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Byline Bancorp (BY)

Filed: 8 May 19, 9:36pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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, 38,014,042 shares outstanding as of May 8, 2019

 

 

 

 


BYLINE BANCORP, INC.

FORM 10-Q

March 31, 2019

INDEX

 

 

 

 

 

Page

 

 

 

 

 

PART I.

 

FINANCIAL INFORMATION

 

3

Item 1.

 

Financial Statements. The Unaudited Interim Condensed Consolidated Financial Statements of Byline Bancorp, Inc. filed as part of the report are as follows:

 

3

 

 

Consolidated Statements of Financial Condition at March 31, 2019 (unaudited) and December 31, 2018

 

3

 

 

Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

4

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (unaudited)

 

5

 

 

Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended
March 31, 2019 and 2018 (unaudited)

 

6

 

 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018
(unaudited)

 

7

 

 

Notes to Unaudited Interim Condensed Consolidated Financial Statements

 

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

49

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

84

Item 4.

 

Controls and Procedures

 

86

 

 

 

 

 

PART II.

 

OTHER INFORMATION

 

 

Item 1.

 

Legal Proceedings

 

86

Item 1A.

 

Risk Factors

 

86

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

86

Item 3.

 

Defaults Upon Senior Securities

 

86

Item 4.

 

Mine Safety Disclosures

 

86

Item 5.

 

Other Information

 

86

Item 6.

 

Exhibits

 

87

 

 

 

2


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

 

 

(Unaudited)

 

 

 

 

 

(dollars in thousands, except per share data)

 

March 31, 2019

 

 

December 31, 2018

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

50,026

 

 

$

30,190

 

Interest bearing deposits with other banks

 

 

31,971

 

 

 

91,670

 

Cash and cash equivalents

 

 

81,997

 

 

 

121,860

 

Equity and other securities, at fair value

 

 

7,216

 

 

 

 

Securities available-for-sale, at fair value

 

 

964,553

 

 

 

817,656

 

Securities held-to-maturity, at amortized cost (fair value at

   March 31, 2019—$4,431, December 31, 2018—$97,739)

 

 

4,425

 

 

 

99,266

 

Restricted stock, at cost

 

 

19,202

 

 

 

19,202

 

Loans held for sale

 

 

510

 

 

 

19,827

 

Loans and leases:

 

 

 

 

 

 

 

 

Loans and leases

 

 

3,567,566

 

 

 

3,501,626

 

Allowance for loan and lease losses

 

 

(27,106

)

 

 

(25,201

)

Net loans and leases

 

 

3,540,460

 

 

 

3,476,425

 

Servicing assets, at fair value

 

 

19,534

 

 

 

19,693

 

Accrued interest receivable

 

 

11,974

 

 

 

10,863

 

Premises and equipment, net

 

 

97,069

 

 

 

97,680

 

Assets held for sale

 

 

13,596

 

 

 

14,489

 

Other real estate owned, net

 

 

4,799

 

 

 

5,314

 

Goodwill

 

 

128,177

 

 

 

128,177

 

Other intangible assets, net

 

 

31,646

 

 

 

33,419

 

Bank-owned life insurance

 

 

6,087

 

 

 

5,961

 

Deferred tax assets, net

 

 

30,534

 

 

 

35,643

 

Due from counterparty

 

 

20,691

 

 

 

5,338

 

Other assets

 

 

27,455

 

 

 

31,761

 

Total assets

 

$

5,009,925

 

 

$

4,942,574

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Non-interest-bearing demand deposits

 

$

1,163,255

 

 

$

1,192,873

 

Interest-bearing deposits:

 

 

 

 

 

 

 

 

NOW, savings accounts, and money market accounts

 

 

1,385,551

 

 

 

1,413,158

 

Time deposits

 

 

1,259,710

 

 

 

1,143,885

 

Total deposits

 

 

3,808,516

 

 

 

3,749,916

 

Accrued interest payable

 

 

4,390

 

 

 

3,484

 

Line of credit

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

425,000

 

 

 

425,000

 

Securities sold under agreements to repurchase

 

 

34,369

 

 

 

34,166

 

Junior subordinated debentures issued to capital trusts, net

 

 

36,912

 

 

 

36,768

 

Accrued expenses and other liabilities

 

 

31,989

 

 

 

42,568

 

Total liabilities

 

 

4,341,176

 

 

 

4,291,902

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock

 

 

10,438

 

 

 

10,438

 

Common stock, voting, $0.01 par value at March 31, 2019 and December 31, 2018;

   150,000,000 shares authorized at March 31, 2019 and December 31, 2018;

   36,398,144 shares issued and outstanding at March 31, 2019 and 36,343,239

   issued and outstanding at December 31, 2018

 

 

362

 

 

 

361

 

Additional paid-in capital

 

 

548,005

 

 

 

546,849

 

Retained earnings

 

 

116,363

 

 

 

102,522

 

Accumulated other comprehensive loss, net of tax

 

 

(6,419

)

 

 

(9,498

)

Total stockholders’ equity

 

 

668,749

 

 

 

650,672

 

Total liabilities and stockholders’ equity

 

$

5,009,925

 

 

$

4,942,574

 

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

3


 

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended

 

 

 

March 31,

 

(dollars in thousands, except share and per share data)

 

2019

 

 

2018

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

54,383

 

 

$

33,654

 

Interest on taxable securities

 

 

5,759

 

 

 

4,055

 

Interest on tax-exempt securities

 

 

343

 

 

 

174

 

Other interest and dividend income

 

 

625

 

 

 

259

 

Total interest and dividend income

 

 

61,110

 

 

 

38,142

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

8,076

 

 

 

2,498

 

Federal Home Loan Bank advances

 

 

2,099

 

 

 

1,358

 

Subordinated debentures and other borrowings

 

 

850

 

 

 

591

 

Total interest expense

 

 

11,025

 

 

 

4,447

 

Net interest income

 

 

50,085

 

 

 

33,695

 

PROVISION FOR LOAN AND LEASE LOSSES

 

 

3,999

 

 

 

5,115

 

Net interest income after provision for loan and lease losses

 

 

46,086

 

 

 

28,580

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

Fees and service charges on deposits

 

 

1,770

 

 

 

1,312

 

Loan servicing revenue

 

 

2,539

 

 

 

2,450

 

Loan servicing asset revaluation

 

 

(1,261

)

 

 

(1,887

)

ATM and interchange fees

 

 

717

 

 

 

913

 

Change in fair value of equity securities, net

 

 

499

 

 

 

 

Net gains on sales of loans

 

 

6,233

 

 

 

7,476

 

Wealth management and trust income

 

 

595

 

 

 

 

Other non-interest income

 

 

896

 

 

 

859

 

Total non-interest income

 

 

11,988

 

 

 

11,123

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

22,892

 

 

 

18,278

 

Occupancy expense, net

 

 

4,280

 

 

 

3,755

 

Equipment expense

 

 

669

 

 

 

603

 

Loan and lease related expenses

 

 

1,577

 

 

 

1,400

 

Legal, audit and other professional fees

 

 

2,066

 

 

 

1,851

 

Data processing

 

 

3,273

 

 

 

2,301

 

Net loss (gain) recognized on other real estate owned and other related expenses

 

 

196

 

 

 

(1

)

Regulatory assessments

 

 

(59

)

 

 

241

 

Other intangible assets amortization expense

 

 

1,773

 

 

 

767

 

Advertising and promotions

 

 

709

 

 

 

249

 

Telecommunications

 

 

464

 

 

 

418

 

Other non-interest expense

 

 

2,839

 

 

 

1,752

 

Total non-interest expense

 

 

40,679

 

 

 

31,614

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

17,395

 

 

 

8,089

 

PROVISION FOR INCOME TAXES

 

 

4,798

 

 

 

1,321

 

NET INCOME

 

 

12,597

 

 

 

6,768

 

Dividends on preferred shares

 

 

196

 

 

 

193

 

INCOME AVAILABLE TO COMMON STOCKHOLDERS

 

$

12,401

 

 

$

6,575

 

EARNINGS PER COMMON SHARE

 

 

 

 

 

 

 

 

Basic

 

$

0.34

 

 

$

0.22

 

Diluted

 

$

0.34

 

 

$

0.22

 

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

4


 

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

  

 

 

Three Months Ended

 

 

 

March 31,

 

(dollars in thousands)

 

2019

 

 

2018

 

Net income

 

$

12,597

 

 

$

6,768

 

Securities available-for-sale

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

8,635

 

 

 

(8,852

)

Tax effect

 

 

(2,296

)

 

 

2,395

 

Net of tax

 

 

6,339

 

 

 

(6,457

)

Cash flow hedges

 

 

 

 

 

 

 

 

Unrealized holding gains (losses) arising during the period

 

 

(1,817

)

 

 

4,070

 

Reclassification adjustments for net gains included in net income

 

 

(705

)

 

 

(61

)

Tax effect

 

 

702

 

 

 

(1,116

)

Net of tax

 

 

(1,820

)

 

 

2,893

 

Total other comprehensive income (loss)

 

 

4,519

 

 

 

(3,564

)

Comprehensive income

 

$

17,116

 

 

$

3,204

 

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

5


 

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2019 and 2018

(UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Accumulated Other

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

 

 

 

 

Comprehensive

 

 

Stockholders’

 

(dollars in thousands, except share data)

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Retained Earnings

 

 

Income (Loss)

 

 

Equity

 

Balance, January 1, 2018

 

 

10,438

 

 

$

10,438

 

 

 

29,317,298

 

 

$

292

 

 

$

391,586

 

 

$

61,349

 

 

$

(5,087

)

 

$

458,578

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,768

 

 

 

 

 

 

6,768

 

Other comprehensive loss,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,564

)

 

 

(3,564

)

Issuance of common stock upon

   exercise of stock options

 

 

 

 

 

 

 

 

86,750

 

 

 

1

 

 

 

1,004

 

 

 

 

 

 

 

 

 

1,005

 

Reclassification of certain income

   tax effects from accumulated

   other comprehensive income

   (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

763

 

 

 

(763

)

 

 

 

Cash dividends declared on

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(193

)

 

 

 

 

 

(193

)

Share-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

342

 

 

 

 

 

 

 

 

 

342

 

Balance, March 31, 2018

 

 

10,438

 

 

$

10,438

 

 

 

29,404,048

 

 

$

293

 

 

$

392,932

 

 

$

68,687

 

 

$

(9,414

)

 

$

462,936

 

Balance, January 1, 2019

 

 

10,438

 

 

$

10,438

 

 

 

36,343,239

 

 

$

361

 

 

$

546,849

 

 

$

102,522

 

 

$

(9,498

)

 

$

650,672

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,597

 

 

 

 

 

 

12,597

 

Other comprehensive loss,

   net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

��

 

 

 

4,519

 

 

 

4,519

 

Issuance of common stock upon

   exercise of stock options

 

 

 

 

 

 

 

 

50,662

 

 

 

1

 

 

 

635

 

 

 

 

 

 

 

 

 

636

 

Forfeiture of restricted stock

   awards

 

 

 

 

 

 

 

 

(8,500

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock in

   connection with employee

   stock purchase plan

 

 

 

 

 

 

 

 

12,743

 

 

 

 

 

 

291

 

 

 

 

 

 

 

 

 

291

 

Cumulative-effect adjustment

   (ASU 2016-01)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,440

 

 

 

(1,440

)

 

 

 

Cash dividends declared on

   preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(196

)

 

 

 

 

 

(196

)

Share-based compensation

   expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

230

 

 

 

 

 

 

 

 

 

230

 

Balance, March 31, 2019

 

 

10,438

 

 

$

10,438

 

 

 

36,398,144

 

 

$

362

 

 

$

548,005

 

 

$

116,363

 

 

$

(6,419

)

 

$

668,749

 

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

6


 

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

(dollars in thousands)

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

 

$

12,597

 

 

$

6,768

 

Adjustments to reconcile net income to net cash from operating activities:

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

 

3,999

 

 

 

5,115

 

Impairment loss on assets held for sale

 

 

 

392

 

 

 

 

Depreciation and amortization of premises and equipment

 

 

 

1,590

 

 

 

1,273

 

Change in fair value of equity securities, net

 

 

 

(499

)

 

 

 

Net amortization of securities

 

 

 

600

 

 

 

1,009

 

Net gains on sales of assets held for sale

 

 

 

(13

)

 

 

(189

)

Net gains on sales of loans

 

 

 

(6,233

)

 

 

(7,476

)

Originations of U.S. government guaranteed loans

 

 

 

(47,157

)

 

 

(82,125

)

Proceeds from U.S. government guaranteed loans sold

 

 

 

55,421

 

 

 

104,604

 

Accretion of premiums and discounts on acquired loans, net

 

 

 

(5,201

)

 

 

(2,346

)

Net change in servicing assets

 

 

 

159

 

 

 

(215

)

Net valuation adjustments on other real estate owned

 

 

 

84

 

 

 

81

 

Net losses (gains) on sales of other real estate owned

 

 

 

33

 

 

 

(140

)

Amortization of intangible assets

 

 

 

1,773

 

 

 

767

 

Amortization of time deposit premium

 

 

 

(69

)

 

 

(5

)

Amortization of Federal Home Loan Bank advances premium

 

 

 

 

 

 

(19

)

Accretion of junior subordinated debentures discount

 

 

 

144

 

 

 

153

 

Share-based compensation expense

 

 

 

230

 

 

 

342

 

Deferred tax provision, net of valuation

 

 

 

3,515

 

 

 

1,284

 

Increase in cash surrender value of bank owned life insurance

 

 

 

(126

)

 

 

(120

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

 

(1,917

)

 

 

673

 

Other assets

 

 

 

4,236

 

 

 

622

 

Accrued interest payable

 

 

 

906

 

 

 

306

 

Accrued expenses and other liabilities

 

 

 

(10,579

)

 

 

(4,894

)

Net cash provided by operating activities

 

 

 

13,885

 

 

 

25,468

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Purchases of securities available-for-sale

 

 

 

(84,950

)

 

 

(72,646

)

Proceeds from maturities and calls of securities available-for-sale

 

 

 

14,850

 

 

 

5,430

 

Proceeds from paydowns of securities available-for-sale

 

 

 

18,966

 

 

 

14,691

 

Proceeds from paydowns of securities held-to-maturity

 

 

 

 

 

 

4,050

 

Purchases of Federal Home Loan Bank stock

 

 

 

(9,630

)

 

 

(6,282

)

Federal Home Loan Bank stock repurchases

 

 

 

9,630

 

 

 

5,448

 

Net change in loans and leases

 

 

 

(62,197

)

 

 

(5,797

)

Purchases of premises and equipment

 

 

 

(979

)

 

 

(63

)

Proceeds from sales of assets held for sale

 

 

 

514

 

 

 

954

 

Proceeds from sales of other real estate owned

 

 

 

445

 

 

 

1,263

 

Net cash used in investing activities

 

 

 

(113,351

)

 

 

(52,952

)

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

7


 

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

 

 

 

 

Three Months Ended

 

 

 

 

March 31,

 

(dollars in thousands)

 

 

2019

 

 

2018

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

$

58,669

 

 

$

81,223

 

Proceeds from Federal Home Loan Bank advances

 

 

 

1,620,500

 

 

 

1,589,900

 

Repayments of Federal Home Loan Bank advances

 

 

 

(1,620,500

)

 

 

(1,571,387

)

Net (decrease) increase in securities sold under agreements to repurchase

 

 

 

203

 

 

 

(3,372

)

Dividends paid on preferred stock

 

 

 

(196

)

 

 

(193

)

Proceeds from issuance of common stock upon exercise of stock options

 

 

 

636

 

 

 

1,005

 

Proceeds from issuance of common stock

 

 

 

291

 

 

 

 

Net cash provided by financing activities

 

 

 

59,603

 

 

 

97,176

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

 

 

 

(39,863

)

 

 

69,692

 

CASH AND CASH EQUIVALENTS, beginning of period

 

 

 

121,860

 

 

 

58,349

 

CASH AND CASH EQUIVALENTS, end of period

 

 

$

81,997

 

 

$

128,041

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

Cash paid during the period for interest

 

 

$

10,044

 

 

$

4,012

 

Cash payments (refunds) during the period for taxes

 

 

$

(2,556

)

 

$

63

 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND

   FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Change in fair value of available-for-sale securities, net of tax

 

 

$

6,339

 

 

$

(6,457

)

Change in fair value of cash flow hedges, net of tax

 

 

$

(1,820

)

 

$

2,893

 

Delayed payments of mortgage-backed securities

 

 

$

626

 

 

$

726

 

Transfer of securities from held-to-maturity to available-for-sale

 

 

$

94,837

 

 

$

 

Reclassification of equity and other securities

 

 

$

6,609

 

 

$

 

Transfers of loans to other real estate owned

 

 

$

230

 

 

$

1,044

 

Internally financed sale of other real estate owned

 

 

$

183

 

 

$

 

Transfer of other assets to assets held for sale

 

 

$

 

 

$

16

 

Due from counterparties

 

 

$

15,353

 

 

$

19,837

 

 

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

 


8


 

 

Note 1—Basis of Presentation

These unaudited interim condensed consolidated financial statements include the accounts of Byline Bancorp, Inc., a Delaware corporation (the “Company,” “Byline,” “we,” “us,” “our”), a bank holding company whose principal activity is the ownership and management of its Illinois state chartered subsidiary bank, Byline Bank (the “Bank”), based in Chicago, Illinois.

These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2019 for potential recognition or disclosure. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position and results of operations for the periods presented have been included. Certain information in footnote disclosures normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to the rules and regulations of the SEC and the accounting standards for interim financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Consolidated Financial Statements for the years ended December 31, 2018, 2017, and 2016.

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 consolidated financial statements.

The Company has one reportable segment. The Company’s chief operating decision maker evaluates the operations of the Company using consolidated information for purposes of allocating resources and assessing performance. Therefore, segments disclosures are not required.

On October 17, 2018, the Company entered a definitive merger agreement with Oak Park River Forest Bankshares, Inc. (“Oak Park River Forest”), the parent company of Community Bank of Oak Park River Forest, to which the Company will acquire Oak Park River Forest through the merger of Oak Park River Forest with and into the Company, followed immediately by the merger of Community Bank of Oak Park River Forest with and into Byline Bank. On April 30, 2019, Byline completed its acquisition of Oak Park River Forest. Under the terms of the merger agreement, each share of Oak Park River Forest's common stock was converted into the right to receive 7.9321 shares of Byline common stock and $33.375 in cash. The value of the total merger consideration at closing was approximately $39.6 million. No other subsequent events were identified that would have required a change to the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or stockholders’ equity.

Note 2—Accounting Pronouncements Recently Adopted or Issued

The following reflect recent accounting pronouncements that have been adopted or are pending adoption by the Company. As the Company qualifies as an emerging growth company and has elected the extended transition period for complying with new or revised accounting pronouncements, it is not subject to new or revised accounting standards applicable to public companies during the extended transition period. The accounting pronouncements pending adoption below reflect effective dates for the Company as an emerging growth company with the extended transition period.

Adopted Accounting Pronouncements

Revenue from Contracts with Customers In May 2014, FASB issued Accounting Standards Update (“ASU”) No. 2014-09, deferred by ASU No. 2015-14 and clarifying standards, Revenue from Contracts with Customers, which creates Topics 606 and 610 and supersedes Topic 605, Revenue Recognition. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In April 2016, FASB issued

9


 

ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments in this ASU clarify the following two aspects of Topic 606: (1) identifying performance obligations and (2) licensing implementation guidance, while retaining the related principles for those areas. In May 2016, FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, amending ASC Topic 606, Revenue from Contracts with Customers. The amendments in this ASU affect only several narrow aspects of Topic 606. In November 2017, FASB issued ASU No. 2017-14, amending ASC Topic 606, Revenue from Contracts with Customers. The ASU amends the codification to incorporate additional previously issued guidance from the SEC. The SEC issued SAB 116 to bring existing SEC staff guidance into conformity with the FASB’s adoption of and amendments to ASC Topic 606.

In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. Given our emerging growth status, the Company adopted this new guidance on January 1, 2019 using the full retrospective method, meaning the standard is applied to all periods presented in the financial statements with the cumulative effect of initially applying the standard recognized at the beginning of the earliest period presented.

The majority of the Company’s revenue streams, including interest and dividend income, servicing fees, and gains on sales of loans and investments, are outside the scope of Topic 606. Revenue streams reported as fees and service charges on deposits, ATM and interchange fees, and wealth management and trust income are within the scope of Topic 606. The Company applied the requirements of Topic 606 to the revenue streams that are within its scope. The adoption of Topic 606 did not result in any changes in the either timing or amount of recognized; there was no cumulative effect adjustment to opening retained earnings as no material changes were identified in the timing of revenue recognition. However, the presentation of certain costs associated with our ATM and debit card income were offset against ATM and interchange income. This change in presentation resulted in $346,000 of expenses for the three months ended March 31, 2019 being netted against ATM and interchange fees and reported in non-interest income instead of as other non-interest expense in non-interest expense. In addition, to conform to the current period presentation, $305,000 of related expenses for the three months ended March 31, 2018 were reclassified from other non-interest expense in non-interest expense to being netted against ATM and interchange fees in non-interest income. The Company elected to apply the practical expedient and therefore does not disclose information about remaining performance obligations that have an original expected term of one year or less and allows the Company to expense costs related to obtaining a contract as incurred when the amortization period would have been one year or less.

The Company adopted ASU 2014-09 using the full retrospective approach. The following table presents the impact of adopting the new revenue standard on our Consolidated Statements of Operations for the periods presented (in thousands):

 

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

As Reported

 

 

Balance

without

Adoption

of ASC 606

 

 

Effect of

Change

 

 

As Reported

 

 

Balance

without

Adoption

of ASC 606

 

 

Effect of

Change

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ATM and interchange fees

 

$

717

 

 

$

1,063

 

 

$

(346

)

 

$

913

 

 

$

1,218

 

 

$

(305

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other non-interest expense

 

$

2,839

 

 

$

3,185

 

 

$

(346

)

 

$

1,752

 

 

$

2,057

 

 

$

(305

)

Fees and service charges on deposits:  

Fees and service charges on deposits include transaction and non-transaction based deposit fees. Transaction based fees on deposit accounts are charged to deposit customers for specific services provided to the customer. These fees include such items as wire fees, official check fees, and overdraft fees. These are contracts specific to each individual transaction and do not extend beyond the individual transaction. The performance obligation is completed and the fees are recognized at the time the specific transactional service is provided to the customer. Non-transactional deposit fees are typically monthly account maintenance fees charged on deposit accounts. These are day-to-day contracts that can be canceled by either party

10


 

without notice. The performance obligation is satisfied and the fees are recognized on a monthly basis after the service period is completed.

ATM and interchange fees:  

ATM fees represent fees earned when a foreign debit or ATM card is used in a Byline Bank ATM. These fees are assessed and paid at the time of each transaction as the performance obligation is satisfied, which is at the point in time that the transaction is performed and approved. Interchange fees represent fees earned when a debit card issued by the Bank is used to purchase goods or services at a merchant. The merchant's bank pays the Bank a default interchange rate set by MasterCard on a transaction by transaction basis. Interchange fees are assessed as the performance obligation is satisfied, which is at the point in time the card transaction is authorized. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the Bank cardholders’ card. Direct expenses associated with ATM and debit cards are recorded as a net reduction against the ATM and interchange income.

Wealth management and trust income

Wealth management and trust income represents fees earned by the Bank for discretionary investment management, trust administration, fiduciary and/or custody services rendered. Fees vary and are based on a contract with the customer. Fee income is determined as a percentage of assets under management and is recognized over the period the underlying account is serviced. Although some trust appointments can last for generations, most contracts are generally cancellable at any time, with the customer subject to a pro-rated fee in the month of termination.

Recognition and Measurement of Financial Assets and Financial Liabilities In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. The amendments simplify the impairment assessment of equity investments without readily determinable fair values. The amendments also eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments require entities to adjust fair value disclosures for financial instruments to be reflected at an exit price. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This amendment excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the provisions of ASU No. 2016-01 as of January 1, 2019. The adoption of this ASU resulted in the Company reclassifying $1.4 million from other comprehensive income to retained earnings, representing the unrealized gain, net of tax, on available-for-sale for sale equity securities at the date of adoption. The provisions of ASU No. 2016-01 require any future changes in fair value of equity securities to be recorded in the Consolidated Statements of Operations which could result in additional volatility in non-interest income. At December 31, 2018, the Company held $6.6 million of available-for-sale equity investment securities which were previously reported as available-for-sale securities, at fair value and are now reported as equity and other securities, at fair value.

In addition, the adoption of this ASU resulted in changing how the Company estimates the fair value of portfolio loans for disclosure purposes. Fair values are estimated first by stratifying the portfolios of loans with similar financial characteristics. Loans are segregated by type such as multifamily real estate, residential mortgage, nonresidential mortgage, commercial/agricultural, consumer and other. Each loan category is further segmented into fixed- and adjustable-rate interest terms. An estimate of fair value is then calculated based on discounted cash flows using as a discount rate based on the current rate offered on similar products, plus an adjustment for liquidity to reflect the non-homogeneous nature of the loans, as well as a quarterly loss rate based on historical losses to arrive at an estimated exit price fair value. Fair value for impaired loans is also based on recent appraisals or estimated cash flows discounted using rates commensurate with risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are judgmentally determined using available market information and specific borrower information.

11


 

Derivatives and Hedging (Topic 815) In August 2017, FASB issued ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company adopted the provisions of ASU No. 2017-12 on January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements. Upon adoption, the Company elected to reclassify $94.8 million of securities held-to-maturity to securities available-for-sale, which did not impact on the Consolidated Statements of Operations.

Compensation—Stock Compensation (Topic 718) In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. The amendments in the ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless all of the following are met: (1) the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified.  If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification. (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified. (3) the classification of the modified award is an equity instrument or liability instrument is the same as the classification of the original award immediately before the original award is modified.  The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The amendments should be applied prospectively to an award modified on or after the adoption date. Given our emerging growth status, the Company adopted the provisions of ASU No. 2017-09 on January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.

Statement of Cash Flows (Topic 230) In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. There is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other Topics. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Those eight issues are (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues. These amendments provide guidance for each of the eight issues, thereby reducing current and potential future diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Given the Company’s emerging growth company status, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company adopted the provisions of ASU No. 2016-15 on January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The ASU will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendment is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Given our emerging growth status, the Company adopted these amendments on January 1, 2019 in conjunction with ASU No. 2016-15, which did not have a material impact on the Company’s Consolidated Financial Statements.

12


 

Business Combinations (Topic 805) In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The guidance clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance is effective for annual and interim periods beginning after December 15, 2017. Given our emerging growth status, the Company adopted the provisions of ASU No. 2017-01 on January 1, 2019, which did not have a material impact on the Company’s Consolidated Financial Statements.

Income Statement—Reporting Comprehensive Income (Topic 220) In February 2018, FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU helps organizations address certain stranded income tax effects in accumulated other comprehensive income (AOCI) resulting from the Tax Cuts and Jobs Act. The ASU provides reporting entities with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The ASU requires reporting entities to disclose: a description of the accounting policy for releasing income tax effects from AOCI; whether they elect to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act; and information about the other income tax effects that are reclassified. The amendments affect any organization that is required to apply the provisions of Topic 220, Income Statement—Reporting Comprehensive Income, and has items of other comprehensive income for which the related tax effects are presented in other comprehensive income as required by GAAP. The amendments are effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company early adopted the new guidance on January 1, 2018. The adoption did not impact the Company’s Statements of Operations, and resulted in a reclassification of $763,000 from accumulated other comprehensive income (loss) to retained earnings.

Fair Value Measurement (Topic 820) In August 2018, FASB issued ASU No. 2018-13, Disclosure FrameworkChanges to the Disclosure Requirements for Fair Value Measurement. The amendments in this ASU modify the disclosure requirements on fair value measurements in Topic 820. The amendments remove the disclosure requirements for the amount and reasons for transfers between Level 1 and Level 2 securities of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurement. The amendments modify the disclosure requirements as follows: in lieu of a rollforward for Level 3 fair value measurements, a nonpublic entity is required to disclose transfers into and out of Level 3 of the fair value hierarchy and purchases and issues of Level 3 assets and liabilities; for investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The amendments add the following disclosure requirements: the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Early adoption is permitted. The Company early adopted these amendments in 2018, which did not have a material impact on the Company’s Consolidated Financial Statements.

Issued Accounting Pronouncements Pending Adoption

Leases (Topic 842) In February 2016, FASB issued ASU No. 2016-02, Leases. The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the new guidance and its impact on the Company’s Consolidated Statements of Operations and Consolidated Statements of Financial Condition. Assuming the Company remains

13


 

an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company expects an increase in assets and liabilities as a result of recognizing additional right-to-use assets and liabilities under lease contracts in which the Company is lessee. While the Company has not quantified the impact of this ASU on its leasing portfolio, it does not expect a change in its accounting for the initial direct costs of leases.

Financial Instruments—Credit Losses (Topic 326) In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2021. The Company is still evaluating the effects this ASU will have on the Company’s Consolidated Financial Statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.

Nonrefundable Fees and Other Costs (Subtopic 310-20) In March 2017, FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs. The amendments in the ASU shorten the amortization period for certain callable debt securities held at a premium at the earliest call date. Under current GAAP, the Company amortizes the premium as an adjustment of yield over the contractual life of the instrument. As a result, upon exercise of a call on a callable debt security held at a premium, the unamortized premium is charged to earnings. The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The Company is required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

Note 3—Acquisition of a Business

On May 31, 2018, the Company acquired all common stock of First Evanston Bancorp, Inc. (“First Evanston”) and its subsidiaries pursuant to an Agreement and Plan of Merger, dated as of November 27, 2017 (the “Merger Agreement”). First Evanston operated two wholly owned subsidiaries, First Bank & Trust and First Evanston Bancorp Trust I. First Evanston was merged with and into Byline. As a result of the merger, First Evanston’s subsidiary bank, First Bank & Trust, was merged with and into Byline Bank, with Byline Bank as the surviving bank. The acquisition improves the Company’s footprint in the Chicagoland market, diversifies its commercial banking business, and strengthens the core deposit base. 

At the effective time of the merger (the “Effective Time”), each share of First Evanston’s common stock was converted into the right to receive: (1) 3.994 shares of Byline’s common stock, and (2) an amount in cash equal to $27.0 million divided by the number of outstanding shares of First Evanston common stock as of the closing date, with cash paid in lieu of any fractional shares. The per share cash consideration was based on the total $27.0 million divided by the outstanding shares of First Evanston common stock, or $16.136 per outstanding share. Based on the closing price of shares of the

14


 

Company’s common stock of $21.62, as reported by the New York Stock Exchange, and 6,682,850 shares of common stock issued with respect to the outstanding shares of First Evanston common stock, the stock consideration was valued at $144.5 million. Options to acquire 144,090 shares of First Evanston common stock that were outstanding at the Effective Time were converted into options to acquire 680,787 shares of Byline common stock, resulting in a consideration value of $7.6 million. The value of the total merger consideration at closing was $179.1 million before the issuance costs of $852,000.

The transaction resulted in goodwill of $73.6 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. The Company incurred First Evanston merger-related expenses, including acquisition advisory expenses, of $123,000 for the three months ended March 31, 2018. There were no merger-related expenses incurred for the three months ended March 31, 2019. Core system conversion expenses were $1.5 million related to the First Evanston acquisition for the three months ended March 31, 2019. There were no core system conversion expenses incurred during the three months ended March 31, 2018. These expenses are reflected in non-interest expense on the Consolidated Statements of Operations.

The acquisition of First Evanston was accounted for using the acquisition method of accounting in accordance with ASC Topic 805. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities involves significant judgment regarding methods and assumptions used to calculate estimated fair values. The fair value adjustments associated with this transaction were finalized during the fourth quarter of 2018.

The following table presents a summary of the fair values of assets acquired and liabilities assumed as of the acquisition date:

 

Assets

 

 

 

 

Cash and cash equivalents

 

$

47,378

 

Securities available-for-sale

 

 

128,063

 

Restricted stock

 

 

1,360

 

Loans

 

 

916,011

 

Premises and equipment

 

 

15,890

 

Other intangible assets

 

 

22,276

 

Deferred tax assets, net

 

 

2,302

 

Other assets

 

 

8,845

 

Total assets acquired

 

 

1,142,125

 

Liabilities

 

 

 

 

Deposits

 

 

1,022,268

 

Junior subordinated debentures

 

 

8,497

 

Accrued expenses and other liabilities

 

 

5,844

 

Total liabilities assumed

 

 

1,036,609

 

Net assets acquired

 

$

105,516

 

Consideration paid

 

 

 

 

Common stock (6,682,850 shares issued at $21.62 per

   share)

 

 

144,483

 

Outstanding stock options converted to Byline stock

   options

 

 

7,644

 

Cash paid

 

 

27,004

 

Total consideration paid

 

 

179,131

 

Goodwill

 

$

73,615

 

 

15


 

The following table presents the acquired non-impaired loans as of the acquisition date:  

 

Fair value

 

$

890,986

 

Gross contractual amounts receivable

 

 

1,057,374

 

Estimate of contractual cash flows not expected to be

   collected(1)

 

 

36,544

 

Estimate of contractual cash flows expected to be collected

 

 

1,020,830

 

 

(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 discount on the acquired non-impaired loans is being accreted into income over the life of the loans on an effective yield basis.  

The following table provides the unaudited pro forma information for the results of operations for the three months ended March 31, 2018, as if the acquisition had occurred on January 1, 2018. The pro forma results combine the historical results of First Evanston 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, and borrowing, net of 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, 2018. 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. The acquisition-related expenses that have been recognized are included in net income in the following table for the three months ended March 31, 2018.

 

 

March 31, 2018

 

Total revenues (net interest income and non-interest income)

 

$

57,697

 

Net income

 

$

10,458

 

Earnings per share—basic

 

$

0.29

 

Earnings per share—diluted

 

$

0.28

 

 

The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of First Evanston for the period beginning June 1, 2018 through March 31, 2019. Revenues and earnings of the acquired company since the acquisition date have not been disclosed as it is not practicable as First Evanston was merged into the Company and separate financial information is not readily available.

 

On April 30, 2019, the Company acquired all common stock of Oak Park River Forest Bankshares, Inc. and its subsidiary pursuant to an Agreement and Plan of Merger, dated as of October 17, 2018 (the “OPRF Merger Agreement”). Oak Park River Forest operated one wholly owned subsidiary, Community Bank of Oak Park and River Forest. Oak Park River Forest was merged with and into Byline. As a result of the merger, Oak Park River Forest’s subsidiary bank, Community Bank of Oak Park and River Forest, was merged with and into Byline Bank, with Byline Bank as the surviving bank. The acquisition improves the Company’s footprint in the Chicagoland market, diversifies its commercial banking business, and strengthens the core deposit base.

 

At the effective time of the merger (the “OPRF Effective Time”), each share of Oak Park River Forest’s common stock was converted into the right to receive: (1) 7.9321 shares of Byline’s common stock, and (2) an amount in cash equal to $6.1 million divided by the number of outstanding shares of Oak Park River Forest common stock as of the closing date, with cash paid in lieu of any fractional shares. The per share cash consideration was based on the total $6.1 million divided by the outstanding shares of Oak Park River Forest common stock, or $33.375 per outstanding share. Based on the closing price of shares of the Company’s common stock of $20.02, as reported by the New York Stock Exchange, and 1,464,558 shares of common stock issued with respect to the outstanding shares of Oak Park River Forest common stock, the stock consideration was valued at $29.3 million.  Options to acquire 35,870 shares of Oak Park River Forest common stock that were outstanding at the OPRF Effective Time were cancelled, at the option holders election, in exchange for a cash payment in accordance with the OPRF Merger agreement, resulting in a consideration value of $4.2 million. As of March 31, 2019, prior to the impact of acquisition fair value adjustments, Oak Park River Forest had $323.5 million in assets, including $30.8 million of securities, $269.5 million of loans, and $285.7 million of total deposits.

16


 

Note 4—Securities

The following tables summarize the amortized cost and fair values of securities available-for-sale, securities held-to-maturity and equity and other securities as of the dates shown and the corresponding amounts of gross unrealized gains and losses:

 

March 31, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

 

Fair

Value

 

Equity and other securities, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

$

2,882

 

 

 

 

 

 

$

2,882

 

Equity securities

 

 

4,334

 

 

 

 

 

 

 

4,334

 

Total

 

$

7,216

 

 

 

 

 

 

$

7,216

 

 

March 31, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes

 

$

57,323

 

 

$

162

 

 

$

(98

)

 

$

57,387

 

U.S. Government agencies

 

 

187,458

 

 

 

816

 

 

 

(772

)

 

 

187,502

 

Obligations of states, municipalities, and political

   subdivisions

 

 

82,049

 

 

 

749

 

 

 

(231

)

 

 

82,567

 

Residential mortgage-backed securities

 

 

 

 

 

 

 

��

 

 

 

 

 

 

 

 

Agency

 

 

347,166

 

 

 

753

 

 

 

(7,435

)

 

 

340,484

 

Non-agency

 

 

132,071

 

 

 

814

 

 

 

(1,219

)

 

 

131,666

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

100,400

 

 

 

78

 

 

 

(2,665

)

 

 

97,813

 

Non-agency

 

 

31,380

 

 

 

 

 

 

(545

)

 

 

30,835

 

Corporate securities

 

 

36,666

 

 

 

59

 

 

 

(426

)

 

 

36,299

 

Other securities

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

974,513

 

 

$

3,431

 

 

$

(13,391

)

 

$

964,553

 

 

March 31, 2019

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities, and political

   subdivisions

 

$

4,425

 

 

$

22

 

 

$

(16

)

 

$

4,431

 

Total

 

$

4,425

 

 

$

22

 

 

$

(16

)

 

$

4,431

 

17


 

 

December 31, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes

 

$

52,775

 

 

$

81

 

 

$

(189

)

 

$

52,667

 

U.S. Government agencies

 

 

187,427

 

 

 

367

 

 

 

(1,296

)

 

 

186,498

 

Obligations of states, municipalities, and political

   subdivisions

 

 

60,686

 

 

 

133

 

 

 

(586

)

 

 

60,233

 

Residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

284,038

 

 

 

101

 

 

 

(11,176

)

 

 

272,963

 

Non-agency

 

 

84,998

 

 

 

199

 

 

 

(1,576

)

 

 

83,621

 

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

93,543

 

 

 

55

 

 

 

(3,164

)

 

 

90,434

 

Non-agency

 

 

31,458

 

 

 

 

 

 

(1,000

)

 

 

30,458

 

Corporate securities

 

 

34,716

 

 

 

67

 

 

 

(610

)

 

 

34,173

 

Other securities

 

 

4,613

 

 

 

2,127

 

 

 

(131

)

 

 

6,609

 

Total

 

$

834,254

 

 

$

3,130

 

 

$

(19,728

)

 

$

817,656

 

 

December 31, 2018

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities, and political

   subdivisions

 

$

23,835

 

 

$

40

 

 

$

(210

)

 

$

23,665

 

Residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

40,082

 

 

 

93

 

 

 

(531

)

 

 

39,644

 

Non-agency

 

 

35,349

 

 

 

 

 

 

(919

)

 

 

34,430

 

Total

 

$

99,266

 

 

$

133

 

 

$

(1,660

)

 

$

97,739

 

 

The Company did not classify securities as trading during the three months ended March 31, 2019 or during 2018.

 

The Company adopted the provisions of ASU No. 2016-01 as of January 1, 2019. The adoption of this ASU resulted in the reclassification of available-for-sale equity securities, at fair value to a separate line item on the Company’s Consolidated Statements of Financial Condition, and the reclassification of $1.4 million from other comprehensive income to retained earnings, representing the net unrealized gain, net of tax, on available-for-sale for sale equity securities at the date of adoption. At December 31, 2018, the Company held $6.6 million of available-for-sale equity investment securities which were reported as available-for-sale securities, at fair value, and are now reported as equity and other securities, at fair value. Additionally, the Company adopted the provisions of ASU No. 2017-12 on January 1, 2019, and elected to reclassify $94.8 million of securities held-to-maturity to securities available-for-sale, which did not impact on the Consolidated Statements of Operations.

18


 

Gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2019 and December 31, 2018, are summarized as follows:

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

March 31, 2019

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes

 

 

13

 

 

$

7,965

 

 

$

(2

)

 

$

14,891

 

 

$

(96

)

 

$

22,856

 

 

$

(98

)

U.S. Government agencies

 

 

20

 

 

 

38,421

 

 

 

(50

)

 

 

50,613

 

 

 

(722

)

 

 

89,034

 

 

 

(772

)

Obligations of states, municipalities and

   political subdivisions

 

 

30

 

 

 

542

 

 

 

(1

)

 

 

20,376

 

 

 

(230

)

 

 

20,918

 

 

 

(231

)

Residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

57

 

 

 

 

 

 

 

 

 

276,827

 

 

 

(7,435

)

 

 

276,827

 

 

 

(7,435

)

Non-agency

 

 

13

 

 

 

 

 

 

 

 

 

82,304

 

 

 

(1,219

)

 

 

82,304

 

 

 

(1,219

)

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

11

 

 

 

25,364

 

 

 

(128

)

 

 

65,029

 

 

 

(2,537

)

 

 

90,393

 

 

 

(2,665

)

Non-agency

 

 

5

 

 

 

 

 

 

 

 

 

30,835

 

 

 

(545

)

 

 

30,835

 

 

 

(545

)

Corporate securities

 

 

12

 

 

 

15,756

 

 

 

(229

)

 

 

8,250

 

 

 

(197

)

 

 

24,006

 

 

 

(426

)

Other securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

161

 

 

$

88,048

 

 

$

(410

)

 

$

549,125

 

 

$

(12,981

)

 

$

637,173

 

 

$

(13,391

)

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

March 31, 2019

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities, and

   political subdivisions

 

 

4

 

 

$

 

 

$

 

 

$

2,605

 

 

$

(16

)

 

$

2,605

 

 

$

(16

)

Total

 

 

4

 

 

$

 

 

$

 

 

$

2,605

 

 

$

(16

)

 

$

2,605

 

 

$

(16

)

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

December 31, 2018

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes

 

 

18

 

 

$

23,835

 

 

$

(52

)

 

$

9,865

 

 

$

(137

)

 

$

33,700

 

 

$

(189

)

U.S. Government agencies

 

 

25

 

 

 

43,487

 

 

 

(80

)

 

 

50,101

 

 

 

(1,216

)

 

 

93,588

 

 

 

(1,296

)

Obligations of states, municipalities and

   political subdivisions

 

 

56

 

 

 

13,926

 

 

 

(97

)

 

 

18,563

 

 

 

(489

)

 

 

32,489

 

 

 

(586

)

Residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

42

 

 

 

4,288

 

 

 

(45

)

 

 

254,121

 

 

 

(11,131

)

 

 

258,409

 

 

 

(11,176

)

Non-agency

 

 

8

 

 

 

59,107

 

 

 

(1,378

)

 

 

4,009

 

 

 

(198

)

 

 

63,116

 

 

 

(1,576

)

Commercial mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

9

 

 

 

21,356

 

 

 

(447

)

 

 

52,640

 

 

 

(2,717

)

 

 

73,996

 

 

 

(3,164

)

Non-agency

 

 

5

 

 

 

 

 

 

 

 

 

30,458

 

 

 

(1,000

)

 

 

30,458

 

 

 

(1,000

)

Corporate securities

 

 

15

 

 

 

25,762

 

 

 

(342

)

 

 

4,642

 

 

 

(268

)

 

 

30,404

 

 

 

(610

)

Other securities

 

 

1

 

 

 

 

 

 

 

 

 

2,844

 

 

 

(131

)

 

 

2,844

 

 

 

(131

)

Total

 

 

179

 

 

$

191,761

 

 

$

(2,441

)

 

$

427,243

 

 

$

(17,287

)

 

$

619,004

 

 

$

(19,728

)

19


 

 

 

 

 

 

 

 

Less than 12 Months

 

 

12 Months or Longer

 

 

Total

 

December 31, 2018

 

# of

Securities

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of states, municipalities, and

   political subdivisions

 

 

23

 

 

$

8,127

 

 

$

(58

)

 

$

8,792

 

 

$

(152

)

 

$

16,919

 

 

$

(210

)

Residential mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

16

 

 

 

6,625

 

 

 

(150

)

 

 

21,139

 

 

 

(381

)

 

 

27,764

 

 

 

(531

)

Non-agency

 

 

7

 

 

 

21,499

 

 

 

(503

)

 

 

12,931

 

 

 

(416

)

 

 

34,430

 

 

 

(919

)

Total

 

 

46

 

 

$

36,251

 

 

$

(711

)

 

$

42,862

 

 

$

(949

)

 

$

79,113

 

 

$

(1,660

)

 

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The Company evaluated the securities which had an unrealized loss for other than temporary impairment and determined all declines in value to be temporary. There were 161 securities available-for-sale with unrealized losses at March 31, 2019. There were four securities held-to-maturity with unrealized losses at March 31, 2019. The Company anticipates full recovery of amortized cost with respect to these securities by maturity, or sooner, in the event of a more favorable market interest rate environment. The Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

There were no sales of securities were available-for-sale, or associated gains and losses, for the three months ended March 31, 2019 and 2018. There were no gains reclassified from accumulated other comprehensive income into earnings for the three months ended March 31, 2019 or 2018.

 

Securities pledged at March 31, 2019 and December 31, 2018 had carrying amounts of $223.9 million and $244.7 million, respectively. At March 31, 2019 and December 31, 2018, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $177.3 million and $197.8 million, respectively, and for customer repurchase agreements of $46.6 million and $46.9 million, respectively. At March 31, 2019 and December 31, 2018, there were no securities pledged for advances from the Federal Home Loan Bank. Other securities were pledged for derivative positions, letters of credit and for purposes required or permitted by law. At March 31, 2019 and December 31, 2018, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders’ equity.

At March 31, 2019, 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. 

 

 

 

Amortized

Cost

 

 

Fair

Value

 

Available-for-sale

 

 

 

 

 

 

 

 

Due in one year or less

 

$

83,952

 

 

$

83,767

 

Due from one to five years

 

 

161,739

 

 

 

161,679

 

Due from five to ten years

 

 

91,146

 

 

 

91,405

 

Due after ten years

 

 

26,659

 

 

 

26,904

 

Mortgage-backed securities

 

 

611,017

 

 

 

600,798

 

Total

 

$

974,513

 

 

$

964,553

 

Held-to-maturity

 

 

 

 

 

 

 

 

Due from one to five years

 

$

3,262

 

 

$

3,264

 

Due from five to ten years

 

 

1,163

 

 

 

1,167

 

Total

 

$

4,425

 

 

$

4,431

 

Equity and other securities, at fair value

 

 

 

 

 

 

 

 

Due after ten years

 

$

695

 

 

$

695

 

No defined maturity

 

 

6,521

 

 

 

6,521

 

Total

 

$

7,216

 

 

$

7,216

 

20


 

 

Note 5—Loan and Lease Receivables

Outstanding loan and lease receivables as of the dates shown were categorized as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Commercial real estate

 

$

1,262,236

 

 

$

1,261,594

 

Residential real estate

 

 

699,088

 

 

 

704,899

 

Construction, land development, and other land

 

 

214,562

 

 

 

186,258

 

Commercial and industrial

 

 

1,189,710

 

 

 

1,145,240

 

Installment and other

 

 

12,766

 

 

 

13,675

 

Lease financing receivables

 

 

186,743

 

 

 

187,797

 

Total loans and leases

 

 

3,565,105

 

 

 

3,499,463

 

Net unamortized deferred fees and costs

 

 

(764

)

 

 

(1,293

)

Initial direct costs

 

 

3,225

 

 

 

3,456

 

Allowance for loan and lease losses

 

 

(27,106

)

 

 

(25,201

)

Net loans and leases

 

$

3,540,460

 

 

$

3,476,425

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Lease financing receivables

 

 

 

 

 

 

 

 

Net minimum lease payments

 

$

203,238

 

 

$

204,646

 

Unguaranteed residual values

 

 

1,511

 

 

 

1,535

 

Unearned income

 

 

(18,006

)

 

 

(18,384

)

Total lease financing receivables

 

 

186,743

 

 

 

187,797

 

Initial direct costs

 

 

3,225

 

 

 

3,456

 

Lease financial receivables before allowance for

   lease losses

 

$

189,968

 

 

$

191,253

 

 

Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases. At March 31, 2019 and December 31, 2018, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $129.0 million and $108.7 million, respectively. At March 31, 2019 and December 31, 2018, installment and other loans included overdraft deposits of $1.1 million and $1.7 million, respectively, which were reclassified as loans. At March 31, 2019 and December 31, 2018, loans and loans held for sale pledged as security for borrowings were $1.4 billion.

The minimum annual lease payments for lease financing receivables as of March 31, 2019 are summarized as follows:

 

 

 

Minimum Lease

Payments

 

2019

 

$

56,181

 

2020

 

 

62,573

 

2021

 

 

43,337

 

2022

 

 

27,072

 

2023

 

 

12,269

 

Thereafter

 

 

1,806

 

Total

 

$

203,238

 

 

Originated loans and leases represent originations excluding loans initially acquired in a business combination. However, once an acquired non-impaired loan reaches its maturity date, and is re-underwritten and renewed, it is internally classified as an originated loan. Acquired impaired loans are loans acquired from a business combination with evidence of credit quality deterioration and are accounted for under ASC Topic 310-30. Acquired non-impaired loans and leases represent loans and leases acquired from a business combination without evidence of credit quality deterioration and are

21


 

accounted for under ASC Topic 310-20. Leases and revolving loans do not qualify to be accounted for as acquired impaired loans and are accounted for under ASC Topic 310-20. The following tables summarize the balances for each respective loan and lease category as of March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

Originated

 

 

Acquired

Impaired

 

 

Acquired

Non-

Impaired

 

 

Total

 

Commercial real estate

 

$

738,832

 

 

$

141,199

 

 

$

382,252

 

 

$

1,262,283

 

Residential real estate

 

 

494,877

 

 

 

106,764

 

 

 

97,395

 

 

 

699,036

 

Construction, land development, and other land

 

 

181,427

 

 

 

3,111

 

 

 

29,121

 

 

 

213,659

 

Commercial and industrial

 

 

900,709

 

 

 

11,963

 

 

 

277,146

 

 

 

1,189,818

 

Installment and other

 

 

11,082

 

 

 

374

 

 

 

1,346

 

 

 

12,802

 

Lease financing receivables

 

 

160,607

 

 

 

 

 

 

29,361

 

 

 

189,968

 

Total loans and leases

 

$

2,487,534

 

 

$

263,411

 

 

$

816,621

 

 

$

3,567,566

 

 

December 31, 2018

 

Originated

 

 

Acquired

Impaired

 

 

Acquired

Non-

Impaired

 

 

Total

 

Commercial real estate

 

$

652,234

 

 

$

146,808

 

 

$

462,565

 

 

$

1,261,607

 

Residential real estate

 

 

466,309

 

 

 

113,934

 

 

 

124,659

 

 

 

704,902

 

Construction, land development, and other land

 

 

144,128

 

 

 

3,779

 

 

 

37,442

 

 

 

185,349

 

Commercial and industrial

 

 

803,508

 

 

 

12,617

 

 

 

328,672

 

 

 

1,144,797

 

Installment and other

 

 

11,718

 

 

 

404

 

 

 

1,596

 

 

 

13,718

 

Lease financing receivables

 

 

159,901

 

 

 

 

 

 

31,352

 

 

 

191,253

 

Total loans and leases

 

$

2,237,798

 

 

$

277,542

 

 

$

986,286

 

 

$

3,501,626

 

 

Acquired impaired loans—As part of the First Evanston acquisition, the Bank acquired impaired loans that are accounted for under ASC 310-30 in the amount of $25.0 million. Refer to Note 3—Acquisition of a Business for additional information regarding the transaction. There were no other acquired impaired loans purchased during 2019 or 2018. The following table presents a reconciliation of the undiscounted contractual cash flows, non-accretable difference, accretable yield, and fair value of acquired impaired loans as of the acquisition date of May 31, 2018:

 

Undiscounted contractual cash flows

 

$

33,594

 

Undiscounted cash flows not expected to be collected (non-accretable difference)

 

 

(5,003

)

Undiscounted cash flows expected to be collected

 

 

28,591

 

Accretable yield at acquisition

 

 

(3,566

)

Estimated fair value of impaired loans acquired at acquisition

 

$

25,025

 

 

The outstanding balance and carrying amount of all acquired impaired loans are summarized below. The balances do not include an allowance for loan and lease losses of $2.8 million and $2.7 million, at March 31, 2019 and December 31, 2018, respectively.

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Outstanding

Balance

 

 

Carrying

Value

 

 

Outstanding

Balance

 

 

Carrying

Value

 

Commercial real estate

 

$

194,328

 

 

$

141,199

 

 

$

216,137

 

 

$

146,808

 

Residential real estate

 

 

155,075

 

 

 

106,764

 

 

 

173,962

 

 

 

113,934

 

Construction, land development, and other land

 

 

10,849

 

 

 

3,111

 

 

 

11,962

 

 

 

3,779

 

Commercial and industrial

 

 

16,794

 

 

 

11,963

 

 

 

24,972

 

 

 

12,617

 

Installment and other

 

 

1,205

 

 

 

374

 

 

 

1,735

 

 

 

404

 

Total acquired impaired loans

 

$

378,251

 

 

$

263,411

 

 

$

428,768

 

 

$

277,542

 

 

22


 

The following table summarizes the changes in accretable yield for acquired impaired loans for the three months ended March 31, 2019 and 2018: 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Beginning balance

 

$

37,115

 

 

$

36,446

 

Additions

 

 

 

 

 

 

Accretion to interest income

 

 

(5,250

)

 

 

(5,691

)

Reclassification from (to) nonaccretable difference, net

 

 

(2,525

)

 

 

8,545

 

Ending balance

 

$

29,340

 

 

$

39,300

 

Acquired non-impaired loans and leases—The Company acquired non-impaired loans as part of the First Evanston acquisition in the amount of $891.0 million. Refer to Note 3—Acquisition of a Business for additional information regarding the transaction.

The unpaid principal balance and carrying value for acquired non-impaired loans and leases at March 31, 2019 and December 31, 2018 were as follows:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Unpaid

Principal

Balance

 

 

Carrying

Value

 

 

Unpaid

Principal

Balance

 

 

Carrying

Value

 

Commercial real estate

 

$

391,806

 

 

$

382,252

 

 

$

473,262

 

 

$

462,565

 

Residential real estate

 

 

99,828

 

 

 

97,395

 

 

 

127,478

 

 

 

124,659

 

Construction, land development, and other land

 

 

30,081

 

 

 

29,121

 

 

 

38,494

 

 

 

37,442

 

Commercial and industrial

 

 

284,997

 

 

 

277,146

 

 

 

344,879

 

 

 

328,672

 

Installment and other

 

 

1,375

 

 

 

1,346

 

 

 

1,831

 

 

 

1,596

 

Lease financing receivables

 

 

30,852

 

 

 

29,361

 

 

 

32,977

 

 

 

31,352

 

Total acquired non-impaired loans and leases

 

$

838,939

 

 

$

816,621

 

 

$

1,018,921

 

 

$

986,286

 

 

23


 

Note 6—Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments

Loans and leases considered for inclusion in the allowance for loan and lease losses include acquired non-impaired loans and leases, those acquired impaired loans with credit deterioration after acquisition, and originated loans and leases. Although all acquired loans and leases are included in the following table, only those with credit deterioration subsequent to acquisition date are actually included in the allowance for loan and lease losses.

The following tables summarize the balance and activity within the allowance for loan and lease losses, the components of the allowance for loan and lease losses in terms of loans and leases individually and collectively evaluated for impairment, and corresponding loan and lease balances by type for the three months ended March 31, 2019 and 2018 are as follows:

 

March 31, 2019

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction,

Land

Development,

and

Other Land

 

 

Commercial

and

Industrial

 

 

Installment

and Other

 

 

Lease

Financing

Receivables

 

 

Total

 

Allowance for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

7,540

 

 

$

1,751

 

 

$

466

 

 

$

12,932

 

 

$

49

 

 

$

2,463

 

 

$

25,201

 

Provisions

 

 

442

 

 

 

218

 

 

 

70

 

 

 

3,032

 

 

 

14

 

 

 

223

 

 

 

3,999

 

Charge-offs

 

 

(1,351

)

 

 

 

 

 

 

 

 

(352

)

 

 

 

 

 

(645

)

 

 

(2,348

)

Recoveries

 

 

29

 

 

 

1

 

 

 

 

 

 

18

 

 

 

 

 

 

206

 

 

 

254

 

Ending balance

 

$

6,660

 

 

$

1,970

 

 

$

536

 

 

$

15,630

 

 

$

63

 

 

$

2,247

 

 

$

27,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for

   impairment

 

$

1,403

 

 

$

34

 

 

$

 

 

$

6,122

 

 

$

 

 

$

 

 

$

7,559

 

Collectively evaluated for

   impairment

 

 

4,141

 

 

 

1,516

 

 

 

536

 

 

 

8,200

 

 

 

61

 

 

 

2,247

 

 

 

16,701

 

Loans acquired with deteriorated

   credit quality

 

 

1,116

 

 

 

420

 

 

 

 

 

 

1,308

 

 

 

2

 

 

 

 

 

 

2,846

 

Total allowance for loan and lease

   losses

 

$

6,660

 

 

$

1,970

 

 

$

536

 

 

$

15,630

 

 

$

63

 

 

$

2,247

 

 

$

27,106

 

 

March 31, 2019

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction,

Land

Development,

and

Other Land

 

 

Commercial

and

Industrial

 

 

Installment

and Other

 

 

Lease

Financing

Receivables

 

 

Total

 

Loans and leases ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for

   impairment

 

$

17,354

 

 

$

2,060

 

 

$

 

 

$

24,384

 

 

$

 

 

$

 

 

$

43,798

 

Collectively evaluated for

   impairment

 

 

1,103,730

 

 

 

590,212

 

 

 

210,548

 

 

 

1,153,471

 

 

 

12,428

 

 

 

189,968

 

 

 

3,260,357

 

Loans acquired with deteriorated

   credit quality

 

 

141,199

 

 

 

106,764

 

 

 

3,111

 

 

 

11,963

 

 

 

374

 

 

 

 

 

 

263,411

 

Total loans and leases

 

$

1,262,283

 

 

$

699,036

 

 

$

213,659

 

 

$

1,189,818

 

 

$

12,802

 

 

$

189,968

 

 

$

3,567,566

 

24


 

 

March 31, 2018

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction,

Land

Development,

and

Other Land

 

 

Commercial

and

Industrial

 

 

Installment

and Other

 

 

Lease

Financing

Receivables

 

 

Total

 

Allowance for loan and lease losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

4,794

 

 

$

1,638

 

 

$

222

 

 

$

7,418

 

 

$

41

 

 

$

2,593

 

 

$

16,706

 

Provisions (releases)

 

 

934

 

 

 

(74

)

 

 

397

 

 

 

3,424

 

 

 

20

 

 

 

414

 

 

 

5,115

 

Charge-offs

 

 

(409

)

 

 

 

 

 

(418

)

 

 

(3,085

)

 

 

 

 

 

(510

)

 

 

(4,422

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

6

 

 

 

 

 

 

235

 

 

 

241

 

Ending balance

 

$

5,319

 

 

$

1,564

 

 

$

201

 

 

$

7,763

 

 

$

61

 

 

$

2,732

 

 

$

17,640

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for

   impairment

 

$

1,572

 

 

$

153

 

 

$

 

 

$

2,963

 

 

$

14

 

 

$

 

 

$

4,702

 

Collectively evaluated for

   impairment

 

 

1,827

 

 

 

1,036

 

 

 

177

 

 

 

3,626

 

 

 

11

 

 

 

2,732

 

 

 

9,409

 

Loans acquired with deteriorated

   credit quality

 

 

1,920

 

 

 

375

 

 

 

24

 

 

 

1,174

 

 

 

36

 

 

 

 

 

 

3,529

 

Total allowance for loan and lease

   losses

 

$

5,319

 

 

$

1,564

 

 

$

201

 

 

$

7,763

 

 

$

61

 

 

$

2,732

 

 

$

17,640

 

 

March 31, 2018

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction,

Land

Development,

and

Other Land

 

 

Commercial

and

Industrial

 

 

Installment

and Other

 

 

Lease

Financing

Receivables

 

 

Total

 

Loans and leases ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for

   impairment

 

$

12,375

 

 

$

2,029

 

 

$

 

 

$

12,598

 

 

$

14

 

 

$

 

 

$

27,016

 

Collectively evaluated for

   impairment

 

 

670,538

 

 

 

426,272

 

 

 

111,914

 

 

 

548,076

 

 

 

3,667

 

 

 

181,461

 

 

 

1,941,928

 

Loans acquired with deteriorated

   credit quality

 

 

157,956

 

 

 

139,858

 

 

 

5,156

 

 

 

8,055

 

 

 

449

 

 

 

 

 

 

311,474

 

Total loans and leases

 

$

840,869

 

 

$

568,159

 

 

$

117,070

 

 

$

568,729

 

 

$

4,130

 

 

$

181,461

 

 

$

2,280,418

 

 

The Company increased the allowance for loan and lease losses by $1.9 million and $934,000 for the three months ended March 31, 2019 and 2018, respectively. For acquired impaired loans, the Company increased the allowance for loan and lease losses by $111,000 for the three months ended March 31, 2019 and decreased the allowance for loans and lease losses by $345,000 for the three months ended March 31, 2018. For loans individually evaluated for impairment, the Company increased the allowance for loan and lease losses by $910,000 and $737,000 for the three months ended March 31, 2019 and 2018, respectively. For loans collectively evaluated for impairment, the Company increased the allowance for loan and lease losses by $884,000 and $542,000 for the three months ended March 31, 2019 and 2018, respectively.

25


 

The following tables summarize the recorded investment, unpaid principal balance, and related allowance for loans and leases considered impaired as of March 31, 2019 and December 31, 2018, which excludes acquired impaired loans:

 

March 31, 2019

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

11,643

 

 

$

13,669

 

 

$

 

Residential real estate

 

 

1,838

 

 

 

1,841

 

 

 

 

Commercial and industrial

 

 

10,907

 

 

 

12,785

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

5,711

 

 

 

5,959

 

 

 

1,403

 

Residential real estate

 

 

222

 

 

 

222

 

 

 

34

 

Commercial and industrial

 

 

13,477

 

 

 

14,111

 

 

 

6,122

 

Total impaired loans

 

$

43,798

 

 

$

48,587

 

 

$

7,559

 

 

 

December 31, 2018

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

With no related allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

6,110

 

 

$

7,693

 

 

$

 

Residential real estate

 

 

1,886

 

 

 

1,858

 

 

 

 

Commercial and industrial

 

 

11,193

 

 

 

13,961

 

 

 

 

With an allowance recorded

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

5,873

 

 

 

6,313

 

 

 

2,191

 

Residential real estate

 

 

251

 

 

 

253

 

 

 

61

 

Commercial and industrial

 

 

10,601

 

 

 

11,153

 

 

 

4,397

 

Total impaired loans

 

$

35,914

 

 

$

41,231

 

 

$

6,649

 

 

The following tables summarize the average recorded investment and interest income recognized for loans and leases considered impaired, which excludes acquired impaired loans, for the three months ended as follows:

 

March 31, 2019

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance recorded

 

 

 

 

 

 

 

 

Commercial real estate

 

$

7,345

 

 

$

119

 

Residential real estate

 

 

1,541

 

 

 

13

 

Commercial and industrial

 

 

11,381

 

 

 

126

 

With an allowance recorded

 

 

 

 

 

 

 

 

Commercial real estate

 

 

5,186

 

 

 

48

 

Residential real estate

 

 

226

 

 

 

2

 

Commercial and industrial

 

 

11,377

 

 

 

154

 

Total impaired loans

 

$

37,056

 

 

$

462

 

 

26


 

March 31, 2018

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance recorded

 

 

 

 

 

 

 

 

Commercial real estate

 

$

9,039

 

 

$

103

 

Residential real estate

 

 

1,930

 

 

 

10

 

Commercial and industrial

 

 

7,300

 

 

 

62

 

With an allowance recorded

 

 

 

 

 

 

 

 

Commercial real estate

 

 

4,122

 

 

 

37

 

Residential real estate

 

 

351

 

 

 

1

 

Commercial and industrial

 

 

6,975

 

 

 

102

 

Installment and other

 

 

14

 

 

 

 

Total impaired loans

 

$

29,731

 

 

$

315

 

 

For purposes of these tables, the unpaid principal balance represents the outstanding contractual balance. Impaired loans include loans that are individually evaluated for impairment as well as troubled debt restructurings for all loan categories. The sum of non-accrual loans and loans past due 90 days still on accrual will differ from the total impaired loan amount.

The following tables summarize the risk rating categories of the loans and leases considered for inclusion in the allowance for loan and lease losses calculation, excluding acquired impaired loans, as of March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction,

Land

Development,

and

Other Land

 

 

Commercial

and

Industrial

 

 

Installment

and Other

 

 

Lease

Financing

Receivables

 

 

Total

 

Pass

 

$

996,417

 

 

$

554,892

 

 

$

172,720

 

 

$

989,123

 

 

$

12,404

 

 

$

186,230

 

 

$

2,911,786

 

Watch

 

 

87,343

 

 

 

29,753

 

 

 

37,828

 

 

 

129,730

 

 

 

17

 

 

 

42

 

 

 

284,713

 

Special Mention

 

 

19,904

 

 

 

5,410

 

 

 

 

 

 

33,489

 

 

 

 

 

 

2,512

 

 

 

61,315

 

Substandard

 

 

17,420

 

 

 

2,217

 

 

 

 

 

 

25,513

 

 

 

7

 

 

 

328

 

 

 

45,485

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

856

 

 

 

856

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,121,084

 

 

$

592,272

 

 

$

210,548

 

 

$

1,177,855

 

 

$

12,428

 

 

$

189,968

 

 

$

3,304,155

 

 

December 31, 2018

 

Commercial

Real Estate

 

 

Residential

Real Estate

 

 

Construction,

Land

Development,

and

Other Land

 

 

Commercial

and

Industrial

 

 

Installment

and Other

 

 

Lease

Financing

Receivables

 

 

Total

 

Pass

 

$

1,009,041

 

 

$

553,665

 

 

$

147,123

 

 

$

962,291

 

 

$

9,997

 

 

$

188,314

 

 

$

2,870,431

 

Watch

 

 

76,276

 

 

 

29,522

 

 

 

31,376

 

 

 

112,996

 

 

 

3,302

 

 

 

80

 

 

 

253,552

 

Special Mention

 

 

17,602

 

 

 

5,656

 

 

 

3,071

 

 

 

34,314

 

 

 

 

 

 

1,794

 

 

 

62,437

 

Substandard

 

 

11,880

 

 

 

2,125

 

 

 

 

 

 

22,579

 

 

 

15

 

 

 

818

 

 

 

37,417

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

247

 

 

 

247

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,114,799

 

 

$

590,968

 

 

$

181,570

 

 

$

1,132,180

 

 

$

13,314

 

 

$

191,253

 

 

$

3,224,084

 

 

27


 

The following tables summarize contractual delinquency information for acquired non-impaired and originated loans and leases by category at March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

30-59

Days

Past Due

 

 

60-89

Days

Past Due

 

 

Greater than

90 Days and

Accruing

 

 

Non-

accrual

 

 

Total

Past Due

 

 

Current

 

 

Total

 

Commercial real estate

 

$

17,155

 

 

$

1,944

 

 

$

 

 

$

9,677

 

 

$

28,776

 

 

$

1,092,308

 

 

$

1,121,084

 

Residential real estate

 

 

1,337

 

 

 

1,248

 

 

 

 

 

 

2,070

 

 

 

4,655

 

 

 

587,617

 

 

 

592,272

 

Construction, land development, and

   other land

 

 

12,009

 

 

 

 

 

 

 

 

 

 

 

 

12,009

 

 

 

198,539

 

 

 

210,548

 

Commercial and industrial

 

 

11,454

 

 

 

117

 

 

 

 

 

 

15,931

 

 

 

27,502

 

 

 

1,150,353

 

 

 

1,177,855

 

Installment and other

 

 

12

 

 

 

6

 

 

 

 

 

 

5

 

 

 

23

 

 

 

12,405

 

 

 

12,428

 

Lease financing receivables

 

 

1,093

 

 

 

328

 

 

 

 

 

 

856

 

 

 

2,277

 

 

 

187,691

 

 

 

189,968

 

Total

 

$

43,060

 

 

$

3,643

 

 

$

 

 

$

28,539

 

 

$

75,242

 

 

$

3,228,913

 

 

$

3,304,155

 

 

December 31, 2018

 

30-59

Days

Past Due

 

 

60-89

Days

Past Due

 

 

Greater than

90 Days and

Accruing

 

 

Non-

accrual

 

 

Total

Past Due

 

 

Current

 

 

Total

 

Commercial real estate

 

$

6,659

 

 

$

2,145

 

 

$

 

 

$

9,484

 

 

$

18,288

 

 

$

1,096,511

 

 

$

1,114,799

 

Residential real estate

 

 

4,488

 

 

 

711

 

 

 

 

 

 

1,815

 

 

 

7,014

 

 

 

583,954

 

 

 

590,968

 

Construction, land development, and

   other land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

181,570

 

 

 

181,570

 

Commercial and industrial

 

 

5,829

 

 

 

1,376

 

 

 

 

 

 

13,932

 

 

 

21,137

 

 

 

1,111,043

 

 

 

1,132,180

 

Installment and other

 

 

1,932

 

 

 

4

 

 

 

 

 

 

12

 

 

 

1,948

 

 

 

11,366

 

 

 

13,314

 

Lease financing receivables

 

 

789

 

 

 

530

 

 

 

 

 

 

591

 

 

 

1,910

 

 

 

189,343

 

 

 

191,253

 

Total

 

$

19,697

 

 

$

4,766

 

 

$

 

 

$

25,834

 

 

$

50,297

 

 

$

3,173,787

 

 

$

3,224,084

 

 

Trouble debt restructurings are granted due to borrower financial difficulty and provide for a modification of loan repayment terms. TDRs are treated in the same manner as impaired loans for purposes of calculating the allowance for loan and lease losses. The tables below present TDRs by loan category as of March 31, 2019 and December 31, 2018:

 

March 31, 2019

 

Number

of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

 

Charge-offs

 

 

Specific

Reserves

 

Accruing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

4

 

 

$

1,486

 

 

$

1,486

 

 

$

 

 

$

124

 

Commercial and industrial

 

 

2

 

 

 

216

 

 

 

216

 

 

 

 

 

 

99

 

Residential real estate

 

 

2

 

 

 

219

 

 

 

219

 

 

 

 

 

 

 

Total accruing

 

 

8

 

 

 

1,921

 

 

 

1,921

 

 

 

 

 

 

223

 

Non-accruing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

9

 

 

 

2,690

 

 

 

2,119

 

 

 

571

 

 

 

141

 

Commercial and industrial

 

 

8

 

 

 

6,871

 

 

 

5,000

 

 

 

1,871

 

 

 

1,271

 

Total non-accruing

 

 

17

 

 

 

9,561

 

 

 

7,119

 

 

 

2,442

 

 

 

1,412

 

Total troubled debt restructurings

 

 

25

 

 

$

11,482

 

 

$

9,040

 

 

$

2,442

 

 

$

1,635

 

28


 

 

December 31, 2018

 

Number

of

Loans

 

 

Pre-Modification

Outstanding

Recorded

Investment

 

 

Post-Modification

Outstanding

Recorded

Investment

 

 

Charge-offs

 

 

Specific

Reserves

 

Accruing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

4

 

 

$

1,508

 

 

$

1,508

 

 

$

 

 

$

113

 

Commercial and industrial

 

 

2

 

 

 

191

 

 

 

191

 

 

 

 

 

 

100

 

Residential real estate

 

 

1

 

 

 

114

 

 

 

114

 

 

 

 

 

 

 

Total accruing

 

 

7

 

 

 

1,813

 

 

 

1,813

 

 

 

 

 

 

213

 

Non-accruing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

9

 

 

 

2,512

 

 

 

2,471

 

 

 

41

 

 

 

743

 

Commercial and industrial

 

 

6

 

 

 

6,714

 

 

 

4,843

 

 

 

1,871

 

 

 

1,290

 

Total non-accruing

 

 

15

 

 

 

9,226

 

 

 

7,314

 

 

 

1,912

 

 

 

2,033

 

Total troubled debt restructurings

 

 

22

 

 

$

11,039

 

 

$

9,127

 

 

$

1,912

 

 

$

2,246

 

In addition, there was a $500,000 commitment outstanding on troubled debt restructurings at March 31, 2019 and December 31, 2018. 

Loans modified as troubled debt restructurings that occurred during the three months ended March 31, 2019 and 2018:

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Accruing:

 

 

 

 

 

 

 

 

Beginning balance

 

$

1,813

 

 

$

1,061

 

Additions

 

 

113

 

 

 

 

Net payments

 

 

(5

)

 

 

(24

)

Net transfers from non-accrual

 

 

 

 

 

 

Ending balance

 

 

1,921

 

 

 

1,037

 

Non-accruing:

 

 

 

 

 

 

 

 

Beginning balance

 

 

7,314

 

 

 

1,569

 

Additions

 

 

246

 

 

 

 

Net payments

 

 

89

 

 

 

(332

)

Charge-offs

 

 

(530

)

 

 

(144

)

Net transfers from accrual

 

 

 

 

 

 

Ending balance

 

 

7,119

 

 

 

1,093

 

Total troubled debt restructurings

 

 

9,040

 

 

 

2,130

 

 

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the three months ended March 31, 2019 and 2018.  

At March 31, 2019 and December 31, 2018, the reserve for unfunded commitments was $1.1 million and $1.2 million, respectively. During the three months ended March 31, 2019, the credit for unfunded commitments was $156,000. During the three months ended March, 31, 2018, the provision for unfunded commitments was $113,000. There were no charge-offs or recoveries related to the reserve for unfunded commitments during the periods.

29


 

Note 7—Servicing Assets

Activity for servicing assets and the related changes in fair value for the three months ended March 31, 2019 and 2018 is as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Beginning balance

 

$

19,693

 

 

$

21,400

 

Additions, net

 

 

1,102

 

 

 

2,102

 

Changes in fair value

 

 

(1,261

)

 

 

(1,887

)

   Ending balance

 

$

19,534

 

 

$

21,615

 

Loans serviced for others are not included in the Consolidated Statements of Financial Condition. The unpaid principal balances of these loans serviced for others as of March 31, 2019 and December 31, 2018 were as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Loan portfolios serviced for:

 

 

 

 

 

 

 

 

SBA guaranteed loans

 

$

1,160,938

 

 

$

1,151,915

 

USDA guaranteed loans

 

 

103,503

 

 

 

106,184

 

Total

 

$

1,264,441

 

 

$

1,258,099

 

 

Loan servicing revenue totaled $2.5 million for the three months ended March 31, 2019 and 2018. Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in downward valuations of $1.3 and $1.9 million for the three months ended March 31, 2019 and 2018, respectively.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in 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 16—Fair Value Measurement for further details.

Note 8—Other Real Estate Owned

The following table presents the change in other real estate owned (“OREO”) for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Beginning balance

 

$

5,314

 

 

$

10,626

 

Net additions to OREO

 

 

230

 

 

 

1,044

 

Proceeds from sales of OREO

 

 

(628

)

 

 

(1,263

)

Gains (losses) on sales of OREO

 

 

(33

)

 

 

140

 

Valuation adjustments

 

 

(84

)

 

 

(81

)

   Ending balance

 

$

4,799

 

 

$

10,466

 

 

At March 31, 2019 and December 31, 2018, the balance of real estate owned included $700,000 and $838,000, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.

At March 31, 2019 and December 31, 2018, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process is $2.7 million and $2.3 million, respectively.

30


 

Proceeds from sales of OREO include proceeds from internally financed sales of OREO of $183,000 for the three months ended March 31, 2019. There were no internally financed sales of OREO for the three months ended March 3, 2018.

Note 9—Goodwill, Core Deposit Intangible and Other Intangible Assets

The following tables summarize the changes in the Company’s goodwill, core deposit intangible assets, and customer relationship intangible assets for the three months ended March 31, 2019 and 2018:  

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

Goodwill

 

 

Core Deposit

Intangible

 

 

Customer Relationship

Intangible

 

 

Goodwill

 

 

Core Deposit

Intangible

 

 

Customer Relationship

Intangible

 

Beginning balance

 

$

128,177

 

 

$

30,360

 

 

$

3,059

 

 

$

54,562

 

 

$

16,720

 

 

$

 

Amortization

 

 

 

 

 

(1,706

)

 

 

(67

)

 

 

 

 

 

(761

)

 

 

 

Ending balance

 

$

128,177

 

 

$

28,654

 

 

$

2,992

 

 

$

54,562

 

 

$

15,959

 

 

$

 

Accumulated amortization

 

N/A

 

 

$

20,592

 

 

$

224

 

 

N/A

 

 

$

14,227

 

 

N/A

 

Weighted average remaining

   amortization period

 

N/A

 

 

6.6 Years

 

 

11.2 Years

 

 

N/A

 

 

5.4 Years

 

 

N/A

 

The Company added additional goodwill, core deposit intangible assets, and customer relationship intangible assets in conjunction with the First Evanston acquisition. Please refer to Note 3—Acquisition of a Business for further details.   

The following table presents the estimated amortization expense for core deposit intangible, customer relationship intangible, and other intangible assets recognized at March 31, 2019:

 

 

 

Estimated

Amortization

 

2019

 

$

5,153

 

2020

 

 

6,476

 

2021

 

 

6,025

 

2022

 

 

5,578

 

2023

 

 

3,645

 

Thereafter

 

 

4,769

 

Total

 

$

31,646

 

 

Note 10—Income Taxes

The Company uses an estimated annual effective tax rate method in computing its interim tax provision. This effective tax rate is based on forecasted annual pre-tax income, permanent tax differences and statutory tax rates.

The effective tax rate for the three months ended March 31, 2019 and 2018 was 27.6% and 16.3%, respectively. The current effective tax rate reflects the passage of the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted on December 22, 2017. Among other things, the Tax Act reduces the corporate federal income tax rate from 35% to 21%, effective January 1, 2018. Also on December 22, 2017, the SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides guidance on accounting for the Tax Act’s impact. SAB 118 provides a measurement period, not to extend beyond one year from the date of enactment during which a company, acting in good faith, may complete the accounting for the impacts of the Tax Act. The Company recorded an additional discrete income tax benefit of $724,000 during the first quarter of 2018. This adjustment includes the impact of the federal income tax rate decrease due to the Tax Act (enacted on December 22, 2017) on our net deferred tax assets. The re-measurement of our net deferred tax assets due to the Tax Act was determined to be provisional at March 31, 2018.  

Net deferred tax assets decreased to $30.5 million at March 31, 2019 compared to $35.6 million at December 31, 2018. The net decrease in the total net deferred tax assets recorded as of March 31, 2019 was a result of a decrease in unrealized losses on available-for-sale securities and utilization of operating loss carryforwards during the period.

31


 

Note 11—Deposits

The composition of deposits was as follows as of March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Non-interest-bearing demand deposits

 

$

1,163,255

 

 

$

1,192,873

 

Interest-bearing checking accounts

 

 

305,393

 

 

 

296,339

 

Money market demand accounts

 

 

611,634

 

 

 

640,401

 

Other savings

 

 

468,524

 

 

 

476,418

 

Time deposits (below $250,000)

 

 

967,999

 

 

 

911,603

 

Time deposits ($250,000 and above)

 

 

291,711

 

 

 

232,282

 

Total deposits

 

$

3,808,516

 

 

$

3,749,916

 

Time deposits of $250,000 or more included $70.0 and $50.0 million of brokered deposits at March 31, 2019 and December 31, 2018, respectively. 

Note 12—Federal Home Loan Bank Advances

The following table summarizes the FHLB advances as of March 31, 2019 and December 31, 2018:   

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Federal Home Loan Bank advances

 

$

425,000

 

 

$

425,000

 

Weighted average cost

 

 

2.59

%

 

 

2.56

%

 

At March 31, 2019, fixed-rate advances totaled $370.0 million with interest rates ranging from 2.56% to 2.61% and maturities ranging from April 2019 to June 2019. Total variable rate advances were $55.0 million at March 31, 2019, with an interest rate of 2.47% that may reset daily, and matures in May 2019. The Company’s advances from the FHLB are collateralized by residential real estate loan, commercial real estate loans, and securities. The Company’s required investment in FHLB stock is $4.50 for every $100 in advances. At March 31, 2019 and December 31, 2018, the Bank has additional borrowing capacity from the FHLB of $1.3 billion, subject to the availability of proper collateral. The Bank’s maximum borrowing capacity is limited to 35% of total assets.

 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 17—Derivative Instruments and Hedging Activities for additional information.

Note 13—Other Borrowings

The following is a summary of the Company’s other borrowings as of March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Securities sold under agreements to repurchase

 

$

34,369

 

 

$

34,166

 

Line of credit

 

 

 

 

 

 

Total

 

$

34,369

 

 

$

34,166

 

 

Securities sold under agreements to repurchase represent a demand deposit product offered to customers that sweep balances in excess of the FDIC insurance limit into overnight repurchase agreements. The Company pledges securities as collateral for the repurchase agreements. Refer to Note 4—Securities for additional discussion.

On October 13, 2016, the Company entered into a $30.0 million credit agreement with a correspondent bank. In April 2017, the revolving line of credit was amended to a non-revolving line of credit as long as the outstanding balance exceeds $5.0 million. When the outstanding balance is reduced to $5.0 million, the line of credit will be converted to a revolving line

32


 

of credit with credit availability up to $5.0 million until maturity. In July 2017, the Company repaid the outstanding balance, in full, under this line of credit of $16.2 million with proceeds from its initial public offering (“IPO”). The line of credit matured on October 11, 2018 and carried an interest rate at either the London Interbank Offered Rate (“LIBOR”) plus 250 basis points or the Prime Rate minus 25 basis points, based on the Company’s election. On October 11, 2018, the Company entered into a third amendment to the revolving credit agreement, which increased the revolving loan commitment to $10.0 million, extended the maturity of the credit facility to October 10, 2019, and makes certain other changes, including a release of the previously executed Stock Pledge Agreement dated October 13, 2016 and execution of a Negative Pledge Agreement dated October 11, 2018. The amended revolving line of credit bears interest at either the LIBOR plus 225 basis points or the Prime Rate minus 50 basis points, based on the Company’s election, which is required to be communicated at least three business days prior to the commencement of an interest period. If the Company fails to provide timely notification, the interest rate will be Prime Rate minus 50 basis points. At March 31, 2019 and December 31, 2018, the line of credit has not been drawn upon, so an interest rate option has not been selected.

On April 30, 2019, the Company drew on the line of credit for $5.7 million and selected the LIBOR plus 225 basis points interest rate option. The funds were utilized to repay a line of credit assumed from the Oak Park River Forest acquisition, which was completed on April 30, 2019.

The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as of March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Federal Reserve Bank of Chicago discount window line

 

$

314,229

 

 

$

293,613

 

Available federal funds lines

 

 

85,000

 

 

 

55,000

 

 

Note 14—Junior Subordinated Debentures

At March 31, 2019 and December 31, 2018, the Company’s junior subordinated debentures by issuance were as follows:

 

Name of Trust

 

Aggregate

Principal

Amount

March 31,

2019

 

 

Aggregate

Principal

Amount

December 31,

2018

 

 

Stated

Maturity

 

Contractual

Rate at

March 31,

2019

 

 

Interest Rate Spread

Metropolitan Statutory Trust 1

 

$

35,000

 

 

$

35,000

 

 

March 17, 2034

 

 

5.40

%

 

Three-month LIBOR + 2.79%

RidgeStone Capital Trust I

 

 

1,500

 

 

 

1,500

 

 

June 30, 2033

 

 

6.38

%

 

Five-year LIBOR + 3.50%

First Evanston Bancorp Trust I

 

 

10,000

 

 

 

10,000

 

 

March 15, 2035

 

 

4.39

%

 

Three-month LIBOR + 1.78%

Total liability, at par

 

 

46,500

 

 

 

46,500

 

 

 

 

 

 

 

 

 

Discount

 

 

(9,588

)

 

 

(9,732

)

 

 

 

 

 

 

 

 

Total liability, at carrying value

 

$

36,912

 

 

$

36,768

 

 

 

 

 

 

 

 

 

In 2004, the Company’s predecessor, Metropolitan Bank Group, Inc., issued $35.0 million floating rate junior subordinated debentures to Metropolitan Statutory Trust 1, which was formed for the issuance of trust preferred securities. The debentures bear interest at three-month LIBOR plus 2.79% (5.40% and 5.58% at March 31, 2019 and December 31, 2018, respectively). Interest is payable quarterly. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after March 2009. Accrued interest payable was $76,000 and $84,000 as of March 31, 2019 and December 31, 2018, respectively.

As part of the Ridgestone acquisition, the Company assumed the obligations to RidgeStone Capital Trust I of $1.5 million in principal amount, which was formed for the issuance of trust preferred securities. Beginning on June 30, 2008, the interest rate reset to the five-year LIBOR plus 3.50% (6.38% at March 31, 2019 and December 31, 2018), which is in effect until June 30, 2023 and updated every five years. 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 June 30, 2008. There was no accrued interest payable as of March 31, 2019 or December 31, 2018.

33


 

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. Refer to Note 3—Acquisition of a Business for additional information. Beginning on March 15, 2010, the interest rate reset to the three-month LIBOR plus 1.78% (4.39% and 4.57% at March 31, 2019 and December 31, 2018, respectively), which is in effect until the debentures mature in 2035. Interest is paid on a quarterly basis. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after March 2010. The Company has the option to defer interest payments on the debentures from time to time for a period not to exceed five consecutive years. Accrued interest payable was $20,000 and $21,000 as of March 31, 2019 and December 31, 2018, respectively.

The Trusts are not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trusts as liabilities. The Company owns all of the common securities of each trust. The junior subordinated debentures qualify, and are treated as, Tier 1 regulatory capital of the Company subject to regulatory limitations. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.

Note 15—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—The Company has entered into various operating lease agreements primarily for facilities and land on which banking facilities are located. Certain lease agreements have renewal options at the end of the original lease term and certain lease agreements have escalation clauses in the rent payments.

The minimum annual rental commitments for operating leases subsequent to March 31, 2019, exclusive of taxes and other charges, are summarized as follows:

 

 

 

Minimum Rental

Commitments

 

2019

 

$

2,714

 

2020

 

 

3,221

 

2021

 

 

2,961

 

2022

 

 

1,954

 

2023

 

 

1,012

 

Thereafter

 

 

3,069

 

Total

 

$

14,931

 

 

The Company’s rental expenses for the three months ended March 31, 2019 and 2018 were $1.3 million and $1.2 million, respectively. During the three months ended March 31, 2019 and 2018, the Company received $181,000 and $170,000, respectively, in sublease income which is included in the Consolidated Statements of Operations as a reduction of occupancy expense. The total amount of minimum rentals to be received in the future on these subleases is approximately $1.6 million, and the leases have contractual lives extending through 2025. In addition to the above required lease payments, the Company has contractual obligations related primarily to information technology contracts and other maintenance contracts. In June 2018, the Company accrued $8.1 million in data processing expense primarily related to contract termination with its core service provider in anticipation of a future system conversion. As of March 31, 2019, there was no remaining contract termination balance.

Commitments to extend credit—The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contractual or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

34


 

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for funded instruments. The Company does not anticipate any material losses as a result of the commitments and letters of credit.

The following table summarizes the contract or notional amount of outstanding loan and lease commitments at March 31, 2019 and December 31, 2018:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

Fixed Rate

 

 

Variable Rate

 

 

Fixed Rate

 

 

Variable Rate

 

Commitments to extend credit

 

$

80,916

 

 

$

875,341

 

 

$

74,099

 

 

$

928,991

 

Letters of credit

 

 

1,750

 

 

 

34,154

 

 

 

1,982

 

 

 

34,071

 

Total

 

$

82,666

 

 

$

909,495

 

 

$

76,081

 

 

$

963,062

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).

Letters of credit are conditional commitments issued by the Company to guarantee to a third-party the performance of a customer. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 2.50% to 19.50% and maturities up to 2042. Variable rate loan commitments have interest rates ranging from 2.88% to 10.00% and maturities up to 2048.

Note 16—Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In addition, the Company has the ability to obtain fair values for markets that are not accessible.

These types of inputs create the following fair value hierarchy:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available. The Company’s own data used to develop unobservable inputs may be adjusted for market considerations when reasonably available.

The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to assets and liabilities.

The Company used the following methods and significant assumptions to estimate fair value for certain assets measured and carried at fair value on a recurring basis:

35


 

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 2018 and 2017, all of the ratings derived by the Company were “BBB” or better with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined, the Company obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets.

Equity and other securities—The Company utilizes the same fair value measurement methodology for equity and other securities as detailed in the securities available-sale portfolio above.

Servicing assets—Fair value is based on a loan-by-loan basis taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing market-based discount rate assumptions.

Derivative instruments—Interest rate derivatives are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. Derivative financial instruments are included in other assets and other liabilities in the Consolidated Statements of Financial Condition.

36


 

The following tables summarize the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

Fair Value Measurements Using

 

March 31, 2019

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes

 

$

57,387

 

 

$

57,387

 

 

$

 

 

$

 

U.S. Government agencies

 

 

187,502

 

 

 

 

 

 

187,502

 

 

 

 

Obligations of states, municipalities, and political

   subdivisions

 

 

82,567

 

 

 

 

 

 

82,372

 

 

 

195

 

Mortgage-backed securities; residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

340,484

 

 

 

 

 

 

340,484

 

 

 

 

Non-Agency

 

 

131,666

 

 

 

 

 

 

131,666

 

 

 

 

Mortgage-backed securities; commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

97,813

 

 

 

 

 

 

97,813

 

 

 

 

Non-Agency

 

 

30,835

 

 

 

 

 

 

30,835

 

 

 

 

Corporate securities

 

 

36,299

 

 

 

 

 

 

36,299

 

 

 

 

Equity and other securities, at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual funds

 

 

2,882

 

 

 

2,882

 

 

 

 

 

 

 

Equity securities

 

 

4,334

 

 

 

 

 

 

3,639

 

 

 

695

 

Servicing assets

 

 

19,534

 

 

 

 

 

 

 

 

 

19,534

 

Derivative assets

 

 

9,788

 

 

 

 

 

 

9,788

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

5,984

 

 

 

 

 

 

5,984

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

December 31, 2018

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury Notes

 

$

52,667

 

 

$

52,667

 

 

$

 

 

$

 

U.S. Government agencies

 

 

186,498

 

 

 

 

 

 

186,498

 

 

 

 

Obligations of states, municipalities, and political

   subdivisions

 

 

60,233

 

 

 

 

 

 

60,038

 

 

 

195

 

Mortgage-backed securities; residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

272,963

 

 

 

 

 

 

272,963

 

 

 

 

Non-Agency

 

 

83,621

 

 

 

 

 

 

83,621

 

 

 

 

Mortgage-backed securities; commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency

 

 

90,434

 

 

 

 

 

 

90,434

 

 

 

 

Non-Agency

 

 

30,458

 

 

 

 

 

 

30,458

 

 

 

 

Corporate securities

 

 

34,173

 

 

 

 

 

 

34,173

 

 

 

 

Other securities

 

 

6,609

 

 

 

2,844

 

 

 

3,074

 

 

 

691

 

Servicing assets

 

 

19,693

 

 

 

 

 

 

 

 

 

19,693

 

Derivative assets

 

 

10,740

 

 

 

 

 

 

10,740

 

 

 

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liabilities

 

 

4,243

 

 

 

 

 

 

4,243

 

 

 

 

The Company has originated, and acquired through a business combination, servicing assets classified as Level 3 of the fair value hierarchy. The Company acquired single-issuer trust preferred securities included in other securities categorized as Level 3 of the fair value hierarchy.

The Company has purchased, and acquired through a business combination, privately-issued municipal securities that are categorized as Level 3. These municipal securities are bonds issued for municipal government entities located in the

37


 

Chicago metropolitan area and are privately placed, non-rated bonds without Committee on Uniform Security Identification Procedures numbers.

The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the three months ended March 31, 2019 and 2018.

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):

 

Three Months Ended March 31,

 

 

2019

 

2018

 

 

2019

 

2018

 

 

Investment Securities

 

 

Servicing Assets

 

Balance, beginning of period

$

886

 

$

1,052

 

 

$

19,693

 

$

21,400

 

Additions, net

 

 

 

 

 

 

1,102

 

 

2,102

 

Amortization

 

1

 

 

1

 

 

 

 

 

 

Change in unrealized gain

 

 

 

14

 

 

 

 

 

 

Change in fair value

 

3

 

 

 

 

 

(1,261

)

 

(1,887

)

Balance, end of period

$

890

 

$

1,067

 

 

$

19,534

 

$

21,615

 

The following table presents additional information about the unobservable inputs used in the fair value measurements on recurring basis that were categorized within Level 3 of the fair value hierarchy as of March 31, 2019:

 

Financial Instruments

 

Valuation Technique

 

Unobservable Inputs

 

Range of

Inputs

 

Weighted

Average

Range

 

Impact to

Valuation from an

Increased or

Higher Input Value

Obligations of states,

   municipalities, and

   political obligations

 

Discounted cash flow

 

Probability of default

 

2.4%

 

2.4%

 

Decrease

Single issuer trust preferred

 

Discounted cash flow

 

Probability of default

 

4.9%—5.4%

 

5.9%

 

Decrease

Servicing assets

 

Discounted cash flow

 

Prepayment speeds

 

2.1%—17.7%

 

11.9%

 

Decrease

 

 

 

 

Discount rate

 

7.1%—21.8%

 

14.3%

 

Decrease

 

 

 

 

Expected weighted

average loan life

 

0.1—10.5 years

 

5.0 years

 

Increase

 

The Company used the following methods and significant assumptions to estimate fair value for certain assets measured and carried at fair value on a non-recurring basis:

Impaired loans (excluding acquired impaired loans)—Impaired loans, other than those existing on the date of a business acquisition, are primarily carried at the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent. Valuations of impaired loans that are collateral dependent are supported by third party appraisals in accordance with the Bank’s credit policy. Other valuation methods include analysis of discounted cash flows, which measures the present value of expected future cash flows discounted at the loan’s effective interest rate. Impaired loans that are not collateral dependent are not material.

Assets held for sale—Assets held for sale consist of former branch locations and real estate previously purchased for expansion. Assets are considered held for sale when management has approved to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based on the lower of carrying value or its fair value, less estimated costs to sell.

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

38


 

fair value adjustments to other real estate owned are recorded to reflect partial write-downs based on an observable market price or current appraised value of property.

Adjustments to fair value based on such non-recurring transactions generally result from the application of lower-of-cost-or-market accounting or write-downs of individual assets due to impairment. The following tables summarize the Company’s assets that were measured at fair value on a non-recurring basis, excluding acquired impaired loans, as of March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

Fair Value Measurements Using

 

March 31, 2019

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Non-recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(excluding acquired impaired loans)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

15,951

 

 

$

 

 

$

 

 

$

15,951

 

Residential real estate

 

 

2,026

 

 

 

 

 

 

 

 

 

2,026

 

Construction, land development, and other land

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

18,262

 

 

 

 

 

 

 

 

 

18,262

 

Assets held for sale

 

 

13,596

 

 

 

 

 

 

 

 

 

13,596

 

Other real estate owned

 

 

4,799

 

 

 

 

 

 

 

 

 

4,799

 

 

 

 

 

 

 

 

Fair Value Measurements Using

 

December 31, 2018

 

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Non-recurring

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(excluding acquired impaired loans)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

9,792

 

 

$

 

 

$

 

 

$

9,792

 

Residential real estate

 

 

2,076

 

 

 

 

 

 

 

 

 

2,076

 

Construction, land development, and other land

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

17,397

 

 

 

 

 

 

 

 

 

17,397

 

Installment and other

 

 

 

 

 

 

 

 

 

 

 

 

Assets held for sale

 

 

14,489

 

 

 

 

 

 

 

 

 

14,489

 

Other real estate owned

 

 

5,314

 

 

 

 

 

 

 

 

 

5,314

 

  

The following methods and assumptions were used by the Company in estimating fair values of other assets and liabilities for disclosure purposes:

Cash and cash equivalents—For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities held-to-maturity—The Company obtains fair value measurements from an independent pricing service. Management reviews the procedures used by the third party, including significant inputs used in the fair value calculations. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. When market quotes are not readily accessible or available, alternative approaches are utilized, such as matrix or model pricing.

Restricted stock—The fair value has been determined to approximate cost.

Loans held for saleThe 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.

39


 

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 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.

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 and levels within the fair value hierarchy are as follows:

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

Fair Value

 

 

2019

 

 

2018

 

 

 

Hierarchy

Level

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

 

Carrying

Amount

 

 

Estimated

Fair Value

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

 

1

 

 

$

50,026

 

 

$

50,026

 

 

$

30,190

 

 

$

30,190

 

Interest bearing deposits with other banks

 

 

2

 

 

 

31,971

 

 

 

31,971

 

 

 

91,670

 

 

 

91,670

 

Securities held-to-maturity

 

 

2

 

 

 

4,425

 

 

 

4,431

 

 

 

99,266

 

 

 

97,739

 

Other restricted stock

 

 

2

 

 

 

19,202

 

 

 

19,202

 

 

 

19,202

 

 

 

19,202

 

Loans held for sale

 

 

3

 

 

 

510

 

 

 

563

 

 

 

19,827

 

 

 

21,654

 

Loans and lease receivables, net (less impaired loans

   at fair value(1)

 

 

3

 

 

 

3,496,662

 

 

 

3,401,501

 

 

 

3,447,160

 

 

 

3,407,652

 

Accrued interest receivable

 

 

3

 

 

 

11,974

 

 

 

11,974

 

 

 

10,863

 

 

 

10,863

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest-bearing deposits

 

 

2

 

 

 

1,163,255

 

 

 

1,163,255

 

 

 

1,192,873

 

 

 

1,192,873

 

Interest-bearing deposits

 

 

2

 

 

 

2,645,261

 

 

 

1,268,458

 

 

 

2,557,043

 

 

 

2,554,329

 

Accrued interest payable

 

 

2

 

 

 

4,390

 

 

 

4,390

 

 

 

3,484

 

 

 

3,484

 

Line of credit

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Home Loan Bank advances

 

 

2

 

 

 

425,000

 

 

 

425,000

 

 

 

425,000

 

 

 

425,000

 

Securities sold under repurchase agreement

 

 

2

 

 

 

34,369

 

 

 

34,369

 

 

 

34,166

 

 

 

34,166

 

Junior subordinated debentures

 

 

3

 

 

 

36,912

 

 

 

42,292

 

 

 

36,768

 

 

 

42,351

 

 

(1)

In accordance with the prospective adoption of ASU 2016-01, the fair value of loans and lease receivables, net (less impaired loans at fair value) as of March 31, 2019 was measured using an exit price notion. The fair value as of December 31, 2018 was measured using an entry price notion.

40


 

Note 17—Derivative Instruments and Hedge Activities

The Company recognizes derivative financial instruments at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. The following tables present the fair value of the Company’s derivative financial instruments and classification on the Consolidated Statements of Financial Condition as of March 31, 2019 and December 31, 2018:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

Fair Value

 

 

 

Notional

Amount

 

 

Other

Assets

 

 

Other

Liabilities

 

 

Notional

Amount

 

 

Other

Assets

 

 

Other

Liabilities

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps designated as cash

    flow hedges

 

$

250,000

 

 

$

4,160

 

 

$

 

 

$

250,000

 

 

$

6,699

 

 

$

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other interest rate derivatives

 

 

324,793

 

 

 

5,628

 

 

 

5,976

 

 

 

294,545

 

 

 

4,041

 

 

 

4,237

 

Other credit derivatives

 

 

4,504

 

 

 

 

 

 

8

 

 

 

4,424

 

 

 

 

 

 

6

 

Total derivatives

 

$

579,297

 

 

$

9,788

 

 

$

5,984

 

 

$

548,969

 

 

$

10,740

 

 

$

4,243

 

 

Interest rate swaps designated as cash flow hedges—Cash flow hedges of interest payments associated with certain FHLB advances had notional amounts totaling $250.0 million as of March 31, 2019 and December 31, 2018. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value of the derivative hedging instrument with the changes in fair value of the designated hedged transactions.

Interest recorded on these swap transactions reduced FHLB interest expense by $705,000 and $61,000 during the three months ended March 31, 2019 and 2018, respectively, and is reported as a component of interest expense on FHLB advances. At March 31, 2019, the Company estimates $2.1 million of the unrealized gain to be reclassified as a decrease to interest expense during the next twelve months.

The following table reflects the cash flow hedges as of March 31, 2019:

Notional amounts

 

$

250,000

 

Derivative assets fair value

 

 

4,160

 

Derivative liabilities fair value

 

 

 

Weighted average pay rates

 

 

1.67

%

Weighted average receive rates

 

 

2.82

%

Weighted average maturity

 

2.9 years

 

 

 


41


 

The following table reflects the net gains (losses) recorded in accumulated other comprehensive income (loss) and the Consolidated Statements of Operations relating to the cash flow derivative instruments for the three months ended: 

 

 

 

March 31, 2019

 

 

March 31, 2018

 

 

 

Amount of

Gain

Recognized in

OCI

 

 

Amount of

Gain

Reclassified

from OCI to

Income as a

Decrease to

Interest

Expense

 

 

Amount of

Gain (Loss)

Recognized in

Other

Non-Interest

Income

 

 

Amount of

Gain

Recognized in

OCI

 

 

Amount of

Gain

Reclassified

from OCI to

Income as an

Increase to

Interest

Expense

 

 

Amount of

Gain (Loss)

Recognized in

Other

Non-Interest

Income

 

Interest rate swaps

 

$

(1,817

)

 

$

705

 

 

$

 

 

$

4,070

 

 

$

61

 

 

$

 

Other interest rate derivatives—The total combined notional amount was $324.8 million as of March 31, 2019 with maturities ranging from April 2020 to January 2030. The fair values of the interest rate derivative agreements are reflected in other assets and other liabilities with corresponding gains or losses reflected in non-interest income. During the three months ended March 31, 2019, there were $325,000 of transaction fees included in other non-interest income, related to these derivative instruments. During the three months ended March 31, 2018, there were no transaction fees related to these derivative instruments. 

The following table reflects other interest rate derivatives as of March 31, 2019:

 

Notional amounts

 

$

324,793

 

Derivative assets fair value

 

 

5,628

 

Derivative liabilities fair value

 

 

5,976

 

Weighted average pay rates

 

 

4.82

%

Weighted average receive rates

 

 

4.64

%

Weighted average maturity

 

5.9 years

 

 

Other credit derivatives—The total notional amount was $4.5 million and $4.4 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of the other credit derivatives are reflected in other liabilities with corresponding gains or losses reflected in non-interest income. The credit valuation adjustment (“CVA”) related to the other credit derivatives resulted in a decrease to other non-interest income during the three months ended March 31, 2019 and 2018 of $1,000 and $3,000, respectively. There were no transaction fees included in non-interest income related to these derivative instruments during the three months ended March 31, 2019, and there was $26,000 of transaction fees during the three months ended March 31, 2018.

The Company has entered into risk participation agreements with counterparty banks to assume a portion of the credit risk related to borrower transactions. The credit risk related to these other credit derivatives is managed through the Company’s loan underwriting process.

 

Credit risk—Derivative 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 CVA is a fair value adjustment to the derivative to account for this risk. During the three months ended March 31, 2019, the CVA resulted in a decrease to non-interest income of $151,000. During three months ended March 31, 2018, the CVA resulted in an increase to non-interest income of $27,000.

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

42


 

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 Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative asset and liabilities on the Consolidated Statements of Financial Condition. The table below summarizes the Company’s interest rate derivatives and offsetting positions as of: 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

Derivative

Assets

Fair Value

 

 

Derivative

Liabilities

Fair Value

 

 

Derivative

Assets

Fair Value

 

 

Derivative

Liabilities

Fair Value

 

Gross amounts recognized

 

$

9,788

 

 

$

5,984

 

 

$

10,740

 

 

$

4,243

 

Less: Amounts offset in the Consolidated Statements of

   Financial Condition

 

 

 

 

 

 

 

 

 

 

 

 

Net amount presented in the Consolidated Statements of

   Financial Condition

 

$

9,788

 

 

$

5,984

 

 

$

10,740

 

 

$

4,243

 

Gross amounts not offset in the Consolidated Statements of

   Financial Condition

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting derivative positions

 

 

(3,852

)

 

 

(3,852

)

 

 

(2,823

)

 

 

(2,823

)

Collateral posted

 

 

(5,433

)

 

 

(2,265

)

 

 

(7,917

)

 

 

(1,317

)

Net credit exposure

 

$

503

 

 

$

(133

)

 

$

 

 

$

103

 

 

Note 18 – Share-Based Compensation

In June 2017, the Company adopted the 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) in connection with our IPO. The Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other equity-based, equity-related or cash-based awards. A total of 1,550,000 shares of our common stock have been reserved for issuance under the Omnibus Plan. As of March 31, 2019, there were 1,359,045 shares available for future grants under the Omnibus Plan.

On July 6, 2017, in conjunction with the completion of the IPO, the Company granted 58,900 restricted shares of the Company’s common stock to certain key employees, pursuant to the Omnibus Plan. The restricted shares will cliff vest on the third anniversary of the grant date, subject to continued employment. A total of 11,898 restricted shares were also granted during the year ended December 31, 2017 in connection with the recruitment of employees. These restricted shares vest ratably over a four year period.    

During 2018, the Company granted 131,157 shares of restricted common stock, par value $0.01 per share. Of this total, 102,559 restricted shares will vest ratably over four years on each anniversary of the grant date, 15,165 restricted shares will vest ratably over three years on each anniversary of the grant date, and 2,268 restricted shares will vest on the first anniversary of the grant date, all subject to continued employment.

In addition, 11,165 performance-based restricted shares were included in the 2018 grant. The number of shares which may be earned under the award is dependent upon the Company’s return on average assets over a three-year period ending December 31, 2020, measured in 2018 against the Company’s internal targets and for 2019 and 2020 against a peer group consisting of publicly-traded bank holding companies ranging in asset size from 50% to 200% of the Company’s total assets. Under the award, 25% of the shares will be earned at threshold performance, 100% will be earned at target and 50th percentile performance, and up to 125% of the shares with above target and 75th percentile performance. Any earned performance shares will vest on the third anniversary of the grant date.  

During April 2019, the Company granted 127,115 shares of restricted common stock, par value $0.01 per share. Of this total, 84,482 restricted shares will vest ratably over four years on each anniversary of the grant date, 20,975 restricted shares will vest ratably over three years on each anniversary of the grant date, and 683 restricted shares will vest on the first anniversary of the grant date, all subject to continued employment.

43


 

In addition, 20,975 performance-based restricted shares were included in the April 2019 grant. The number of shares which may be earned under the award is dependent upon the Company’s return on average assets, weighted equally, over a three-year period ending December 31, 2021, 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.    

On April 30, 2018, the Company completed the acquisition of Oak Park River Forest. The Company expects to make a cash payment of $4.2 million for 35,870 outstanding options to Oak Park River Forest stockholders who elected to receive a cash payment in lieu of converting the options to the Company’s plan. The payment is expected to be completed by May 15, 2019.

The following table discloses the changes in restricted shares for the three months ended March 31, 2019:

 

 

 

Omnibus Plan

 

 

 

Number of Shares

 

 

Weighted Average Grant Date Fair Value

 

Beginning balance, January 1, 2019

 

 

196,480

 

 

$

21.66

 

Granted

 

 

 

 

 

 

Vested

 

 

(6,134

)

 

 

20.69

 

Forfeited

 

 

(8,500

)

 

 

21.03

 

Ending balance outstanding at March 31, 2019

 

 

181,846

 

 

$

21.72

 

A total of 6,134 restricted shares vested during the three months ended March 31, 2019. The fair value of restricted shares that vested during the three months ended March 31, 2019 was $102,000. A total of 2,975 restricted shares vested during the year ended December 31, 2018. The fair value of restricted shares that vested during the year ended December 31, 2018 was $62,000.  

The Company recognizes share-based compensation based on the estimated fair value of the restricted stock at the grant date. Share-based compensation expense is included in non-interest expense in the Consolidated Statements of Operations.  

The following table summarizes restricted stock compensation expense for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Total share-based compensation - restricted stock

 

$

353

 

 

$

112

 

Income tax benefit

 

 

98

 

 

 

31

 

Unrecognized compensation expense

 

 

2,675

 

 

 

1,114

 

Weighted-average amortization period remaining

 

2.7 years

 

 

2.6 years

 

The fair value of the unvested restricted stock awards at March 31, 2019 was $3.4 million.

The Company maintained a nonqualified, share-based, stock option plan adopted prior to recapitalization (“MBG Plan”). There were no options granted or exercised under this plan during the year ended December 31, 2017. At the time of the Company’s reincorporation in Delaware, in June 2017, the Board of Directors cancelled the MBG Plan and all the respective outstanding options were cancelled.

In October 2014, the Company adopted the Byline Bancorp, Inc. Equity Incentive Plan (“BYB Plan”). The maximum number of shares available for grants under this plan was 2,476,122 shares. During 2016 and 2015, the Company granted options to purchase 212,400 and 1,634,568 shares, respectively, under this plan. The Company did not grant any stock options during the year ended December 31, 2017. In June 2017, the Board of Directors terminated the BYB Plan and

44


 

no future grants can be made under this plan. Options to purchase a total of 1,588,872 shares remain outstanding under the BYB Plan at March 31, 2019.

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.  

The vesting of Time Options is conditional based on completion of service. Performance Options have conditional vesting based on either performance targets or market performance. Certain Performance Options’ performance goals will be satisfied (in whole or in part) if the Bank achieves various performance targets such as profitability, asset quality, and conditional based on market performance, as outlined in the BYB Plan. Each of the performance goals identified are measured for achievement (or failure to achieve) independent of each other. In October 2017, the Board of Directors determined that the Performance Option goals were satisfied, in whole, and these Performance Options converted to Time Options. As a result of the previous completion of service, 414,894 performance options vested on October 3, 2017.

The fair values of the stock options were determined using the Black-Scholes-Merton model for Time Options and a Monte Carlo simulation model for Performance Options.

 

The following table discloses the activity in shares subject to options and the weighted average exercise prices, in actual dollars, for the three months ended March 31, 2019:

 

 

BYB Plan

 

 

 

Number of Shares

 

 

Weighted Average Exercise Price

 

 

Intrinsic Value

 

 

Weighted Average Remaining Contractual Term (in Years)

 

Beginning balance, January 1, 2019

 

 

1,598,872

 

 

$

11.84

 

 

$

7,713

 

 

 

6.6

 

Exercised

 

 

(10,000

)

 

 

16.25

 

 

$

32

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance outstanding at

   March 31, 2019

 

 

1,588,872

 

 

$

11.81

 

 

$

10,601

 

 

 

6.3

 

Exercisable at March 31, 2019

 

 

1,490,572

 

 

$

11.52

 

 

$

10,382

 

 

 

6.3

 

A total of 10,000 stock options were exercised during the three months ended March 31, 2019. During the three months ended March 31, 2019, proceeds from the exercise of stock options were $163,000 and related tax benefit was $9,000. A total of 148,748 stock options were exercised during the year ended December 31, 2018. During the year ended December 31, 2018, proceeds from the exercise of stock options were $1.7 million and related tax benefit was $449,000. No stock options vested during the three months ended March 31, 2019.

45


 

The Company recognizes share-based compensation based on the estimated fair value of the option at the grant date. Forfeitures are estimated based upon industry standards. Share-based compensation expense is included in non-interest expense in the Consolidated Statements of Operations. The following table summarizes stock option compensation expense for the three months ended March 31, 2019 and 2018:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Total share-based compensation - stock options

 

$

33

 

 

$

229

 

Income tax benefit

 

 

9

 

 

 

64

 

Unrecognized compensation expense - stock options

 

 

113

 

 

 

499

 

Weighted-average amortization period remaining

 

0.8 years

 

 

1.1 years

 

Pursuant to the terms of the Merger Agreement, upon the Effective Time, each outstanding First Evanston Option held by a participant in the First Evanston Bancorp, Inc. Stock Incentive Plan (the “FEB Plan”) ceased to represent a right to acquire shares of First Evanston common stock and was assumed and converted automatically into a fully vested and exercisable adjusted option to purchase shares of Byline common stock (each an “Adjusted Option”). In accordance with the Merger Agreement, the number of shares of Byline common stock to which each such Adjusted Option relates is equal to the product (rounded down to the nearest whole share of Byline common stock) of: (a) the number of shares of First Evanston common stock subject to the First Evanston Option immediately prior to May 31, 2018, multiplied by (ii) 4.725. Each Adjusted Option has an exercise price per share of Byline common stock equal to the quotient (rounded up to the nearest whole cent) of (x) the per share exercise price of such First Evanston Option immediately prior to May 31, 2018, divided by (y) 4.725. The description of the conversion process is based on, and qualified by, the Merger Agreement.

The following table discloses the activity in shares subject to options under the FEB Plan and the weighted average exercise prices, in actual dollars, for the three months ended March 31, 2019:

 

 

 

FEB Plan

 

 

 

Number of Shares

 

 

Weighted Average Exercise Price

 

 

Intrinsic Value

 

 

Weighted Average Remaining Contractual Term (in Years)

 

Beginning balance, January 1, 2019

 

 

624,383

 

 

$

11.31

 

 

$

3,339

 

 

 

5.2

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(40,662

)

 

 

11.63

 

 

$

316

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance outstanding at

   March 31, 2019

 

 

583,721

 

 

$

11.29

 

 

$

4,197

 

 

 

4.9

 

Exercisable at March 31, 2019

 

 

583,721

 

 

$

11.29

 

 

$

4,197

 

 

 

4.9

 

A total of 40,662 stock options were exercised during the three months ended March 31, 2019. During the three months ended March 31, 2019, proceeds from the exercise of stock options were $473,000 and related tax benefit was $88,000. A total of 56,404 stock options were exercised during the year ended December 31, 2018. During the year ended December 31, 2018, proceeds from the exercise of stock options were $601,000 and related tax benefit was $168,000.

All shares of restricted performance shares of First Evanston common stock (“restricted stock”) that were previously issued under and held by Participants in the FEB Plan prior to the Merger were converted into the right to receive the per share merger consideration in connection with the Merger and pursuant to the Merger Agreement. Accordingly, no shares of First Evanston restricted stock remain outstanding under the FEB Plan.

 

46


 

Note 19—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 2,172,593 and 1,696,270 shares of common stock were outstanding as of March 31, 2019 and 2018, respectively. There were 181,846 and 70,798 restricted stock awards outstanding at March 31, 2019 and 2018, respectively.  

The following represent the calculation of basic and diluted earnings per share for the periods presented:

 

 

 

Three Months Ended

March 31,

 

 

 

2019

 

 

2018

 

Net income

 

$

12,597

 

 

$

6,768

 

Less: Dividends on preferred shares

 

 

196

 

 

 

193

 

Net income available to common stockholders

 

$

12,401

 

 

$

6,575

 

Weighted-average common stock outstanding:

 

 

 

 

 

 

 

 

Weighted-average common stock outstanding

   (basic)

 

 

36,169,477

 

 

 

29,291,179

 

Incremental shares

 

 

707,097

 

 

 

622,454

 

Weighted-average common stock outstanding

   (dilutive)

 

 

36,876,574

 

 

 

29,913,633

 

Basic earnings per common share

 

$

0.34

 

 

$

0.22

 

Diluted earnings per common share

 

$

0.34

 

 

$

0.22

 

 

Note 20—Stockholders’ Equity

A summary of the Company’s preferred and common stock at March 31, 2019 and December 31, 2018 is as follows:

 

 

 

March 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Series B 7.5% fixed to floating non-cumulative

   perpetual preferred stock

 

 

 

 

 

 

 

 

Par value

 

$

0.01

 

 

$

0.01

 

Shares authorized

 

 

50,000

 

 

 

50,000

 

Shares issued

 

 

10,438

 

 

 

10,438

 

Shares outstanding

 

 

10,438

 

 

 

10,438

 

Common stock, voting

 

 

 

 

 

 

 

 

Par value

 

$

0.01

 

 

$

0.01

 

Shares authorized

 

 

150,000,000

 

 

 

150,000,000

 

Shares issued

 

 

36,398,144

 

 

 

36,343,239

 

Shares outstanding

 

 

36,398,144

 

 

 

36,343,239

 

 

During 2016, the Company authorized and issued Series B 7.50% fixed-to-floating non-voting, noncumulative perpetual preferred stock with a liquidation preference of $1,000 per share, plus the amount of unpaid dividends, if any, which is redeemable at the Company’s option on or after March 31, 2022. Holders of Series B Preferred Stock do not have any rights to convert such stock into shares of any other class of capital stock of the Company. Holders of Series B Preferred Stock are entitled to receive a fixed dividend of 7.50% per annum from the original issue date through December 30, 2021, after which the dividend is paid at a floating rate of three-month LIBOR plus 5.41% per annum.

The Company Series B Preferred Stock is included in Tier 1 capital for regulatory capital purposes and is redeemable at the option of the Company at a redemption price of $1,000 per share, plus any declared and unpaid dividends (i) in whole or part on any dividend payment date on or after March 31, 2022, and (ii) in whole but not in part prior to March 31, 2022, within 90 days following a regulatory event, as defined in the Certificate of Designations of the Company Series B Preferred Stock. The Company must receive approval of the Federal Reserve Board prior to any redemption of the Company Series B Preferred Stock.

47


 

 For the three months ended March 31, 2019, the Company declared and paid dividends on the Series B preferred stock of $196,000, compared to $193,000 for the three months ended March 31, 2018.

   

Note 21—Consolidated Statements of Changes in Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2019 and 2018:

 

(dollars in thousands)

 

Unrealized

Gains (Losses)

on Cash Flow

Hedges

 

 

Unrealized Gains

(Losses) on

Available-for

-Sale

Securities

 

 

Total

Accumulated Other

Comprehensive

Income (Loss)

 

Balance, January 1, 2018

 

$

2,913

 

 

$

(8,000

)

 

$

(5,087

)

Reclassification of certain income tax effects from

   accumulated other comprehensive income

 

 

687

 

 

 

(1,450

)

 

 

(763

)

Other comprehensive income (loss), net of tax

 

 

2,893

 

 

 

(6,457

)

 

 

(3,564

)

Balance, March 31, 2018

 

$

6,493

 

 

$

(15,907

)

 

$

(9,414

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

 

$

4,763

 

 

$

(14,261

)

 

$

(9,498

)

Adoption of ASU 2016-01

 

 

 

 

 

(1,440

)

 

 

(1,440

)

Other comprehensive income (loss), net of tax

 

 

(1,820

)

 

 

6,339

 

 

 

4,519

 

Balance, March 31, 2019

 

$

2,943

 

 

$

(9,362

)

 

$

(6,419

)

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of Byline Bancorp, Inc.’s financial condition and results of operations and should be read in conjunction with our Unaudited Interim Condensed Consolidated Financial Statements and notes thereto included elsewhere in this report. The words “the Company,” “we,” “Byline,” “our” and “us” refer to Byline Bancorp, Inc. and its consolidated subsidiaries, unless we indicate otherwise.

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. 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 New York, and sales representatives in Illinois, Michigan, New Jersey, and New York. Following our acquisition of Ridgestone Financial Services, Inc. (“Ridgestone”) in October 2016, we also participate in U.S. government guaranteed lending programs and originate U.S. government guaranteed loans. Byline Bank was the fifth most active originator of SBA loans in the country and the most active SBA lender in Illinois and Wisconsin, as reported by the SBA for the quarter ended March 31, 2019. Following our acquisition of First Evanston Bancorp, Inc. (“First Evanston”) and its subsidiary bank, First Bank & Trust, at the end of May 2018, we also provide trust and wealth management services to our customers. As of March 31, 2019, we had consolidated total assets of $5.0 billion, total gross loans and leases outstanding of $3.6 billion, total deposits of $3.8 billion, and total stockholders’ equity of $668.7 million.

Ridgestone Acquisition

On October 14, 2016, we completed the acquisition of Ridgestone Financial Services, Inc. under the terms of a definitive merger agreement. As of the acquisition date, Ridgestone had $447.4 million in assets, including $347.3 million of loans, $14.7 million of loans held for sale, $27.2 million of securities, $21.5 million of servicing assets and total deposits of $358.7 million. Ridgestone’s loan portfolio was primarily comprised of the retained unguaranteed portion of U.S. government guaranteed loans as a participant in the SBA and USDA (together, “U.S. government guaranteed”) lending programs. 

First Evanston Acquisition

On May 31, 2018, we completed the acquisition of First Evanston Bancorp, Inc. under the terms of a definitive merger agreement. As a result of the merger, First Evanston’s wholly owned bank subsidiary, First Bank & Trust, was merged with and into Byline Bank. As of the acquisition date, First Evanston had $1.1 billion in assets, including $932.4 million of loans, $128.1 million of securities, and total deposits of $1.0 billion.

At the effective time of the merger (the “Effective Time”), each share of First Evanston’s common stock (the “First Evanston Common Stock”) was converted into the right to receive: (1) 3.994 shares of Byline’s common stock, and (2) an amount in cash equal to $27.0 million divided by the number of outstanding shares of First Evanston Common Stock as of the closing date, with cash paid in lieu of any fractional shares. Options to acquire First Evanston Common Stock that were outstanding at the Effective Time were converted into options of substantially equivalent value to acquire Byline common stock. In the aggregate, Byline paid $27.0 million in cash and issued 6,682,850 shares of its common stock in respect of the outstanding shares of First Evanston Common Stock. The value of the total merger consideration at closing was approximately $179.1 million.

Oak Park River Forest Acquisition

On April 30, 2019, we completed the acquisition of Oak Park River Forest Bankshares, Inc. (“Oak Park River Forest”), the parent company of Community Bank of Oak Park River Forest, under the terms of a definitive merger agreement. As a result of the merger, we acquired Oak Park River Forest through the merger of Oak Park River Forest with and into us, followed immediately by the merger of Community Bank of Oak Park River Forest with and into Byline Bank. As of March

49


 

31, 2019, Oak Park River Forest had $323.5 million in assets, including $30.8 million of securities, $269.5 million of loans, and $285.7 million of total deposits.

Strategic Branch Consolidation

We continually perform strategic reviews of our existing banking footprint. With technology improvements and changes to customers’ banking preferences, we examine branch growth potential, customer usage, branch profitability, services provided, markets served and proximity to other locations with a goal of minimizing customer impact and deposit runoff. Since our recapitalization, which occurred in June 2013, our branch network has been reduced from 88 to 58, including eight branches added through the First Evanston acquisition. During 2018 and the first quarter of 2019, we consolidated seven branches and two other facilities within our current network that had a minimal impact on our customer service levels, convenience, and business development capabilities. We will continue to strategically evaluate our locations based on our growth and profitability standards.

We plan to continue to leverage our seasoned management team, the attractive market opportunity in the Chicago metropolitan area, our diversified lending approach and our track record of successfully integrating acquisitions to drive future growth. We believe that having a deep understanding of customers, longstanding ties to the communities in which we operate, a strong market position and exceptional employees allows us to provide the attention, responsiveness and customized service our clients seek while offering a diverse range of products to serve a variety of needs.

Critical Accounting Policies and Significant Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and to general practices within the Banking industry. To prepare financial statements and interim financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes; and are based on information available as of the date of the financial statements. As this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgements inherent in those policies, are critical in understanding our financial statements.

These critical accounting policies and estimates include (i) acquisition‑related fair value computations, (ii) the carrying value of loans and leases, (iii) determining the provision and allowance for loan and lease losses, (iv) the valuation of intangible assets such as goodwill, servicing assets and core deposit intangibles, (v) the determination of fair value for financial instruments, including other-than-temporary-impairment losses, (vi) the valuation of real estate held for sale and (vii) the valuation of or recognition of deferred tax assets and liabilities.

The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period provided for under the JOBS Act.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2018, that we filed with the Securities and Exchange Commission (“SEC”) on March 15, 2019.

Business Combinations

We account for business combinations under the acquisition method of accounting in accordance with ASC 805. We recognize the fair value of the assets acquired and liabilities assumed as of the date of acquisition, with any excess of the fair value of consideration provided over the fair value of the identifiable net tangible and intangible assets acquired recorded as goodwill. Transaction costs are expensed as incurred. Application of the acquisition method requires extensive use of accounting estimates and judgements to determine the fair values of the identifiable assets acquired and liabilities assumed at the acquisition date.

In accordance with ASC 805, the acquiring company retains the right to make appropriate adjustments to the assets and liabilities of the acquired entity for information obtained during the measurement period about facts and circumstances that

50


 

existed as of the acquisition date. The measurement period ends as of the earlier of (i) one year from the acquisition date or (ii) the date when the acquirer receives the information necessary to complete the business combination accounting.

Carrying Value of Loans and Leases

Our accounting methods for loans and leases differ depending on whether they are new or acquired loans and leases; and for acquired loans, whether the loans were acquired at a discount as a result of credit deterioration since the date of origination.

Originated Loans and Leases

We account for originated loans and leases and purchased loans and leases not acquired through business combinations as originated loans and leases. The new loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any allowance for loan and lease losses, unamortized deferred fees and costs and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the new loans using methods which approximate the level yield method. Discounts and premiums are amortized or accreted to interest income over the estimated term of the new loans using methods that approximate the effective yield method. Interest income on new loans is accrued based on the unpaid principal balance outstanding. Additionally, once an acquired non-impaired loan reaches its contractual maturity date, it is re-underwritten, and if renewed, it is classified as an originated loan.

Acquired Loans and Leases

Acquired loans and leases are recorded at fair value as of the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either acquired impaired or acquired non‑impaired. Acquired impaired loans reflect evidence of credit deterioration since origination for which it is probable that all contractually required principal and interest will not be collected by us. Subsequent to acquisition, we periodically update for changes in cash flow expectations, which is reflected in interest income over the life of the loan as accretable yield. Any subsequent decreases in expected cash flow attributable to credit deterioration are recognized by recording a provision for loan losses.

For acquired non‑impaired loans and leases, the excess or deficit of the loan and lease principal balance over the fair value is recorded as a discount or premium at acquisition and is accreted through interest income over the life of the loan or lease. Subsequent to acquisition, these loans and leases are evaluated for credit deterioration and a provision for loan and lease losses would be recorded when probable loss is incurred. These loans and leases are evaluated for impairment consistent with originated loans and leases.

Provision and Allowance for Loan and Lease Losses

The provision for loan and lease losses reflects the amount required to maintain the allowance for loan and lease losses (“ALLL”) at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves.

The ALLL is maintained at a level that management believes is appropriate to provide for known and inherent incurred loan and lease losses as of the dates of the Consolidated Statements of Financial Condition, and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are determined on an individual loan basis. We increase our ALLL by charging provisions for probable losses against our income and decreased by charge‑offs, net of recoveries.

The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses available information to recognize losses on loans and leases, changes in economic or other conditions may necessitate revision of the estimate in future periods.

The ALLL is maintained at a level management believes is sufficient to provide for probable losses based upon an ongoing review of the originated and acquired non‑impaired loan and lease portfolios by portfolio category, which include consideration of actual loss experience, peer loss experience, changes in the size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrower’s ability to repay, and evaluation of prevailing economic conditions.

51


 

For acquired impaired loans, a specific valuation allowance is established when it is probable that we will be unable to collect all of the cash flows expected at acquisition, plus the additional cash flows expected to be collected arising from changes in estimates after acquisition.

The originated and non‑impaired acquired loans have limited delinquency and credit loss history and have not yet exhibited an observable loss trend. The credit quality of loans in these loan portfolios are impacted by delinquency status and debt service coverage generated by the borrowers’ businesses and fluctuations in the value of real estate collateral.

Acquired non‑impaired loans and originated loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements. All acquired non‑impaired loans and originated loans of $100,000 or greater with an internal risk rating of substandard or below and on nonaccrual, as well as loans classified as troubled debt restructurings (“TDR”), are reviewed individually for impairment on a quarterly basis.

Goodwill and Other Intangible Assets

Goodwill

Goodwill represents the excess of the purchase consideration over the fair value of net assets acquired in connection with our recapitalization and acquisitions using the acquisition method of accounting. Goodwill is not amortized but is periodically evaluated for impairment under the provisions of ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”).

Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. Our goodwill is allocated to Byline Bank, which is our only applicable reporting unit for the purposes of testing goodwill for impairment. We have selected November 30 as the date to perform the annual goodwill impairment test. Additionally, we perform a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists.

Servicing Assets

Servicing assets are recognized separately when they are acquired through sales of loans or when the rights to service loans are purchased. When loans are sold with servicing rights retained, servicing assets are recorded at fair value in accordance with ASC Topic 860, Transfers and Servicing (“ASC 860”). Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in the prepayment speed and discount rate assumptions have the most significant impact on the fair value of servicing rights. See Note 7 and Note 16 of our Unaudited Interim Condensed Consolidated Financial Statements as of March 31, 2019, included in this report, for additional information.

Core Deposit Intangible Assets

Other intangible assets primarily consist of core deposit intangible assets. In valuing core deposit intangibles, we consider variables such as deposit servicing costs, attrition rates and market discount rates. Core deposit intangibles are reviewed annually, or more frequently when events or changes in circumstances occur that indicate that their carrying values may not be recoverable. If the recoverable amount of the core deposit intangibles is determined to be less than its carrying value, we would then measure the amount of impairment based on an estimate of the fair value at that time. We also evaluate whether the events or circumstances have occurred that warrant a revision to the remaining useful lives of intangible assets. In cases where a revision is deemed appropriate, the remaining carrying amounts of the intangible assets are amortized over the revised remaining useful life. Core deposit intangibles are currently amortized over an approximate ten year period.

Customer Relationship Intangible

Other intangible assets also include our customer relationship intangible asset. In valuing our customer relationship intangibles, we consider variables such as assets under management, attrition rates, and fee structure. Customer relationship intangibles are currently amortized over a 12 year period.

52


 

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 18 of Byline’s Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2018, for a complete discussion of our use of fair value of financial assets and liabilities and their related measurement practices.

Valuation of Real Estate Held for Sale

Other Real Estate Owned (OREO)

OREO includes real estate assets that have been acquired through, or in lieu of, loan foreclosure or repossession and are to be sold. OREO assets are initially recorded at fair value, less estimated costs to sell, of the collateral of the loan, on the date of foreclosure or repossession, establishing a new cost basis. Adjustments that reduce loan balances to fair value at the time of foreclosure or repossession are recognized as charge‑offs in the allowance for loan and lease losses. Positive adjustments, if any, at the time of foreclosure or repossession are recognized in non‑interest expense. After foreclosure or repossession, management periodically obtains new valuations and real estate or other assets may be adjusted to a lower carrying amount, determined by the fair value of the asset, less estimated costs to sell. Any subsequent write‑downs are recorded as a decrease in the asset and charged against other real estate owned valuation adjustments, included within non-interest expense. Operating expenses of such properties, net of related income, are included in non‑interest expense, and gains and losses on their disposition are included in non‑interest expense. Gains on internally financed other real estate owned sales are accounted for in accordance with the methods stated in ASC Topic 360‑20, Real Estate Sales (“ASC 360‑20”). Any losses on the sales of other real estate owned properties are recognized immediately.

Assets Held for Sale

Assets held for sale consist of former branch locations and real estate purchased for expansion. Assets are considered held for sale when management has approved a plan to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based at the lower of its carrying value or its fair value, less estimated costs to sell. Adjustments to reduce the asset balances to fair value are recorded at the time of transfer and are recognized through a charge against income. An assessment of the recoverability of other long-lived assets associated with all branches is periodically performed, resulting in impairment losses which are reflected in other non-interest expense.

Income Taxes

We use the asset and liability method to account for income taxes. The objective of the asset and liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the income tax basis of our assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. Our annual tax rate is based on our income, statutory tax rates and available tax planning opportunities. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions, including evaluating uncertainties.

Deferred income tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss carryforwards. We review our deferred tax positions quarterly for changes which may impact realizability. We evaluate the recoverability of these future tax deductions by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. We use short and long‑range business forecasts to provide additional information for its

53


 

evaluation of the recoverability of deferred tax assets. It is our policy to recognize interest and penalties associated with uncertain tax positions, if applicable, as components of non‑interest expense.

A deferred tax valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some of the deferred tax asset will not be realized. See Note 11 of the notes to our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2018, for further information on income taxes.

Recently Issued Accounting Pronouncements

Refer to Note 2 of our Unaudited Interim Condensed Consolidated Financial Statements as of March 31, 2019, included in this report, for a description of recent accounting pronouncements, including the effective dates of adoption and anticipated effects on our results of operations and financial condition.

Primary Factors Used to Evaluate Our Business

As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our consolidated balance sheet and income statement as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the final condition and performance of comparable financial institutions in our region. Comparison of our financial performance against other financial institutions is impacted by the accounting for acquired non‑impaired and acquired impaired loans.

These factors and metrics described in this prospectus may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of other financial services companies, given our limited operating history and strategic acquisitions since our recapitalization.

Results of Operations

Overview

Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and lease receivables, including accretion income on loans, investment securities and other short-term investments, and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent upon our generation of non-interest income, consisting primarily of income from fees and service charges on deposits, loan servicing revenue, wealth management and trust income, ATM and interchange fees, and net gains on sales of investment securities and loans. Other factors contributing to our results of operations include our provisions for loan and lease losses, provision for income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy and equipment expenses and other miscellaneous operating costs.

Our first quarter 2019 results reflect growth in net interest income, primarily driven by the First Evanston acquisition and organic loan and lease growth. Net interest margin decreased slightly to 4.43% for the first quarter of 2019, compared to 4.45% for the first quarter of 2018. The decrease was primarily due to increased interest expense due to the First Evanston acquisition and increased rates paid on time deposits. This was partially offset by increased interest income due to an increase in earning assets as a result of the acquisition, organic loan and lease growth, an increase in interest rates on variable rate loans during the quarter, and increased loan accretion income. Our total revenues increased by $17.0 million, or 37.6%, compared to the first quarter of 2018, primarily driven by a full quarter