16.9 million of the net unrealized gain to be reclassified as a net 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 $3.5 million and $3.7 million as of March 31, 2024 and December 31, 2023, respectively.
The following table reflects the cash flow hedges as of March 31, 2024:
Notional amounts
Derivative assets fair value
Derivative liabilities fair value
582
Weighted average remaining maturity
2.7 Years
Receive rates are determined at the time the swaps become effective. As of March 31, 2024, the weighted average pay rates of the six effective pay-fixed hedges for $450.0 million were 1.04% and the weighted average receive rates were 5.32%. As of March 31, 2024, the weighted average pay rates of the receive-fixed interest rate swaps of $150.0 million were 8.50% and the weighted average receive rates were 7.31%.
The following table reflects the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Condensed Consolidated Statements of Operations relating to the cash flow derivative instruments for the three months ended:
Amount ofGain Recognized inAOCI
Amount ofNet GainReclassifiedfrom AOCI toIncome as anIncrease toNet InterestIncome
Amount ofGain (Loss)Recognized inOtherNon-InterestIncome
Amount ofGain Recognized inOCI
Amount ofGainReclassifiedfrom OCI toIncome as aDecrease toInterestExpense
Interest rate swaps
4,836
1,956
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 $691.6 million as of March 31, 2024 with maturities ranging from August 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 three months ended March 31, 2024 and 2023, there were $4,000 and $472,000 of net transaction fees, included in other non-interest income, related to these derivative instruments.
These instruments are inherently subject to market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the Company’s risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Market and credit risks are managed and monitored as part of the Company’s overall asset-liability management process. The credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company’s loan underwriting process. The Company’s loan underwriting process also approves the Bank’s swap counterparty used to mirror the borrowers’ swap. The Company has a bilateral agreement with each swap counterparty that provides that fluctuations in derivative values are to be fully collateralized with either cash or securities.
The following table reflects other interest rate derivatives as of March 31, 2024:
21,949
Weighted average pay rates
4.29
Weighted average receive rates
6.16
4.4 Years
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. As of March 31, 2024 and December 31, 2023, for each period, the total notional amount of risk participated in was $1.2 million and the notional amount of risk participated out was $2.3 million and $2.4 million, respectively. The credit risk related to these other derivatives is managed through the Company’s loan underwriting process. 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 March 31, 2024 and December 31, 2023. The fair values of the credit derivatives is reflected in
accrued interest receivable and other assets and accrued interest payable and other 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 months ended March 31, 2024 and 2023:
(73
(308
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 the periods indicated:
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
(880
880
(925
925
Collateral posted
(57,900
(54,930
Net credit exposure
1,323
(21,651
1,068
(18,420
As of March 31, 2024, 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 $22.5 million. If the Company had breached any of these provisions at March 31, 2024, it could have been required to settle its obligations under the agreements at their termination value less offsetting positions of $880,000. 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 March 31, 2024, there were 826,874 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 2024, the Company granted 347,492 shares of restricted common stock, par value $0.01 per share. Of this total, 268,595 restricted shares will vest ratably over three years on each anniversary of the grant date and 12,861 restricted
shares will cliff vest on the third anniversary of the grant date, all subject to continued employment. In addition, 66,036 performance-based restricted shares were included in the 2024 grant. 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, 2026, 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 three months ended March 31, 2024:
Omnibus Plan
Number of Shares
Weighted AverageGrant Date FairValue
Beginning balance, January 1, 2024
627,271
24.24
Granted
347,492
20.89
Incremental performance shares issued and vested
13,632
Vested
(228,195
22.66
Forfeited
(6,505
25.88
Ending balance outstanding at March 31, 2024
753,695
23.07
A total of 228,195 restricted shares vested during the three months ended March 31, 2024. A total of 238,638 restricted shares vested during the year ended December 31, 2023. The fair value of restricted shares that vested during the three months ended March 31, 2024 was $4.8 million. The fair value of restricted shares that vested during the year ended December 31, 2023 was $5.7 million.
The Company recognizes share-based compensation based on the estimated fair value of the restricted stock at the grant date. Share-based compensation expense is included in non-interest expense in the Condensed Consolidated Statements of Operations. The fair value of the total stock return performance-based awards granted in 2024 and 2023 were calculated based on a Monte Carlo simulation, using the following assumptions:
Performance Based Grants
Risk-free interest rate
4.47
4.42
Expected term (years)
2.85 years
Expected stock price volatility
29.28% - 33.68%
38.11% - 39.80%
Weighted average grant date fair value
20.18
25.20
40
The following table summarizes restricted stock compensation expense for the three months ended March 31, 2024 and 2023:
Total share-based compensation - restricted stock
Income tax benefit
Unrecognized compensation expense
14,880
14,416
2.3 Years
2.5 years
The fair value of the unvested restricted stock awards at March 31, 2024 was $16.4 million.
In October 2014, the Company adopted the Byline Bancorp, Inc. Equity Incentive Plan (“BYB Plan”). The maximum number of shares available for grants under this plan was 2,476,122 shares. The Company granted 1,846,968 options to purchase shares under this plan. In June 2017, the Board of Directors terminated the BYB Plan and no future grants can be made under this plan. Options to purchase a total of 554,070 shares remain outstanding under the BYB Plan at March 31, 2024.
The types of stock options granted under the BYB Plan were Time Options and Performance Options. The exercise price of each option is equal to the fair value of the stock as of the date of grant. These option awards have vesting periods ranging from one to five years and have 10-year contractual terms. Stock volatility was computed as the average of the volatilities of peer group companies. All outstanding stock options were fully vested and exercisable at March 31, 2024.
The fair values of the stock options were determined using the Black-Scholes-Merton model for Time Options and a Monte Carlo simulation model for Performance Options.
The following table discloses the activity in shares subject to options and the weighted average exercise prices, in actual dollars, for the three months ended March 31, 2024:
BYB Plan
Weighted Average Exercise Price
Intrinsic Value
Weighted Average Remaining Contractual Term (in Years)
768,564
11.31
9,413
1.5
Exercised
(214,494
11.18
2,587
Expired
554,070
11.36
5,738
1.2
Exercisable at March 31, 2024
A total of 214,494 stock options were exercised during the three months ended March 31, 2024. The exercise was cashless and had a related tax benefit of $690,000 for the three months ended March 31, 2024. No stock options were exercised during the during the year ended December 31, 2023. No stock options vested during the three months ended March 31, 2024 or the year ended December 31, 2023. No stock option compensation expense was recognized for the three months ended March 31, 2024 or the year ended December 31, 2023.
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 657,205 and 930,852 shares of common stock were outstanding as of March 31, 2024 and 2023, respectively. There were 753,695 and 693,104 restricted stock awards outstanding at March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024 and 2023, no stock options outstanding were excluded from the calculation of diluted earnings per common share.
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The following represent the calculation of basic and diluted earnings per share for the periods presented:
Weighted-average common stock outstanding:
Weighted-average common stock outstanding (basic)
43,258,087
36,955,085
Incremental shares
469,257
584,827
Weighted-average common stock outstanding (dilutive)
43,727,344
37,539,912
Basic earnings per common share
Diluted earnings per common share
Note 19—Stockholders’ Equity
A summary of the Company’s preferred and common stock at March 31, 2024 and December 31, 2023 is as follows:
Common stock, voting
On December 12, 2022, 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. The program was in effect from January 1, 2023 until December 31, 2023. No shares were repurchased under this program.
On December 6, 2023, 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 the Company’s outstanding common stock. The program is in effect from January 1, 2024 until December 31, 2024, 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. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase program will be determined by the Company at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market and economic conditions and applicable legal requirements. The shares authorized to be repurchased represented approximately 2.9% of the Company’s outstanding common stock at December 31, 2023.
We did not purchase any shares under either stock repurchase program during the three months ended March 31, 2024 or 2023.
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 March 31, 2024 and 2023, cash dividends were declared and paid to stockholders of record of our common stock of $0.09 per share.
On April 23, 2024, our Board of Directors declared a cash dividend of $0.09 per share payable on May 21, 2024 to stockholders of record of our common stock as of May 7, 2024.
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Note 20—Consolidated Statements of Changes in Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2024 and 2023:
Unrealized Gains on Cash Flow Hedges
Unrealized Losseson Available-for-SaleSecurities
Total AccumulatedOther ComprehensiveIncome (Loss)
34,315
(151,865
Other comprehensive income (loss), net of tax
33,024
(141,166
30,131
(130,248
29,908
(136,818
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, 2023 that was filed with the SEC on March 4, 2024, 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 SBA loans and was the second most active 7(a) and 504 lender in Illinois for the quarter ended March 31, 2024.
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 $30.4 million, or $0.70 per basic and diluted common share, for the three months ended March 31, 2024, compared to net income of $23.9 million, or $0.65 per basic and $0.64 per diluted common share, for the three months ended March 31, 2023, an increase of $6.5 million. The increase in net income was attributable to a $9.8 million increase in net interest income. The increase in net interest income during the three months ended March 31, 2024 was primarily driven by higher yields on loans and leases, and organic growth in the loan and lease portfolio, as well as from the Inland acquisition.
Dividends declared on common shares were $3.9 million and $3.4 million for the three months ended March 31, 2024 and 2023, respectively. Dividends paid on common shares were $3.9 million and $3.3 million for the three months ended March 31, 2024 and 2023, respectively.
Our results of operations for the three months ended March 31, 2024 and 2023 yielded an annual return on average assets of 1.36% and 1.32% and a return on average stockholders’ equity of 12.26% and 12.38% respectively.
As of March 31, 2024, we had consolidated total assets of $9.4 billion, total gross loans and leases outstanding of $6.8 billion, total deposits of $7.4 billion, and total stockholders’ equity of $1.0 billion.
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. Refer to Note 3—Acquisition of a Business of our Unaudited Interim Condensed Financial Statements as of March 31, 2024, which is included in this report, 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, which 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) determination of the allowance for credit losses, (ii) the valuation of intangible assets such as goodwill, and assessment of impairment, (iii) fair value estimations, and (iv) the determination and assessment of impairment for other intangible assets.
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, 2023, that we filed with the SEC on March 4, 2024.
The allowance for credit losses ("ACL") represents management’s estimate of current expected credit losses over the life of a financial asset carried at amortized cost 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.
For each portfolio, management estimates expected credit losses over the life of each loan and lease utilizing lifetime or cumulative loss rate methodology. 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, primarily unemployment rates, 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 and lease portfolio and is monitored quarterly. All loans and leases of $500,000 or greater with an internal risk rating of substandard or below, or on nonaccrual status are individually evaluated 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. 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.
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
46
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.
Other intangible assets primarily consist of core deposit intangible assets and customer relationship intangible. In valuing intangible assets, we consider variables such as servicing costs, attrition rates and market discount rates. Intangible assets 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 intangible asset 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 and customer intangibles are amortized over a twelve-year period.
Fair value of Financial Instruments
ASC Topic 820, Fair Value Measurement defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.
The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.
See Note 15 of our Unaudited Interim Condensed Consolidated Financial Statements as of March 31, 2024, included in this report, for a complete discussion of our use of fair value of financial assets and liabilities and their related measurement practices.
Recently Issued Accounting Pronouncements
Refer to Note 2 of our Unaudited Interim Condensed Consolidated Financial Statements as of March 31, 2024, which is 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.
47
Selected Financial Data
As of or for the Three Months Ended
Summary of Operations
Common Share Data
Adjusted diluted earnings per share(1)(3)
Weighted-average common shares outstanding (basic)
Weighted-average common shares outstanding (diluted)
Common shares outstanding
Cash dividends per common share
0.09
Dividend payout ratio on common stock
12.86
14.06
Book value per common share
22.88
21.10
Tangible book value per common share(1)
18.29
16.92
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin
4.00
4.38
Net interest margin, fully taxable equivalent (1)(4)
4.01
4.39
Average cost of deposits
2.56
1.15
Efficiency ratio(2)
51.94
52.10
Adjusted efficiency ratio(1)(2)(3)
51.75
51.54
Non-interest income to total revenues(1)
15.32
16.67
Non-interest expense to average assets
2.40
2.69
Adjusted non-interest expense to average assets(1)(3)
2.39
2.67
Return on average stockholders' equity
12.26
12.38
Adjusted return on average stockholders' equity(1)(3)
12.31
12.62
Return on average assets
1.36
1.32
Adjusted return on average assets(1)(3)
1.35
Pre-tax pre-provision return on average assets(1)
2.10
2.32
Adjusted pre-tax pre-provision return on average assets(1)(3)
2.11
2.35
Return on average tangible common stockholders' equity(1)
15.88
16.20
Adjusted return on average tangible common stockholders' equity(1)(3)
15.95
16.49
Non-interest-bearing deposits to total deposits
25.19
33.58
Loans and leases held for sale and loans and leases held for investment to total deposits
92.54
95.37
Deposits to total liabilities
87.49
86.31
Deposits per branch
153,129
152,965
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment
1.00
0.84
Non-performing assets to total assets
0.73
0.67
ACL to total loans and leases held for investment, net before ACL
1.51
1.64
Net charge-offs to average total loans and leases held for investment, net before ACL - loans and leases
0.37
Capital Ratios
Common equity to total assets
10.72
10.57
Tangible common equity to tangible assets(1)
8.76
8.66
Leverage ratio
10.91
10.46
Common equity tier 1 capital ratio
10.59
10.27
Tier 1 capital ratio
11.62
10.90
Total capital ratio
13.66
13.19
(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 and ROU assets, and merger-related expenses.
(4) 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 $30.4 million for the three months ended March 31, 2024 compared to net income of $23.9 million for the three months ended March 31, 2023, an increase of $6.5 million. The increase in net income was primarily attributable to a $9.8 million increase in net interest income and a decrease in the provision for credit losses of $3.2 million, offset by an increase in non-interest expense of $5.0 million. Net income available to common stockholders was $0.70 per basic and per diluted common share, for the three months ended March 31, 2024 compared to $0.65 per basic and $0.64 per diluted common share, for the three months ended March 31, 2023.
The increase in net interest income during the three months ended March 31, 2024 was mainly a result of higher yields on loans and leases, organic growth in the loan and lease portfolio, as well as from the Inland acquisition.. The decrease in provision for credit losses was due to a smaller allocation for individually assessed loans. The increase in non-interest expense was primarily due to increases in salaries and employee benefits mainly due to headcount.
Our annualized return on average assets was 1.36% for the three months ended March 31, 2024 compared to 1.32% for the three months ended March 31, 2023. Our annualized return on average stockholders’ equity was 12.26% for the three months ended March 31, 2024 compared to 12.38% for the three months ended March 31, 2023. Our efficiency ratio was 51.94% for the three months ended March 31, 2024 compared to 52.10% for the three months ended March 31, 2023.
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 March 31, 2024, purchased credit deteriorated loans accounted for under ASC Topic 326 represented 3.0% of our total loan and lease portfolio compared to 3.4% at December 31, 2023.
Changes in the market interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. In addition, our interest income includes the accretion of the discounts on our acquired loans, which will also affect our net interest spread, net interest margin and net interest income.
The following tables present, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis (dollars in thousands).
AverageBalance(5)
InterestInc / Exp
AverageYield /Rate
339,449
3,828
4.54
97,578
1.84
Loans and leases(1)
6,681,488
7.45
5,484,372
6.83
Taxable securities
1,422,661
9,822
2.78
1,275,377
2.04
Tax-exempt securities(2)
159,984
2.80
151,817
994
2.65
Total interest-earning assets
8,603,582
138,554
6.48
7,009,144
100,210
5.80
(102,256
(84,321
All other assets
529,615
420,328
TOTAL ASSETS
9,030,941
7,345,151
Interest checking
590,406
1.65
606,008
2,494
1.67
Money market accounts
2,237,324
19,660
3.53
1,465,677
7,728
2.14
Savings
531,912
197
0.15
613,590
227
Time deposits
1,992,357
23,676
4.78
966,409
5,849
2.45
Total interest-bearing deposits
5,351,999
3.45
3,651,684
1.81
472,644
3.25
573,433
5,852
4.14
Federal funds purchased
0.00
2,778
5.30
144,387
8.34
111,101
7.66
Total borrowings
617,031
6,818
4.44
687,312
7,986
4.71
Total interest-bearing liabilities
5,969,030
3.56
4,338,996
2.27
1,874,322
2,076,613
Other liabilities
188,783
145,253
998,806
784,289
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Net interest spread(3)
2.92
Net interest income, fully taxable equivalent
85,774
75,926
Net interest margin, fully taxable equivalent(2)(4)
Reconciliation to reported net interest income:
Less: Tax-equivalent adjustment
233
208
Net interest margin(4)
Net loan accretion impact on margin
4,284
0.20
729
0.04
50
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis. The table below is a summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates (dollars in thousands):
Three Months Ended March 31, 2024
Compared to Three Months Ended March 31, 2023
Increase (Decrease) Due to
Volume
Rate
Interest income
2,731
3,386
22,995
8,454
31,449
1,044
2,347
3,391
Tax-exempt securities
57
Total interest income
26,831
11,513
38,344
Interest expense
(35
(65
6,867
5,065
11,932
12,228
5,599
17,827
19,030
10,634
29,664
(757
(1,271
(2,028
(37
708
188
896
(48
(1,120
(1,168
18,982
9,514
28,496
7,849
1,999
9,848
Net interest income for the three months ended March 31, 2024 was $85.5 million compared to $75.7 million during the same period in 2023, an increase of $9.8 million, or 13.0%. Interest income increased $38.3 million for the three months ended March 31, 2024 compared to the same period in 2023 primarily a result of growth in the loan and lease portfolio, including acquired loans, and higher yields on interest earning assets. Interest expense increased by $28.5 million for the three months ended March 31, 2024 compared to the same period in 2023 mostly due growth of the deposit portfolio, including assumed deposits, change in deposit mix, and higher rates paid on interest-bearing deposits.
The net interest margin for the three months ended March 31, 2024 was 4.00%, a decrease of 38 basis points compared to 4.38% for the three months ended March 31, 2023. The decrease was primarily attributable to the rising rate environment.
Net loan accretion income was $4.3 million for the three months ended March 31, 2024 compared to $729,000 for the three months ended March 31, 2023, an increase of $3.6 million due to loans acquired in the Inland acquisition. Total net loan accretion on acquired loans contributed 20 basis points to the net interest margin for the three months ended March 31, 2024 compared to four basis points for the three months ended March 31, 2023. We expected loan accretion income to decline and projected accretion income as of March 31, 2024 is summarized as follows:
EstimatedProjectedAccretion(1)(2)
Remainder of 2024
6,530
6,126
4,469
2,808
1,599
13,766
35,298
(1) Estimated projected accretion excludes contractual interest income on acquired loans and leases.
(2) Projections are undated quarterly, assume no prepayments, and are subject to change.
51
Provision for Credit Losses
The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation 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.
The provision for credit losses was $6.6 million for the three months ended March 31, 2204, compared to $9.8 million for the three months ended March 31, 2023, a decrease of $3.2 million and is comprised of a provision for credit losses - loans and leases and a provision for credit losses - unfunded commitments. Provision for credit losses - loans and leases was $6.9 million for the three months ended March 31, 2024, compared to $9.7 million for the three months ended March 31, 2023, a decrease of $2.8 million. The decrease in provision for credit losses - loans and leases was driven by lower allocation to individually assessed loans. The provision for credit losses - unfunded commitments was a recapture of $248,000 and a provision of $113,000 for the three months ended March 31, 2024 and 2023, respectively
Non-Interest Income
The following table presents the major components of non-interest income for the three months ended March 31, 2024 and 2023, respectively (dollars in thousands):
QTD 2024Compared to 2023
$ Change
% Change
307
14.5
(16
(0.5
)%
(1,359
(207.2
1.1
11.9
385
7.5
25.2
724
48.1
328
2.2
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 $2.4 million and $2.1 million for the three months ended March 31, 2024 and 2023, respectively. The increases is primarily due to increases in deposit balances.
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 March 31, 2024 and 2023. At March 31, 2024 and 2023, 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 $703,000 and an upward adjustment $656,000 for the three months ended March 31, 2024 and 2023, respectively, a change of $1.4 million. Changes in the revaluation were mainly due to higher prepayment speeds and a lower average life.
Net gains on sales of loans were $5.5 million for the three months ended March 31, 2024 compared to $5.1 million for the three months ended March 31, 2023, an increase of $385,000, or 7.5%, driven mainly by higher premiums. We sold $72.5 million of U.S. government guaranteed loans during the three months ended March 31, 2024 compared to $72.2 million during the three months ended March 31, 2023.
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 $1.2 million for the three months ended March 31, 2024 compared to $924,000 for the three months ended March 31, 2023, an increase of $233,000 or 25.2%. Assets under administration were $654.1 million and $573.7 million as of March 31, 2024 and 2023, respectively. Assets under administration decreased $116.4 million or 15.1% from $770.5 million as of December 31, 2023, due to the loss of accounts.
Other non-interest income was $2.2 million for the three months ended March 31, 2024 compared to $1.5 million for the three months ended March 31, 2023, an increase of $724,000 or 48.1%. The increase was primarily driven by net gains on sales of leased equipment and income associated with bank owned life insurance.
Non-Interest Expense
The following table presents the major components of non-interest expense for the three months ended March 31, 2024 and 2023, respectively (dollars in thousands):
3,559
11.7
840
18.9
(20
(100.0
(278
(28.8
(395
(12.7
362
9.6
(4.9
(110
(7.6
1,046
22.1
5,009
10.3
Salaries and employee benefits, the single largest component of our non-interest expense, totaled $34.0 million for the three months ended March 31, 2024 compared to $30.4 million for the three months ended March 31, 2023, an increase of $3.6 million, or 11.7%. The increases were primarily a result of increased headcount as a result of our acquisition of Inland. Our staffing increased from 971 full-time equivalent employees as of March 31, 2023 to 1,064 as of March 31, 2024.
Occupancy and equipment expense, net was $5.3 million for the three months ended March 31, 2024 compared to $4.4 million for the three months ended March 31, 2023, an increase of $840,000 or 18.9%. The increase is primarily due to branches acquired as a result of the Inland acquisition.
Loan and lease related expenses were $685,000 for the three months ended March 31, 2024 compared to $963,000 for the three months ended March 31, 2023, a decrease of $278,000, or 28.8%. The decrease was primarily driven by lower government guaranteed expenses.
Legal, audit, and other professional fees were $2.7 million for the three months ended March 31, 2024 compared to $3.1 million for the three months ended March 31, 2023, a decrease of $395,000, or 12.7%. The decrease was principally driven by merger-related expenses incurred during the first quarter of 2023.
Data processing was $4.1 million for the three months ended March 31, 2024, compared to $3.8 million for the three months ended March 31, 2023, an increase of $362,000 or 9.6%. The increases were driven by increased software licensing and IT infrastructure expenses.
Other non-interest expense was $5.8 million for the three months ended March 31, 2024 compared to $4.7 million for the three months ended March 31, 2023, an increase of $1.0 million or 22.1%. These increase was primarily due $1.3 million in charges taken for planned branch consolidations that will occur during the second quarter of 2024, which is inclusive of impairment on right-of-use assets.
Our efficiency ratio was 51.94% for the three months ended March 31, 2024 compared to 52.10% for the three months ended March 31, 2023. The change in our efficiency ratio for the three months ended March 31, 2024 was driven by net interest income growth. Our adjusted efficiency ratio was 51.75% for the three months ended March 31, 2024 compared to 51.54% for the three months ended March 31, 2023.
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.
Income Taxes
Our provision for income taxes for the three months ended March 31, 2024 totaled $10.1 million compared to $8.3 million for the three months ended March 31, 2023, an increase of $1.8 million, or 22.0%. The increase in income tax expense was principally due to an increase in net income before provision for income taxes. Our effective tax rate was 25.0% for the three months ended March 31, 2024 and 25.7% for the three months ended March 31, 2023.
We expect our effective tax rate for 2024 to be approximately 25-27%.
53
Financial Condition
Condensed Consolidated Statements of Financial Condition Analysis
Our total assets increased by $528.5 million, or 6.0%, to $9.4 billion at March 31, 2024 compared to $8.9 billion at December 31, 2023. The increase in total assets was primarily due to an increase in cash and cash equivalents of $410.7 million, inclusive of $200.0 million in short term investments, an increase of $93.9 million in loans and leases, or 1.4%, from $6.7 billion at December 31, 2023 to $6.8 billion at March 31, 2024. Our originated loan and lease portfolio increased by $133.4 million and our purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases portfolio decreased by $39.5 million. The increase in our originated portfolio was primarily attributed to growth in the commercial and industrial portfolio. The decrease in our purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases portfolio was attributed to decreases in commercial and residential real estate resulting from resolutions and charge-offs.
Total liabilities increased by $509.6 million, or 6.5%, to $8.4 billion at March 31, 2024 compared to $7.9 billion at December 31, 2023. Total deposits increased by $173.2 million, or 2.4%, driven by growth in time deposits and money market accounts, offset by a decrease in non-interest bearing deposits. Other borrowings increased by $326.0 million, or 82.5%, mainly due to advances under the Bank Term Funding Program of $200.0 million and increased FHLB advances.
Investment Portfolio
Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no securities classified as trading in our investment portfolio as of March 31, 2024 or December 31, 2023. 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 increased by $36.7 million, or 2.7%, from $1.3 billion at December 31, 2023 to $1.4 billion at March 31, 2024. The increase was mainly attributed to purchases of securities, net of maturities, calls, and repayments.
At March 31, 2024, 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 $1.2 million at March 31, 2024, and at December 31, 2023, respectively.
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 March 31, 2024, we evaluated the securities that had an unrealized loss for credit losses and determined there were none. There were 320 investment securities with unrealized losses at March 31, 2024. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.
The following table (dollars in thousands) set forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of March 31, 2024. 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 March 31, 2024
Due in One Year or Less
Due from One toFive Years
Due from Five toTen Years
Due after Ten Years
WeightedAverageYield(1)
72,421
3.91
14,726
3.77
U.S. government agencies
70,171
2.54
78,352
7,136
4.04
2,851
2.99
20,326
3.09
23,884
3.76
39,099
2.47
Residential mortgage- backed securities
31,356
52,702
1.61
741,122
2.50
2.58
Commercial mortgage- backed securities
14,083
183,088
2.41
13,611
4.85
27,056
3.78
5.49
3.87
150,190
2.76
229,959
1,107,006
2.75
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $54.0 million at March 31, 2024, a decrease of $1.7 million from December 31, 2023.
There were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, with total outstanding balances greater than 10% of our stockholders’ equity as of March 31, 2024 or December 31, 2023.
Restricted Stock
As a member of the Federal Home Loan Bank system, Byline Bank is required to maintain an investment in the capital stock of the FHLB. No market exists for this stock, and it has no quoted market value. The stock is redeemable at par by the FHLB and is, therefore, carried at cost. In addition, Byline Bank owns stock of Bankers’ Bank that was acquired as part of a bank acquisition. The stock is redeemable at par and carried at cost. As of March 31, 2024 and December 31, 2023, we held $22.8 million and $16.3 million, respectively, in FHLB and Bankers’ Bank stock. We evaluate impairment of our investment in FHLB and Bankers’ Bank based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We did not identify any indicators of impairment of FHLB and Bankers’ Bank stock as of March 31, 2024 and December 31, 2023.
Loan and Lease Portfolio
Lending-related income is the most important component of our net interest income and is the main driver of the results of our operations. Total loans and leases at March 31, 2024 and December 31, 2023 were $6.8 billion and $6.7 billion, respectively, an increase of $93.9 million, or 1.4%. Originated loans and leases were $5.9 billion at March 31, 2024, an increase of $133.4 million, or 2.3%, compared to $5.8 billion at December 31, 2023. Purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases were $877.8 million at March 31, 2024, a decrease of $39.5 million, or 4.3%, compared to $917.3 million at December 31, 2023. The increase in our originated portfolio was primarily attributed to organic loan and lease growth, and renewals of acquired 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 of acquired loans and leases as well as resolutions and charge-offs.
We strive to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. Loans, excluding leases, are typically made to real estate, manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and operations. As of March 31, 2024, the loan portfolio included $424.3 million of unguaranteed 7(a) SBA and USDA loans with exposure to the following top three industries: 17.3% retail trade, 13.2% 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
27.7
28.5
7.2
7.0
6.2
35.7
34.6
0.0
Leasing financing receivables
10.2
10.0
Total originated loans and leases
87.0
86.3
Purchased credit deteriorated loans
1.7
2.1
0.6
0.4
0.3
3.0
3.4
Acquired non-credit-deteriorated loans and leases
4.0
4.1
3.2
1.3
100.0
Total loans and leases, net of allowance for credit losses - loans and leases
Loans collateralized by real estate comprised 52.1% and 53.4% of the loan and lease portfolio at March 31, 2024 and December 31, 2023, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of March 31, 2024 and December 31, 2023 and totaled $2.3 billion, or 64.3% of real estate loans and 33.5% of the total loan and lease portfolio at March 31, 2024. At December 31, 2023, commercial real estate loans totaled $2.3 billion and comprised 65.1% of real estate loans and 34.7% of the total loan and lease portfolio. Purchased credit deteriorated commercial real estate loans decreased from $137.8 million as of December 31, 2023 to $117.5 million as of March 31, 2024, a decrease of $20.3 million, or 14.8%. At March 31, 2024 and December 31, 2023, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 279.7% and 299.6%, respectively. Non-owner occupied commercial real estate loans were $1.0 billion, or 86.8% and 95.9% of total capital, at March 31, 2024 and December 31, 2023, respectively.
Residential real estate loans totaled $733.0 million at March 31, 2024 compared to $719.5 million at December 31, 2023, an increase of $13.5 million, or 1.9%. The residential real estate loan portfolio comprised 20.8% and 20.2% of real estate loans as of March 31, 2024 and December 31, 2023, respectively, and 10.8% of total loans and leases at March 31, 2024 and December 31, 2023. Purchased credit deteriorated and acquired non-credit-deteriorated residential real estate loans decreased from $254.4 million at December 31, 2023 to $244.1 million at March 31, 2024, a decrease of $10.3 million, or 4.0%. Multifamily real estate loans were $421.3 million and $399.3 million, or 36.5% and 36.8% of total capital, at March 31, 2024 and December 31, 2023, respectively.
Construction, land development, and other land loans totaled $529.0 million at March 31, 2024 compared to $526.8 million at December 31, 2023, an increase of $2.1 million, or 0.4%. The construction, land development and other land loan portfolio comprised 15.0% and 14.8% of real estate loans at March 31, 2024 and December 31, 2023, respectively, and 7.9% of the total loan and lease portfolio at March 31, 2024 and December 31, 2023. The construction, land development and other land loan portfolio was 45.8% and 48.3% of total capital, at March 31, 2024 and December 31, 2023, respectively.
Our exposure to non-owner occupied commercial real estate office space as of March 31, 2024 was $205.5 million, or 3.0% of our total loan and lease portfolio.
Commercial and industrial loans totaled $2.6 billion at March 31, 2024 and $2.4 billion at December 31, 2023, an increase of $104.2 million, or 4.3%. The commercial and industrial loan portfolio comprised 37.7% and 36.6% of the total loan and lease portfolio at March 31, 2024 and December 31, 2023, respectively.
Lease financing receivables comprised 10.2% and 10.0% of the loan and lease portfolio at March 31, 2024 and December 31, 2023, respectively. Total lease financing receivables were $692.0 million and $665.9 million at March 31, 2024 and December 31, 2023, respectively, an increase of $26.2 million, or 3.9%.
Loan and Lease Portfolio Maturities and Interest Rate Sensitivity
The following table shows our loan and lease portfolio by scheduled maturity at March 31, 2024 (dollars in thousands):
Due after One YearThrough Five Years
Due after Five YearsThrough Fifteen Years
Due after Fifteen Years
FloatingRate
FixedRate
109,110
195,360
760,363
314,260
233,805
106,318
10,103
149,830
19,160
64,578
163,009
74,723
17,331
87,546
59,798
2,742
692
175,702
45,418
174,351
15,957
4,521
355
34,089
472,033
373,251
1,080,767
151,248
269,175
31,099
9,290
642
1,633
195
20,630
618,459
52,528
184,066
907,673
1,961,142
1,645,734
471,064
467,560
101,355
161,862
32,254
7,067
37,898
24,908
4,450
10,629
7,787
15,949
5,876
5,595
3,227
26,403
230
741
8,013
2,659
6,457
96
40,282
34,330
61,886
28,142
10,422
17,493
5,717
3,359
Acquired non-credit- deteriorated loans and leases
30,991
27,239
147,626
18,823
6,528
22,956
2,477
15,080
13,113
1,131
40,756
12,140
22,418
9,368
7,150
98,513
17,983
10,616
40,590
5,111
11,253
2,162
7,453
35,269
9,120
57,778
1,891
124
321
Total acquired non-credit- deteriorated loans and leases
46,629
53,806
234,496
80,673
86,724
34,215
14,738
124,846
270,977
995,809
2,257,524
1,754,549
568,210
519,268
121,810
290,067
At March 31, 2024, 47.5% of the loan and lease portfolio bears interest at fixed rates and 52.5% 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 326, 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.
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
58
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 $102.4 million at March 31, 2024 compared to $101.7 million at December 31, 2023, an increase of $680,000, or 0.7%. The increase was primarily due to an increase in qualitative adjustments and growth in the loan and lease portfolio, offset by charge-offs on on individually evaluated loans.. Total ACL to total loans and leases held for investment, net before ACL, was 1.51% and 1.52% of total loans and leases at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, approximately $30.1 million of the ACL was allocated to unguaranteed portion of SBA 7(a) and USDA loans.
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The following tables present an analysis of the allowance credit losses - loans and leases for the periods presented (dollars in thousands):
ResidentialRealEstate
Construction,LandDevelopment,and OtherLand
CommercialandIndustrial
Balance at December 31, 2023
Provision/(recapture) for PCD loans
629
(25
(61
(347
196
Provision/(recapture) for acquired non-credit-deteriorated loans
(44
(42
(68
Provision/(recapture) for originated loans
239
(126
68
6,225
360
6,763
Total provision/(recapture)
Charge-offs for PCD loans
(74
Charge-offs for acquired non-credit deteriorated loans
(58
Charge-offs for originated loans
(2,983
(3,561
(6,917
Total charge-offs
Recoveries for PCD loans
Recoveries for acquired non-credit deteriorated loans
Recoveries for originated loans
432
834
Total recoveries
Net (charge-offs) recoveries
(2,621
(3,387
(204
(6,211
Balance at March 31, 2024
Ending ACL Balances
PCD loans
7,392
877
150
1,722
10,142
Acquired non-credit-deteriorated loans
2,026
639
624
1,310
4,602
Originated loans
22,022
1,832
2,156
53,199
8,383
87,622
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Loans and leases ending balance
Total loans and leases at March 31, 2024, gross
Ratio of net charge-offs to average loans outstanding during the year
0.16
Loans ending balance as a percentage of total loans, gross
0.50
1.25
32.77
10.76
7.80
37.16
10.21
98.75
33.47
10.81
37.66
100.00
Balance at December 31, 2022
Provision/(recapture) for acquired impaired loans
(560
(10
(851
Provision/(recapture) for acquired non-impaired loans and leases
(865
(158
(1
(346
(1,380
Provision for originated loans
306
(17
368
11,159
129
11,943
Total provision
Charge-offs for acquired impaired loans
Charge-offs for acquired non-impaired loans and leases
Charge-offs for originated loans and leases
Recoveries for acquired impaired loans
Recoveries for acquired non-impaired loans and leases
Recoveries for originated loans and leases
(843
(119
(1,171
Balance at March 31, 2023
591
1,035
2,871
883
3,917
21,276
2,145
3,488
50,930
7,652
85,513
Total loans and leases at March 31, 2023, gross
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
0.06
Loans and leases ending balance as a percentage of total loans and leases, gross
0.57
0.10
0.62
1.29
34.41
9.05
8.01
0.03
10.05
98.71
34.98
8.11
37.78
Non-Performing Assets
Non-performing loans and leases include loans and leases 90 days past due and still accruing and loans and leases accounted for on a non-accrual basis. Non-performing assets consist of non-performing loans and leases plus other real estate owned. Non-performing assets at March 31, 2024 and December 31, 2023 totaled $68.7 million and $65.3 million, with the increase driven mainly by increases to non-accrual loans and leases. The U.S. government guaranteed portion of non-performing loans totaled $7.1 million at March 31, 2024 and $4.2 million at December 31, 2023.
Total OREO decreased from $1.2 million at December 31, 2023 to $785,000 at March 31, 2024. The $415,000 decrease in OREO resulted 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)
Past due loans and leases 90 days or more and still accruing interest
Total non-performing loans and leases
Total non-performing assets
68,684
65,307
Total non-performing loans and leases as a percentage of total loans and leases
0.96
Total non-accrual loans and leases as a percentage of total loans and leases
Total non-performing assets as a percentage of total assets
0.74
Allowance for credit losses - loans and leases, as a percentage of non-performing loans and leases
150.76
158.62
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
7,138
4,154
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
0.90
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
0.69
Our loan and lease growth is funded primarily through core deposits. We gather deposits primarily through each of our 47 branch locations in the Chicago metropolitan area and one branch in Wauwatosa, Wisconsin. Through our branch network, online, mobile and direct banking channels, we offer a variety of deposit products including demand deposit accounts, interest-bearing products, savings accounts, and certificates of deposit. We offer competitive online, mobile, and direct banking channels. Small businesses are a significant source of low cost deposits as they value convenience, flexibility, and access to local decision makers that are responsive to their needs.
Total deposits at March 31, 2024 were $7.4 billion, representing an increase of $173.2 million, or 2.4%, compared to $7.2 billion at December 31, 2023, driven by an increase in time deposits and money market demand accounts. Non-interest-bearing deposits were $1.9 billion, or 25.2% of total deposits, at March 31, 2024, a decrease of $54.1 million, or 2.8%, compared to $1.9 billion at December 31, 2023, or 26.6% of total deposits. Core deposits were 85.7% and 87.0% of total deposits at March 31, 2024 and December 31, 2023, 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)
982,090
4.84
529,078
2.64
Time deposits ($100,000 and above)
1,010,267
4.72
437,331
2.24
7,226,321
5,728,297
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Our average cost of deposits was 2.56% during the three months ended March 31, 2024, compared to 1.15% for the three months ended March 31, 2023. This increase was principally attributed to higher rates on interest-bearing deposits as a result of the rising interest rate environment, an increase in interest bearing deposits and corresponding decrease in non-interest bearing deposits both related to deposit flows and the impact of the Inland acquisition. The ratio of our average non-interest bearing deposits to total average deposits was 25.9% during the three months ended March 31, 2024, compared to 36.3% during the three months ended March 31, 2023. We had $436.3 million in brokered time deposits at March 31, 2024 and $480.0 million at December 31, 2023, which represented 5.9% and 6.7% of total deposits, respectively. The decrease in brokered deposits was due to increases in other sources of funding. Our loan and lease to deposit ratio was 92.54% at March 31, 2024 compared to 93.39% at December 31, 2023.
The following table shows time deposits and other time deposits of $250,000 or more by time remaining until maturity as of March 31, 2024 (dollars in thousands):
Less than $250,000
$250,000 or Greater
Uninsured Portion
Three months or less
396,340
103,894
500,234
36,144
Over three months through six months
574,975
164,784
739,759
53,284
Over six months through 12 months
518,783
135,457
654,240
50,957
Over 12 months
104,192
24,199
128,391
8,949
149,334
Total estimated uninsured deposits, were $2.1 billion and $1.9 billion as of March 31, 2024 and December 31, 2023.
Short Term and Long 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 March 31, 2024 and December 31, 2023, we had an available borrowing capacity from the FHLB of $2.6 billion and $2.8 billion, respectively, subject to the availability of collateral. At March 31, 2024, the Company had $470.0 million of FHLB advances outstanding with a maturities ranging from April 2024 to June 2024. The company also had a $200.0 million advance taken as part of the Bank Term Funding Program ("BTFP") and a $16.7 million term loan outstanding maturing in May 2026.
On January 17, 2024, the Company entered into a Letter Agreement with the Federal Reserve Bank ("FRB") of Chicago that allows the Bank to access the BTFP. On January 22, 2024, the Company opened an advance of $200.0 million from the FRB as part of the BTFP. Under the terms of the BTFP, the bank pledges securities to FBR Chicago as collateral for available advances. The advance carries a fixed interest rate of 4.91%, and matures on January 22, 2025. Advances under the BTFP are prepayable at any time without a prepayment penalty.
The Company has the capacity to borrow funds from the discount window of the Federal Reserve System. There were no borrowings outstanding under the Federal Reserve Bank discount window line as of March 31, 2024 and December 31, 2023. The Company pledges loans as collateral for any borrowings under the Federal Reserve Bank discount window.
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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:
259,176
551,501
625,000
1.92
4.25
5.47
4.91
Federal funds purchased:
Bank Term Funding Program:
153,846
4.92
Term Loan:
16,685
7.77
7.62
Revolving Line of Credit:
5,316
7,500
8.33
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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 decreased by $6.1 million, from $40.6 million at December 31, 2023 to $34.5 million at March 31, 2024.
Liquidity
We manage liquidity based upon factors that include the amount of core deposits as a percentage of total deposits, the level of diversification of our funding sources, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities, the ability to securitize and sell certain pools of assets and other factors.
Our liquidity needs are primarily met by cash and investment securities positions, growth in deposits, cash flow from amortizing loan portfolios, and borrowings from the FHLB. For additional information regarding our operating, investing, and financing cash flows, see Consolidated Statements of Cash Flows in our Unaudited Interim Condensed Consolidated Financial Statements included elsewhere in this report.
As of March 31, 2024, Byline Bank had maximum advance potential from the FHLB of $3.1 billion and $868.8 million from the FRB. As of March 31, 2024, Byline Bank had open FHLB advances of $470.0 million and open letters of credit of $13.5 million. Based on collateral and securities pledged, our available aggregate borrowing capacity at March 31, 2024 was $1.4 billion. In addition, Byline Bank had uncommitted federal funds lines available of $135.0 million available at March 31, 2024.
As of December 31, 2023, Byline Bank had maximum borrowing capacity from the FHLB of $3.1 billion and $866.5 million from the FRB. As of December 31, 2023, Byline Bank had open advances of $325.0 million and open letters of credit of $19.7 million. Based on collateral and securities pledged, our available aggregate borrowing capacity at December 31, 2023 was $1.6 billion. In addition, Byline Bank had an uncommitted federal funds line available of $135.0 million available at December 31, 2023.
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 205 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 $15.0 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, each subject to the existing Negative Pledge Agreement dated October 11, 2018, as amended.
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, 2023 for additional information. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.
We expect that our cash and liquidity resources will be generated by the operations of Byline Bank, which we expect to be sufficient to satisfy our liquidity and capital requirements for at least the next twelve months.
Capital Resources
Stockholders’ equity at March 31, 2024 was $1.0 billion compared to $990.2 million at December 31, 2023, an increase of $18.9 million, or 1.9%. The increase was primarily driven by an increase in retained earnings, offset by an increase in accumulated other comprehensive loss during the three months ended March 31, 2024, reflecting the unrealized losses in our available-for-sale securities portfolio of $136.8 million compared to $130.2 million as of December 31, 2023.
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
65
amounts and ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, (referred to as the “leverage ratio”), as defined under these capital requirements.
As of March 31, 2024, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized.” There have been no conditions or events since March 31, 2024 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
1,153,483
675,398
8.00
Bank
1,113,131
13.22
673,490
841,862
10.00
Tier 1 capital to risk weighted assets:
981,085
506,548
6.00
1,015,732
12.07
505,117
Common Equity Tier 1 (CET1) to risk weighted assets:
894,085
379,911
4.50
378,838
547,210
6.50
Tier 1 capital to average assets:
359,579
359,280
449,100
5.00
1,123,568
13.38
671,576
1,085,915
12.97
669,904
837,380
956,027
11.39
503,682
993,375
11.86
502,428
869,027
10.35
377,762
376,821
544,297
10.86
352,089
11.30
351,735
439,669
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 March 31, 2024 reflect 75% of the CECL impact and December 31, 2023 reflect 50% 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 March 31, 2024.
Provisions of state and federal banking regulations may limit, by statute, the amount of dividends that may be paid to the Company by Byline Bank without prior approval of Byline Bank’s regulatory agencies. The Company is economically dependent on the cash dividends received from Byline Bank. These dividends represent the primary cash flow from operating activities used to service obligations. For the three months ended March 31, 2024 the Company received $11.5 million in cash dividends from Byline Bank, in order to pay the required interest on its outstanding subordinated note, junior subordinated debentures in connection with its trust preferred securities interest, principal and interest payments related to its term note and revolving line of credit, and to fund other Company-related activities. For the year ended December 31, 2023, the Company received $35.0 million in cash dividends from Byline Bank, in order to pay the required interest on its outstanding subordinated note and junior subordinated debentures in connection with its trust preferred securities interest, principal and interest on its term loan and revolving line of credit, and to fund other Company-related activities.
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On December 6, 2023, 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 the Company’s outstanding common stock. The program will be effect from January 1, 2024 until December 31, 2024, 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. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase program will be determined by the Company at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market and economic conditions and applicable legal requirements. The shares authorized to be repurchased represented approximately 2.9% of the Company’s outstanding common stock at December 31, 2023. No shares were repurchased under this program during the three months ended March 31, 2024.
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.
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 15.00% and maturities up to 2052. Variable rate loan commitments have interest rates ranging from 4.00% to 18.00% and maturities up to 2053.
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 accrued interest receivable and other assets, and accrued interest payable and other liabilities, respectively. Because the derivative assets and liabilities recorded on the balance sheet at March 31, 2024 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 March 31, 2024, 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, 2023 for additional information on derivatives.
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 March 31,
(dollars in thousands, except per share data)
Net income and earnings per share excluding significant items
Reported Net Income
Significant items:
Impairment charges on assets held for sale and ROU asset
Merger-related expense
Tax benefit
(52
(56
Adjusted Net Income
30,582
24,398
Reported Diluted Earnings per Share
Adjusted Diluted Earnings per Share
Adjusted non-interest expense:
Non-interest expense
Less: Impairment charges on assets held for sale and ROU asset
Less: Merger-related expenses
Adjusted non-interest expense
53,615
48,291
Adjusted non-interest expense excluding amortization of intangible assets:
Less: Amortization of intangible assets
Adjusted non-interest expense excluding amortization of intangible assets
52,270
46,836
Pre-tax pre-provision net income:
Pre-tax income
Add: Provision for credit losses
Pre-tax pre-provision net income
47,205
42,063
Adjusted pre-tax pre-provision net income:
Merger-related expenses
Adjusted pre-tax pre-provision net income
47,399
42,572
Taxable equivalent net interest income:
Add: Tax-equivalent adjustment
Total revenues:
Add: non-interest income
Total revenues
101,014
90,863
Tangible common stockholders' equity:
Total stockholders' equity
Less: Goodwill and other intangibles
157,432
Tangible common stockholders' equity
806,916
638,218
Tangible assets:
7,530,346
Tangible assets
9,208,370
7,372,914
Average tangible common stockholders' equity:
Average total stockholders' equity
Less: Average goodwill and other intangibles
202,773
158,181
Average tangible common stockholders' equity
796,033
626,108
Average tangible assets:
Average total assets
Average tangible assets
8,828,168
7,186,970
Tangible net income available to common stockholders:
Net income available to common stockholders
Add: After-tax intangible asset amortization
Tangible net income available to common stockholders
31,426
25,011
Adjusted tangible net income available to common stockholders:
Tax benefit on significant items
Adjusted tangible net income available to common stockholders
31,568
25,464
70
Pre-tax pre-provision return on average assets:
Pre-tax pre-provision return on average assets
Adjusted pre-tax pre-provision return on average assets:
Net interest margin, fully taxable equivalent
Total average interest-earning assets
Non-interest income to total revenues:
Non-interest income
Non-interest income to total revenues
Adjusted non-interest expense to average assets:
Adjusted non-interest expense to average assets
Adjusted efficiency ratio:
Adjusted efficiency ratio
Adjusted return on average assets:
Adjusted net income
Adjusted return on average assets
Adjusted return on average stockholders' equity:
Average stockholders' equity
Adjusted return on average stockholders' equity
Tangible common equity to tangible assets:
Tangible common equity
Tangible common equity to tangible assets
Return on average tangible common stockholders' equity:
Return on average tangible common stockholders' equity
Adjusted return on average tangible common stockholders' equity:
Adjusted return on average tangible common stockholders' equity
Tangible book value per share:
Tangible book value per share
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 outline 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 customers’ and Byline Bank’s needs. As of March 31, 2024, we had a notional amount of $1.3 billion of interest rate derivatives outstanding that 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 evaluate interest rate risk through the use of two different models: net interest income ("NII") simulations and economic value of equity ("EVE") simulations. The simulations provide an estimate of the impact of changes in interest rates on equity and net interest income based on a variety of assumptions. Changes in assumptions may significantly alter the results of our simulations.
We use an NII 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 NII simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (1) asset prepayment speed assumptions, (2) predefined credit spreads for both investment securities and loans, (3) re-pricing characteristics for market-rate-sensitive instruments on and off balance sheet, and (4) the effect of interest rate limitations in our assets, such as floors and caps. 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.
We use an EVE simulation to analyze the Company's long-term view of interest rate risk as it analyzes the Company's future cash flows. EVE is defined as the present value of the Company's assets, less the present value of its liabilities, adjusted for off-balance sheet items, with the results showing a theoretical change in the economic value of stockholders' equity as interest rates change. Our EVE simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (1) asset prepayment speed assumptions, (2) deposit decay rate assumptions, (3) predefined credit spreads for both investment securities and loans (4) re-pricing characteristics for market-rate-sensitive instruments on and off balance sheet, (5) amortization schedule, and (6) discount rates associated with the products on balance sheet.
Potential changes to our net interest income and economic value of equity in hypothetical rising and declining interest rate scenarios calculated as of March 31, 2024 are presented below.
Estimated Increase/Decrease in Net Interest Income
Estimated PercentageChange in EVE
Year ending December 31
As of
Basis Point Change in Interest Rates
+300
13.2%
14.7%
(13.4)%
+200
8.8%
9.7%
(9.1)%
+100
4.4%
4.9%
(4.6)%
-100
(2.1)%
(2.8)%
5.0%
-200
(5.3)%
(7.2)%
8.9%
-300
(8.2)%
(10.9)%
11.4%
For the dynamic balance sheet and rate shift scenarios, we assume a balance sheet that reflects management's growth outlook and interest rates follow a forward yield curve. The shocks are defined as gradual shifts up and down it by 1/12th of the total change in rates each month for 12 months. For dynamic balance sheet and rate shifts, a gradual shift downward of 100 basis points would result in a 1.4% decrease to net interest income, and a gradual shift upwards of 100 and 200 basis points would result in 2.3% and 4.5% increases to net interest income, respectively, over the next 12 months.
The Bank's aggregate interest rate risk exposure is monitored and managed based on the economic outlook and under guidance of board-approved policy limits. The results of the simulations are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted including the timing, magnitude, frequency of interest rate changes, changes in market conditions, depositor behavior changes, and management strategies.
Item 4. Controls and Procedures.
The Company’s management, including our Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of March 31, 2024, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the quarter ended March 31, 2024, 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, 2023 that was filed with the SEC on March 4, 2024.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On December 6, 2023, 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, 2024 until December 31, 2024 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 March 31, 2024. We did not purchase any shares of our common stock during the first quarter of 2024 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
January 1 - January 31, 2024
146,308
23.24
1,250,000
February 1 - February 29, 2024
78,075
21.02
March 1 - March 31, 2024
20.67
224,782
22.46
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits.
EXHIBIT
Number
Description
3.1
Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
Certain instruments defining the rights of holders of long-term debt securities of the registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
31.1
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1(a)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2024, 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 3, 2024
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)