UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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, 44,260,652 shares outstanding as of July 31, 2024
BYLINE BANCORP, INC.
June 30, 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
46
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
79
Item 4.
Controls and Procedures
80
PART II.
OTHER INFORMATION
81
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
82
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
$
68,251
60,431
Interest bearing deposits with other banks
662,206
165,705
Cash and cash equivalents
730,457
226,136
Equity and other securities, at fair value
8,745
8,743
Securities available-for-sale, at fair value (amortized cost at June 30, 2024—$1,573,276; December 31, 2023—$1,516,801)
1,386,827
1,342,480
Securities held-to-maturity, at amortized cost (fair value at June 30, 2024—$601; December 31, 2023 —$1,149)
606
1,157
Restricted stock, at cost
31,775
16,304
Loans held for sale
13,360
18,005
Loans and leases:
Loans and leases
6,891,204
6,684,306
Allowance for credit losses - loans and leases
(99,730
)
(101,686
Net loans and leases
6,791,474
6,582,620
Servicing assets, at fair value
19,617
19,844
Premises and equipment, net
63,919
66,627
Goodwill and other intangible assets, net
200,788
203,478
Bank-owned life insurance
98,519
96,900
Deferred tax assets, net
48,888
50,058
Accrued interest receivable and other assets
238,840
249,615
Total assets
9,633,815
8,881,967
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing demand deposits
1,762,891
1,905,876
Interest-bearing deposits
5,584,290
5,271,123
Total deposits
7,347,181
7,176,999
Other borrowings
918,738
395,190
Subordinated notes, net
73,953
73,866
Junior subordinated debentures issued to capital trusts, net
70,675
70,452
Accrued interest payable and other liabilities
190,254
175,309
Total liabilities
8,600,801
7,891,816
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
STOCKHOLDERS’ EQUITY
Preferred stock
—
Common stock
452
451
Additional paid-in capital
710,792
710,488
Retained earnings
481,232
429,036
Treasury stock, at cost
(47,993
(49,707
Accumulated other comprehensive loss, net of tax
(111,469
(100,117
Total stockholders’ equity
1,033,014
990,151
Total liabilities and stockholders’ equity
PreferredShares
CommonShares
Par value
0.01
Shares authorized
25,000,000
150,000,000
Shares issued
45,981,155
45,714,241
Shares outstanding
44,180,829
43,764,056
Treasury shares
1,800,326
1,950,185
See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Six Months Ended
June 30,
(dollars in thousands, except share and per share data)
2024
2023
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases
126,523
99,134
250,315
191,477
Interest on securities
10,514
6,559
20,248
13,159
Other interest and dividend income
4,532
1,579
9,327
2,638
Total interest and dividend income
141,569
107,272
279,890
207,274
INTEREST EXPENSE
Deposits
47,603
24,723
93,565
41,021
4,460
4,241
8,284
10,129
Subordinated notes and debentures
2,980
2,142
5,974
4,240
Total interest expense
55,043
31,106
107,823
55,390
Net interest income
86,526
76,166
172,067
151,884
PROVISION FOR CREDIT LOSSES
6,045
5,790
12,688
15,615
Net interest income after provision for credit losses
80,481
70,376
159,379
136,269
NON-INTEREST INCOME
Fees and service charges on deposits
2,548
2,233
4,975
4,353
Loan servicing revenue
3,216
3,377
6,580
6,757
Loan servicing asset revaluation
(2,468
(865
(3,171
(209
ATM and interchange fees
1,163
1,112
2,238
2,175
Change in fair value of equity securities, net
(390
193
543
Net gains on sales of loans
6,036
5,704
11,569
10,852
Wealth management and trust income
942
1,039
2,099
1,963
Other non-interest income
1,797
1,498
4,025
3,002
Total non-interest income
12,844
14,291
28,317
29,436
NON-INTEREST EXPENSE
Salaries and employee benefits
33,911
29,642
67,864
60,036
Occupancy and equipment expense, net
4,639
4,404
9,923
8,848
Impairment charge on assets held for sale
20
Loan and lease related expenses
741
488
1,426
1,451
Legal, audit and other professional fees
3,708
3,675
6,427
6,789
Data processing
4,036
4,272
8,181
8,055
Net (gain) loss recognized on other real estate owned and other related expenses
(62
288
(160
185
Other intangible assets amortization expense
1,345
1,455
2,690
2,910
Other non-interest expense
4,892
5,104
10,668
9,834
Total non-interest expense
53,210
49,328
107,019
98,128
INCOME BEFORE PROVISION FOR INCOME TAXES
40,115
35,339
80,677
67,577
PROVISION FOR INCOME TAXES
10,444
9,232
20,566
17,525
NET INCOME
29,671
26,107
60,111
50,052
EARNINGS PER COMMON SHARE
Basic
0.68
0.70
1.39
1.35
Diluted
1.37
1.34
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
(3,169
(13,822
(12,128
777
Tax effect
846
3,693
3,235
(207
Net of tax
(2,323
(10,129
(8,893
570
Cash flow hedges
Unrealized holding gains arising during the period
1,670
8,515
6,201
8,709
Reclassification adjustments for net gains included in net income
(4,719
(3,863
(9,555
(5,819
813
(1,243
895
(772
(2,236
3,409
(2,459
2,118
Total other comprehensive income (loss)
(4,559
(6,720
(11,352
2,688
Comprehensive income
25,112
19,387
48,759
52,740
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, March 31, 2023
37,713,427
390
598,103
356,365
(51,066
(108,142
795,650
Other comprehensive (loss), net of tax
Restricted stock activity, net
(547
1
(92
(25
(116
Issuance of common stock in connection with employee stock purchase plan
39,122
708
Cash dividends declared on common stock ($0.09 per share)
(3,394
Share-based compensation expense
1,707
Balance, June 30, 2023
37,752,002
391
599,718
379,078
(50,383
(114,862
813,942
Balance, January 1, 2023
37,492,775
389
598,297
335,794
(51,114
(117,550
765,816
Other comprehensive income, net of tax
220,105
(1,796
23
(1,771
Cash dividends declared on common stock ($0.18 per share)
(6,768
3,217
Balance, March 31, 2024
44,108,387
708,844
455,532
(48,869
(106,910
1,009,049
Other comprehensive loss, net of tax
Issuance of common stock upon exercise of stock options, net
19,800
222
19,886
(115
98
(17
778
32,756
(3,971
1,841
Balance, June 30, 2024
Balance, January 1, 2024
87,986
(109
(671
(780
296,031
(3,274
1,607
(1,666
(7,915
3,687
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
194
Impairment loss on assets held for sale
Depreciation and amortization of premises and equipment
2,582
1,932
Net amortization (accretion) of securities
(943
1,678
Net change in fair value of equity securities
(2
(543
Net gains on sales and disposal of premises and equipment
(460
(11,569
(10,852
Originations of U.S. government guaranteed loans
(143,643
(146,974
Proceeds from U.S. government guaranteed loans sold
106,830
162,600
Accretion of premiums and discounts on acquired loans, net
(7,940
(1,340
Net change in servicing assets
227
(2,543
Net losses (gains) on sales and valuation adjustments of other real estate owned
(55
392
Net amortization of other acquisition accounting adjustments
3,252
Amortization of subordinated debt issuance cost
87
Accretion of junior subordinated debentures discount
223
219
Deferred tax benefit
5,298
(140
Increase in cash surrender value of bank owned life insurance
(1,620
(1,118
Changes in assets and liabilities:
3,025
6,110
69,441
11,149
Net cash provided by operating activities
102,482
92,471
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale
(209,158
(11,221
Proceeds from maturities and calls of securities available-for-sale
77,764
4,463
Proceeds from paydowns of securities available-for-sale
75,740
44,708
Proceeds from maturities and calls of securities held-to-maturity
550
545
Redemptions (purchases) of Federal Home Loan Bank stock, net
(15,471
3,825
Proceeds from other loans sold
6,750
Net change in loans and leases
(214,688
(152,170
Purchases of premises and equipment
(1,539
Proceeds from sales of premises and equipment
365
Proceeds from sales of assets held for sale
1,459
Proceeds from sales of other real estate owned
480
2,559
Net cash used in investing activities
(284,202
(102,080
7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits
169,620
221,971
Repayments of line of credit
(11,250
Repayments of term loan
(3,333
Proceeds from short-term borrowings
1,700,000
9,723,100
Repayments of short-term borrowings
(1,355,000
(9,808,100
Proceeds from BTFP advances
200,000
Net increase (decrease) in securities sold under agreements to repurchase
(6,869
19,523
Dividends paid on common stock
(8,005
(6,655
Proceeds from issuance of common stock
878
602
Net cash provided by financing activities
686,041
150,441
NET CHANGE IN CASH AND CASH EQUIVALENTS
504,321
140,832
CASH AND CASH EQUIVALENTS, beginning of period
179,353
CASH AND CASH EQUIVALENTS, end of period
320,185
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest
102,417
46,538
Cash paid during the period for taxes
974
3,031
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of loans to other real estate owned
499
Right-of-use assets exchanged for operating lease liabilities
1,115
932
Common share withholding
2,668
1,771
Common dividend declared, not paid
(90
113
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 June 30, 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 as of December 31, 2023 and 2022 and for each of the three years in the period ended December 31, 2023.
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 $653,000, core system conversion expenses of $640,000, salaries and employee benefits of $17,000, and other non-interest expenses of $81,000 related to the Inland acquisition are reflected in non-interest expense on the Consolidated Statements of Operations for the three months ended June 30, 2023.
Merger-related expenses for the six months ended June 30, 2023, including acquisition advisory expenses of $909,000, core system conversion expenses of $839,000, salaries and employee benefits of $36,000, and other non-interest expenses of $96,000 related to the Inland acquisition are reflected in non-interest expense on the Consolidated Statements of Operations for the six months ended June 30, 2023.
There were no merger related expenses in the three and six months ended June 30, 2024.
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
10
used to calculate estimated fair values. Fair value adjustments associated with this transaction were finalized during the second quarter of 2024.
The following table presents a summary of the 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 and six months ended June 30, 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
For the Six Months Ended
Total revenues (net interest income and non-interest income)
103,200
210,995
27,670
52,995
Earnings per share—basic
0.64
1.23
Earnings per share—diluted
1.22
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
52,638
(853
51,785
U.S. Government agencies
164,453
(17,299
147,174
Obligations of states, municipalities, and political subdivisions
85,541
154
(5,305
80,390
Residential mortgage-backed securities
Agency
850,340
1,377
(102,519
749,198
Non-agency
131,968
(22,914
109,054
Commercial mortgage-backed securities
227,984
(34,036
193,948
Corporate securities
40,652
(3,872
36,780
Asset-backed securities
19,700
22
(1,224
18,498
1,573,276
1,573
(188,022
Held-to-maturity
(5
601
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
1,149
The Company did not classify securities as trading during the six months ended June 30, 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 June 30, 2024 and December 31, 2023, are summarized as follows:
Less than 12 Months
12 Months or Longer
Number ofSecurities
UnrealizedLosses
14,645
(65
37,140
(788
20,462
(47
118,307
(17,252
138,769
Obligations of states, municipalities and political subdivisions
85
20,361
(428
52,320
(4,877
72,681
129
155,273
(1,937
507,970
(100,582
663,243
21
14,768
94,286
(22,824
51
37,482
(306
141,892
(33,730
179,374
1,418
(73
35,362
(3,799
5,852
338
264,409
(2,946
993,129
(185,076
1,257,538
13
5,018
(4
31,843
(1,021
36,861
18
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
48
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 338 securities available-for-sale with unrealized losses at June 30, 2024. There was one security held-to-maturity with unrealized losses at June 30, 2024. There was no allowance for credit losses for held-to-maturity debt securities at June 30, 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 June 30, 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 and six months ended June 30, 2024 and 2023, respectively.
Securities posted and pledged as collateral were $727.6 million and $464.5 million at June 30, 2024 and December 31, 2023. At June 30, 2024 and December 31, 2023, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $471.1 million and $390.3 million, respectively, and for customer repurchase agreements of $37.6 million and $47.8 million, respectively. At June 30, 2024, there were $192.0 million of securities pledged to the Federal Reserve Bank ("FRB"). At December 31, 2023, no securities were pledged to the FRB. At June 30, 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 June 30, 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 June 30, 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
43,997
43,361
Due from one to five years
111,663
104,964
Due from five to ten years
162,003
145,903
Due after ten years
45,321
40,399
Mortgage-backed securities
1,210,292
1,052,200
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
2,290,656
2,317,289
Residential real estate
727,092
718,733
Construction, land development, and other land
532,312
528,275
Commercial and industrial
2,620,828
2,444,405
Installment and other
2,788
3,138
Lease financing receivables
704,740
659,686
Total loans and leases
6,878,416
6,671,526
Net unamortized deferred fees and costs
6,471
6,600
Initial direct costs
6,317
6,180
Net minimum lease payments
679,887
644,507
Unguaranteed residual values
111,057
92,127
Unearned income
(86,204
(76,948
Total lease financing receivables
Lease financial receivables before allowance for credits losses - loans and leases
711,057
665,866
Total loans and leases consist of originated loans and leases, purchased credit deteriorated ("PCD") and acquired non-credit-deteriorated loans and leases. At June 30, 2024 and December 31, 2023, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $94.9 million and $93.3 million, respectively. At June 30, 2024 and December 31, 2023, the discount on the unguaranteed portion of U.S. government guaranteed loans was $25.3 million and $26.2 million, respectively, which are included in total loans and leases. At June 30, 2024 and December 31, 2023, installment and other loans included overdraft deposits of $693,000 and $754,000, respectively, which were reclassified as loans. At June 30, 2024 and December 31, 2023, loans and leases and loans held for sale pledged as security for borrowings were $2.0 billion and $2.2 billion, respectively. Accrued interest on loans and leases was $38.9 million for each of the quarters ended June 30, 2024 and December 31, 2023, respectively, and is included in the accrued interest receivable and other assets line item on the Condensed Consolidated Statement of Financial Condition.
15
The minimum annual lease payments for lease financing receivables as of June 30, 2024 are summarized as follows:
Minimum LeasePayments
111,886
2025
220,017
2026
171,074
2027
110,416
2028
54,533
Thereafter
11,961
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 June 30, 2024 and December 31, 2023:
Originated
Purchased Credit Deteriorated
AcquiredNon-Credit-Deteriorated
1,924,797
114,053
254,858
2,293,708
498,578
40,728
188,489
727,795
445,919
84,849
530,777
2,493,229
17,796
113,997
2,625,022
2,576
116
153
2,845
710,784
273
6,075,883
172,702
642,619
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
PCD loans—The unpaid principal balance and carrying amount of PCD loans excluding an allowance for credit losses - loans and leases of $8.0 million and $10.0 million at June 30, 2024 and December 31, 2023, respectively, were as follows:
UnpaidPrincipalBalance
CarryingValue
157,757
185,007
85,403
88,036
6,678
32,140
20,609
21,870
780
789
Total purchased credit deteriorated loans
271,227
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.
16
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 $3.9 million and $4.7 million at June 30, 2024 and December 31, 2023, respectively, were as follows:
262,635
284,819
202,288
227,392
85,395
87,143
119,085
123,540
165
170
274
628
Total acquired non-credit-deteriorated loans and leases
669,842
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.
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 June 30, 2024 and December 31, 2023:
17
Term loans amortized cost by origination year
Revolving
2022
2021
2020
Prior
Commercial Real Estate
Pass
140,888
246,084
421,253
453,722
231,309
493,618
15,028
2,001,902
Watch
2,281
26,344
26,638
39,933
32,761
69,916
197,873
Special Mention
2,911
9,794
2,572
31,237
46,514
Substandard
2,953
3,750
4,937
839
34,940
47,419
143,169
275,381
454,552
508,386
267,481
629,711
Gross charge-offs for the six months ended June 30, 2024
295
187
718
2,299
3,499
Residential Real Estate
19,634
49,142
133,696
118,396
51,791
246,883
57,520
677,062
5,139
598
22,666
11,892
1,567
41,862
3,753
3,857
200
579
29
101
3,179
915
5,014
19,834
49,721
138,864
119,095
78,221
261,960
60,100
Construction, Land Development, & Land
5,845
141,785
135,873
159,474
37,079
2,898
345
483,299
3,521
13,661
17,237
3,096
37,515
454
9,509
9,963
145,306
149,988
186,220
5,994
Commercial & Industrial
224,599
482,778
477,896
270,323
97,392
197,833
547,736
2,298,557
724
45,958
21,902
45,389
1,605
20,535
46,818
182,931
1,381
23,847
10,395
1,724
4,980
43,089
85,416
92
6,003
11,266
9,408
4,674
17,523
9,152
58,118
225,415
536,120
534,911
335,515
105,395
240,871
646,795
746
3,777
1,203
497
6,926
13,149
Installment and Other
158
378
103
44
127
360
1,601
2,771
67
408
1,604
Lease Financing Receivables
162,555
283,352
169,324
70,434
20,328
2,285
708,278
54
817
-
882
130
66
196
122
988
41
1,701
283,474
170,366
71,794
20,476
2,392
334
377
284
58
1,053
Total Loans and Leases
553,679
1,203,519
1,338,145
1,072,393
438,026
943,877
622,230
6,171,869
3,005
75,823
67,394
103,974
57,043
105,487
48,388
461,114
27,212
29,698
8,179
36,289
43,187
145,946
292
9,657
16,033
15,012
5,531
55,683
10,067
112,275
556,976
1,290,380
1,448,784
1,221,077
508,779
1,141,336
723,872
1,080
4,449
1,674
1,273
9,225
17,701
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
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
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
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
6,643
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
104
425
327,099
207,640
93,242
29,343
5,443
856
663,623
1,008
1,091
179
36
316
259
138
384
55
836
327,358
207,845
94,634
29,593
5,544
892
734
886
549
139
75
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 June 30, 2024 and at December 31, 2023 there were no loans or leases which were risk rated Doubtful or Loss. As of June 30, 2024 and December 31, 2023, respectively, there were $58.8 million and $52.2 million of term loans that had been converted from revolving loans.
19
The following tables summarize contractual delinquency information of the loans and leases considered for inclusion in the allowance for credit losses - loans and leases calculation at June 30, 2024 and December 31, 2023:
Revolving Loans
TotalLoans
Current
272,428
451,268
504,037
267,218
607,648
2,260,796
30-59 Days Past Due
60-89 Days Past Due
172
742
1,550
Greater than 90 Accruing
Non-accrual
2,648
4,177
263
21,321
31,362
Total Past Due
3,284
4,349
22,063
32,912
136,347
118,994
258,394
58,885
720,196
2,488
381
300
3,169
3,139
4,384
2,517
3,566
1,215
7,599
225,323
534,074
527,308
333,045
101,186
229,335
643,388
2,593,659
70
201
574
845
516
1,508
991
1,042
4,173
1,460
5,894
2,354
3,218
10,494
2,833
26,345
2,046
7,603
2,470
4,209
11,536
3,407
31,363
2,822
162,268
281,980
167,798
70,481
20,178
2,343
705,048
272
226
2,274
594
1,015
72
2,041
989
40
1,694
287
1,494
2,568
1,313
298
49
6,009
556,397
1,283,887
1,432,812
1,212,821
504,009
1,104,122
719,250
6,813,298
848
3,253
874
6,288
1,110
3,159
633
1,063
1,830
7,810
4,535
9,560
7,198
3,481
34,994
3,748
63,808
6,493
15,972
8,256
4,770
37,214
4,622
77,906
Total non-accrual loans without an allowance included $10.1 million of commercial real estate loans, $790,000 of residential real estate, and $4.3 million of commercial and industrial loans as of June 30, 2024. The Company recognized
$1.1 million and $1.3 million of interest income on non-accrual loans and leases for the three and six months ended June 30, 2024, respectively.
259,998
474,878
558,236
279,098
178,729
501,620
2,281,748
359
648
638
74
3,176
484
5,379
826
286
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
426
38
1,349
540
481
302
218
45
1,525
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 $1.0 million and $2.0 million of interest income on non-accrual loans and leases for the three and six months ended June 30, 2023, respectively.
The following table summarize the balance and activity within the allowance for credit losses - loans and leases, the components of the allowance for credit losses - loans and leases by loans and leases individually and collectively evaluated for impairment, and corresponding loan and lease balances by type for the three and six months ended June 30, 2024 are as follows:
CommercialReal Estate
ResidentialReal Estate
Construction, Land Development,and Other Land
Commercialand Industrial
Installmentand Other
LeaseFinancingReceivables
Three months ended
Beginning balance
31,440
3,348
2,930
56,231
33
8,384
102,366
Provision/(recapture)
(3,627
(326
10,561
(3
6,878
Charge-offs
(442
(9,530
(680
(10,652
Recoveries
322
1,138
Ending balance
27,852
3,023
2,723
57,584
30
8,518
99,730
Six months ended
33,237
3,495
2,906
53,782
8,230
101,686
(2,803
(474
(183
16,397
(6
838
13,769
(3,499
(13,149
(1,053
(17,701
917
554
503
Ending balance:
Individually evaluated for impairment
7,329
57
16,185
23,571
Collectively evaluated for impairment
20,523
2,966
41,399
76,159
Total allowance for credit losses - loans and leases
Loans and leases ending balance:
36,755
3,788
35,210
75,753
2,256,953
724,007
2,589,812
6,815,451
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 and six months ended June 30, 2023:
June 30, 2023
24,738
2,679
3,498
51,849
7,676
90,465
4,359
(198
(1,563
3,161
691
6,467
(2,945
(2,097
(462
(5,504
225
63
727
221
1,237
26,377
2,544
1,935
53,640
43
8,126
92,665
26,061
3,140
3,134
41,889
24
81,924
Provision
3,240
(651
(1,199
13,964
810
16,179
(3,911
(3,887
(766
(8,573
987
64
406
3,135
8,555
17,399
25,954
17,822
36,241
66,711
30,750
38,485
69,235
1,932,696
504,947
387,943
2,066,265
3,736
605,695
5,501,282
1,963,446
2,104,750
5,570,517
The Company decreased the allowance for credit losses - loans and leases by $2.6 million and $2.0 million for the three and six months ended June 30, 2024, respectively. The Company increased the allowance for credit losses - loans and leases by $2.2 million and $10.7 million for the three and six months ended June 30, 2023, respectively.
For loans individually evaluated for impairment, the Company increased allowance for credit losses - loans and leases by $1.9 million and recaptured $3.7 million for the three and six months ended June 30, 2024, and increased the allowance for credit losses for loans individually evaluated by $3.9 million and $10.6 million for the three and six months ended June 30, 2023.
For loans and leases collectively evaluated for impairment, the Company recaptured $4.5 million and increased the allowance by $1.7 million for the three and six months ended June 30, 2024. For loans and leases collectively evaluated for impairment, the Company recaptured $1.7 million and increased the allowance by $124,000 for three and six months ended June 30, 2023, respectively.
The decrease in allowance for credit losses - loans and leases was mainly due to charge-offs of individually assessed loans previously reserved for and improvement in macro-economic factors impacting the collectively assessed portfolio.
There were no borrowers receiving loan modifications during the three months ended March 31, 2024. The following table presents loans with modified terms for the three and six months ended June 30, 2024:
Term Modification
Total Modified by Class
% of Class of Loans and Leases
2,501
0.1
%
1,470
3,971
The financial effect of the loan modifications presented above reflects a three-month weighted average extension of maturity date.
The following table presents the amortized cost basis of loans that were both experiencing financial difficulty and modified during the three and six months ended June 30, 2023, by type of modification:
Three Months EndedJune 30, 2023
Payment Delay
Combination Term Modification and Interest Rate Reduction
110
0.0
11,210
0.5
Total modified loans
11,320
0.2
Six Months EndedJune 30, 2023
8,719
51,370
385
60,474
2.9
8,829
60,584
1.1
Loans reflected as having a payment delay included a general adjustment in loan terms similar to those of pass-rated credits. Loans having term modifications included extension of term as a result of a new borrower structure and other miscellaneous term adjustments. Loans having a combination of term modification and interest rate reduction reflect a longer amortization period and a reduced weighted average contractual rate from 8.85% to 7.01%.
As of June 30, 2024, the amortized cost of commercial real estate loans that had a payment default and were modified in the twelve months prior to default was $2.8 million, which represented 0.14% of outstanding commercial estate loans.
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 June 30, 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
9,808
26,947
1,365
1,844
28,767
35,572
64,339
2,793
800
3,593
44,749
113,494
The following table presents the change in the balance of the allowance for credit losses - unfunded commitments as of June 30, 2024 and 2023:
3,388
4,316
3,636
4,203
Recapture for unfunded commitments
(833
(677
(1,081
(564
2,555
3,639
Note 6—Servicing Assets
Activity for servicing assets and the related changes in fair value for the three and six months ended June 30, 2024 and 2023 was as follows:
Three Months Ended June 30,
Six Months Ended June 30,
20,992
20,944
19,172
Additions, net
1,093
1,636
2,944
2,752
Changes in fair value
21,715
Loans serviced for others are not included in the Condensed Consolidated Statements of Financial Condition. The unpaid principal balances of these loans serviced for others as of June 30, 2024 and December 31, 2023 were as follows:
Loan portfolios serviced for:
SBA guaranteed loans
1,497,752
1,530,401
USDA guaranteed loans
190,363
197,942
1,688,115
1,728,343
Loan servicing revenue totaled $3.2 million and $3.4 million for the three months ended June 30, 2024 and 2023, respectively. Loan servicing revenue totaled $6.6 million and $6.8 million for the six months ended June 30, 2024 and 2023, respectively.
Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in a downward valuation adjustment of $2.5 million and $865,000 for the three months ended June 30, 2024 and 2023, respectively. Loan servicing asset revaluation resulted in a downward valuation adjustment of $3.2 million and $209,000 for the six months ended June 30, 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 and six months ended June 30, 2024 and 2023:
785
3,712
1,200
4,717
Net additions to OREO
445
Proceeds from sales of OREO
(78
(1,795
(480
(2,559
Gains (losses) on sales of OREO
73
(85
Valuation adjustments
(12
(343
2,265
At June 30, 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 June 30, 2024, and December 31, 2023, there was $818,000 and $27,000 of consumer mortgage loans secured by residential real estate properties in foreclosure, respectively.
There were no internally financed sales of OREO for the three or six months ended June 30, 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
10,274
12,474
11,729
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 June 30, 2024, the weighted average discount rate of operating leases was 2.98% and the weighted average remaining life of operating leases was 5.2 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
658
621
1,244
Short-term lease cost
99
266
168
Variable lease cost
411
357
834
769
Less: Sublease income
(130
(159
(260
(315
Total lease cost, net
1,118
918
2,225
1,866
Operating cash flows paid for operating lease amounts included in the measure of lease liabilities were $1.2 million and $821,000 for the three months ended June 30, 2024 and 2023, respectively. Operating cash flows paid for operating lease amounts included in the measure of lease liabilities were $2.1 million and $1.7 million for the six months ended June 30, 2024 and 2023, respectively.
The Company recorded $693,000 and $619,000 of right-of-use lease assets in exchange for operating lease liabilities for the three months ended June 30, 2024 and 2023, respectively. The Company recorded $1.1 million and $932,000 of right-of-use lease assets in exchange for operating lease liabilities for the six months ended June 30, 2024 and 2023, respectively.
During the six months ended June 30, 2024, the Company recorded $194,000 of impairment related to two branch facilities that were closed in the of the second quarter of 2024. Impairments were recognized on operating lease right-of-use assets and are reflected in other non-interest expense.
27
The future minimum lease payments for operating leases, subsequent to June 30, 2024, as recorded on the Condensed Consolidated Statements of Financial Condition, are summarized as follows:
Operating LeaseCommitments
1,898
3,212
2,371
1,461
1,136
2,877
Total undiscounted lease payments
12,955
Less: Imputed interest
(1,226
Net lease liabilities
The total amount of minimum rentals to be received in the future on these subleases is approximately $1.1 million, and the leases have contractual lives extending through 2028. In addition to the above required lease payments, the Company has contractual obligations related primarily to information technology contracts and other maintenance contracts.
Note 9—Goodwill, Core Deposit Intangible and Other Intangible Assets
The following tables summarize the changes in the Company’s goodwill, core deposit intangible assets, and customer relationship intangible assets for the three and six months ended June 30, 2024 and 2023:
For the Three Months Ended June 30,
Core DepositIntangible
Customer RelationshipIntangible
181,705
19,115
148,353
7,498
1,581
Amortization
(1,278
(67
(1,388
17,837
1,246
1,514
Accumulated amortization
N/A
54,879
1,970
49,356
1,702
Weighted average remaining amortization period
7.9 years
4.7 years
4.8 years
5.7 years
For the Six Months Ended June 30,
20,393
1,380
8,886
1,648
(2,556
(134
(2,776
The following table presents the estimated amortization expense for core deposit intangible and customer relationship intangible assets remaining at June 30, 2024:
EstimatedAmortization
4,473
2,676
2,101
3,577
19,083
Note 10—Income Taxes
The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates.
The effective tax rate for the six months ended June 30, 2024 and 2023 was 25.5% and 25.9%, respectively. The Company recorded discrete income tax benefit of $564,000 and $140,000 related to the exercise of stock options and vesting of restricted shares for the six months ended June 30, 2024 and 2023, respectively.
Net deferred tax assets decreased to $48.9 million at June 30, 2024 compared to $50.1 million at December 31, 2023. The net decrease in the total net deferred tax assets was a result of a decreases in the allowance for credit losses - loans and leases, and loan basis and net operating losses, partially offset by an increase in unrealized losses on available-for-sale securities.
During the second quarter 2024, Illinois House Bill 4951 was enacted, which amends numerous Illinois tax law provisions, including a temporary limitation on Net Loss Deduction ("NLD") usage. For tax years 2024, 2025, and 2026, C Corporations are limited to applying a maximum of $500,000 of NLD to taxable income.
Note 11—Deposits
The composition of deposits was as follows as of June 30, 2024 and December 31, 2023:
Interest-bearing checking accounts
717,229
577,609
Money market demand accounts
2,323,245
2,266,030
Other savings
503,935
542,532
Time deposits (below $250,000)
1,610,308
1,520,082
Time deposits ($250,000 and above)
429,573
364,870
There were $403.1 million and $480.0 million of brokered deposits included in time deposits below $250,000 at June 30, 2024 and December 31, 2023, respectively.
At June 30, 2024, the scheduled maturities of time deposits were:
Scheduled Maturities
1,375,883
650,097
7,350
4,958
1,172
421
2,039,881
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:
670,000
325,000
Bank Term Funding Program
33,738
40,607
Term Loan
15,000
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 June 30, 2024 and December 31, 2023, there were no outstanding advances under the Federal Reserve Bank discount window line. We pledge 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, we entered into a Letter Agreement with the Federal Reserve Bank of Chicago ("FRB") that allows the Bank to access the Bank Term Funding Program ("BTFP"). On January 22, 2024, we 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 the FBR 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 June 30, 2024, one variable-rate Federal Home Loan Bank (“FHLB”) advance totaled $250.0 million, with an interest rate of 5.50% that may reset daily and maturity in September 2024. Total fixed-rate advances were $420.0 million at June 30, 2024, with interest rates between 5.42% and 5.44% and maturities in July 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 Federal Deposit Insurance Corporation ("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, we entered into a $30.0 million revolving credit agreement with a correspondent bank. Through subsequent amendments, the revolving credit agreement was reduced to $15.0 million. The amended revolving line of credit bears interest at either the 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 24, 2024, we entered into the First Amendment to the Second Amended and restated Term Loan and Revolving Credit Agreement (the "Amendment") with the lender, which is effective May 26, 2024, and provides for: (1) the renewal of the revolving line-of-credit facility of up to $15.0 million, and (2) extending its maturity date to May 25, 2025, subject to the existing Negative Pledge Agreement dated October 11, 2018, as amended.
At June 30, 2024, the variable term loan had an interest rate of 7.63% and an outstanding balance of $15.0 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 June 30, 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
2,599,365
2,781,747
Federal Reserve Bank of Chicago discount window line
764,587
866,490
Available federal funds lines
127,500
123,750
The Company hedges interest rates on borrowed funds using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. Refer to Note 16—Derivative Instruments and Hedging Activities for additional discussion.
Note 13—Subordinated Notes and Junior Subordinated Debentures
In 2020, the Company issued $75.0 million in fixed-to-floating subordinated notes that mature on July 1, 2030. The subordinated notes bear a fixed interest rate of 6.00% until July 1, 2025 and a floating interest rate equal to a benchmark rate, which is expected to be the three-month SOFR, plus 588 basis points thereafter until maturity. The transaction resulted in debt issuance costs of approximately $1.7 million that is being amortized over 10 years.
As of June 30, 2024, the net liability outstanding of the subordinated notes was $74.0 million. The Company may, at its option, redeem the notes, in whole or in part, on a semi-annual basis beginning on July 1, 2025, subject to obtaining the prior approval of the Federal Reserve to the extent such approval is then required. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
At June 30, 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 June 30, 2024
Interest Rate Spread(1)
Metropolitan Statutory Trust I
March 17, 2034
35,000
8.39%
SOFR + spread adjustment + 2.79%
First Evanston Bancorp Trust I
March 15, 2035
10,000
7.38%
SOFR + spread adjustment + 1.78%
AmeriMark Capital Trust I
April 23, 2034
5,000
8.34%
SOFR + spread adjustment + 2.75%
Inland Bancorp Trust II
September 15, 2035
7.20%
SOFR + spread adjustment + 1.60%
Inland Bancorp Trust III
December 15, 2036
7.25%
SOFR + spread adjustment + 1.65%
Inland Bancorp Trust IV
June 6, 2037
7,000
7.22%
SOFR + spread adjustment + 1.62%
Inland Bancorp Trust V
September 15, 2037
7.02%
SOFR + spread adjustment + 1.42%
Total liability, at par
87,000
Discount
(16,325
(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% (8.39% and 8.43% at June 30, 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% (7.38% and 7.43% at June 30, 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.
31
Note 14—Commitments and Contingent Liabilities
Legal contingencies—In the ordinary course of business, the Company and Bank have various outstanding commitments and contingent liabilities that are not recognized in the accompanying consolidated financial statements. In addition, the Company may be a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is currently not expected to have a material adverse effect on the Company’s Consolidated Financial Statements.
Operating lease commitments—Refer to Note 8—Leases for discussion of operating lease commitments.
Commitments to extend credit—The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Condensed Consolidated Statements of Financial Condition. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for funded instruments. The Company does not anticipate any material losses as a result of the commitments and letters of credit.
The following table summarizes the contract or notional amount of outstanding loan and lease commitments at June 30, 2024 and December 31, 2023:
Fixed Rate
Variable Rate
Commitments to extend credit
235,648
2,011,724
2,247,372
269,325
2,013,819
2,283,144
Letters of credit
630
65,467
66,097
612
67,443
68,055
236,278
2,077,191
2,313,469
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 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 18.50% 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.
32
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.
The following tables summarize the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at June 30, 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
2,504
Equity securities
6,241
5,957
Servicing assets
Derivative assets
57,426
Financial liabilities
Derivative liabilities
22,772
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
(27
Balance, end of period
639
34
The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the six months ended June 30, 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 June 30, 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% - 34.1%
16.3
0.0% - 55.0%
11.0
Expected weightedaverage loan life
0.0 - 8.3 Years
3.6 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 rate, or a calculation of the fair value of the underlying collateral less estimated selling costs. Valuations of individually assessed loans that are collateral dependent are supported by third party appraisals in accordance with the Bank's credit policy. Accordingly, individually evaluated loans are classified as Level 3.
Assets held for sale—Assets held for sale consist of former branch locations and real estate previously purchased for expansion. Assets are considered held for sale when management has approved to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based on the lower of carrying value or its fair value, less estimated costs to sell. The Company records assets held for sale on the Condensed Consolidated Statements of Financial Condition within accrued interest receivable and other assets.
Other real estate owned—Certain assets held within other real estate owned represent real estate or other collateral that has been adjusted to its estimated fair value, less cost to sell, as a result of transferring from the loan portfolio at the time of foreclosure or repossession and based on management’s periodic impairment evaluation. From time to time, non-recurring fair value adjustments to other real estate owned are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.
Adjustments to fair value based on such non-recurring transactions generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. The following tables summarize the Company’s assets that were measured at fair value on a non-recurring basis, as of June 30, 2024 and December 31, 2023:
Non-recurring
Individually evaluated loans
29,426
3,731
19,025
Assets held for sale
3,420
Other real estate owned
51,978
29,869
4,484
35
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
14,075
19,136
Loans and lease receivables, net (less impaired loans at fair value)
6,739,292
6,517,994
6,496,367
6,326,413
Accrued interest receivable
44,484
43,922
Non-interest-bearing deposits
5,578,956
5,268,926
Accrued interest payable
26,493
22,233
Securities sold under repurchase agreement
Subordinated notes
70,398
76,063
73,675
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 June 30, 2024 and December 31, 2023:
NotionalAmount
OtherAssets
OtherLiabilities
Derivatives designated as hedging instruments
Interest rate swaps designated as cash flow hedges
650,000
35,297
(822
37,475
Derivatives not designated as hedging instruments
Other interest rate derivatives
734,434
22,126
(21,931
706,126
19,447
(19,345
Other credit derivatives
12,833
(19
3,602
Total derivatives
1,397,267
(22,772
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 June 30, 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 June 30, 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 June 30, 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 $4.7 million and $3.9 million of interest income recorded during the three months ended June 30, 2024, and 2023, respectively, and is reported as a component of interest expense on deposits and other borrowings. Interest recorded on these swap transactions included $9.6 million and $5.8 million of interest income recorded during the six months ended June 30, 2024, and 2023, respectively, and is reported as a component of interest expense on deposits and other borrowings. As of June 30, 2024, the Company estimates $16.4 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 (loss) 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 $3.3 million and $3.7 million as of June 30, 2024 and December 31, 2023, respectively.
The following table reflects the cash flow hedges as of June 30, 2024:
Notional amounts
Derivative assets fair value
Derivative liabilities fair value
822
Weighted average remaining maturity
2.5 years
Receive rates are determined at the time the swaps become effective. As of June 30, 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 5.33%. As of June 30, 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
4,719
5,819
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 $734.4 million as of June 30, 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 June 30, 2024, there were $110,000 of net transaction fees, included in other non-interest income, related to these derivative instruments. There were no transaction fees during the three months ended June 30, 2023. During the six months ended June 30, 2024 and 2023, there were $114,000 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 June 30, 2024:
21,931
Weighted average pay rates
4.23
Weighted average receive rates
6.15
4.0 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 June 30, 2024 and December 31, 2023, for each period, the notional amount of risk participated in was $1.2 million and the notional amount of risk participated out was $2.6 million and
39
$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 June 30, 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 six months ended June 30, 2024 and 2023:
(20
115
(93
(193
(54
(74
(147
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
(971
971
(925
925
Collateral posted
(55,280
(54,930
Net credit exposure
1,175
(21,801
1,068
(18,420
As of June 30, 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 $22.8 million. If the Company had breached any of these provisions at June 30, 2024, it could have been required to settle its obligations under the agreements at their termination value less offsetting positions of $971,000. For purposes of this disclosure, the amount of posted collateral by the Company and counterparties is limited to the amount offsetting the derivative asset and derivative liability.
Note 17 – Share-Based Compensation
In June 2017, the Company's Board of Directors adopted, and the Company's stockholder approved, the 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”). The Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other equity-based, equity-related or cash-based awards. A total of 2,600,000 shares of our common stock have been reserved for issuance under the Omnibus Plan. As of June 30, 2024, there were 806,210 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 376,799 shares of restricted common stock, par value $0.01 per share. Of this total, 294,819 restricted shares will vest ratably over three years on each anniversary of the grant date, 12,861 restricted shares will cliff vest on the third anniversary of the grant date, and 3,083 restricted shares will vest on the first 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 six months ended June 30, 2024:
Omnibus Plan
Number of Shares
Weighted AverageGrant Date FairValue
Beginning balance, January 1, 2024
627,271
24.24
Granted
376,799
20.92
Incremental performance shares issued and vested
13,632
Vested
(234,308
22.57
Forfeited
(15,148
24.28
Ending balance outstanding at June 30, 2024
768,246
23.04
A total of 234,308 restricted shares vested during the six months ended June 30, 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 six months ended June 30, 2024 was $4.9 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
The following table summarizes restricted stock compensation expense for the six months ended June 30, 2024 and 2023:
Total share-based compensation - restricted stock
Income tax benefit
1,012
866
Unrecognized compensation expense
13,462
12,757
2.1 years
2.3 years
The fair value of the unvested restricted stock awards at June 30, 2024 was $18.2 million.
In October 2014, the Company adopted the Byline Bancorp, Inc. Equity Incentive Plan (“BYB Plan”). The maximum number of shares available for grants under this plan was 2,476,122 shares. The Company granted 1,846,968 options to purchase shares under this plan. In June 2017, the Board of Directors terminated the BYB Plan and no future grants can be made under this plan. Options to purchase a total of 537,270 shares remain outstanding under the BYB Plan at June 30, 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 June 30, 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 six months ended June 30, 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
(231,294
11.18
2,782
Expired
537,270
11.37
6,647
0.9
Exercisable at June 30, 2024
A total of 231,294 stock options were exercised during the six months ended June 30, 2024. Proceeds from exercise of stock options were $188,000 and had a related tax benefit of $742,000 for the six months ended June 30, 2024. No stock options were exercised during the during the year ended December 31, 2023. No stock options vested during the six months ended June 30, 2024 or the year ended December 31, 2023. No stock option compensation expense was recognized for the six months ended June 30, 2024 or the year ended December 31, 2023.
Pursuant to the terms of the Agreement and Plan of Merger with First Evanston and its subsidiaries, dated as of November 27, 2017 (the "First Evanston Merger Agreement"), each outstanding First Evanston option held by a participant in the First Evanston Bancorp, Inc. Stock Incentive Plan (the "FEB Plan") ceased to represent a right to acquire shares of First Evanston common stock and was assumed and converted automatically into a fully vested and exercisable adjusted option to purchase shares of Byline common stock (each an "Adjusted Option"). In accordance with the First Evanston Merger Agreement, the number of shares of Byline common stock to which each such Adjusted Option relates is equal to the product (rounded down to the nearest whole share of Byline common stock) of: (a) the number of shares of First Evanston common stock subject to the First Evanston option immediately prior to May 31, 2018, multiplied by (b) 4.725. Each Adjusted Option has an exercise price per share of Byline common stock equal to the quotient (rounded up to the nearest whole cent) of (x) the per share exercise price of such First Evanston option immediately prior to May 31, 2018, divided by (y) 4.725. The description of the conversion process is based on, and qualified by, the First Evanston Merger Agreement.
42
The following table discloses the activity in shares subject to options under the FEB Plan and the weighted average exercise prices, in actual dollars, for the year ended June 30, 2024:
FEB Plan
103,135
11.95
1,197
1.9
(3,000
11.65
100,135
11.96
1,179
1.4
A total of 3,000 stock Adjusted Options were exercised during the six months ended June 30, 2024. Proceeds from exercise of Adjusted Options were $35,000 and had a related tax benefit of $10,000 for the six months ended June 30, 2024. A total of 59,153 Adjusted Options were exercised during the during the year ended December 31, 2023, with proceeds of $659,000 and a related tax benefit of $158,000.
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 637,405 and 930,852 shares of common stock were outstanding as of June 30, 2024 and 2023, respectively. There were 768,246 and 676,454 restricted stock awards outstanding at June 30, 2024 and 2023, respectively. For the three and six months ended June 30, 2024 and 2023, there were no anti-dilutive weighted average shares outstanding.
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)
43,361,516
37,034,626
43,309,802
36,995,075
Incremental shares
380,324
303,280
428,328
449,306
Weighted-average common stock outstanding (dilutive)
43,741,840
37,337,906
43,738,130
37,444,381
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 June 30, 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 or six months ended June 30, 2024 and 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 June 30, 2024 and 2023, cash dividends were declared and paid to stockholders of record of our common stock of $0.09 per share. For each of the six months ended June 30, 2024 and 2023, cash dividends were declared and paid to stockholders of record of our common stock of $0.18 per share.
On July 23, 2024, our Board of Directors declared a cash dividend of $0.09 per share payable on August 20, 2024 to stockholders of record of our common stock as of August 6, 2024.
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 and six months ended June 30, 2024 and 2023:
Unrealized Gains on Cash Flow Hedges
Unrealized Losseson Available-for-SaleSecurities
Total AccumulatedOther ComprehensiveIncome (Loss)
33,024
(141,166
Other comprehensive income (loss), net of tax
36,433
(151,295
34,315
(151,865
29,908
(136,818
27,672
(139,141
30,131
(130,248
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 June 30, 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 $29.7 million, or $0.68 per basic and diluted common share, and $60.1 million or $1.39 per basic and $1.37 per diluted share for the three and six months ended June 30, 2024, compared to net income of $26.1 million, or $0.70 per basic and diluted common share, and $50.1 million or $1.35 per basic and $1.34 per diluted share and for the three and six months ended June 30, 2023, an increase of $3.6 million and $10.1 million for the three and six month periods. The increase in net income was attributable to a $10.4 million and $20.2 million increase in net interest income for the three and six months ended June 30, 2024. The increase in net interest income during the three and six months ended June 30, 2024 was primarily driven by higher yields on loans and leases, and organic growth in the loan and lease portfolio, as well as growth in the portfolio as a result of the Inland acquisition.
Dividends declared on common shares were $4.0 million and $3.4 million for the three months ended June 30, 2024 and 2023, respectively. Dividends paid on common shares were $4.0 million and $3.3 million for the three months ended June 30, 2024 and 2023, respectively.
Dividends declared on common shares were $7.9 million and $6.8 million for the six months ended June 30, 2024 and 2023, respectively. Dividends paid on common shares were $8.0 million and $6.7 million for the six months ended June 30, 2024 and 2023, respectively.
47
Our results of operations for the three months ended June 30, 2024 and 2023 yielded an annualized return on average assets of 1.31% and 1.41% and an annualized return on average stockholders’ equity of 11.83% and 12.99%, respectively. Our results of operations for the six months ended June 30, 2024 and 2023 yielded an annualized return on average assets of 1.33% and 1.37% and an annualized return on average stockholders’ equity of 12.04% and 12.69%, respectively.
As of June 30, 2024, we had consolidated total assets of $9.6 billion, total gross loans and leases outstanding of $6.9 billion, total deposits of $7.3 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 June 30, 2024, which is included in this report, for additional information.
Critical Accounting Policies and Significant Estimates
Our accounting and reporting policies conform to 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 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 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 350.
Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. Our goodwill is allocated to Byline Bank, which is our only applicable reporting unit for the purposes of testing goodwill for impairment. We have selected November 30 as the date to perform the annual goodwill impairment test. Additionally, we perform a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists.
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 June 30, 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 June 30, 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.
Selected Financial Data
As of or for the Three Months Ended
As of or For the Six Months Ended
Summary of Operations
Common Share Data
Adjusted diluted earnings per share(1)(3)
0.73
1.38
Weighted-average common shares outstanding (basic)
Weighted-average common shares outstanding (diluted)
Common shares outstanding
Cash dividends per common share
0.09
0.18
Dividend payout ratio on common stock
13.24
12.86
13.14
13.43
Book value per common share
23.38
21.56
Tangible book value per common share(1)
18.84
17.43
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin
3.98
4.32
3.99
4.35
Net interest margin, fully taxable equivalent (1)(4)
4.33
4.00
4.36
Average cost of deposits
2.63
1.70
2.60
1.43
Efficiency ratio(2)
52.19
52.92
52.06
52.51
Adjusted efficiency ratio(1)(2)(3)
51.39
51.97
51.47
Non-interest income to total revenues(1)
12.93
15.80
14.13
16.23
Non-interest expense to average assets
2.34
2.67
2.37
2.68
Adjusted non-interest expense to average assets(1)(3)
2.36
Return on average stockholders' equity
11.83
12.99
12.04
12.69
Adjusted return on average stockholders' equity(1)(3)
13.56
12.07
13.10
Return on average assets
1.31
1.41
1.33
Adjusted return on average assets(1)(3)
1.48
Pre-tax pre-provision return on average assets(1)
2.03
2.23
2.07
2.27
Adjusted pre-tax pre-provision return on average assets(1)(3)
2.30
2.33
Return on average tangible common stockholders' equity(1)
15.27
16.78
15.57
16.50
Adjusted return on average tangible common stockholders' equity(1)(3)
17.50
15.61
17.01
Non-interest-bearing deposits to total deposits
23.99
30.31
Loans and leases held for sale and loans and leases held for investment to total deposits
93.98
94.58
Deposits to total liabilities
85.42
87.51
Deposits per branch
159,721
155,713
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment
0.93
0.69
Non-performing assets to total assets
0.67
0.54
ACL to total loans and leases held for investment, net before ACL
1.45
1.66
Net charge-offs to average total loans and leases held for investment, net before ACL - loans and leases
0.56
0.31
0.20
Capital Ratios
Common equity to total assets
10.72
10.74
Tangible common equity to tangible assets(1)
8.82
8.87
Leverage ratio
11.08
Common equity tier 1 capital ratio
10.84
10.58
Tier 1 capital ratio
11.86
11.22
Total capital ratio
13.86
13.52
(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%.
50
We reported consolidated net income of $29.7 million for the three months ended June 30, 2024 compared to net income of $26.1 million for the three months ended June 30, 2023, an increase of $3.6 million. The increase in net income was primarily attributable to a $10.4 million increase in net interest income, offset by a decrease in non-interest income of $1.4 million and an increase in non-interest expense of $3.9 million and provision for income taxes of $1.2 million. Net income available to common stockholders was $0.68 per basic and per diluted common share, for the three months ended June 30, 2024 compared to $0.70 per basic and per diluted common share, for the three months ended June 30, 2023. The increase in provision for income taxes was due to higher income before taxes.
The increase in net interest income during the three months ended June 30, 2024 was mainly a result of higher yields on loans and leases, organic growth in the loan and lease portfolio, as well as growth in the portfolio as a result of the Inland acquisition. The decrease in non-interest income was mainly due to an increase in the downward revaluation of the loan servicing asset. 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 1.31% for the three months ended June 30, 2024 compared to 1.41% for the three months ended June 30, 2023. Our annualized return on average stockholders’ equity was 11.83% for the three months ended June 30, 2024 compared to 12.99% for the three months ended June 30, 2023. Our efficiency ratio was 52.19% for the three months ended June 30, 2024 compared to 52.92% for the three months ended June 30, 2023.
We reported consolidated net income of $60.1 million for the six months ended June 30, 2024 compared to net income of $50.1 million for the six months ended June 30, 2023, an increase of $10.1 million. The increase in net income was primarily attributable to a $20.2 million increase in net interest income and decrease of $2.9 million in provision for credit losses, offset by an $8.9 million increase in non-interest expense, and a $3.0 million increase in the provision for income taxes.
The increase in net interest income during the six months ended June 30, 2024 was mainly a result of higher yields on loans and leases and increased average balances. The increase in non-interest expense was mostly due to an increase in salaries and employee benefits.
Our annualized return on average assets was 1.33% for the six months ended June 30, 2024 compared to 1.37% for the six months ended June 30, 2023. Our annualized return on average stockholders’ equity was 12.04% for the six months ended June 30, 2024 compared to 12.69% for the six months ended June 30, 2023. Our efficiency ratio was 52.06% for the six months ended June 30, 2024 compared to 52.51% for the six months ended June 30, 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 June 30, 2024, purchased credit deteriorated loans accounted for under ASC Topic 326 represented 2.5% 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
305,873
3,315
135,003
1,041
3.09
Loans and leases(1)
6,807,934
7.47
5,535,593
7.18
Taxable securities
1,473,000
10,869
2.97
1,250,780
6,324
Tax-exempt securities(2)
156,655
2.80
151,205
980
Total interest-earning assets
8,743,462
141,798
6.52
7,072,581
107,479
6.10
(103,266
(92,804
All other assets
500,540
424,122
TOTAL ASSETS
9,140,736
7,403,899
Interest checking
717,513
4,096
541,036
1.61
Money market accounts
2,270,231
19,978
3.54
1,534,463
10,799
2.82
Savings
514,192
0.15
575,254
220
Time deposits
1,951,448
23,335
4.81
1,328,679
11,529
3.48
Total interest-bearing deposits
5,453,384
3.51
3,979,432
2.49
521,545
4,439
3.42
509,419
3.34
Federal funds purchased
1,401
6.05
0.00
144,548
8.29
111,255
7.72
Total borrowings
667,494
7,440
4.48
620,674
6,383
4.12
Total interest-bearing liabilities
6,120,878
3.62
4,600,106
2.71
1,817,133
1,848,538
Other liabilities
193,923
148,983
1,008,802
806,272
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
Net interest spread(3)
2.90
3.39
Net interest income, fully taxable equivalent
86,755
76,373
Net interest margin, fully taxable equivalent(2)(4)
Reconciliation to reported net interest income:
Less: Tax-equivalent adjustment
229
207
Net interest margin(4)
Net loan accretion impact on margin
3,656
0.17
611
0.03
52
322,661
7,143
4.45
116,394
1,483
2.57
6,744,711
7.46
5,510,124
7.01
1,447,830
20,691
2.87
1,263,010
12,755
2.04
158,319
2,203
151,509
1,974
8,673,521
280,352
6.50
7,041,037
207,689
5.95
(102,761
(88,586
515,079
422,236
9,085,839
7,374,687
653,960
6,525
2.01
573,342
4,669
1.64
2,253,777
39,638
1,500,260
18,527
523,052
594,316
447
1,971,902
47,011
4.79
1,148,545
17,378
3.05
5,402,691
3,816,463
2.17
497,095
8,263
541,249
10,093
3.76
701
5.30
144,467
8.32
111,178
7.69
642,263
14,258
4.46
653,808
14,369
4.43
6,044,954
3.59
4,470,271
2.50
1,845,728
1,961,945
191,353
147,130
1,003,804
795,341
2.91
3.45
172,529
152,299
462
415
7,940
1,340
0.04
53
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis. The table below is a summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates (dollars in thousands):
Three Months Ended June 30, 2024
Compared to Three Months Ended June 30, 2023
Increase (Decrease) Due to
Volume
Rate
Interest income
1,848
23,398
3,991
27,389
2,923
4,545
Tax-exempt securities
111
Total interest income
26,904
7,415
34,319
Interest expense
993
928
1,921
6,432
2,747
9,179
(26
7,412
4,394
11,806
14,811
8,069
22,880
106
198
680
793
264
15,604
8,333
23,937
11,300
(918
10,382
Six Months Ended June 30, 2024
Compared to Six Months Ended June 30, 2023
4,572
1,088
5,660
46,508
12,330
58,838
5,213
7,936
128
53,904
18,759
72,663
801
1,055
1,856
13,278
7,833
21,111
(56
19,695
9,938
29,633
33,718
18,826
52,544
(706
(1,124
(1,830
(15
1,388
346
1,734
662
(773
(111
34,380
18,053
52,433
19,524
706
20,230
Net interest income for the three months ended June 30, 2024 was $86.5 million compared to $76.2 million during the same period in 2023, an increase of $10.4 million, or 13.6%. Interest income increased $34.3 million for the three months ended June 30, 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 $23.9 million for the three months ended June 30, 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.
Net interest income for the six months ended June 30, 2024 was $172.1 million compared to $151.9 million during the same period in 2023, an increase of $20.2 million, or 13.3%. Interest income increased $72.6 million for the six months ended June 30, 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 $52.4 million for the six months ended June 30, 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 June 30, 2024 was 3.98%, a decrease of 34 basis points compared to 4.32% for the three months ended June 30, 2023. The decrease was primarily attributable to the rising rate environment. The net interest margin for the six months ended June 30, 2024 was 3.99%, a decrease of 36 basis points compared to 4.35% for the six months ended June 30, 2023. The decrease was primarily attributable to the rising rate environment.
Net loan accretion income was $3.7 million for the three months ended June 30, 2024 compared to $611,000 for the three months ended June 30, 2023, an increase of $3.0 million due to loans acquired in the Inland acquisition. Total net loan accretion on acquired loans contributed 17 basis points to the net interest margin for the three months ended June 30, 2024 compared to three basis points for the three months ended June 30, 2023.
Net loan accretion income was $7.9 million for the six months ended June 30, 2024 compared to $1.3 million for the six months ended June 30, 2023, an increase of $6.6 million due to loans acquired in the Inland acquisition. Total net loan accretion on acquired loans contributed 18 basis points to the net interest margin for the six months ended June 30, 2024 compared to four basis points for the six months ended June 30, 2023.
Assuming no additional acquisitions, we expect loan accretion income to decline over time. Based on our portfolio, the estimated projected accretion income for the remaining periods as of June 30, 2024 is summarized as follows (dollars in thousands):
EstimatedProjectedAccretion(1)(2)
Remainder of 2024
3,932
4,470
2,802
1,590
11,982
30,877
(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.
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 $6.0 million for the three months ended June 30, 2024, compared to $5.8 million for the three months ended June 30, 2023, an increase of $255,000 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 June 30, 2024, and $6.5 million for the three months ended June 30, 2023, an increase of $411,000. The provision for credit losses - unfunded commitments was a recapture of $833,000 and a recapture of $677,000 for the three months ended June 30, 2024 and 2023, respectively.
The provision for credit losses was $12.7 million for the six months ended June 30, 2024, compared to $15.6 million for the six months ended June 30, 2023, a decrease of $2.9 million. Provision for credit losses - loans and leases was $13.8 million for the six months ended June 30, 2024, and $16.2 million for the six months ended June 30, 2023, a decrease of $2.4 million. The provision for credit losses - unfunded commitments reflects a recapture of $1.1 million and a recapture of $564,000 for the six months ended June 30, 2024 and 2023, respectively.
Non-Interest Income
The following table presents the major components of non-interest income for the three and six months ended June 30, 2024 and 2023, respectively (dollars in thousands):
QTD 2024Compared to 2023
YTD 2024Compared to 2023
$ Change
% Change
315
14.1
622
14.3
(161
(4.8
)%
(177
(2.6
(1,603
185.3
(2,962
1,417.2
4.6
(583
NM
(541
(99.6
332
5.8
717
6.6
(97
(9.3
136
6.9
299
20.0
1,023
34.1
(1,447
(10.1
(1,119
(3.8
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 $2.5 million and $2.2 million for the three months ended June 30, 2024 and 2023, respectively. Fees and service charges on deposits were $5.0 million and $4.4 million for the six months ended June 30, 2024 and 2023, respectively. The increases were 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 $3.2 million and $3.4 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the three months ended June 30, 2024 and 2023, respectively. We generated $6.6 million and $6.8 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the six months ended June 30, 2024 and 2023, respectively. At June 30, 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 $2.5 million and $865,000 for the three months ended June 30, 2024 and 2023, respectively, a change of $1.6 million. Loan servicing asset revaluation had a downward adjustment of $3.2 million and $209,000 for the six months ended June 30, 2024 and 2023, respectively, a change of $3.0 million. Changes in the revaluation were mainly due to a decline in overall loans serviced balances and higher prepayment speeds.
Net gains on sales of loans were $6.0 million for the three months ended June 30, 2024 compared to $5.7 million for the three months ended June 30, 2023, an increase of $332,000, or 5.8%, driven mainly by higher premiums. We sold $72.5 million of U.S. government guaranteed loans during the three months ended June 30, 2024 compared to $72.2 million during the three months ended June 30, 2023. Net gains on sales of loans were $11.6 million for the six months ended June 30, 2024 compared to $10.9 million for the six months ended June 30, 2023, an increase of $717,000 or 6.6%, driven by higher premiums. We sold $146.4 million of U.S. government guaranteed loans during the six months ended June 30, 2024 compared to $158.1 million during the six months ended June 30, 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 $942,000 for the three months ended June 30, 2024 compared to $1.0 million for the three months ended June 30, 2023, a decrease of $97,000 or 9.3%. Wealth management and trust income was $2.1 million for the six months ended June 30, 2024 compared to $2.0 million for the six months ended June 30, 2023, an increase of $136,000 or 6.9%. Assets under administration were $665.7 million and $636.0 million as of June 30, 2024 and 2023, respectively. Assets under administration decreased $104.8 million or 13.6% from $770.5 million as of December 31, 2023, due to account attrition.
Other non-interest income was $1.8 million for the three months ended June 30, 2024 compared to $1.5 million for the three months ended June 30, 2023, an increase of $299,000 or 20.0%. The increase was primarily driven by income associated with bank owned life insurance. Other non-interest income was $4.0 million for the six months ended June 30, 2024 compared to $3.0 million for the six months ended June 30, 2023, an increase of $1.0 million or 34.1%. The increase was primarily driven by net gains on sales of leased equipment and income associated with bank owned life insurance.
56
Non-Interest Expense
The following table presents the major components of non-interest expense for the three and six months ended June 30, 2024 and 2023, respectively (dollars in thousands):
4,269
14.4
7,828
13.0
235
5.3
1,075
12.1
(100.0
253
51.8
(1.7
(362
(5.3
(236
(5.5
126
1.6
(350
(345
(110
(7.6
(220
(212
(4.2
8.5
3,882
8,891
9.1
Salaries and employee benefits, the single largest component of our non-interest expense, totaled $33.9 million for the three months ended June 30, 2024 compared to $29.6 million for the three months ended June 30, 2023, an increase of $4.3 million, or 14.4%. Salaries and employee benefits, totaled $67.9 million for the six months ended June 30, 2024 compared to $60.0 million for the six months ended June 30, 2023, an increase of $7.8 million, or 13.0%. The increases were primarily a result of increased headcount as a result of our acquisition of Inland. Our staffing increased from 987 full-time equivalent employees as of June 30, 2023 to 1,052 as of June 30, 2024.
Occupancy and equipment expense, net, was $4.6 million for the three months ended June 30, 2024 compared to $4.4 million for the three months ended June 30, 2023, an increase of $235,000 or 5.3%. Occupancy and equipment expense, net, was $9.9 million for the six months ended June 30, 2024 compared to $8.8 million for the six months ended June 30, 2023, an increase of $1.1 million, or 12.1%. The increases were primarily due to branches acquired as a result of the Inland acquisition.
Loan and lease related expenses were $741,000 for the three months ended June 30, 2024 compared to $488,000 for the three months ended June 30, 2023, an increase of $253,000, or 51.8%. Loan and lease related expenses were $1.4 million for the six months ended June 30, 2024, compared to $1.5 million for the six months ended June 30, 2023, a decrease of $25,000. The decrease was primarily driven by lower government guaranteed expenses.
Legal, audit, and other professional fees were $3.7 million for the three months ended June 30, 2024 compared to $3.7 million for the three months ended June 30, 2023, an increase of $33,000, or 0.9%. Legal, audit, and other professional fees were $6.4 million for the six months ended June 30, 2024 compared to $6.8 million for the six months ended June 30, 2023, a decrease of $362,000 or 5.3%. The decrease was principally driven by merger-related expenses incurred during the first half of 2023.
Data processing was $4.0 million for the three months ended June 30, 2024 compared to $4.3 million for the three months ended June 30, 2023, a decrease of $236,000 or 5.5%. The decrease was driven by lower IT infrastructure expenses. Data processing was $8.2 million for the six months ended June 30, 2024, compared to $8.1 million for the six months ended June 30, 2023, an increase of $126,000 or 1.6%. The increases were driven by increased software licensing expenses.
Other non-interest expense was $4.9 million for the three months ended June 30, 2024 compared to $5.1 million for the three months ended June 30, 2023, a decrease of $212,000 or 4.2%. This decrease was due to lower general expenses. Other non-interest expense was $10.7 million for the six months ended June 30, 2024, compared to $9.8 million for the six months ended June 30, 2023, an increase of $834,000 or 8.5%. These increases were mostly due to branch consolidation charges taken during the first half of 2024.
Our efficiency ratio was 52.19% for the three months ended June 30, 2024 compared to 52.92% for the three months ended June 30, 2023. The change in our efficiency ratio for the three months ended June 30, 2024 was driven by net interest income growth. Our adjusted efficiency ratio was 52.19% for the three months ended June 30, 2024 compared to 51.39% for the three months ended June 30, 2023. Our efficiency ratio was 52.06% for the six months ended June 30, 2024, compared to 52.51% for the six months ended June 30, 2023. The change in our efficiency ratio was due to higher net interest income. Our adjusted efficiency ratio was 51.97% for the six months ended June 30, 2024, compared to 51.47% for the six months ended June 30, 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 June 30, 2024 totaled $10.4 million compared to $9.2 million for the three months ended June 30, 2023, an increase of $1.2 million, or 13.1%. 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 26.0% for the three months ended June 30, 2024 and 26.1% for the three months ended June 30, 2023.
Our provision for income taxes for the six months ended June 30, 2024 totaled $20.6 million compared to $17.5 million for the six months ended June 30, 2023, an increase of $3.0 million or 17.4%. 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 25.5% for the six months ended June 30, 2024 and 25.9% for the six months ended June 30, 2023.
We expect our effective tax rate for 2024 to be approximately 25-27%.
Financial Condition
Condensed Consolidated Statements of Financial Condition Analysis
Our total assets increased by $751.8 million, or 8.5%, to $9.6 billion at June 30, 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 $504.3 million, inclusive of $200.0 million in short term investments, and an increase of $206.9 million in loans and leases, or 3.1%, from $6.7 billion at December 31, 2023 to $6.9 billion at June 30, 2024. Our originated loan and lease portfolio increased by $308.8 million and our purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases portfolio decreased by $101.9 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 $709.0 million, or 9.0%, to $8.6 billion at June 30, 2024 compared to $7.9 billion at December 31, 2023. Total deposits increased by $170.2 million, or 2.4%, driven by growth in time deposits and interest bearing checking accounts. Other borrowings increased by $523.5 million, or 132.5%, mainly due to advances under the BTFP 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 June 30, 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 $44.3 million, or 3.3%, from $1.3 billion at December 31, 2023 to $1.4 billion at June 30, 2024. The increase was mainly attributed to purchases of securities, net of maturities, calls, and repayments.
At June 30, 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 $606,000 at June 30, 2024, and $1.2 million 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 June 30, 2024, we evaluated the securities that had an unrealized loss for credit losses and determined there were none. There were 339 investment securities with unrealized losses at June 30, 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 June 30, 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 June 30, 2024
Due in One Year or Less
Due from One toFive Years
Due from Five toTen Years
Due after Ten Years
WeightedAverageYield(1)
37,889
2.53
14,749
3.78
U.S. government agencies
3,000
3.40
61,786
1.82
93,357
6,310
3.77
3,108
19,527
3.11
23,895
39,011
2.47
Residential mortgage- backed securities
30,100
50,249
1.60
769,991
2.52
Commercial mortgage- backed securities
2,916
11,098
1.42
213,970
2.81
15,601
5.29
25,051
3.69
4.98
2.61
144,679
2.54
223,350
2.77
1,161,250
2.75
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $53.5 million at June 30, 2024, a decrease of $2.2 million from December 31, 2023.
59
There were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, with total outstanding balances greater than 10% of our stockholders’ equity as of June 30, 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 June 30, 2024 and December 31, 2023, we held $31.8 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 June 30, 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 June 30, 2024 and December 31, 2023 were $6.9 billion and $6.7 billion, respectively, an increase of $206.9 million, or 3.1%. Originated loans and leases were $6.1 billion at June 30, 2024, an increase of $308.8 million, or 5.4%, compared to $5.8 billion at December 31, 2023. Purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases were $815.3 million at June 30, 2024, a decrease of $101.9 million, or 11.1%, 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 June 30, 2024, the loan portfolio included $414.4 million of unguaranteed 7(a) SBA and USDA loans with exposure to the following top three industries: 17.6% retail trade, 13.9% accommodation and food services, and 10.8% 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
27.9
28.5
7.2
7.0
6.5
6.2
36.2
34.6
Leasing financing receivables
10.3
10.0
Total originated loans and leases
88.1
86.3
Purchased credit deteriorated loans
1.7
2.1
0.6
0.4
0.3
2.6
3.4
Acquired non-credit-deteriorated loans and leases
3.7
4.1
2.7
3.2
1.2
1.3
9.3
100.0
Total loans and leases, net of allowance for credit losses - loans and leases
Loans collateralized by real estate comprised 51.5% and 53.4% of the loan and lease portfolio at June 30, 2024 and December 31, 2023, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of June 30, 2024 and December 31, 2023 and totaled $2.3 billion, or 64.6% of real estate loans and 33.3% of the total loan and lease portfolio at June 30, 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 $114.1 million as of June 30, 2024, a decrease of $23.8 million, or 17.2%. At June 30, 2024 and December 31, 2023, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 287.9% and 299.6%, respectively. Non-owner occupied commercial real estate loans were $992.5 million and $1.0 billion, or 87.4% and 95.9% of total capital, at June 30, 2024 and December 31, 2023, respectively.
Residential real estate loans totaled $727.8 million at June 30, 2024 compared to $719.5 million at December 31, 2023, an increase of $8.3 million, or 1.1%. The residential real estate loan portfolio comprised 20.5% and 20.2% of real estate loans as of June 30, 2024 and December 31, 2023, respectively, and 10.6% and 10.8% of total loans and leases at June 30, 2024 and December 31, 2023, respectively. Purchased credit deteriorated and acquired non-credit-deteriorated residential real estate loans decreased from $254.4 million at December 31, 2023 to $229.2 million at June 30, 2024, a decrease of $25.2 million, or 9.9%. Multifamily real estate loans were $423.4 million and $399.3 million, or 37.3% and 36.8% of total capital, at June 30, 2024 and December 31, 2023, respectively.
Construction, land development, and other land loans totaled $530.8 million at June 30, 2024 compared to $526.8 million at December 31, 2023, an increase of $3.9 million, or 0.7%. The construction, land development and other land loan portfolio comprised 14.9% and 14.8% of real estate loans at June 30, 2024 and December 31, 2023, respectively, and 7.7% and 7.9% of the total loan and lease portfolio at June 30, 2024 and December 31, 2023, respectively. The construction, land development and other land loan portfolio was 46.8% and 48.3% of total capital, at June 30, 2024 and December 31, 2023, respectively.
Our exposure to non-owner occupied commercial real estate office space as of June 30, 2024 was $196.7 million, or 2.9% of our total loan and lease portfolio.
Commercial and industrial loans totaled $2.6 billion at June 30, 2024 and $2.4 billion at December 31, 2023, an increase of $176.5 million, or 7.2%. The commercial and industrial loan portfolio comprised 38.1% and 36.6% of the total loan and lease portfolio at June 30, 2024 and December 31, 2023, respectively.
Lease financing receivables comprised 10.3% and 10.0% of the loan and lease portfolio at June 30, 2024 and December 31, 2023, respectively. Total lease financing receivables were $711.1 million and $665.9 million at June 30, 2024 and December 31, 2023, respectively, an increase of $45.2 million, or 6.8%.
62
Loan and Lease Portfolio Maturities and Interest Rate Sensitivity
The following table shows our loan and lease portfolio by scheduled maturity at June 30, 2024 (dollars in thousands):
Due after One YearThrough Five Years
Due after Five YearsThrough Fifteen Years
Due after Fifteen Years
FloatingRate
FixedRate
131,475
221,610
772,792
328,661
204,001
112,758
10,126
143,374
18,753
50,523
162,304
106,578
15,731
83,261
58,767
2,661
197,619
50,338
172,896
16,585
7,796
529
38,454
516,705
407,035
1,099,017
132,553
259,623
30,950
8,892
206
1,250
20,847
637,743
52,194
210,069
986,663
2,030,761
1,708,402
421,251
463,438
100,372
154,927
35,714
10,329
31,966
21,453
3,806
10,538
131
2,158
8,948
17,005
468
4,128
236
3,336
1,073
7,832
2,650
38,960
19,277
56,821
24,571
8,026
17,015
4,565
3,467
Acquired non-credit- deteriorated loans and leases
31,632
17,384
142,317
18,691
6,289
23,618
12,607
4,181
1,113
41,506
11,924
3,485
97,081
10,689
10,918
46,099
4,598
12,545
3,080
11,116
34,058
8,034
55,875
1,834
124
Total acquired non-credit- deteriorated loans and leases
49,884
40,531
218,005
84,748
81,247
35,568
10,403
122,233
298,913
1,046,471
2,305,587
1,817,721
510,524
516,021
115,340
280,627
At June 30, 2024, 46.9% of the loan and lease portfolio bears interest at fixed rates and 53.1% 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
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 $99.7 million at June 30, 2024 compared to $101.7 million at December 31, 2023, a decrease of $2.0, or 1.9%. The decrease was primarily due to an increase in qualitative adjustments and growth in the loan and lease portfolio, offset by charge-offs on individually evaluated loans. Total ACL to total loans and leases held for investment, net before ACL, was 1.45% and 1.52% of total loans and leases at June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, approximately $36.1 million of the ACL was allocated to the unguaranteed portion of SBA 7(a) and USDA loans.
The following tables present an analysis of the allowance for credit losses - loans and leases for the periods presented (dollars in thousands):
ResidentialRealEstate
Construction,Land Development,and Other Land
CommercialandIndustrial
Balance at March 31, 2024
Provision/(recapture) for PCD loans
(3,396
1,302
(2,181
Provision/(recapture) for acquired non-credit-deteriorated loans
(142
(201
(215
(1
(579
Provision/(recapture) for originated loans
(89
(16
(14
9,638
Total provision/(recapture)
Charge-offs for PCD loans
Charge-offs for acquired non-credit deteriorated loans
Charge-offs for originated loans
(302
(10,512
Total charge-offs
Recoveries for PCD loans
Recoveries for acquired non-credit deteriorated loans
Recoveries for originated loans
1,137
Total recoveries
Net (charge-offs) recoveries
(9,208
(346
(9,514
Balance at June 30, 2024
Ending ACL Balances
PCD loans
3,997
768
3,024
7,962
Acquired non-credit-deteriorated loans
1,744
438
409
1,290
3,883
Originated loans
22,111
1,817
53,270
8,517
87,885
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Loans and leases ending balance
Total loans and leases at June 30, 2024, gross
Ratio of net charge-offs to average loans outstanding during the year
(0.01
0.02
0.55
Loans ending balance as a percentage of total loans, gross
0.53
0.51
1.10
32.75
10.51
7.70
37.58
10.32
98.90
33.28
10.55
38.09
100.00
65
Construction,LandDevelopment,and OtherLand
Balance at December 31, 2023
(2,767
(39
955
(1,985
(186
(647
150
15,504
840
16,401
(58
(3,285
(13,091
(17,429
912
1,971
(2,582
(12,595
(550
(15,725
0.46
0.07
0.37
0.47
0.05
10.50
Balance at March 31, 2023
142
190
(42
(199
(7
4,027
(101
(1,560
3,357
698
6,438
(2,720
(1,370
(241
(4,267
Balance at June 30, 2023
733
341
1,122
3,061
96
684
3,859
22,583
2,107
1,928
52,917
8,109
87,684
Total loans and leases at June 30, 2023, gross
0.19
0.10
1.24
34.70
9.06
6.96
37.09
10.87
98.76
35.25
37.78
Balance at December 31, 2022
26,062
41,888
Provision/(recapture) for acquired impaired loans
(418
(333
(764
Provision/(recapture) for acquired non-impaired loans and leases
(675
(200
(545
(1,438
Provision for originated loans
4,331
(118
(1,192
14,518
828
Total provision
3,238
13,966
811
Charge-offs for acquired impaired loans
Charge-offs for acquired non-impaired loans and leases
Charge-offs for originated loans and leases
(3,910
(767
Recoveries for acquired impaired loans
Recoveries for acquired non-impaired loans and leases
Recoveries for originated loans and leases
1,673
2,214
361
5,438
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
0.11
0.08
Loans and leases ending balance as a percentage of total loans and leases, gross
Non-Performing Assets
Non-performing loans and leases include loans and leases 90 days past due and still accruing and loans and leases accounted for on a non-accrual basis. Non-performing assets consist of non-performing loans and leases plus other real estate owned. Non-performing assets at June 30, 2024 and December 31, 2023 totaled $64.6 million and $65.3 million, with the decrease driven mainly by decreases to non-accrual loans and leases. The U.S. government guaranteed portion of non-performing loans totaled $6.6 million at June 30, 2024 and $4.2 million at December 31, 2023.
Total OREO decreased from $1.2 million at December 31, 2023 to $780,000 at June 30, 2024. The $420,000 decrease in OREO resulted from sales.
68
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
64,588
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
156.30
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
6,616
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
0.83
0.90
Total non-accrual loans and leases not guaranteed as a percentage of total loans and leases
0.62
Total non-performing assets not guaranteed as a percentage of total assets
0.60
Our loan and lease growth is funded primarily through core deposits. We gather deposits primarily through each of our 45 branch locations in the Chicago metropolitan area and one branch in 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. 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 June 30, 2024 were $7.3 billion, representing an increase of $170.2 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 $1.8 billion, or 24.0% of total deposits, at June 30, 2024, a decrease of $143.0 million, or 7.5%, 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 June 30, 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)
906,103
4.84
797,241
3.82
Time deposits ($100,000 and above)
1,045,345
4.72
531,438
2.96
7,270,517
2.56
5,827,970
69
944,097
663,900
3.35
1,027,805
4.80
484,645
2.64
7,248,419
5,778,408
Our average cost of deposits was 2.63% during the three months ended June 30, 2024, compared to 1.70% for the three months ended June 30, 2023. Our average cost of deposits was 2.60% during the six months ended June 30, 2024, compared to 1.43% for the six months ended June 30, 2023 These increases were 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 25.0% during the three months ended June 30, 2024, compared to 31.7% during the three months ended June 30, 2023. The ratio of our average non-interest bearing deposits to total average deposits ratios was 25.5% during the six months ended June 30, 2024 compared to 34.0% during the six months ended June 30, 2023. We had $433.1 million in brokered time deposits at June 30, 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 93.98% at June 30, 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 June 30, 2024 (dollars in thousands):
Less than $250,000
$250,000 or Greater
Uninsured Portion
Three months or less
564,784
163,167
727,951
53,417
Over three months through six months
505,795
142,137
647,932
53,887
Over six months through 12 months
469,693
101,253
570,946
32,253
Over 12 months
70,036
23,016
93,052
9,516
149,073
Total estimated uninsured deposits were $2.1 billion and $1.9 billion as of June 30, 2024 and December 31, 2023. Estimated uninsured deposits reflect amounts disclosed in our regulatory reports, adjusted to exclude related accrued interest and intercompany deposit balances.
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 June 30, 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 June 30, 2024, we had $670.0 million of FHLB advances outstanding with a maturities ranging from July 2024 to September 2024. We also had a $15.0 million term loan outstanding maturing in May 2026.
On January 17, 2024, we entered into a Letter Agreement with the FRB that allows the Bank to access the BTFP. On January 22, 2024, we 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 the FBR 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.
We also have the capacity to borrow funds from the discount window of the Federal Reserve System. There were no borrowings outstanding under the Federal Reserve Bank discount window line as of June 30, 2024 and December 31, 2023. We pledge loans as collateral for any borrowings under the Federal Reserve Bank discount window.
The following table sets forth certain information regarding our short-term borrowings at the dates and for the periods indicated (dollars in thousands):
Federal Reserve Bank discount window borrowing:
Average balance outstanding
Maximum outstanding at any month-end period during the year
Balance outstanding at end of period
Weighted average interest rate during period
Weighted average interest rate at end of period
Federal Home Loan Bank advances:
266,566
511,929
675,000
540,000
3.87
5.46
5.24
Federal funds purchased:
Bank Term Funding Program:
176,923
4.92
4.91
Term Loan:
15,842
16,667
7.81
7.63
Revolving Line of Credit:
2,658
7,500
9.05
71
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 $6.9 million, from $40.6 million at December 31, 2023 to $33.7 million at June 30, 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 June 30, 2024, Byline Bank had maximum advance potential from the FHLB of $3.3 billion and $764.6 million from the FRB. As of June 30, 2024, Byline Bank had open FHLB advances of $670.0 million and open letters of credit of $13.5 million. Based on collateral and securities pledged, our available aggregate borrowing capacity at June 30, 2024 was $1.1 billion. In addition, Byline Bank had uncommitted federal funds lines available of $127.5 million available at June 30, 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, we entered into a $30.0 million revolving credit agreement with a correspondent bank. Through subsequent amendments, the revolving credit agreement was reduced to $15.0 million. The amended revolving line of credit bears interest at either SOFR plus 205 basis points or Prime Rate minus 75 basis points, not to be less than 2.00%, based on our election, which is required to be communicated at least three business days prior to the commencement of an interest period. If we fail to provide timely notification, the interest rate will be Prime Rate minus 75 basis points. On May 24, 2024, we entered into the First Amendment to the Second Amended and restated Term Loan and Revolving Credit Agreement (the "Amendment") with the lender, which is effective May 26, 2024, and provides for: (1) the renewal of the revolving line-of-credit facility of up to $15.0 million, and (2) extending its maturity date to May 25, 2025, subject to the existing Negative Pledge Agreement dated October 11, 2018, as amended.
At June 30, 2024, the variable term loan had an interest rate of 7.63% and an outstanding balance of $15.0 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 June 30, 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%
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 June 30, 2024 was $1.0 billion compared to $990.2 million at December 31, 2023, an increase of $42.9 million, or 4.3%. The increase was primarily driven by an increase in retained earnings, offset by an increase in accumulated other comprehensive loss during the six months ended June 30, 2024, reflecting the unrealized losses in our available-for-sale securities portfolio of $139.1 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
amounts and ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, (referred to as the “leverage ratio”), as defined under these capital requirements.
As of June 30, 2024, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized.” There have been no conditions or events since June 30, 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
1,181,194
681,657
8.00
Bank
1,135,095
13.36
679,661
849,577
10.00
Tier 1 capital to risk weighted assets:
1,010,763
511,243
6.00
1,039,663
12.24
509,746
Common Equity Tier 1 (CET1) to risk weighted assets:
923,763
383,432
4.50
382,310
552,225
Tier 1 capital to average assets:
364,801
11.41
364,325
455,406
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
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 three years beginning January 1, 2022. Accordingly, capital ratios as of June 30, 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 June 30, 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 six months ended June 30, 2024 the Company received $23.0 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.
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 or six months ended June 30, 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 June 30, 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 June 30, 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 June 30,
As of or For the Six Months EndedJune 30,
(dollars in thousands, except per share data)
Net income and earnings per share excluding significant items
Reported Net Income
Significant items:
Impairment charges on assets held for sale and ROU asset
Merger-related expense
1,391
1,880
Tax benefit
(230
(52
(286
Adjusted Net Income
27,268
60,253
51,666
Reported Diluted Earnings per Share
Adjusted Diluted Earnings per Share
76
As of or For the Six Months Ended June 30,
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
47,937
106,825
96,228
Adjusted non-interest expense excluding amortization of intangible assets:
Less: Amortization of intangible assets
Adjusted non-interest expense excluding amortization of intangible assets
51,865
46,482
104,135
93,318
Pre-tax pre-provision net income:
Pre-tax income
Add: Provision for credit losses
Pre-tax pre-provision net income
46,160
41,129
93,365
83,192
Adjusted pre-tax pre-provision net income:
Add: Impairment charges on assets held for sale and ROU asset
Add: Merger-related expenses
Adjusted pre-tax pre-provision net income
42,520
93,559
85,092
Taxable equivalent net interest income:
Add: Tax-equivalent adjustment
Total revenues:
Add: non-interest income
Total revenues
99,370
90,457
200,384
181,320
Tangible common stockholders' equity:
Total stockholders' equity
Less: Goodwill and other intangibles
155,977
Tangible common stockholders' equity
832,226
657,965
Tangible assets:
7,575,690
Tangible assets
9,433,027
7,419,713
Average tangible common stockholders' equity:
Average total stockholders' equity
Less: Average goodwill and other intangibles
201,428
156,766
202,101
157,469
Average tangible common stockholders' equity
807,374
649,506
801,703
637,872
Average tangible assets:
Average total assets
Average tangible assets
8,939,308
7,247,133
8,883,738
7,217,218
Tangible net income available to common stockholders:
Net income available to common stockholders
Add: After-tax intangible asset amortization
1,067
1,973
2,133
Tangible net income available to common stockholders
30,658
27,174
62,084
52,185
Adjusted tangible net income available to common stockholders:
Add: Tax benefit on significant items
Adjusted tangible net income available to common stockholders
28,335
62,226
53,799
77
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
78
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 June 30, 2024, we had a notional amount of $1.4 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 June 30, 2024 are presented below.
Estimated Increase/Decrease in Net Interest Income
Estimated PercentageChange in EVE
Twelve Months Ending June 30,
As of
Basis Point Change in Interest Rates
+300
11.8%
13.6%
(17.4)%
+200
8.4%
9.5%
(11.8)%
+100
4.2%
4.7%
(6.0)%
-100
(3.2)%
(4.1)%
5.6%
-200
(6.5)%
(9.0)%
10.7%
-300
(8.3)%
(12.2)%
14.8%
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 and 200 basis points would result in a 1.9% and 3.7% decrease to net interest income, and a gradual shift upwards of 100 and 200 basis points would result in 1.9% and 4.0% 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 June 30, 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 June 30, 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 June 30, 2024. We did not purchase any shares of our common stock during the second 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
April 1 - April 30, 2024
1,250,000
May 1 - May 31, 2024
June 1 - June 30, 2024
22.38
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.
10.1
First Amendment to Second Amended and Restated Term Loan and Revolving Credit Agreement dated as of May 24, 2024, but effective May 26, 2024, by and between Byline Bancorp, Inc. and CIBC Bank USA (filed as exhibit 10.1 to the Company's Current Report on Form 8-K (File No. 001-38139) filed on May 30, 2024 and incorporated herein by reference)
31.1
Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1(a)
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 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: August 5, 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)
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