BYLINE BANCORP, INC. - Quarter Report: 2018 September (Form 10-Q)

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 September 30, 2018

☐	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 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 ☒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, 36,311,686 shares outstanding as of November 9, 2018

BYLINE BANCORP, INC.

FORM 10-Q

September 30, 2018

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 September 30, 2018 (unaudited) and December 31, 2017	3
	Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017 (unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (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	50
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	92
Item 4.	Controls and Procedures	94

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	94
Item 1A.	Risk Factors	94
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	94
Item 3.	Defaults Upon Senior Securities	95
Item 4.	Mine Safety Disclosures	95
Item 5.	Other Information	95
Item 6.	Exhibits	95

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
(dollars in thousands, except share and per share data)	September 30, 2018			December 31, 2017
ASSETS
Cash and due from banks	$	25,162		$	19,404
Interest bearing deposits with other banks		119,594			38,945
Cash and cash equivalents		144,756			58,349
Securities available-for-sale, at fair value		795,408			583,236
Securities held-to-maturity, at amortized cost (fair value September 30, 2018—$99,933, December 31, 2017—$117,277)		102,683			117,163
Restricted stock, at cost		19,202			16,343
Loans held for sale		8,737			5,212
Loans and leases:
Loans and leases		3,455,802			2,277,492
Allowance for loan and lease losses		(23,424	)		(16,706	)
Net loans and leases		3,432,378			2,260,786
Servicing assets, at fair value		20,674			21,400
Accrued interest receivable		11,331			7,670
Premises and equipment, net		106,948			95,224
Assets held for sale		8,343			9,779
Other real estate owned, net		4,891			10,626
Goodwill		127,536			54,562
Other intangible assets, net		35,248			16,756
Bank-owned life insurance		5,923			5,718
Deferred tax assets, net		42,287			47,376
Due from counterparty		14,484			39,824
Other assets		36,580			16,106
Total assets	$	4,917,409		$	3,366,130
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest bearing demand deposits	$	1,175,222		$	760,887
Interest bearing deposits:
NOW, savings accounts, and money market accounts		1,455,295			973,685
Time deposits		1,110,250			708,757
Total deposits		3,740,767			2,443,329
Accrued interest payable		2,971			1,306
Line of credit		—			—
Federal Home Loan Bank advances		425,000			361,506
Securities sold under agreements to repurchase		24,446			31,187
Junior subordinated debentures issued to capital trusts, net		36,615			27,647
Accrued expenses and other liabilities		57,749			42,577
Total liabilities		4,287,548			2,907,552
STOCKHOLDERS’ EQUITY
Preferred stock		10,438			10,438
Common stock, voting, $0.01 par value at September 30, 2018 and December 31, 2017; 150,000,000 shares authorized at September 30, 2018 and December 31, 2017; 36,279,600 shares issued and outstanding at September 30, 2018 and 29,317,298 issued and outstanding at December 31, 2017		361			292
Additional paid-in capital		545,827			391,586
Retained earnings		85,597			61,349
Accumulated other comprehensive loss, net of tax		(12,362	)		(5,087	)
Total stockholders’ equity		629,861			458,578
Total liabilities and stockholders’ equity	$	4,917,409		$	3,366,130

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except share and per share data)	2018			2017			2018		2017
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases	$	55,045		$	30,933		$	128,326	$	88,510
Interest on taxable securities		5,076			3,720			13,703		11,213
Interest on tax-exempt securities		337			174			740		458
Other interest and dividend income		615			217			1,287		666
Total interest and dividend income		61,073			35,044			144,056		100,847
INTEREST EXPENSE
Deposits		5,971			2,112			12,214		5,518
Federal Home Loan Bank advances		1,723			850			4,441		2,282
Subordinated debentures and other borrowings		786			670			2,057		2,286
Total interest expense		8,480			3,632			18,712		10,086
Net interest income		52,593			31,412			125,344		90,761
PROVISION FOR LOAN AND LEASE LOSSES		5,842			3,900			14,913		9,306
Net interest income after provision for loan and lease losses		46,751			27,512			110,431		81,455
NON-INTEREST INCOME
Fees and service charges on deposits		1,825			1,418			4,593		3,985
Net servicing fees		176			959			1,198		2,954
ATM and interchange fees		1,781			1,495			4,140		4,342
Net gains on sales of securities available-for-sale		—			—			4		8
Net gains on sales of loans		5,015			7,499			22,214		24,026
Wealth management and trust income		674			—			866		—
Other non-interest income		1,672			547			4,058		2,104
Total non-interest income		11,143			11,918			37,073		37,419
NON-INTEREST EXPENSE
Salaries and employee benefits		21,312			16,323			58,834		50,151
Occupancy expense, net		3,548			3,301			11,802		10,525
Equipment expense		617			630			1,778		1,809
Loan and lease related expenses		1,015			891			3,886		2,569
Legal, audit and other professional fees		2,358			1,608			8,627		4,369
Data processing		2,724			2,399			15,396		7,255
Net loss (gain) recognized on other real estate owned and other related expenses		(284	)		565			187		136
Regulatory assessments		675			326			1,282		894
Other intangible assets amortization expense		1,898			769			3,795		2,307
Advertising and promotions		537			196			1,133		803
Telecommunications		435			351			1,319		1,165
Other non-interest expense		3,121			3,706			7,606		7,182
Total non-interest expense		37,956			31,065			115,645		89,165
INCOME BEFORE PROVISION FOR INCOME TAXES		19,938			8,365			31,859		29,709
PROVISION (BENEFIT) FOR INCOME TAXES		5,402			(1,390	)		7,787		7,248
NET INCOME		14,536			9,755			24,072		22,461
Dividends on preferred shares		196			195			587		11,081
INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	14,340		$	9,560		$	23,485	$	11,380
EARNINGS PER COMMON SHARE
Basic	$	0.40		$	0.33		$	0.73	$	0.43
Diluted	$	0.39		$	0.32		$	0.71	$	0.43

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2018			2017			2018			2017
Net income	$	14,536		$	9,755		$	24,072		$	22,461
Securities available-for-sale
Unrealized holding gains (losses) arising during the period		(3,451	)		1,473			(14,859	)		4,920
Reclassification adjustments for net gains included in net income		—			—			(4	)		(8	)
Tax effect		961			303			4,138			(1,587	)
Net of tax		(2,490	)		1,776			(10,725	)		3,325
Cash flow hedges
Unrealized holding gains (losses) arising during the period		1,070			17			6,702			(1,408	)
Reclassification adjustments for net (gains) losses included in net income		(428	)		159			(863	)		426
Tax effect		(179	)		(88	)		(1,626	)		377
Net of tax		463			88			4,213			(605	)
Total other comprehensive income (loss)		(2,027	)		1,864			(6,512	)		2,720
Comprehensive income	$	12,509		$	11,619		$	17,560		$	25,181

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2018 and 2017

(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, 2017		25,441		$	25,441			24,616,706		$	—	$	313,552		$	50,933		$	(7,268	)	$	382,658
Net income		—			—			—			—		—			22,461			—			22,461
Other comprehensive income, net of tax		—			—			—			—		—			—			2,720			2,720
Issuance of common stock in connection with merger		—			—			—			246		(246	)		—			—			—
Repurchase of preferred stock		(15,003	)		(15,003	)		—			—		—			—			—			(15,003	)
Issuance of common stock, net of issuance costs		—			—			4,630,194			46		76,783			—			—			76,829
Issuance of common stock in connection with restricted stock awards		—			—			58,900			—		—			—			—			—
Forfeiture of restricted stock awards		—			—			(400	)		—		—			—			—			—
Cash dividends declared on preferred stock		—			—			—			—		—			(11,081	)		—			(11,081	)
Cash paid in lieu of fractional shares		—			—			—			—		—			(2	)		—			(2	)
Share-based compensation expense		—			—			—			—		951			—			—			951
Balance, September 30, 2017		10,438		$	10,438			29,305,400		$	292	$	391,040		$	62,311		$	(4,548	)	$	459,533
Balance, January 1, 2018		10,438		$	10,438			29,317,298		$	292	$	391,586		$	61,349		$	(5,087	)	$	458,578
Net income		—			—			—			—		—			24,072			—			24,072
Other comprehensive loss, net of tax		—			—			—			—		—			—			(6,512	)		(6,512	)
Issuance of common stock upon exercise of stock options		—			—			146,513			2		1,700			—			—			1,702
Issuance of common stock and stock options due to business combination, net of issuance costs		—			—			6,682,850			67		151,208			—			—			151,275
Issuance of common stock in connection with restricted stock awards		—			—			126,157			—		—			—			—			—
Forfeiture of restricted stock awards		—			—			(2,100	)		—		—			—			—			—
Issuance of common stock in connection with employee stock purchase plan		—			—			8,882			—		172			—			—			172
Reclassification of certain income tax effects from accumulated other comprehensive income (loss)		—			—			—			—		—			763			(763	)		—
Cash dividends declared on preferred stock		—			—			—			—		—			(587	)		—			(587	)
Share-based compensation expense		—			—			—			—		1,161			—			—			1,161
Balance, September 30, 2018		10,438		$	10,438			36,279,600		$	361	$	545,827		$	85,597		$	(12,362	)	$	629,861

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	Nine Months Ended
	September 30,
(dollars in thousands)	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	24,072		$	22,461
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan and lease losses		14,913			9,306
Impairment loss on assets held for sale		256			951
Depreciation and amortization of premises and equipment		4,089			3,919
Net amortization of securities		2,553			3,544
Net gains on sales of securities available-for-sale		(4	)		(8	)
Losses on disposal of premises or equipment		194			—
Net gains on sales of assets held for sale		(1,102	)		(167	)
Net gains on sales of loans		(22,214	)		(24,026	)
Net proceeds from mortgage loans sold		—			151
Originations of government guaranteed loans		(237,945	)		(202,176	)
Proceeds from government guaranteed loans sold		279,390			228,852
Accretion of premiums and discounts on acquired loans, net		(14,239	)		(24,767	)
Net change in servicing assets		726			(578	)
Net valuation adjustments on other real estate owned		512			735
Net gains on sales of other real estate owned		(380	)		(1,538	)
Amortization of intangible assets		3,795			2,307
Amortization of time deposit premium		(273	)		(759	)
Amortization of Federal Home Loan Bank advances premium		(19	)		(156	)
Accretion of junior subordinated debentures discount		471			556
Share-based compensation expense		1,161			951
Deferred tax provision		9,656			6,196
Increase in cash surrender value of bank owned life insurance		(205	)		(209	)
Net gain on death benefit of bank owned life insurance		—			(313	)
Changes in assets and liabilities:
Accrued interest receivable		(593	)		(324	)
Other assets		(6,680	)		515
Accrued interest payable		1,095			(1,243	)
Accrued expenses and other liabilities		2,937			(11,382	)
Net cash provided by operating activities		62,166			12,798
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale		(153,995	)		(34,814	)
Proceeds from maturities and calls of securities available-for-sale		13,630			7,672
Proceeds from paydowns of securities available-for-sale		45,785			53,171
Proceeds from sales of securities available-for-sale		544			8
Proceeds from maturities of securities held-to-maturity		—			655
Proceeds from paydowns of securities held-to-maturity		13,778			15,597
Purchases of Federal Home Loan Bank stock		(25,293	)		(9,855	)
Federal Home Loan Bank stock repurchases		23,794			14,220
Proceeds from other loans sold		—			9,984
Net change in loans and leases		(257,598	)		(63,870	)
Purchases of premises and equipment		(1,380	)		(2,238	)
Proceeds from sales of assets held for sale		4,414			4,398
Proceeds from sales of other real estate owned		6,686			9,583
Proceeds from bank owned life insurance death benefit		—			1,399
Net cash received in acquisition of business		20,374			—
Net cash (used in) provided by investing activities		(309,261	)		5,910

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

	Nine Months Ended
	September 30,
(dollars in thousands)	2018			2017
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	275,443		$	31,294
Proceeds from Federal Home Loan Bank advances		4,460,000			1,993,000
Repayments of Federal Home Loan Bank advances		(4,396,487	)		(2,072,000	)
Repayments of line of credit		—			(20,650	)
Net (decrease) increase in securities sold under agreements to repurchase		(6,741	)		13,558
Dividends paid on preferred stock		(587	)		(11,081	)
Cash paid in lieu of fractional shares		—			(2	)
Proceeds from issuance of common stock upon exercise of stock options		1,702			—
Proceeds from issuance of common stock		172			76,829
Proceeds from issuance of preferred stock		—			1,050
Repurchase of preferred stock		—			(15,003	)
Net cash provided by (used in) financing activities		333,502			(3,005	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		86,407			15,703
CASH AND CASH EQUIVALENTS, beginning of period		58,349			46,533
CASH AND CASH EQUIVALENTS, end of period	$	144,756		$	62,236
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	16,868		$	11,689
Cash payments during the period for taxes	$	3,114		$	2,121
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in fair value of available-for-sale securities, net of tax	$	(10,725	)	$	3,325
Change in fair value of cash flow hedges, net of tax	$	4,213		$	(605	)
Delayed payments of mortgage-backed securities	$	229		$	389
Transfers of loans to loans held for sale	$	—		$	10,061
Transfers of loans to other real estate owned	$	1,527		$	6,069
Internally financed sale of other real estate owned	$	444		$	—
Transfers of land and premises to assets held for sale	$	2,531		$	3,372
Transfers of assets held for sale to premises and equipment	$	(415	)	$	—
Transfers of premises and equipment to other assets	$	35		$	687
Transfers of other assets to assets held for sale	$	16		$	—
Due from counterparty	$	(5,503	)	$	21,084
Due to broker	$	6,983		$	—
Total assets acquired from acquisition	$	1,142,766		$	—
Total liabilities assumed from acquisition	$	1,036,609		$	—
Common stock and stock options issued due to business combination	$	152,127		$	—

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1—Basis of Presentation

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

These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2018 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, 2017, 2016, and 2015.

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.

On October 17, 2018, we entered a definitive merger agreement with Oak Park River Forest Bankshares, Inc. (which we refer to as “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. At such time, Community Bank of Oak Park River Forest’s banking offices will become banking offices of the Bank. The above described merger agreements are anticipated to be completed during the first half of 2019, subject to the satisfaction or waiver of the conditions included in the merger agreement. 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.

During the three months ended March 31, 2018, we revised our previously issued 2017 consolidated financial statements to properly record a deferred tax liability associated with the bad debt recapture assumed from the acquisition of Ridgestone Financial Services, Inc. (“Ridgestone”) and its subsidiaries on October 14, 2016. The acquisition of Ridgestone was accounted for using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (“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 2017.

We evaluated the effect of the error to our previously issued consolidated financial statements in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 99 and No. 108, and, based upon quantitative and qualitative factors, determined that the error was not material to our previously issued consolidated financial statements. Accordingly, we have reflected the change in 2017 and revised our Consolidated Statements of Financial Condition disclosed herein. Consolidated financial statements for periods not presented herein will be revised, as applicable, as they are included in future filings.

All financial information presented in the accompanying notes to these consolidated financial statements was revised to reflect the change. The change did not affect net income or stockholders’ equity for the periods impacted.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following table presents the effect of the aforementioned revisions to our Consolidated Statements of Financial Condition as of December 31, 2017:

	December 31, 2017
	(dollars in thousands)
	As Reported		Adjustment			As Revised
Goodwill	$	51,975	$	2,587		$	54,562
Deferred tax assets, net		49,963		(2,587	)		47,376
Total assets		3,366,130		—			3,366,130

Note 2—Recently Issued Accounting Pronouncements

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.

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 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. Under the terms of ASU No. 2015-14 the standard is effective for interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact the standard will have on the Company’s Consolidated Financial Statements. As a financial institution, the Company’s largest component of revenue, interest income, is excluded from the scope of this ASU. The Company is currently evaluating which, if any, of its sources of non-interest income will be impacted by this ASU. Assuming the Company remains an emerging growth company, the Company expects to adopt this new guidance on January 1, 2019, with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant. In April 2016, FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing. The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, 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. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606, Revenues from Contracts with Customers. The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

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 do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606. The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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, Revenue from Contracts with Customers. The SAB modified SAB Topic 13, Revenue Recognition. ASU 2017-14 supersedes various SEC paragraphs and amends an SEC paragraph pursuant to the issuance of SAB 116. The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014‑09 to determine the potential impact Topic 606 and its amendments will have on the Company’s Consolidated Financial Statements.

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 is currently evaluating the provisions of ASU No. 2016-01 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods beginning January 1, 2019 and is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

In March 2018, FASB issued ASU No. 2018-03, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU clarifies the guidance in ASU No. 2016-01. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years beginning after June 15, 2018. The Company is currently evaluating the provisions of ASU No. 2018-03 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods beginning January 1, 2019 and is not expected to have a significant impact on the Company’s Consolidated Financial Statements.

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 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 lease contracts where the Company is a lessee.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 with early adoption permitted. The Company is evaluating the new guidance and its impact on the Company’s Consolidated Statements of Operations and Consolidated Statements of Financial Condition.

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) or 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. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the new guidance and its impact on the Company’s Consolidated Statements of Operations and Consolidated Statements of Financial Condition.

In June 2018, the FASB issued ASU 2018-07, Improvements to Nonemployee Share-based Payment Accounting. The amendments in the ASU expands the scope of Topic 718 to include share-based payments issued to nonemployees for goods and services, in order to align the accounting for share-based payments to employees and nonemployees to reduce cost and complexity to improve financial reporting. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued, but no earlier than the Company’s adoption date of Topic 606, Revenue from Contracts with Customers. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the new guidance and its impact on the Company’s Consolidated Statements of Operations and Consolidated Statements of Financial Condition.

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

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. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is currently evaluating the provisions of ASU No. 2016-15 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (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. Early adoption of the update is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect this ASU to have a material impact on the Company’s Consolidated Financial Statements.

Income Taxes (Topic 740) In October 2016, the FASB issued ASU No. 2016-16, Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory. The ASU was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party; this update clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. The amendment is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of the update is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect this ASU to have a material impact on the Company’s Consolidated Financial Statements.

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. Early adoption is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect a material impact of this ASU on the Company’s Consolidated Financial Statements.

Intangibles—Goodwill and Other (Topic 350) In January 2017, FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment. The amendments in this ASU are intended to reduce the cost and complexity of the goodwill impairment test by eliminating step two from the impairment test. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this ASU, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount which the carrying amount exceeds the reporting unit’s fair value;

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU are effective for the Company’s annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted these amendments in 2017, which did not have a material impact on the Company’s Consolidated Financial Statements.

Other Income (Subtopic 610-20) In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. This ASU will clarify the scope of Subtopic 610-20 and add guidance for partial sales of nonfinancial assets. The amendments should be applied either on retrospectively to each period presented or with a modified retrospective approach. The amendment is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU No. 2017-05 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

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.

Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815) In July 2017, FASB issued ASU No. 2017-11, (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. Down round features are common in warrants, convertible preferred shares, and convertible debt instruments. The ASU requires companies to disregard the down round feature when assessing whether the instrument is indexed to its own stock, for purposes of determining liability or equity classification. Companies that provide earnings per share (EPS) data will adjust their basic EPS calculation for the effect of the feature when triggered (i.e., when the exercise price of the related equity-linked financial instrument is adjusted downward because of the down round feature) and will also recognize the effect of the trigger within equity. 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. 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. 2017‑11 to determine the potential impact the new standard will have 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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.

Financial Services—Depository and Lending (Topic 942) In May 2018, FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Depository and Lending—Income Taxes. The amendments in this ASU supersede the guidance within Subtopic 942-741 that has been rescinded by the OCC and no longer relevant. A cross-reference between Subtopic 740-30, Income Taxes—Other Considerations or Special Areas, and Subtopic 942-740 is being added to the remaining guidance in Subtopic 740-30 to improve the usefulness of the codification. The amendments in this Update are effective upon issuance, as no accounting requirements are affected. The amendments in this ASU do not have a material impact on the Company’s Consolidated Financial Statements.

Fair Value Measurement (Topic 820) In August 2018, FASB issued ASU No. 2018-13, Disclosure Framework—Changes 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. This guidance is effective for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company early adopted these amendments in 2018, which did not have a material impact 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 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 $73.0 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

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

assets acquired and reflects related synergies expected from the combined operations. Merger-related expenses, including acquisition advisory expenses of $1.7 million and core system conversion expenses of $9.2 million related to the First Evanston acquisition, are reflected in non-interest expense on the Consolidated Statements of Operations for the nine months ended September 30, 2018.

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. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available.

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

Assets
Cash and cash equivalents	$	47,378
Securities available-for-sale		128,063
Restricted stock		1,360
Loans		916,011
Premises and equipment		16,778
Other intangible assets		22,276
Deferred tax assets, net		2,055
Other assets		8,845
Total assets acquired		1,142,766
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	$	106,157
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	$	72,974

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

Fair value	$	889,115
Gross contractual amounts receivable		1,055,502
Estimate of contractual cash flows not expected to be collected⁽¹⁾		36,544
Estimate of contractual cash flows expected to be collected		1,018,958

(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.

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

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 and nine months ended September 30, 2018 and 2017, as if the acquisition had occurred on January 1, 2017. 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 security discount accretion, loan discount accretion, intangible assets amortization, deposit premium accretion, fixed assets amortization, and borrowing discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2017. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for loan and lease 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				For the Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Total revenues (net interest income and non-interest income)	$	63,736	$	56,188	$	183,564	$	167,812
Net income	$	14,726	$	12,553	$	37,737	$	31,626
Earnings per share—basic	$	0.40	$	0.34	$	1.03	$	0.62
Earnings per share—diluted	$	0.39	$	0.34	$	1.01	$	0.61

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 September 30, 2018. 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.

Note 4—Securities

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

September 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury Notes	$	55,717	$	—	$	(384	)	$	55,333
U.S. Government agencies		148,892		2		(2,274	)		146,620
Obligations of states, municipalities, and political subdivisions		62,389		24		(1,186	)		61,227
Residential mortgage-backed securities
Agency		301,515		—		(16,067	)		285,448
Non-agency		75,763		—		(2,200	)		73,563
Commercial mortgage-backed securities
Agency		75,380		154		(3,547	)		71,987
Non-agency		31,535		—		(1,489	)		30,046
Small Business Administration mortgage-backed securities		26,715		9		—			26,724
Corporate securities		37,685		251		(523	)		37,413
Other securities		4,611		2,591		(155	)		7,047
Total	$	820,202	$	3,031	$	(27,825	)	$	795,408

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	23,885	$	14	$	(545	)	$	23,354
Residential mortgage-backed securities
Agency		42,668		40		(948	)		41,760
Non-agency		36,130		—		(1,311	)		34,819
Total	$	102,683	$	54	$	(2,804	)	$	99,933

December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury Notes	$	14,999	$	—	$	(136	)	$	14,863
U.S. Government agencies		54,248		—		(1,290	)		52,958
Obligations of states, municipalities, and political subdivisions		33,405		100		(335	)		33,170
Residential mortgage-backed securities
Agency		315,103		—		(7,646	)		307,457
Non-agency		39,485		104		(75	)		39,514
Commercial mortgage-backed securities
Agency		70,964		45		(1,966	)		69,043
Non-agency		31,763		—		(792	)		30,971
Corporate securities		29,573		507		(104	)		29,976
Other securities		3,627		1,730		(73	)		5,284
Total	$	593,167	$	2,486	$	(12,417	)	$	583,236

December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	24,030	$	197	$	(82	)	$	24,145
Residential mortgage-backed securities
Agency		53,731		79		(203	)		53,607
Non-agency		39,402		174		(51	)		39,525
Total	$	117,163	$	450	$	(336	)	$	117,277

The Company did not classify securities as trading during the nine months ended September 30, 2018 or during 2017.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 September 30, 2018 and December 31, 2017 are summarized as follows:

			Less than 12 Months					12 Months or Longer					Total
September 30, 2018	# of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale
U.S. Treasury Notes		23	$	42,524	$	(196	)	$	9,814	$	(188	)	$	52,338	$	(384	)
U.S. Government agencies		52		92,091		(510	)		52,536		(1,764	)		144,627		(2,274	)
Obligations of states, municipalities and political subdivisions		133		40,567		(467	)		14,693		(719	)		55,260		(1,186	)
Residential mortgage-backed securities
Agency		44		29,441		(886	)		254,756		(15,181	)		284,197		(16,067	)
Non-agency		9		69,533		(1,962	)		4,029		(238	)		73,562		(2,200	)
Commercial mortgage-backed securities
Agency		8		7,181		(116	)		53,213		(3,431	)		60,394		(3,547	)
Non-agency		5		—		—			30,046		(1,489	)		30,046		(1,489	)
Corporate securities		12		19,286		(282	)		4,691		(241	)		23,977		(523	)
Other securities		1		—		—			2,819		(155	)		2,819		(155	)
Total		287	$	300,623	$	(4,419	)	$	426,597	$	(23,406	)	$	727,220	$	(27,825	)

			Less than 12 Months					12 Months or Longer					Total
September 30, 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		29	$	18,197	$	(444	)	$	3,600	$	(101	)	$	21,797	$	(545	)
Residential mortgage-backed securities
Agency		18		24,101		(388	)		14,465		(560	)		38,566		(948	)
Non-agency		7		30,927		(1,105	)		3,891		(206	)		34,818		(1,311	)
Total		54	$	73,225	$	(1,937	)	$	21,956	$	(867	)	$	95,181	$	(2,804	)

			Less than 12 Months					12 Months or Longer					Total
December 31, 2017	# of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale
U.S. Treasury Notes		5	$	4,998	$	(2	)	$	9,865	$	(134	)	$	14,863	$	(136	)
U.S. Government agencies		9		992		(7	)		51,966		(1,283	)		52,958		(1,290	)
Obligations of states, municipalities and political subdivisions		29		16,059		(137	)		4,453		(198	)		20,512		(335	)
Residential mortgage-backed securities
Agency		41		15,441		(181	)		292,016		(7,465	)		307,457		(7,646	)
Non-agency		1		—		—			4,565		(75	)		4,565		(75	)
Commercial mortgage-backed securities
Agency		7		—		—			57,442		(1,966	)		57,442		(1,966	)
Non-agency		5		—		—			30,971		(792	)		30,971		(792	)
Corporate securities		3		2,406		(80	)		2,489		(24	)		4,895		(104	)
Other securities		1		—		—			1,921		(73	)		1,921		(73	)
Total		101	$	39,896	$	(407	)	$	455,688	$	(12,010	)	$	495,584	$	(12,417	)

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

			Less than 12 Months					12 Months or Longer					Total
December 31, 2017	# of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Held-to-maturity
Obligations of states, municipalities, and political subdivisions		12	$	7,409	$	(38	)	$	1,548	$	(44	)	$	8,957	$	(82	)
Residential mortgage-backed securities
Agency		13		24,344		(107	)		7,935		(96	)		32,279		(203	)
Non-agency		3		10,458		(10	)		4,382		(41	)		14,840		(51	)
Total		28	$	42,211	$	(155	)	$	13,865	$	(181	)	$	56,076	$	(336	)

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2018, 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 287 securities available-for-sale with unrealized losses at September 30, 2018. There were 54 securities held-to-maturity with unrealized losses at September 30, 2018. 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.

The proceeds from all sales of securities available-for-sale, and the associated gains and losses for the three and nine months ended September 30, 2018 and 2017 are listed below:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2018		2017		2018		2017
Proceeds	$	—	$	—	$	544	$	8
Gross gains		—		—		4		8
Gross losses		—		—		—		—

There were no gains reclassified from accumulated other comprehensive income into earnings for the three months ended September 30, 2018 or 2017. There were $4,000 and $8,000 gains reclassified from accumulated other comprehensive income into earnings for the nine months ended September 30, 2018 and 2017, respectively.

Securities pledged at September 30, 2018 and December 31, 2017 had carrying amounts of $261.1 million and $262.5 million, respectively. At September 30, 2018 and December 31, 2017, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $227.6 million and $99.3 million, respectively, and for customer repurchase agreements of $33.5 million and $34.8 million, respectively. At September 30, 2018, there were no securities pledged for advances from the Federal Home Loan Bank. At December 31, 2017, securities pledged for advances from the Federal Home Loan Bank were $128.4 million. Other securities were pledged for purposes required or permitted by law. At September 30, 2018 and December 31, 2017, 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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2018, 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	$	66,866	$	66,842
Due from one to five years		179,535		176,765
Due from five to ten years		44,295		43,365
Due after ten years		14,525		14,312
Mortgage-backed securities		510,908		487,768
Other securities with no defined maturity		4,073		6,356
Total	$	820,202	$	795,408
Held-to-maturity
Due from one to five years	$	5,067	$	4,966
Due from five to ten years		10,616		10,349
Due after ten years		8,202		8,039
Mortgage-backed securities		78,798		76,579
Total	$	102,683	$	99,933

Note 5—Loan and Lease Receivables

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

	September 30,			December 31,
	2018			2017
Commercial real estate	$	1,272,208		$	891,971
Residential real estate		705,132			577,123
Construction, land development, and other land		182,727			105,996
Commercial and industrial		1,095,946			522,254
Installment and other		12,150			4,182
Lease financing receivables		185,540			174,165
Total loans and leases		3,453,703			2,275,691
Net unamortized deferred fees and costs		(1,418	)		(1,720	)
Initial direct costs		3,517			3,521
Allowance for loan and lease losses		(23,424	)		(16,706	)
Net loans and leases	$	3,432,378		$	2,260,786

	September 30,			December 31,
	2018			2017
Lease financing receivables
Net minimum lease payments	$	201,938		$	188,986
Unguaranteed residual values		1,630			1,644
Unearned income		(18,028	)		(16,465	)
Total lease financing receivables		185,540			174,165
Initial direct costs		3,517			3,521
Lease financial receivables before allowance for lease losses	$	189,057		$	177,686

Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases. At September 30, 2018 and December 31, 2017, total loans and leases included the guaranteed amount of

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

U.S. Government guaranteed loans of $101.9 million and $77.0 million, respectively. At September 30, 2018 and December 31, 2017, installment and other loans included overdraft deposits of $1.1 million and $617,000, respectively, which were reclassified as loans. At September 30, 2018 and December 31, 2017, loans and loans held for sale pledged as security for borrowings were $1.4 billion and $516.9 million, respectively.

The minimum annual lease payments for lease financing receivables as of September 30, 2018 are summarized as follows:

	Minimum Lease Payments
2018	$	17,443
2019		69,639
2020		53,597
2021		34,663
2022		19,821
Thereafter		6,775
Total	$	201,938

Originated loans and leases represent originations or purchases other than those from a business combination. 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 significant credit quality deterioration and are accounted for under ASC Topic 310-20. Leases and revolving loans are accounted for under ASC Topic 310-20. The following tables summarize the balances for each respective loan and lease category as of September 30, 2018 and December 31, 2017:

September 30, 2018	Originated		Acquired Impaired		Acquired Non- Impaired		Total
Commercial real estate	$	619,767	$	154,108	$	498,329	$	1,272,204
Residential real estate		445,717		120,963		138,516		705,196
Construction, land development, and other land		140,391		4,203		37,111		181,705
Commercial and industrial		696,750		14,436		384,260		1,095,446
Installment and other		7,729		458		4,007		12,194
Lease financing receivables		155,825		—		33,232		189,057
Total loans and leases	$	2,066,179	$	294,168	$	1,095,455	$	3,455,802

December 31, 2017	Originated		Acquired Impaired		Acquired Non- Impaired		Total
Commercial real estate	$	513,622	$	166,712	$	211,359	$	891,693
Residential real estate		400,571		144,562		32,085		577,218
Construction, land development, and other land		97,638		5,946		1,845		105,429
Commercial and industrial		416,499		10,008		94,731		521,238
Installment and other		3,724		462		42		4,228
Lease financing receivables		141,329		—		36,357		177,686
Total loans and leases	$	1,573,383	$	327,690	$	376,419	$	2,277,492

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 2018 or 2017. 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 $3.0 million and $3.9 million, at September 30, 2018 and December 31, 2017, respectively.

	September 30, 2018				December 31, 2017
	Outstanding Balance		Carrying Value		Outstanding Balance		Carrying Value
Commercial real estate	$	169,149	$	154,108	$	235,898	$	166,712
Residential real estate		123,542		120,963		207,660		144,562
Construction, land development, and other land		4,615		4,203		13,270		5,946
Commercial and industrial		23,467		14,436		18,333		10,008
Installment and other		1,126		458		1,819		462
Total acquired impaired loans	$	321,899	$	294,168	$	476,980	$	327,690

The following table summarizes the changes in accretable yield for acquired impaired loans for the three and nine months ended September 30, 2018 and 2017:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Beginning balance	$	41,306		$	37,619		$	36,446		$	36,868
Additions		—			—			3,566			—
Accretion to interest income		(5,665	)		(8,165	)		(17,227	)		(24,768	)
Reclassification from nonaccretable difference, net		2,507			6,901			15,363			24,255
Ending balance	$	38,148		$	36,355		$	38,148		$	36,355

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Acquired non-impaired loans and leases—The Company acquired non-impaired loans as part of the First Evanston acquisition in the amount of $889.1 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 September 30, 2018 and December 31, 2017 were as follows:

	September 30, 2018				December 31, 2017
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial real estate	$	506,507	$	498,329	$	221,710	$	211,359
Residential real estate		141,011		138,516		32,605		32,085
Construction, land development, and other land		39,694		37,111		1,926		1,845
Commercial and industrial		397,746		384,260		105,529		94,731
Installment and other		7,601		4,007		355		42
Lease financing receivables		34,706		33,232		37,476		36,357
Total acquired non-impaired loans and leases	$	1,127,265	$	1,095,455	$	399,601	$	376,419

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 and nine months ended September 30, 2018 and 2017 are as follows:

September 30, 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	$	6,453		$	1,648	$	332		$	8,369		$	30		$	2,855		$	19,687
Provisions		1,705			29		58			3,579			12			459			5,842
Charge-offs		(736	)		—		—			(858	)		(4	)		(823	)		(2,421	)
Recoveries		—			—		—			75			—			241			316
Ending balance	$	7,422		$	1,677	$	390		$	11,165		$	38		$	2,732		$	23,424

Nine months ended
Beginning balance	$	4,794		$	1,638	$	222		$	7,418		$	41		$	2,593		$	16,706
Provisions		3,975			39		586			8,959			33			1,321			14,913
Charge-offs		(1,347	)		—		(418	)		(5,539	)		(36	)		(1,888	)		(9,228	)
Recoveries		—			—		—			327			—			706			1,033
Ending balance	$	7,422		$	1,677	$	390		$	11,165		$	38		$	2,732		$	23,424
Ending balance:
Individually evaluated for impairment	$	2,294		$	70	$	—		$	4,044		$	14		$	—		$	6,422
Collectively evaluated for impairment		3,413			1,150		390			6,301			21			2,732			14,007
Loans acquired with deteriorated credit quality		1,715			457		—			820			3			—			2,995
Total allowance for loan and lease losses	$	7,422		$	1,677	$	390		$	11,165		$	38		$	2,732		$	23,424

September 30, 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	$	13,612	$	1,941	$	—	$	19,962	$	14	$	—	$	35,529
Collectively evaluated for impairment		1,104,484		582,292		177,502		1,061,048		11,722		189,057		3,126,105
Loans acquired with deteriorated credit quality		154,108		120,963		4,203		14,436		458		—		294,168
Total loans and leases	$	1,272,204	$	705,196	$	181,705	$	1,095,446	$	12,194	$	189,057	$	3,455,802

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2017	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	$	3,668		$	1,835		$	327		$	5,689		$	344		$	2,106		$	13,969
Provisions (releases)		1,577			52			(111	)		1,440			13			929			3,900
Charge-offs		(186	)		(161	)		—			(763	)		(327	)		(862	)		(2,299	)
Recoveries		—			—			—			—			—			410			410
Ending balance	$	5,059		$	1,726		$	216		$	6,366		$	30		$	2,583		$	15,980

Nine months ended
Beginning balance	$	1,945		$	2,483		$	742		$	4,196		$	334		$	1,223		$	10,923
Provisions (releases)		3,591			(400	)		(526	)		3,932			23			2,686			9,306
Charge-offs		(477	)		(357	)		—			(1,762	)		(327	)		(2,399	)		(5,322	)
Recoveries		—			—			—			—			—			1,073			1,073
Ending balance	$	5,059		$	1,726		$	216		$	6,366		$	30		$	2,583		$	15,980
Ending balance:
Individually evaluated for impairment	$	1,186		$	176		$	—		$	1,585		$	2		$	—		$	2,949
Collectively evaluated for impairment		1,844			1,237			155			3,389			10			2,583			9,218
Loans acquired with deteriorated credit quality		2,029			313			61			1,392			18			—			3,813
Total allowance for loan and lease losses	$	5,059		$	1,726		$	216		$	6,366		$	30		$	2,583		$	15,980

September 30, 2017	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	$	14,928	$	1,948	$	565	$	6,075	$	2	$	—	$	23,518
Collectively evaluated for impairment		673,851		428,565		88,315		484,547		2,762		172,341		1,850,381
Loans acquired with deteriorated credit quality		173,106		152,149		5,424		11,433		488		—		342,600
Total loans and leases	$	861,885	$	582,662	$	94,304	$	502,055	$	3,252	$	172,341	$	2,216,499

The Company increased the allowance for loan and lease losses by $3.7 million and $6.7 million for the three and nine months ended September 30, 2018, respectively. The Company increased the allowance for loan and lease losses by $2.0 million and $5.1 million for the three and nine months ended September 30, 2017, respectively. For acquired impaired loans, the Company increased the allowance for loan and lease losses by $244,000 for the three months ended September 30, 2018, and decreased the allowance for loan and lease losses by $879,000 for the nine months ended September 30, 2018. The Company increased the allowance for loan and lease losses for acquired impaired loans by $559,000 and $2.2 million for the three and nine months ended September 30, 2017, respectively.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables summarize the recorded investment, unpaid principal balance, and related allowance for loans and leases considered impaired as of September 30, 2018 and December 31, 2017, which excludes acquired impaired loans:

September 30, 2018	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial real estate	$	8,439	$	9,566	$	—
Residential real estate		1,689		1,655		—
Commercial and industrial		9,971		11,694		—
With an allowance recorded
Commercial real estate		5,173		5,419		2,294
Residential real estate		252		253		70
Commercial and industrial		9,991		10,535		4,044
Installment and other		14		14		14
Total impaired loans	$	35,529	$	39,136	$	6,422

December 31, 2017	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial real estate	$	11,425	$	12,936	$	—
Residential real estate		2,075		2,046		—
Commercial and industrial		5,470		6,774		—
With an allowance recorded
Commercial real estate		2,459		2,634		1,101
Residential real estate		354		351		158
Commercial and industrial		9,314		9,724		2,692
Installment and other		14		14		14
Total impaired loans	$	31,111	$	34,479	$	3,965

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 nine months ended as follows:

September 30, 2018	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial real estate	$	9,441	$	232
Residential real estate		1,910		24
Construction, land development and other land		—		15
Commercial and industrial		8,018		194
With an allowance recorded
Commercial real estate		5,022		16
Residential real estate		330		3
Commercial and industrial		9,047		484
Installment and other		14		9
Total impaired loans	$	33,782	$	977

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2017	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial real estate	$	10,605	$	419
Residential real estate		1,698		33
Construction, land development and other land		269		2
Commercial and industrial		2,391		253
With an allowance recorded
Commercial real estate		1,043		287
Residential real estate		444		4
Construction, land development and other land		19		—
Commercial and industrial		1,673		500
Installment and other		213		11
Total impaired loans	$	18,355	$	1,509

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 September 30, 2018 and December 31, 2017:

September 30, 2018	Commercial Real Estate		Residential Real Estate		Construction, Land Development, and Other Land		Commercial and Industrial		Installment and Other		Lease Financing Receivables		Total
Pass	$	1,017,225	$	544,986	$	159,712	$	915,027	$	11,696	$	187,623	$	2,836,269
Watch		71,382		30,287		14,691		128,597		—		100		245,057
Special Mention		14,508		5,729		3,099		15,654		13		856		39,859
Substandard		14,981		3,231		—		21,732		27		317		40,288
Doubtful		—		—		—		—		—		161		161
Loss		—		—		—		—		—		—		—
Total	$	1,118,096	$	584,233	$	177,502	$	1,081,010	$	11,736	$	189,057	$	3,161,634

December 31, 2017	Commercial Real Estate		Residential Real Estate		Construction, Land Development, and Other Land		Commercial and Industrial		Installment and Other		Lease Financing Receivables		Total
Pass	$	638,066	$	398,743	$	73,935	$	415,163	$	3,732	$	174,672	$	1,704,311
Watch		58,217		29,165		22,380		67,024		20		190		176,996
Special Mention		14,645		2,251		3,168		13,535		—		1,293		34,892
Substandard		14,053		2,497		—		15,508		14		1,259		33,331
Doubtful		—		—		—		—		—		272		272
Loss		—		—		—		—		—		—		—
Total	$	724,981	$	432,656	$	99,483	$	511,230	$	3,766	$	177,686	$	1,949,802

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables summarize contractual delinquency information for acquired non-impaired and originated loans and leases by category at September 30, 2018 and December 31, 2017:

September 30, 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	$	5,452	$	1,282	$	—	$	12,553	$	19,287	$	1,098,809	$	1,118,096
Residential real estate		434		196		—		1,631		2,261		581,972		584,233
Construction, land development, and other land		—		—		—		—		—		177,502		177,502
Commercial and industrial		3,600		2,361		291		13,958		20,210		1,060,800		1,081,010
Installment and other		34		1		—		23		58		11,678		11,736
Lease financing receivables		1,511		624		—		478		2,613		186,444		189,057
Total	$	11,031	$	4,464	$	291	$	28,643	$	44,429	$	3,117,205	$	3,161,634

December 31, 2017	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	$	4,783	$	968	$	—	$	8,459	$	14,210	$	710,771	$	724,981
Residential real estate		148		—		—		2,092		2,240		430,416		432,656
Construction, land development, and other land		—		—		—		—		—		99,483		99,483
Commercial and industrial		6,667		967		—		4,348		11,982		499,248		511,230
Installment and other		18		—		—		14		32		3,734		3,766
Lease financing receivables		997		638		—		851		2,486		175,200		177,686
Total	$	12,613	$	2,573	$	—	$	15,764	$	30,950	$	1,918,852	$	1,949,802

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 September 30, 2018 and December 31, 2017:

September 30, 2018	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserves
Accruing:
Commercial real estate		3	$	914	$	914	$	—	$	113
Commercial and industrial		2		193		193		—		107
Residential real estate		1		123		123		—		—
Total accruing		6		1,230		1,230		—		220
Non-accruing:
Commercial real estate		8		2,678		2,637		41		420
Commercial and industrial		4		6,593		4,722		1,871		1,155
Total non-accruing		12		9,271		7,359		1,912		1,575
Total troubled debt restructurings		18		10,501		8,589		1,912		1,795

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2017	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserves
Accruing:
Commercial real estate		3	$	912	$	912	$	—	$	—
Residential real estate		1		149		149		—		—
Total accruing		4		1,061		1,061		—		—
Non-accruing:
Commercial real estate		2		743		743		—		111
Commercial and industrial		3		1,246		759		487		246
Residential real estate		1		67		67		—		—
Total non-accruing		6		2,056		1,569		487		357
Total troubled debt restructurings		10		3,117		2,630		487		357

In addition, there was a $500,000 commitment outstanding on troubled debt restructurings at September 30, 2018 and no commitments outstanding on troubled debt restructurings at December 31, 2017.

Loans modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2018 and 2017:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Accruing:
Beginning balance	$	1,238		$	981		$	1,061		$	602
Additions		—			673			37			1,017
Net payments		(8	)		(23	)		(56	)		(59	)
Net transfers from non-accrual		—			—			188			71
Ending balance		1,230			1,631			1,230			1,631
Non-accruing:
Beginning balance		5,776			470			1,570			552
Additions		1,667			194			7,123			194
Net payments		(84	)		(8	)		(1,002	)		(19	)
Charge-offs		—			—			(144	)		—
Net transfers to accrual		—			—			(188	)		(71	)
Ending balance		7,359			656			7,359			656
Total troubled debt restructurings		8,589			2,287			8,589			2,287

Troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the three and nine months ended September 30, 2018 had a recorded investment of zero and $340,000, respectively.

No troubled debt restructurings subsequently defaulted within twelve months of the restructure date during the three and nine months ended September 30, 2017.

At September 30, 2018 and December 31, 2017, the reserve for unfunded commitments was $1.4 million and $923,000, respectively. During the three months ended September 30, 2018 and 2017, the provisions for unfunded commitments were $411,000 and $299,000, respectively. During the nine months ended September 30, 2018 and 2017, the provisions for unfunded commitments were $496,000 and $272,000, respectively. There were no charge-offs or recoveries related to the reserve for unfunded commitments during the periods.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 7—Servicing Assets

Activity for servicing assets and the related changes in fair value for the three and nine months ended September 30, 2018 and 2017 is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Beginning balance	$	21,587		$	21,424		$	21,400		$	21,091
Additions, net		1,489			1,727			5,680			4,675
Changes in fair value		(2,402	)		(1,482	)		(6,406	)		(4,097	)
Ending balance	$	20,674		$	21,669		$	20,674		$	21,669

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 September 30, 2018 and December 31, 2017 were as follows:

	September 30,		December 31,
	2018		2017
Loan portfolios serviced for:
SBA guaranteed loans	$	1,135,871	$	1,021,143
USDA guaranteed loans		86,417		91,758
Total	$	1,222,288	$	1,112,901

During the three months ended September 30, 2018 and 2017, loan servicing income, net of changes in fair value of servicing assets were $176,000 and $1.0 million, respectively. During the nine months ended September 30, 2018 and 2017, loan servicing income, net of changes in fair value of servicing assets were $1.2 million and $3.0 million, 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 condition 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 and nine months ended September 30, 2018 and 2017.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Beginning balance	$	6,402		$	12,684		$	10,626		$	16,570
Net additions to OREO		307			3,417			1,527			6,069
Dispositions of OREO		(1,519	)		(1,989	)		(6,750	)		(8,045	)
Valuation adjustments		(299	)		(253	)		(512	)		(735	)
Ending balance	$	4,891		$	13,859		$	4,891		$	13,859

At September 30, 2018 and December 31, 2017, the balance of real estate owned included $657,000 and $3.6 million, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2018 and December 31, 2017, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process is $3.1 million and $1.9 million, respectively.

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

The following tables summarize the changes in the Company’s goodwill, core deposit intangible assets, and customer relationship intangible assets for the three and nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018								2017
	Goodwill		Core Deposit Intangible			Customer Relationship Intangible			Goodwill		Core Deposit Intangible			Customer Relationship Intangible
Beginning balance	$	54,562	$	16,720		$	—		$	51,975	$	19,776		$	—
Additions		72,974		19,060			3,216			—		—			—
Amortization		—		(3,685	)		(89	)		—		(2,293	)		—
Ending balance	$	127,536	$	32,095		$	3,127		$	51,975	$	17,483		$	—
Accumulated amortization	N/A		$	17,151		$	89		N/A		$	12,703		N/A
Weighted average remaining amortization period	N/A		7.1 Years			11.7 Years			N/A		5.8 Years			N/A

	Three Months Ended September 30,
	2018								2017
	Goodwill		Core Deposit Intangible			Customer Relationship Intangible			Goodwill		Core Deposit Intangible			Customer Relationship Intangible
Beginning balance	$	127,536	$	33,917		$	3,194		$	51,975	$	18,247		$	—
Additions		—		—			—			—		—			—
Amortization		—		(1,822	)		(67	)		—		(764	)		—
Ending balance	$	127,536	$	32,095		$	3,127		$	51,975	$	17,483		$	—
Accumulated amortization	N/A		$	17,151		$	89		N/A		$	12,703		N/A
Weighted average remaining amortization period	N/A		7.1 Years			11.7 Years			N/A		5.8 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.

Additionally, the Company had other intangible assets of $26,000 and $36,000 as of September 30, 2018 and December 31, 2017, respectively, associated with trademark-related transactions.

The following table presents the estimated amortization expense for core deposit intangible, customer relationship intangible, and other intangible assets recognized at September 30, 2018:

	Estimated Amortization
2018	$	1,807
2019		6,945
2020		6,477
2021		6,026
2022		5,578
Thereafter		8,415
Total	$	35,248

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 nine months ended September 30, 2018 and 2017 was 24.4%. 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 TCJ Act (enacted on December 22, 2017) on our net deferred tax assets. The re-measurement of our net deferred tax assets due to the TCJ Act was determined to be provisional at March 31, 2018.

As part of a budget package passed by the Legislature of the State of Illinois, the corporate income tax rate increased from 5.25% to 7.00% effective July 1, 2017. As a result of the increase in the corporate income tax rate, during the third quarter of 2017 we recorded a state income tax benefit of $4.6 million due to increased value of our deferred tax asset related to our Illinois net loss deduction.

Net deferred tax assets decreased to $42.3 million at September 30, 2018 compared to $47.4 million at December 31, 2017. The net decrease in the total net deferred tax assets recorded as of September 30, 2018 was a result of a reduction due to the utilization of net operating loss carryforward deferred tax assets, partially offset with an increase in net deferred tax assets related to the acquisition of First Evanston.

Note 11—Deposits

The composition of deposits was as follows as of September 30, 2018 and December 31, 2017:

	September 30,		December 31,
	2018		2017
Non-interest bearing demand deposits	$	1,175,222	$	760,887
Interest bearing checking accounts		317,145		186,611
Money market demand accounts		661,271		349,862
Other savings		476,879		437,212
Time deposits (below $250,000)		916,014		627,255
Time deposits ($250,000 and above)		194,236		81,502
Total deposits	$	3,740,767	$	2,443,329

Time deposits of $250,000 or more included $10.0 million of brokered deposits at September 30, 2018 and none at December 31, 2017.

Note 12—Federal Home Loan Bank Advances

The following table summarizes the FHLB advances as of September 30, 2018 and December 31, 2017:

	September 30,			December 31,
	2018			2017
Federal Home Loan Bank advances	$	425,000		$	361,506
Weighted average cost		2.30	%		1.49	%

At September 30, 2018, fixed-rate advances totaled $250.0 million with an interest rate of 2.36% and maturity of December 2018. Total variable rate advances were $175.0 million at September 30, 2018, with interest rates of 2.22% that

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

may reset daily and maturities ranging from October 2018 to December 2018. The Company’s advances from the FHLB are collateralized by residential real estate loans and securities. The Company’s required investment in FHLB stock is $4.50 for every $100 in advances. At September 30, 2018 and December 31, 2017, the Bank has additional borrowing capacity from the FHLB of $1.2 billion and $795.0 million, respectively, 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 Hedge Activities for additional information.

Note 13—Other Borrowings

The following is a summary of the Company’s other borrowings as of September 30, 2018 and December 31, 2017:

	September 30,		December 31,
	2018		2017
Securities sold under agreements to repurchase	$	24,446	$	31,187
Line of credit		—		—
Total	$	24,446	$	31,187

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 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. 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 September 30, 2018 and December 31, 2017, the line of credit has not been drawn upon, so an interest rate option has not been selected.

The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as of September 30, 2018 and December 31, 2017:

	September 30,		December 31,
	2018		2017
Federal Reserve Bank of Chicago discount window line	$	310,345	$	144,248
Available federal funds lines		55,000		55,000

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 14—Junior Subordinated Debentures

At September 30, 2018 and December 31, 2017, the Company’s junior subordinated debentures by issuance were as follows:

Name of Trust	Aggregate Principal Amount September 30, 2018			Aggregate Principal Amount December 31, 2017			Stated Maturity	Contractual Rate at September 30, 2018			Interest Rate Spread
Metropolitan Statutory Trust 1	$	35,000		$	35,000		March 17, 2034		5.12	%	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			—		March 15, 2035		4.11	%	Three-month LIBOR + 1.78%
Total liability, at par		46,500			36,500
Discount		(9,885	)		(8,853	)
Total liability, at carrying value	$	36,615		$	27,647

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 LIBOR plus 2.79% (5.12% and 4.39% at September 30, 2018 and December 31, 2017, 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 $72,000 and $62,000 as of September 30, 2018 and December 31, 2017, 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% and 5.09% at September 30, 2018 and December 31, 2017, respectively), 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. Accrued interest payable was $25,000 as of September 30, 2018. There was no accrued interest payable as of December 31, 2017.

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% (4.11% at September 30, 2018), 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 $18,000 as of September 30, 2018.

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 Statements of Financial Condition.

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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The minimum annual rental commitments for operating leases subsequent to September 30, 2018, exclusive of taxes and other charges, are summarized as follows:

	Minimum Rental Commitments
2018	$	944
2019		3,316
2020		2,777
2021		2,450
2022		1,488
Thereafter		3,167
Total	$	14,142

The Company’s rental expenses for the nine months ended September 30, 2018 and 2017 were $4.2 million and $3.4 million, respectively. Rental expenses for the three months ended September 30, 2018 and 2017 were $1.4 million and $1.1 million, respectively. During the nine months ended September 30, 2018 and 2017, the Company received $569,000 and $526,000, respectively, in sublease income which is included in the Consolidated Statements of Operations as a reduction of occupancy expense. Sublease income for the three months ended September 30, 2018 and 2017 was $223,000 and $166,000, respectively. The total amount of minimum rentals to be received in the future on these subleases is approximately $1.5 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.

Commitments to extend credit—The Bank 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 Bank has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for funded instruments. The Bank 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 September 30, 2018 and December 31, 2017:

	September 30,				December 31,
	2018				2017
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to extend credit	$	74,062	$	944,577	$	55,924	$	467,429
Letters of credit		1,985		24,105		1,226		3,337
Total	$	76,047	$	968,682	$	57,150	$	470,766

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 Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).

Letters of credit are conditional commitments issued by the Bank 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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 2.00% to 20.00% and maturities up to 2048. Variable rate loan commitments have interest rates ranging from 2.45% to 15.00% 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:

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.

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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Derivative instruments—Interest rate swaps 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.

The following tables summarize the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017:

			Fair Value Measurements Using
September 30, 2018	Fair Value		Level 1		Level 2		Level 3
Financial assets
Securities available-for-sale
U.S. Treasury Notes	$	55,333	$	55,333	$	—	$	—
U.S. Government agencies		146,620		—		146,620		—
Obligations of states, municipalities, and political subdivisions		61,227		—		60,538		689
Residential mortgage-backed securities
Agency		285,448		—		285,448		—
Non-agency		73,563		—		73,563		—
Commercial mortgage-backed securities
Agency		71,987		—		71,987		—
Non-agency		30,046		—		30,046		—
Small Business Administration mortgage-backed securities		26,724		—		26,724		—
Corporate securities		37,413		—		37,413		—
Other securities		7,047		2,819		3,536		692
Servicing assets		20,674		—		—		20,674
Derivative assets		13,620		—		13,620		—
Financial liabilities
Derivative liabilities		2,769		—		2,769		—

			Fair Value Measurements Using
December 31, 2017	Fair Value		Level 1		Level 2		Level 3
Financial assets
Securities available-for-sale
U.S. Treasury Notes	$	14,863	$	14,863	$	—	$	—
U.S. Government agencies		52,958		—		52,958		—
Obligations of states, municipalities, and political subdivisions		33,170		—		32,795		375
Residential mortgage-backed securities
Agency		307,457		—		307,457		—
Non-agency		39,514		—		39,514		—
Commercial mortgage-backed securities
Agency		69,043		—		69,043		—
Non-agency		30,971		—		30,971		—
Corporate securities		29,976		—		29,976		—
Other securities		5,284		1,921		2,686		677
Servicing assets		21,400		—		—		21,400
Derivative assets		5,981		—		5,981		—
Financial liabilities
Derivative liabilities		994		—		994		—

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 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 nine months ended September 30, 2018 or 2017.

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):

	Nine Months Ended September 30,
	2018		2017		2018			2017
	Investment Securities				Servicing Assets
Balance, beginning of period	$	1,052	$	1,080	$	21,400		$	21,091
Acquired assets at fair value		314		—		—			—
Additions, net		—		—		5,680			4,675
Amortization		4		3		—			—
Change in unrealized gain		11		6		—			—
Changes in fair value		—		—		(6,406	)		(4,097	)
Balance, end of period	$	1,381	$	1,089	$	20,674		$	21,669

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 September 30, 2018:

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

1.3%—2.4%

1.8

Decrease

Single issuer trust preferred

Discounted cash flow

Probability of default

4.9%—7.0%

6.1

Decrease

Servicing assets

Discounted cash flow

Prepayment speeds

2.1%—25.9%

10.9

Decrease

Discount rate

7.7%—24.4%

14.9

Decrease

Expected weighted

average loan life

0.8—10.8 years

5.3 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. Impaired loans that are not collateral dependent are not material.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 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 September 30, 2018 and December 31, 2017:

			Fair Value Measurements Using
September 30, 2018	Fair Value		Level 1		Level 2		Level 3
Non-recurring
Impaired loans
(excluding acquired impaired loans)
Commercial real estate	$	11,318	$	—	$	—	$	11,318
Residential real estate		1,871		—		—		1,871
Construction, land development, and other land		—		—		—		—
Commercial and industrial		15,918		—		—		15,918
Installment and other		—		—		—		—
Assets held for sale		8,343		—		—		8,343
Other real estate owned		4,891		—		—		4,891

			Fair Value Measurements Using
December 31, 2017	Fair Value		Level 1		Level 2		Level 3
Non-recurring
Impaired loans
(excluding acquired impaired loans)
Commercial real estate	$	12,783	$	—	$	—	$	12,783
Residential real estate		2,271		—		—		2,271
Construction, land development, and other land		—		—		—		—
Commercial and industrial		12,092		—		—		12,092
Installment and other		—		—		—		—
Assets held for sale		9,779		—		—		9,779
Other real estate owned		10,626		—		—		10,626

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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

Loans held for sale—The fair value of loans held for sale are based on quoted market prices, where available, and determined by discounted estimated cash flows using interest rates approximating the Company’s current origination rates for similar loans adjusted to reflect the inherent credit risk.

Loan and lease receivables, net—For certain variable rate loans that reprice frequently and with no significant changes in credit risk, fair value is estimated at carrying value. The fair value of other types of loans is estimated 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:

			September 30,				December 31,
	Fair Value		2018				2017
	Hierarchy Level		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and due from banks		1	$	25,162	$	25,162	$	19,404	$	19,404
Interest bearing deposits with other banks		2		119,594		119,594		38,945		38,945
Securities held-to-maturity		2		102,683		99,933		117,163		117,277
Other restricted stock		2		19,202		19,202		16,343		16,343
Loans held for sale		3		8,737		9,707		5,212		5,851
Loans and lease receivables, net		3		3,432,378		3,356,116		2,260,786		2,240,235
Accrued interest receivable		3		11,331		11,331		7,670		7,670
Financial liabilities
Non-interest bearing deposits		2		1,175,222		1,175,222		760,887		760,887
Interest bearing deposits		2		2,565,545		2,561,465		1,682,442		1,678,535
Accrued interest payable		2		2,971		2,971		1,306		1,306
Line of credit		2		—		—		—		—
Federal Home Loan Bank advances		2		425,000		425,000		361,506		361,500
Securities sold under repurchase agreement		2		24,446		24,446		31,187		31,187
Junior subordinated debentures		3		36,615		42,693		27,647		33,907

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 September 30, 2018 and December 31, 2017:

	September 30, 2018						December 31, 2017
			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	$	10,883	$	—	$	250,000	$	5,030	$	38
Derivatives not designated as hedging instruments
Other interest rate swaps		236,916		2,737		2,766		94,726		951		956
Other credit derivatives		4,504		—		3		—		—		—
Total derivatives	$	491,420	$	13,620	$	2,769	$	344,726	$	5,981	$	994

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 September 30, 2018 and December 31, 2017. The aggregate fair value of the swaps is recorded in other assets or other liabilities with changes in fair value recorded in other comprehensive income (loss), net of taxes, to the extent effective. The amount included in accumulated other comprehensive income (loss) would be reclassified to current interest incurred from the hedged FHLB advances when it affects earnings. 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. The Company expects the hedges to remain highly effective during the remaining terms of the swaps and did not recognize any hedge ineffectiveness in current earnings during the three or nine months ended September 30, 2018 and 2017.

Interest recorded on these swap transactions reduced FHLB interest expense by $428,000 and increased FHLB interest expense by $159,000 during the three months ended September 30, 2018 and 2017, respectively, and is reported as a component of interest expense on FHLB advances. Interest recorded on these swap transactions reduced FHLB interest expense by $863,000 and increased FHLB interest expense by $426,000 during the nine months ended September 30, 2018 and 2017, respectively. At September 30, 2018, the Company estimates $2.7 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 September 30, 2018:

Notional amounts	$	250,000
Derivative assets fair value		10,883
Derivative liabilities fair value		—
Weighted average pay rates		1.67	%
Weighted average receive rates		2.33	%
Weighted average maturity	3.4 years

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 nine months ended:

September 30, 2018

September 30, 2017

Amount of

Gain (Loss)

Recognized in

OCI

(Effective

Portion)

Amount of

Gain (Loss)

Reclassified

from OCI to

Income as a

Decrease to

Interest

Expense

Amount of

Gain (Loss)

Recognized in

Other

Non-Interest

Income

(Ineffective

Portion)

Amount of

Gain (Loss)

Recognized in

OCI

(Effective

Portion)

Amount of

Gain (Loss)

Reclassified

from OCI to

Income as an

Increase to

Interest

Expense

Amount of

Gain (Loss)

Recognized in

Other

Non-Interest

Income

(Ineffective

Portion)

Interest rate swaps

6,702

863

—

(1,408

)

(426

)

—

Other interest rate swaps—The total combined notional amount was $236.9 million as of September 30, 2018 with maturities ranging from December 2018 to August 2028. The fair values of the interest rate swap agreements are reflected in other assets and other liabilities with corresponding gains or losses reflected in non-interest income. During the three and nine months ended September 30, 2018, there were $230,000 and $1.2 million of transaction fees, respectively, included in other non-interest income, related to these derivative instruments. During the three and nine months ended September 30, 2017, transaction fees were $40,000 and $219,000, respectively.

The following table reflects other interest rate swaps as of September 30, 2018:

Notional amounts	$	236,916
Derivative assets fair value		2,737
Derivative liabilities fair value		2,766
Weighted average pay rates		4.64	%
Weighted average receive rates		4.19	%
Weighted average maturity	5.7 years

Other credit derivatives—The total notional amount was $4.5 million as of September 30, 2018. There were no credit derivatives as of or for the year ended December 31, 2017. 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 an increase to other non-interest income during the three and nine months ended September 30, 2018 of $34,000 and $57,000, respectively.

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 September 30, 2018, the CVA resulted in an increase to non-interest income of $13,000. During the nine months ended September 30, 2018, the CVA resulted in a decrease to non-interest income of $25,000, respectively. During the three and nine months ended September 30, 2017, the CVA resulted in a decrease to non-interest income of $6,000 and $36,000, respectively.

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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The Company has agreements with its derivative counterparties that contain a cross-default provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company also has agreements with certain derivative counterparties that contain a provision where if the Company fails to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Company would be required to settle its obligations resulted in a net asset position.

The 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:

	September 30, 2018						December 31, 2017
	Derivative Assets Fair Value			Derivative Liabilities Fair Value			Derivative Assets Fair Value			Derivative Liabilities Fair Value
Gross amounts recognized	$	13,620		$	2,769		$	5,981		$	994
Less: Amounts offset in the Consolidated Statements of Financial Condition		—			—			—			—
Net amount presented in the Consolidated Statements of Financial Condition	$	13,620		$	2,769		$	5,981		$	994
Gross amounts not offset in the Consolidated Statements of Financial Condition
Offsetting derivative positions		(757	)		(757	)		(232	)		(232	)
Collateral posted		(12,863	)		(2,007	)		(5,371	)		(745	)
Net credit exposure	$	—		$	5		$	378		$	17

As of September 30, 2018, the counterparties posted collateral of $13.3 million, which resulted in no excess collateral with the Company. For purposes of this disclosure, the amount of posted collateral by the counterparties is limited to the amount offsetting the derivatives asset.

Note 18 – Share-Based Compensation

In June 2017, the Company adopted the 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) in connection with our initial public offering. 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 and are available for issuance under the Omnibus Plan.

On July 6, 2017, in conjunction with the completion of the initial public offering, 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 2017 in connection with the recruitment of employees. These restricted shares vest ratably over a four year period.

During 2018, the Company granted 126,157 shares of restricted common stock, par value $0.01 per share. Of this total, 101,559 restricted shares will vest ratably over four years on each anniversary of the grant date, 11,165 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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

percentile performance, and up to 125% of the shares with above target and 75th percentile performance. Any earned shares will vest on the third anniversary of the grant date. As of September 30, 2018, there were 1,355,545 shares available for future grants under the Omnibus Plan.

During October 2018, the Company granted 5,000 shares of restricted common stock. These restricted shares will vest ratably over periods ranging between three and four years.

The following table discloses the changes in restricted shares for the nine months ended September 30, 2018:

	Omnibus Plan
	Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance, January 1, 2018		70,398		$	20.31
Granted		126,157		$	22.38
Vested		—		$	—
Forfeited		(2,100	)	$	20.84
Ending balance outstanding at September 30, 2018		194,455		$	21.65

No restricted shares vested during the nine months ended September 30, 2018.

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 nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018		2017
Total share-based compensation - restricted stock	$	638	$	94
Income tax benefit		178		38
Unrecognized compensation expense		3,379		1,087
Weighted-average amortization period remaining	3.1 years		2.8 years

The fair value of the unvested restricted stock awards at September 30, 2018 was $4.4 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 no future grants can be made under this plan. Options to purchase a total of 1,654,272 shares remain outstanding under the BYB Plan at September 30, 2018.

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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 fair values of options under the BYB Plan were determined using the following assumptions as of the grant dates:

	Time Options Grants
	2016			2015
Risk-free interest rate	1.34% - 1.40%			1.68% - 1.85%
Expected term (years)	5.2 - 5.6			5.7 - 6.3
Expected stock price volatility		20.39	%	16.18%-16.55%
Expected dividend yield		0.00	%		0.00	%
Weighted average grant date fair value	$	3.55		$	2.25

	Performance Options Grants
	2016			2015
Risk-free interest rate	Implied forward rates			Implied forward rates
Expected term (years)	Variable			Variable
Expected stock price volatility	20.34% - 20.39%			16.18%-16.55%
Expected dividend yield		0.00	%		0.00	%
Weighted average grant date fair value	$	3.75		$	1.65

The following table discloses the activity in shares subject to options and the weighted average exercise prices, in actual dollars, for the nine months ended September 30, 2018:

	BYB Plan
	Number of Shares			Weighted Average Exercise Price		Intrinsic Value		Weighted Average Remaining Contractual Term (in Years)
Beginning balance, January 1, 2018		1,783,020		$	11.91	$	19,718		7.6
Granted		—
Expired		—
Exercised		(123,748	)		11.79	$	1,345
Forfeited		(5,000	)		16.25
Ending balance outstanding at September 30, 2018		1,654,272		$	11.91	$	17,855		6.9
Exercisable at September 30, 2018		1,487,672		$	11.42	$	16,780		6.8

A total of 123,748 stock options were exercised during the nine months ended September 30, 2018. During the nine months ended September 30, 2018, proceeds from the exercise of stock options were $1.5 million and related tax benefit was $297,000. There were no stock options exercised during the year ended December 31, 2017. A total of 307,163 stock options vested during the nine months ended September 30, 2018.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,
	2018		2017
Total share-based compensation - stock options	$	510	$	857
Income tax benefit		142		348
Unrecognized compensation expense		209		1,132
Weighted-average amortization period remaining	1.2 years		1.2 years

Pursuant to the terms of the Merger Agreement, upon the Effective Time, each outstanding First Evanston Option held by a participant (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”, and collectively, the “Adjusted Options”). 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 “Conversion Calculation”). 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 nine months ended September 30, 2018:

	FEB Plan
	Number of Shares			Weighted Average Exercise Price		Intrinsic Value		Weighted Average Remaining Contractual Term (in Years)
Beginning balance, January 1, 2018		—		$	—	$	—		—
Granted		680,787			11.26	$	7,544
Expired		—
Exercised		(22,765	)		10.59	$	281
Forfeited		—
Ending balance outstanding at September 30, 2018		658,022		$	11.28	$	7,513		5.2
Exercisable at September 30, 2018		658,022		$	11.28	$	7,513		5.2

A total of 22,765 stock options were exercised during the nine months ended September 30, 2018. During the nine months ended September 30, 2018, proceeds from the exercise of stock options were $241,000 and related tax benefit was $64,000.

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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 2,312,294 and 1,798,223 shares of common stock were outstanding as of September 30, 2018 and 2017, respectively. There were 194,455 and 58,500 restricted stock awards outstanding at September 30, 2018 and 2017, respectively.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Net income	$	14,536	$	9,755	$	24,072	$	22,461
Less: Dividends on preferred shares		196		195		587		11,081
Net income available to common stockholders	$	14,340	$	9,560	$	23,485	$	11,380
Weighted-average common stock outstanding:
Weighted-average common stock outstanding (basic)		36,042,914		29,246,900		32,341,087		26,194,025
Incremental shares		915,295		505,431		947,570		503,816
Weighted-average common stock outstanding (dilutive)		36,958,209		29,752,331		33,288,657		26,697,841
Basic earnings per common share	$	0.40	$	0.33	$	0.73	$	0.43
Diluted earnings per common share	$	0.39	$	0.32	$	0.71	$	0.43

Note 20—Stockholders’ Equity

A summary of the Company’s preferred and common stock at September 30, 2018 and December 31, 2017 is as follows:

	September 30,		December 31,
	2018		2017
Series B 7.5% fixed 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		36,279,600		29,317,298
Shares outstanding		36,279,600		29,317,298

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.

For the three months ended September 30, 2018, the Company declared and paid dividends on the Series B preferred stock of $196,000, compared to $195,000 for the three months ended September 30, 2017. For the nine months ended September 30, 2018, the Company declared and paid dividends on the Series B preferred stock of $587,000, compared to $580,000 for the nine months ended September 30, 2017.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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 nine months ended September 30, 2018 and September 30, 2017:

(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, 2017	$	2,233		$	(9,501	)	$	(7,268	)
Other comprehensive income (loss), net of tax		(605	)		3,325			2,720
Balance, September 30, 2017	$	1,628		$	(6,176	)	$	(4,548	)

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		4,213			(10,725	)		(6,512	)
Balance, September 30, 2018	$	7,813		$	(20,175	)	$	(12,362	)

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 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 North Carolina and New York, and sales representatives in Michigan, New Jersey, and Arizona. 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 sixth 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 September 30, 2018. Following our recent 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 September 30, 2018, we had consolidated total assets of $4.9 billion, total gross loans and leases outstanding of $3.5 billion, total deposits of $3.7 billion, and total stockholders’ equity of $629.9 million.

Small Ticket Leasing Acquisition

On October 10, 2014, Byline Bank acquired certain assets and liabilities related to the small ticket leasing operation of Baytree National Bank and Trust Company and Baytree Leasing Company LLC (collectively, “Baytree”). In a separate but related transaction, on September 3, 2014, Byline Bank purchased approximately $55.7 million of direct finance leases that Baytree had sold to a third party. We have grown our leasing portfolio to $189.1 million as of September 30, 2018.

Ridgestone Acquisition

On October 14, 2016, we completed the acquisition of Ridgestone Financial Services, Inc. (“Ridgestone”) and its subsidiary bank, Ridgestone Bank, under the terms of a definitive merger agreement (the “Ridgestone 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 lending programs.

First Evanston Acquisition

On May 31, 2018, we completed the acquisition of First Evanston Bancorp, Inc. (“First Evanston”), under the terms of a definitive merger agreement (the “First Evanston 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 $931.6 million of loans, $127.1 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.

We determined that the First Evanston acquisition constituted a business combination as defined by Accounting Standards Codification (“ASC”) 805. Accordingly, the assets acquired and liabilities assumed were recorded at their fair value amount on the date of acquisition. Fair value was determined in accordance with the guidance provided in ASC 820. The fair values may be adjusted through the end of the measurement period, which closes at the earlier of the Company receiving all necessary information to complete the acquisition or one year from the date of acquisition. The transaction qualified for federal income tax purposes as a tax free transaction under section 368(a) of the Code.

Oak Park River Forest Acquisition

On October 17, 2018, we 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, pursuant 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. As of June 30, 2018, Oak Park River Forest had $325.5 million in assets, including $253.6 million of loans and $292.6 million of total deposits. We believe the acquisition will enhance our position in an attractive Chicago metropolitan market, while also providing an important source of low-cost deposits. We believe the synergies from this combination will further enhance the value of the Byline franchise. Completion of the transaction is subject to regulatory approval, the effectiveness of a registration statement to be filed with the Securities and Exchange Commission (“SEC”), the approval of Oak Park River Forest’s stockholders, and other customary closing conditions. We expect the acquisition to close during the first half of 2019.

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, our branch network has been reduced from 88 to 59, including the additional nine branches added through the First Evanston acquisition. During June 2018, we consolidated six 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.

Critical Accounting Policies and Significant Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States (“GAAP”) and conform to general practices within the industry in which we operate. 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. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, 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 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 that we filed with the SEC on March 30, 2018.

Business Combinations

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

In accordance with ASC 805, the acquiring company retains the right to make appropriate adjustments to the assets and liabilities of the acquired entity for information obtained during the measurement period about facts and circumstances that existed as of the acquisition date. The measurement period ends as of the earlier of (i) one year from the acquisition date or (ii) the date when the acquirer receives the information necessary to complete the business combination accounting.

Carrying Value of Loans and Leases

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

Originated Loans and Leases

We account for originated loans and leases and purchased loans and leases not acquired through business combinations as originated loans and leases. The new loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any allowance for loan and lease losses, unamortized deferred fees and costs and unamortized premiums or discounts. The net amount of 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.

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

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

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

Acquired non‑impaired loans and originated loans are considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements. All acquired non‑impaired loans and originated loans of $100,000 or greater with an internal risk rating of substandard or below and on 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, 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 September 30, 2018, included in this report, for additional information.

Core Deposit Intangible

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.

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, 2017, 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. 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 non-interest expense.

Income Taxes

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

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

A deferred tax valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some of the deferred tax asset will not be realized. See Note 11 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2017, for further information on income taxes.

Recently Issued Accounting Pronouncements

Refer to Note 2 of our Interim Unaudited Condensed Consolidated Financial Statements as of September 30, 2018, 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 and leases, 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, servicing fees, 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 third quarter 2018 results reflect healthy growth in net interest income, primarily driven by the First Evanston acquisition and continued growth in organic loan and lease originations. Net interest margin increased to 4.73% for the third quarter of 2018, compared to 4.18% for the third quarter of 2017. The increase was primarily due to increased interest income due to an increase in earning assets as a result of the acquisition, and an increase in interest rates on variable rate loans during the quarter. Our total revenues increased by $20.4 million, or 47.1%, compared to the third quarter of 2017, primarily driven by a full quarter of the inclusion of the First Evanston loan portfolio, loan and lease originations, and increased loan and lease yields.

Selected Financial Data

	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
(dollars in thousands, except share and per share data)	2018			2017			2018			2017
Summary of Operations
Net interest income	$	52,593		$	31,412		$	125,344		$	90,761
Provision for loan and lease losses		5,842			3,900			14,913			9,306
Non-interest income		11,143			11,918			37,073			37,419
Non-interest expense		37,956			31,065			115,645			89,165
Income before provision for income taxes		19,938			8,365			31,859			29,709
Provision (benefit) for income taxes		5,402			(1,390	)		7,787			7,248
Net income		14,536			9,755			24,072			22,461
Dividends on preferred shares		196			195			587			11,081
Income available to common stockholders	$	14,340		$	9,560		$	23,485		$	11,380
Earnings per Common Share
Basic earnings per common share	$	0.40		$	0.33		$	0.73		$	0.43
Diluted earnings per common share	$	0.39		$	0.32		$	0.71		$	0.43
Adjusted diluted earnings per share⁽²⁾⁽³⁾	$	0.40		$	0.18		$	0.93		$	0.27
Weighted average common shares outstanding (basic)		36,042,914			29,246,900			32,341,087			26,194,025
Weighted average common shares outstanding (diluted)		36,958,209			29,752,331			33,288,657			26,697,841
Common shares outstanding		36,279,600			29,305,400			36,279,600			29,305,400
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin		4.73	%		4.18	%		4.56	%		4.07	%
Cost of deposits		0.64	%		0.33	%		0.54	%		0.29	%
Efficiency ratio⁽¹⁾		56.57	%		69.92	%		68.87	%		67.76	%
Adjusted Efficiency ratio^(1)(2)(3)(5)		55.78	%		67.73	%		61.93	%		67.02	%
Non-interest expense to average assets		3.13	%		3.73	%		3.85	%		3.61	%
Adjusted non-interest expense to average assets⁽²⁾⁽³⁾		3.09	%		3.61	%		3.47	%		3.57	%
Return on average stockholders' equity		9.22	%		8.44	%		6.01	%		7.23	%
Adjusted return on average stockholders' equity^(2)(3)(5)		9.47	%		4.79	%		7.90	%		5.87	%
Return on average assets		1.20	%		1.17	%		0.80	%		0.91	%
Adjusted return on average assets^(2)(3)(5)		1.23	%		0.66	%		1.05	%		0.74	%
Non-interest income to total revenues⁽²⁾		17.48	%		27.51	%		22.83	%		29.19	%
Pre-tax pre-provision return on average assets⁽²⁾		2.13	%		1.47	%		1.56	%		1.58	%
Adjusted Pre-tax pre-provision return on average assets⁽²⁾		2.17	%		1.59	%		1.93	%		1.62	%
Return on average tangible common stockholders' equity⁽²⁾⁽³⁾		13.81	%		10.51	%		8.51	%		5.26	%
Adjusted return on average tangible common stockholders' equity^(2)(3)(5)		14.16	%		6.08	%		10.96	%		3.52	%
Non-interest bearing deposits to total deposits		31.42	%		29.90	%		31.42	%		29.90	%
Deposits per branch	$	63,403		$	44,227		$	63,403		$	44,227
Loans and leases held for sale and loans and leases held for investment to total deposits		92.62	%		88.01	%		92.62	%		88.01	%
Deposits to total liabilities		87.25	%		88.58	%		87.25	%		88.58	%
Tangible book value per common share⁽²⁾	$	12.59		$	12.95		$	12.59		$	12.95
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment, net before ALLL		0.87	%		0.76	%		0.87	%		0.76	%
ALLL to total loans and leases held for investment, net before ALLL		0.68	%		0.72	%		0.68	%		0.72	%
Net charge-offs to average total loans and leases held for investment, net before ALLL		0.25	%		0.34	%		0.40	%		0.26	%
Acquisition accounting adjustments⁽⁴⁾	$	42,375		$	34,249		$	42,375		$	34,249
Capital Ratios
Common equity to total assets		12.60	%		13.59	%		12.60	%		13.59	%
Tangible common equity to tangible assets⁽²⁾		9.60	%		11.73	%		9.60	%		11.73	%
Leverage ratio		10.78	%		11.95	%		10.78	%		11.95	%
Common equity tier 1 capital ratio		11.26	%		13.93	%		11.26	%		13.93	%
Tier 1 capital ratio		12.71	%		15.38	%		12.71	%		15.38	%
Total capital ratio		13.37	%		16.08	%		13.37	%		16.08	%

(1)	Represents non-interest expense less amortization of intangible assets divided by net interest income and non-interest income.

(2)	Represents a non-GAAP financial measure. See “Reconciliations of non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

(3)	Calculation excludes impairment charges, merger-related expenses, and core system conversion expenses.

(4)	Represents the remaining unamortized premium or unaccreted discount as a result of applying the fair value acquisition accounting adjustment at the time of the business combination on acquired loans.

(5)	Calculation excludes incremental income tax expense or benefit related to changes in corporate income tax rates.

We reported consolidated net income for the three months ended September 30, 2018 of $14.5 million compared to net income of $9.8 million for the three months ended September 30, 2017, an increase of $4.8 million. The increase in net income was primarily attributable to a $21.2 million increase in net interest income, offset by a $6.9 million increase in non-interest expense, a $6.8 million increase in provision for income taxes, a $1.9 million increase in provision for loan and lease losses, and a $775,000 decrease in non-interest income. The increase in net interest income during the three months ended September 30, 2018 was a result of the First Evanston acquisition, organic loan growth, and recent rate increases, slightly offset by increased interest-bearing deposit yields during the current quarter. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $5.0 million due to organizational growth as a result of the First Evanston acquisition, an increase in legal, audit and other professional fees of $750,000 partially due to merger related expenses, and an increase in data processing of $325,000 partially due to expenses regarding the upcoming core system conversion. The increase in provision for income taxes was primarily driven by an increase in net income during the quarter. The increase in provision for loan and lease losses was mainly due to credit deterioration in the government guaranteed portfolio and increases to the general reserve driven by new loan and lease originations. The decrease in non-interest income was driven by decreased volume of loan sales during the quarter.

Net income available to common stockholders was $14.3 million or $0.40 per basic common share and $0.39 per diluted common share for the three months ended September 30, 2018, compared to a $9.6 million net income or $0.33 per basic common share and $0.32 per diluted common share for the three months ended September 30, 2017. Dividends on preferred shares were $196,000 for the three months ended September 30, 2018 compared to $195,000 for the three months ended September 30, 2017.

Our annualized return on average assets for the three months ended September 30, 2018 was 1.20% compared to 1.17% for the three months ended September 30, 2017. Our annualized return on stockholders’ equity was 9.22% for the three months ended September 30, 2018 compared to 8.44% for the three months ended September 30, 2017.

We reported consolidated net income for the nine months ended September 30, 2018 of $24.1 million compared to net income of $22.5 million for the nine months ended September 30, 2017, an increase of $1.6 million. The increase in net income was primarily attributable to a $34.6 million increase in net interest income, offset by a $26.5 million increase in non-interest expense, a $5.6 million increase in provision for loan and lease losses, a $539,000 increase in provision for income taxes, and a $346,000 decrease in non-interest income. The increase in net interest income during the nine months ended September 30, 2018 was a result of the First Evanston acquisition, organic loan growth, and recent rate increases, slightly offset by increased interest-bearing deposits yields during the current period. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits of $8.7 million due to organizational growth as a result of the First Evanston acquisition, an increase in data processing of $8.1 million due to expenses incurred related to the upcoming core system conversion, and an increase in legal, audit and other professional fees of $4.3 million partially due to acquisition related expenses. The increase in provision for loan and lease losses was primarily driven by new loan and lease originations. The increase in provision for income taxes was primarily driven by an increase in net income during the period. The decrease in non-interest income was primarily driven by decreased volume of loan sales and a change in fair value of the servicing asset for the current period.

Net income available to common stockholders was $23.5 million or $0.73 per basic and $0.71 per diluted common share for the nine months ended September 30, 2018, compared to $11.4 million or $0.43 per basic and diluted common share for the nine months ended September 30, 2017. Dividends on preferred shares were $587,000 for the nine months ended September 30, 2018 compared to $11.1 million for the nine months ended September 30, 2017.

Our annualized return on average assets for the nine months ended September 30, 2018 was 0.80% compared to 0.91% for the nine months ended September 30, 2017. Our annualized return on average stockholders’ equity was 6.01% for the nine months ended September 30, 2018 compared to 7.23% for the nine months ended September 30, 2017.

Net Interest Income

Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which include loans, leases and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, which include interest-bearing deposits, FHLB advances, junior subordinated debentures and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and

other funding sources, (iii) our net interest spread, and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources.

We also recognize income from the accretable discounts associated with the purchase of interest-earning assets. Because of our recapitalization and the acquisitions of Ridgestone and First Evanston, we derive a portion of our interest income from the accretable discounts on acquired loans. The accretion is generally recognized over the life of the loan and is impacted by changes in expected cash flows on the loan. This accretion will continue to have an impact on our net interest income as long as loans acquired with a discount at acquisition represent a meaningful portion of our interest-earning assets. As of September 30, 2018, acquired loans with evidence of credit deterioration accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, represented 8.5% of our total loan portfolio.

Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. In addition, our interest income includes the accretion of the discounts on our acquired loans, which will also affect our net interest spread, net interest margin and net interest income.

The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis (dollars in thousands).

	Three Months Ended September 30,
	2018								2017
	Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate			Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate
ASSETS
Cash and cash equivalents	$	107,555		$	368		1.36	%	$	48,354		$	106		0.87	%
Loans and leases⁽¹⁾		3,387,569			55,045		6.45	%		2,193,076			30,933		5.60	%
Securities available-for-sale		768,189			4,738		2.45	%		602,146			3,181		2.10	%
Securities held-to-maturity		91,892			585		2.53	%		111,345			650		2.32	%
Tax-exempt securities⁽²⁾		55,656			337		2.40	%		26,166			174		2.63	%
Total interest-earning assets	$	4,410,861		$	61,073		5.49	%	$	2,981,087		$	35,044		4.66	%
Allowance for loan and lease losses		(21,557	)							(14,570	)
All other assets		420,635								340,669
TOTAL ASSETS	$	4,809,939							$	3,307,186
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Interest checking	$	316,394		$	384		0.48	%	$	186,447		$	29		0.06	%
Money market accounts		618,213			1,200		0.77	%		388,365			275		0.28	%
Savings		479,837			148		0.12	%		441,096			79		0.07	%
Time deposits		1,084,550			4,239		1.55	%		758,518			1,729		0.90	%
Total interest-bearing deposits		2,498,994			5,971		0.95	%		1,774,426			2,112		0.47	%
Federal Home Loan Bank advances		394,588			1,723		1.73	%		222,800			850		1.51	%
Other borrowed funds		61,582			786		5.06	%		60,418			670		4.40	%
Total borrowings		456,170			2,509		2.18	%		283,218			1,520		2.13	%
Total interest-bearing liabilities	$	2,955,164		$	8,480		1.14	%	$	2,057,644		$	3,632		0.70	%
Non-interest bearing demand deposits		1,175,523								748,523
Other liabilities		53,631								42,577
Total stockholders’ equity		625,621								458,442
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,809,939							$	3,307,186
Net interest spread⁽³⁾							4.35	%							3.96	%
Net interest income				$	52,593							$	31,412
Net interest margin⁽⁴⁾							4.73	%							4.18	%

Net loan accretion impact on margin				$	8,259		0.74	%				$	2,166		0.29	%
Net interest margin excluding accretion⁽⁶⁾							3.99	%							3.89	%

(1)	Loan and lease balances are net of deferred origination fees and costs and initial direct costs. Non-accrual loans and leases are included in total loan and lease balances.

(2)	Interest income and rates exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality.

(3)	Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

(4)	Represents net interest income (annualized) divided by total average interest-earning assets.

(5)	Average balances are average daily balances.

(6)	Represents a non-GAAP financial measure. See “Reconciliations of non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

	Nine Months Ended September 30,
	2018								2017
	Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate			Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate
ASSETS
Cash and cash equivalents	$	71,607		$	648		1.21	%	$	54,894		$	327		0.80	%
Loans and leases⁽¹⁾		2,771,274			128,326		6.19	%		2,180,507			88,510		5.43	%
Securities available-for-sale		697,584			12,563		2.41	%		610,249			9,525		2.09	%
Securities held-to-maturity		96,677			1,779		2.46	%		116,764			2,027		2.32	%
Tax-exempt securities⁽²⁾		40,065			740		2.47	%		22,033			458		2.78	%
Total interest-earning assets	$	3,677,207		$	144,056		5.24	%	$	2,984,447		$	100,847		4.52	%
Allowance for loan and lease losses		(19,085	)							(12,715	)
All other assets		358,793								330,209
TOTAL ASSETS	$	4,016,915							$	3,301,941
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Interest checking	$	244,088		$	546		0.30	%	$	185,409		$	87		0.06	%
Money market accounts		478,607			2,352		0.66	%		376,751			712		0.25	%
Savings		457,179			308		0.09	%		445,082			237		0.07	%
Time deposits		895,502			9,008		1.34	%		782,672			4,482		0.77	%
Total interest-bearing deposits		2,075,376			12,214		0.79	%		1,789,914			5,518		0.41	%
Federal Home Loan Bank advances		367,098			4,441		1.62	%		249,630			2,282		1.22	%
Other borrowed funds		58,585			2,057		4.70	%		68,803			2,286		4.44	%
Total borrowings		425,683			6,498		2.04	%		318,433			4,568		1.92	%
Total interest-bearing liabilities	$	2,501,059		$	18,712		1.00	%	$	2,108,347		$	10,086		0.64	%
Non-interest bearing demand deposits		938,423								736,982
Other liabilities		42,257								41,393
Total stockholders’ equity		535,176								415,219
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	4,016,915							$	3,301,941
Net interest spread⁽³⁾							4.24	%							3.88	%
Net interest income				$	125,344							$	90,761
Net interest margin⁽⁴⁾							4.56	%							4.07	%

Net loan accretion impact on margin				$	14,199		0.52	%				$	6,347		0.28	%
Net interest margin excluding loan accretion⁽⁶⁾							4.04	%							3.79	%

(1)	Loan and lease balances are net of deferred origination fees and costs and initial direct costs. Non-accrual loans and leases are included in total loan and lease balances.

(2)	Interest income and rates exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality.

(3)	Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

(4)	Represents net interest income (annualized) divided by total average interest-earning assets.

(5)	Average balances are average daily balances.

(6)	Represents a non-GAAP financial measure. See “Reconciliations of non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis. The table below is a summary of increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates (dollars in thousands):

	Three Months Ended September 30, 2018 compared to Three Months Ended September 30, 2017
	Increase (Decrease) Due to
	Volume			Rate			Total
Interest income
Cash and cash equivalents	$	202		$	60		$	262
Loans and leases⁽¹⁾		19,413			4,699			24,112
Securities available-for-sale		1,025			532			1,557
Securities held-to-maturity		(124	)		59			(65	)
Tax-exempt securities		178			(15	)		163
Total interest income	$	20,694		$	5,335		$	26,029
Interest expense
Deposits
Interest checking	$	157		$	198		$	355
Money market accounts		446			479			925
Savings		14			55			69
Time deposits		1,267			1,243			2,510
Total interest-bearing deposits		1,884			1,975			3,859
Federal Home Loan Bank advances		750			123			873
Other borrowed funds		16			100			116
Total borrowings		766			223			989
Total interest expense	$	2,650		$	2,198		$	4,848
Net interest income	$	18,044		$	3,137		$	21,181

(1)	Includes loans and leases on non-accrual status.

Net interest income for the three months ended September 30, 2018 was $52.6 million compared to $31.4 million during the same period in 2017, an increase of $21.2 million, or 67.4%. The increase in interest income of $26.0 million was primarily a result of loans and securities assumed as a result of the First Evanston acquisition and an increase in average yield on loans and leases. Interest expense increased by $4.8 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to deposits assumed as a result of the acquisition, an increase in time deposits and money market demand deposits driven by continued promotional campaigns during the quarter, and a slight increase in average yield on interest-bearing deposits due to increased interest rates.

	Nine Months Ended September 30, 2018 compared to Nine Months Ended September 30, 2017
	Increase (Decrease) Due to
	Volume			Rate			Total
Interest income
Cash and cash equivalents	$	152		$	169		$	321
Loans and leases⁽¹⁾		27,421			12,395			39,816
Securities available-for-sale		1,577			1,461			3,038
Securities held-to-maturity		(370	)		122			(248	)
Tax-exempt securities		333			(51	)		282
Total interest income	$	29,113		$	14,096		$	43,209
Interest expense
Deposits
Interest checking	$	126		$	333		$	459
Money market accounts		484			1,156			1,640
Savings		4			67			71
Time deposits		1,190			3,336			4,526
Total interest-bearing deposits		1,804			4,892			6,696
Federal Home Loan Bank advances		1,412			747			2,159
Other borrowed funds		(363	)		134			(229	)
Total borrowings		1,049			881			1,930
Total interest expense	$	2,853		$	5,773		$	8,626
Net interest income	$	26,260		$	8,323		$	34,583

(1)	Includes loans and leases on non-accrual status.

Net interest income for the nine months ended September 30, 2018 was $125.3 million compared to $90.8 million during the same period in 2017, an increase of $34.6 million, or 38.1%. The increase in interest income of $43.2 million was primarily a result of loan growth as a result of the First Evanston acquisition, organic loan and lease originations, an increase in average yield on loans and leases, and an increase in average yield on securities available-for-sale. Interest expense increased by $8.6 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily due to an increase in average yield on interest-bearing deposits and deposit growth as a result of acquired time deposits.

The net interest margin for the three months ended September 30, 2018 was 4.73%, an increase of 55 basis points compared to 4.18% for the three months ended September 30, 2017. The net interest margin for the nine months ended September 30, 2018 was 4.56%, an increase of 49 basis points compared to 4.07% for the nine months ended September 30, 2017. The primary driver of the increases for the three and nine month periods was an increase in average loan and lease yields and an increase in loan accretion income, partially offset by an increase in average interest-bearing deposit yields. Net loan accretion income was $8.3 million for the three months ended September 30, 2018 compared to $2.2 million for the three months ended September 30, 2017. Net loan accretion income was $14.2 million for the nine months ended September 30, 2018 compared to $6.3 million for the nine months ended September 30, 2017. Total net loan accretion on acquired loans contributed 74 basis points to the net interest margin for the three months ended September 30, 2018, compared to 29 basis points for the three months ended September 30, 2017. Total net loan accretion on acquired loans contributed 52 basis points to the net interest margin for the nine months ended September 30, 2018, compared to 28 basis points for the nine months ended September 30, 2017.

Provision for Loan and Lease Losses

The provision for loan and lease losses represents a charge to earnings necessary to establish an allowance for loan and lease losses that, in management’s evaluation, is appropriate to provide coverage for probable losses incurred in the loan and lease portfolio. The allowance for loan and lease losses is increased by the provision for loan and lease losses and is decreased by charge-offs, net of recoveries on prior charge-offs.

Provisions for loan and lease losses totaled $5.8 million and $3.9 million for the three months ended September 30, 2018 and 2017, respectively, an increase of $1.9 million. Provisions for loan and lease losses totaled $14.9 million and $9.3 million for the nine months ended September 30, 2018 and 2017, respectively, an increase of $5.6 million. These increases were mainly due to an increase in a specific reserve on a commercial loan relationship during the first quarter of 2018, additional specific impairment in the unguaranteed portion of the government guaranteed portfolio, and an increase to the general reserve driven by growth in the originated loan and lease portfolio.

The ALLL as a percentage of loans and leases, net of acquisition accounting adjustments, decreased from 0.73% at December 31, 2017, to 0.68% at September 30, 2018. The decrease was primarily due to an increase in the loan portfolio from the First Evanston acquisition, which has been adjusted to fair value under ASC Topic 805, Business Combinations.

Non-Interest Income

We reported non-interest income of $11.1 million and $11.9 million for the three months ended September 30, 2018 and 2017, respectively. The decrease of $775,000 was primarily due to a decrease in gains on sales of government guaranteed loans through our Small Business Capital operations of $2.5 million for the three months ended September 30, 2018 compared to the same period in 2017. The gains on sale of loans were $5.0 million for the three months ended September 30, 2018, compared to $7.5 million for the three months ended September 30, 2017. The decrease is also attributed to a decrease in net servicing fees of $783,000 for the three months ended September 30, 2018, primarily due to a change in fair value of the servicing asset as a result of increases in prepayment speed and discount rate assumptions on government guaranteed loans. These decreases were partially offset by an increase in other non-interest income of $1.1 million, primarily due to an increase in customer derivative products fee income and a net gain on sale of an asset held for sale for the three months ended September 30, 2018.

We reported non-interest income of $37.1 million and $37.4 million for the nine months ended September 30, 2018 and 2017, respectively. The decrease of $346,000 was primarily due to decreased gains on sales of government guaranteed loans through our Small Business Capital operation, which were $22.2 million and $24.0 million during the nine months ended September 30, 2018 and 2017, respectively, and a decrease in net servicing fees of $1.8 million compared to the nine months ended September 30, 2017. These decreases were partially offset by an increase in other non-interest income of $2.0 million primarily due to an increase in customer derivative products fee income.

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2018		2017		2018		2017
Fees and service charges on deposits	$	1,825	$	1,418	$	4,593	$	3,985
Net servicing fees		176		959		1,198		2,954
ATM and interchange fees		1,781		1,495		4,140		4,342
Net gains on sales of securities available-for-sale		—		—		4		8
Net gains on sales of loans		5,015		7,499		22,214		24,026
Wealth management and trust income		674		—		866		—
Other non-interest income		1,672		547		4,058		2,104
Total non-interest income	$	11,143	$	11,918	$	37,073	$	37,419

Service charges and fees represent fees charged to customers for banking services, such as fees on deposit accounts, and include, but are not limited to, maintenance fees, insufficient fund fees, overdraft protection fees, wire transfer fees and other fees. Fees and service charges on deposits increased $407,000 for the three months ended September 30, 2018 compared to the same period in 2017. Fees and service charges on deposits increased $608,000 for the nine months ended September 30, 2018 compared to the same period in 2017. The increases were primarily driven by additional deposit accounts from the First Evanston acquisition.

While portions of the loans that we originate are sold and generate gain on sale revenue, servicing rights for the majority of loans that we sell are retained by Byline Bank. In exchange for continuing to service loans that have been sold, Byline Bank receives a servicing fee paid from a portion of the interest cash flow of the loan. We generated $176,000 in net servicing fees on the sold portion of the government guaranteed portfolio for the three months ended September 30, 2018, compared to $959,000 for the three months ended September 30, 2017, a decrease of $783,000. Net servicing fees decreased $1.8 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. The decreases were primarily driven by the change in fair value of the servicing asset as a result of changes to valuation assumptions on government guaranteed loans based on the higher interest rate environment.

ATM and interchange fee income increased by $286,000 for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily driven by increased interchange fees resulting from a credit card vendor agreement signing bonus. ATM and interchange fees decreased $202,000 for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017, primarily driven by a revision to our fee assessment schedule.

There were no sales of securities during the three months ended September 30, 2018 and 2017. Gains on sales of securities during the nine months ended September 30, 2018 were $4,000 compared to $8,000 for the nine months ended September 30, 2017.

Net gains on sales of loans decreased by $2.5 million for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. We sold $59.6 million of government guaranteed loans for the three months ended September 30, 2018 compared to $71.8 million for the three months ended September 30, 2017. Net gains on sales of loans decreased $1.8 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. We sold $233.1 million of government guaranteed loans for the nine months ended September 30, 2018 compared to $223.4 million for the nine months ended September 30, 2017. The decrease in net gains on sales was primarily driven by a decrease in average premiums.

Wealth management and trust income represents fees charged to customers for investment, trust, or wealth management services and are primarily determined by total assets under management. Wealth management and trust income was $674,000 for the three months ended September 30, 2018 and $866,000 for the nine months ended September 30, 2018. Prior to the First Evanston acquisition in the second quarter of 2018, we did not offer these services. Assets under management were $648.5 million as of September 30, 2018.

Other non-interest income was $1.7 million for the three months ended September 30, 2018 compared to $547,000 for the three months ended September 30, 2017. The primary drivers of the increase were an increase in gains on sales of assets held for sale of $741,000 resulting from the sale of a former branch property and an increase in customer derivative products fee income of $190,000 due to additional customer swaps executed during the first and second quarters.

Other non-interest income was $4.1 million compared to $2.1 million for the nine months ended September 30, 2018 and 2017, respectively. The primary drivers of the increase were an increase in customer derivative products fee income of $958,000 due to additional customer swaps executed during the first and second quarters and an increase in gains on sales of assets held for sale of $741,000 resulting from the sale of a former branch property, partially offset by a $313,000 decrease in gain on death benefit for bank owned life insurance regarding a gain recorded in the second quarter of 2017.

Non-Interest Expense

Non-interest expense for the three months ended September 30, 2018 was $38.0 million compared to $31.1 million for the three months ended September 30, 2017, an increase of $6.9 million or 22.2%. Non-interest expense for the nine months ended September 30, 2018 was $115.6 million compared to $89.2 million for the nine months ended September 30, 2017, an increase of $26.5 million or 29.7%.

The following table presents the major components of our non-interest expense for the periods indicated (dollars in thousands):

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2018			2017		2018		2017
Salaries and employee benefits	$	21,312		$	16,323	$	58,834	$	50,151
Occupancy expense, net		3,548			3,301		11,802		10,525
Equipment expense		617			630		1,778		1,809
Loan and lease related expenses		1,015			891		3,886		2,569
Legal, audit and other professional fees		2,358			1,608		8,627		4,369
Data processing		2,724			2,399		15,396		7,255
Net loss (gain) recognized on other real estate owned and other related expenses		(284	)		565		187		136
Regulatory assessments		675			326		1,282		894
Other intangible assets amortization expense		1,898			769		3,795		2,307
Advertising and promotions		537			196		1,133		803
Telecommunications		435			351		1,319		1,165
Other non-interest expense		3,121			3,706		7,606		7,182
Total non-interest expense	$	37,956		$	31,065	$	115,645	$	89,165

Salaries and employee benefits, the single largest component of our non-interest expense, totaled $21.3 million for the three months ended September 30, 2018 compared to $16.3 million for the three months ended September 30, 2017, an increase of $5.0 million or 30.6%. Salaries and employee benefits totaled $58.8 million for the nine months ended September 30, 2018, an increase of $8.7 million compared to the nine months ended September 30, 2017. The increases were primarily a result of the First Evanston acquisition. Our staffing increased from 824 full-time equivalent employees as of September 30, 2017 to 924 as of September 30, 2018.

Occupancy expense for the three months ended September 30, 2018 was $3.5 million compared to $3.3 million for the three months ended September 30, 2017, an increase of $247,000 or 7.5%. Occupancy expense increased $1.3 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017. These increases were primarily a result of our larger branch network.

Equipment expense for three months ended September 30, 2018 was $617,000 compared to $630,000 for the three months ended September 30, 2017, a decrease of $13,000 or 2.1%. Equipment expense for the nine months ended September 30, 2018 and 2017 was $1.8 million, a decrease of $31,000.

Loan and lease related expenses for the three months ended September 30, 2018 were $1.0 million compared to $891,000 for the three months ended September 30, 2017, an increase of $124,000 or 13.9%. Loan and lease related expenses for the nine months ended September 30, 2018 were $3.9 million compared to $2.6 million for the nine months ended September 30, 2017, an increase of $1.3 million. The increases were primarily driven by loan originations during the quarter and additional loans from the First Evanston acquisition.

Legal, audit and other professional fees for the three months ended September 30, 2018 were $2.4 million compared to $1.6 million for the three months ended September 30, 2017, an increase of $750,000 or 46.6%. Legal, audit and other professional fees for the nine months ended September 30, 2018 were $8.6 million compared to $4.4 million for the nine months ended September 30, 2017, an increase of $4.3 million, or 97.5%. The increases were primarily driven by increased legal and professional services incurred related to our recent acquisitions and the upcoming core system conversion.

Data processing expense for the three months ended September 30, 2018 was $2.7 million compared to $2.4 million for the three months ended September 30, 2017, an increase of $325,000, or 13.5%. The increase was primarily attributable to additional expenses associated with the First Evanston acquisition and upcoming core system conversion. Data processing expense was $15.4 million for the nine months ended September 30, 2018 compared to $7.3 million for the nine months ended September 30, 2017. The increase was primarily due to $8.1 million of contract termination expenses in connection with the upcoming core system conversion.

Net gain recognized on other real estate owned and other related expenses were $284,000 for the three months ended September 30, 2018 compared to a net loss of $565,000 for three months ended September 30, 2017, a decrease in expense of $849,000 or 150.2%. The decrease was primarily due to net gains recorded on sales of other real estate owned properties during the quarter. Net loss recognized on other real estate owned and other related expenses for the nine months ended September 30, 2018 were $187,000 compared to $136,000 for the nine months ended September 30, 2017. The increase in net loss recognized on other real estate owned and other related expenses was primarily attributed to decreased gains on sales due to decreased volume of sales of properties offset by decreased expenses due to decreased inventory of properties.

Regulatory assessments for the three months ended September 30, 2018 were $675,000 compared to $326,000 for the three months ended September 30, 2017, an increase of $349,000 or 106.6%. Regulatory assessments for the nine months ended September 30, 2018 were $1.3 million compared to $894,000 for the comparable period in 2017, an increase of $388,000 or 43.4%. The increases were primarily due to our increased asset size, offset by our improved risk profile as a result of improved financial ratios and performance.

Advertising and promotions for the three months ended September 30, 2018 were $537,000 compared to $196,000 for the three months ended September 30, 2017, an increase of $341,000 or 174.3%. Advertising and promotions were $1.1 million for the nine months ended September 30, 2018 compared to $803,000 for the comparable period in 2017, an increase of $330,000, primarily due to an increase in advertising and promotions attributable to our deposit promotional campaigns.

Telecommunications expense was $435,000 for the three months ended September 30, 2018 compared to $351,000 for the three months ended September 30, 2017, an increase of $84,000. Telecommunications expense was $1.3 million for the nine months ended September 30, 2018, an increase of $154,000 or 13.2% compared to the same period in 2017. The increases were primarily due to additional wireless services.

Other non-interest expense for the three months ended September 30, 2018 was $3.1 million compared to $3.7 million for the three months ended September 30, 2017, a decrease of $585,000 or 15.8%. The decrease includes impairment charges on assets held for sale of $139,000 for the three months ended September 30, 2018 compared to $951,000 for the comparable period in 2017.

Other non-interest expense was $7.6 million for the nine months ended September 30, 2018 compared to $7.2 million for the nine months ended September 30, 2017. Our provision for unfunded commitments was $496,000 for the nine months ended September 30, 2018 compared to $272,000 for the nine months ended September 30, 2017, an increase of $224,000, primarily due to growth in our unfunded loan and lease commitments. Operational insurance costs increased $199,000 and non-compete expenses increased $175,000 as a result of the acquisition. These increases were partially offset by a decrease in impairment charges on assets held for sale. During the nine months ended September 30, 2018, we incurred impairment charges on assets held for sale of $257,000 compared to $951,000 over the comparable period in 2017.

Our efficiency ratio was 56.57% for the three months ended September 30, 2018, compared to 69.92% for the three months ended September 30, 2017. The improvement in our efficiency ratio for the three months ended September 30, 2018 is primarily attributable to the increase in our net interest income resulting from our acquisition of First Evanston. Our efficiency ratio was 68.87% for the nine months ended September 30, 2018, compared to 67.76% for the comparable period in 2017. The change in our efficiency ratio for the nine months ended September 30, 2018 is primarily attributable to increased non-interest expense resulting from our acquisition and integration of First Evanston, including merger related expenses and core system conversion expenses. Our adjusted efficiency ratio was 55.78% for the three months ended September 30, 2018, compared to 67.73% for the three months ended September 30, 2017. Our adjusted efficiency ratio was 61.93% for the nine months ended September 30, 2018, compared to 67.02% for the comparable period in 2017. Please refer to the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

Income Taxes

Income tax expense was $5.4 million for the three months ended September 30, 2018 compared to a benefit of $1.4 million for the three months ended September 30, 2017. As part of a budget package passed by the Legislature of the State of Illinois, the corporate income tax rate increased from 5.25% to 7.00% effective July 1, 2017. As a result of the increase in the corporate income tax rate, during the third quarter of 2017 we recorded a state income tax benefit of $4.6 million due to increased value of our deferred tax asset related to our Illinois net loss deduction.

Our provision for income taxes for the nine months ended September 30, 2018 totaled $7.8 million compared to $7.2 million for the nine months ended September 30, 2017. The increase in income tax expense was primarily due to increased net income partially offset by the lower tax rate of “H.R. 1”, commonly known as the “Tax Cuts and Jobs Act” (“Tax Act”), which was signed into law on December 22, 2017. Among other items, the law reduced the federal corporate income tax rate to 21% effective January 1, 2018. As a result of the new 21% corporate federal tax rate, the Company expects its effective tax rate for 2018 to be between approximately 27% and 29%. Our effective tax rate was 20.0% for the nine months ended September 30, 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. At September 30, 2018, the Company’s accounting for the impact of the Tax Act on its net deferred tax assets is based upon reasonable estimates of the tax effects of the Tax Act; however, these estimates may change as additional information and interpretive guidance regarding the provisions of the Tax Act become available. As a result of the rate change, the Company’s net deferred tax assets were required to be revalued, and we recorded a net income tax benefit of $724,000 during the first quarter of 2018.

Financial Condition

Balance Sheet Analysis

Our total assets increased by $1.6 billion, or 46.1%, to $4.9 billion at September 30, 2018, compared to December 31, 2017. The increase in total assets includes an increase of $1.2 billion, or 51.7%, in loans and leases, an increase in investment securities of $197.7 million, and an increase in interest bearing deposits with other banks of $80.6 million. These increases are primarily attributed to the First Evanston acquisition and organic loan and lease growth.

Investment Portfolio

The investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no trading securities classified in our investment portfolio as of September 30, 2018 or December 31, 2017. All available-for sale securities are carried at fair value and may be used for liquidity purposes should management consider it to be in our best interest. Securities available-for-sale consist primarily of residential mortgage-backed securities, commercial mortgage- backed securities and U.S. government agencies securities.

Securities available-for-sale increased $212.2 million, from $583.2 million at December 31, 2017 to $795.4 million at September 30, 2018. The increase was primarily due to the acquisition of the First Evanston securities portfolio, as well as additional purchases of agency, mortgage-backed, and U.S. Treasury securities during the year.

Our held-to-maturity securities portfolio consists of mortgage-backed securities and obligations of states, municipalities and political subdivisions. We carry these securities at amortized cost, and at September 30, 2018 totaled $102.7 million compared to $117.2 million at December 31, 2017, a decrease of $14.5 million, or 12.4%, due to principal paydowns received during the year.

We had no securities that were classified as having other-than-temporary-impairment at September 30, 2018 or December 31, 2017.

The following table summarizes the fair value of the available-for-sale and held-to-maturity securities portfolio as of the dates presented (dollars in thousands):

	September 30, 2018				December 31, 2017
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale
U.S. Treasury Notes	$	55,717	$	55,333	$	14,999	$	14,863
U.S. Government agencies		148,892		146,620		54,248		52,958
Obligations of states, municipalities, and political subdivisions		62,389		61,227		33,405		33,170
Residential mortgage-backed securities
Agency		301,515		285,448		315,103		307,457
Non-agency		75,763		73,563		39,485		39,514
Commercial mortgage-backed securities
Agency		75,380		71,987		70,964		69,043
Non-agency		31,535		30,046		31,763		30,971
Small Business Administration mortgage-backed securities		26,715		26,724		—		—
Corporate securities		37,685		37,413		29,573		29,976
Other securities		4,611		7,047		3,627		5,284
Total	$	820,202	$	795,408	$	593,167	$	583,236

	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	23,885	$	23,354	$	24,030	$	24,145
Residential mortgage-backed securities
Agency		42,668		41,760		53,731		53,607
Non-agency		36,130		34,819		39,402		39,525
Total	$	102,683	$	99,933	$	117,163	$	117,277

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2018, we evaluated the securities which had an unrealized loss for other than temporary impairment and determined all declines in value to be temporary. There were 341 investment securities with unrealized losses at September 30, 2018. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

The following table (dollars in thousands) sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	Maturity as of September 30, 2018
	Due in One Year or Less					Due from One to Five Years					Due from Five to Ten Years					Due after Ten Years
	Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾
Available-for-sale
U.S. Treasury Notes	$	16,392		2.15	%	$	39,325		2.30	%	$	—		0.00	%	$	—		0.00	%
U.S. government agencies		38,871		1.95	%		100,193		2.30	%		9,828		3.40	%		—		0.00	%
Obligations of states, municipalities, and political subdivisions		3,475		2.13	%		26,974		2.32	%		17,953		2.56	%		13,987		3.19	%
Residential mortgage-backed securities
Agency		—		0.00	%		—		0.00	%		30,243		1.98	%		271,272		2.19	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		75,762		3.41	%
Commercial mortgage-backed securities
Agency		—		0.00	%		7,297		3.43	%		11,439		2.75	%		56,644		2.22	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		31,535		2.61	%
Small Business Administration mortgage-backed securities		—		0.00	%		—		0.00	%		9,752		2.50	%		16,963		2.51	%
Corporate securities		8,128		6.27	%		13,043		2.99	%		16,514		4.08	%		—		0.00	%
Other securities		—		0.00	%		—		0.00	%		—		0.00	%		4,612		3.26	%
Total	$	66,866		2.53	%	$	186,832		2.40	%	$	95,729		2.74	%	$	470,775		2.47	%

	Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	—		0.00	%	$	5,067		2.29	%	$	10,616		2.61	%	$	8,202		2.81	%
Residential mortgage-backed securities
Agency		—		0.00	%		—		0.00	%		—		0.00	%		42,668		2.29	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		36,130		3.35	%
Total	$	—		0.00	%	$	5,067		2.29	%	$	10,616		2.61	%	$	87,000		2.78	%

(1)	The weighted average yields are based on amortized cost.

	Maturity as of December 31, 2017
	Due in One Year or Less					Due from One to Five Years					Due from Five to Ten Years					Due after Ten Years
	Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾
Available-for-sale
U.S. Treasury Notes	$	4,999		1.04	%	$	10,000		1.21	%	$	—		0.00	%	$	—		0.00	%
U.S. government agencies		3,001		1.06	%		41,247		1.50	%		10,000		1.74	%		—		0.00	%
Obligations of states, municipalities, and political subdivisions		285		3.30	%		4,902		2.92	%		17,149		2.48	%		11,069		3.18	%
Residential mortgage-backed securities
Agency		—		0.00	%		—		0.00	%		15,855		1.62	%		299,248		2.01	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		39,485		3.12	%
Commercial mortgage-backed securities
Agency		—		0.00	%		—		0.00	%		11,557		1.98	%		59,407		2.19	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		31,763		2.61	%
Corporate securities		—		0.00	%		16,283		4.44	%		13,290		3.67	%		—		0.00	%
Other securities		—		0.00	%		—		0.00	%		—		0.00	%		3,627		3.63	%
Total	$	8,285		1.13	%	$	72,432		2.22	%	$	67,851		2.32	%	$	444,599		2.22	%

	Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾			Amortized Cost		Weighted Average Yield⁽¹⁾
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	—		0.00	%	$	1,719		2.20	%	$	13,532		2.53	%	$	8,779		2.82	%
Residential mortgage-backed securities
Agency		—		0.00	%		—		0.00	%		—		0.00	%		53,731		2.20	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		39,402		3.29	%
Total	$	—		0.00	%	$	1,719		2.20	%	$	13,532		2.53	%	$	101,912		2.67	%

(1)	The weighted average yields are based on amortized cost.

Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $45.9 million at September 30, 2018, an increase of $19.2 million from December 31, 2017.

There were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, with total outstanding balances greater than 10% of our stockholders’ equity as of September 30, 2018 or December 31, 2017.

Restricted Stock

As a member of the Federal Home Loan Bank system, our bank is required to maintain an investment in the capital stock of the FHLB. No market exists for this stock, and it has no quoted market value. The stock is redeemable at par by the FHLB and is, therefore, carried at cost. In addition, our bank owns stock of Bankers’ Bank that was acquired as part of the Ridgestone acquisition. The stock is redeemable at par and carried at cost. As of September 30, 2018 and December 31, 2017, we held approximately $19.2 million and $16.3 million, respectively, in FHLB and Bankers’ Bank stocks. We evaluate impairment of our investment in FHLB and Bankers’ Bank based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We did not identify any indicators of impairment of FHLB and Bankers’ Bank stock as of September 30, 2018 and December 31, 2017.

Loan and Lease Portfolio

Lending-related income is the most important component of our net interest income and is the main driver of the results of our operations. Total loans and leases at September 30, 2018 were $3.5 billion, an increase of $1.2 billion compared to December 31, 2017. Our originated loan and lease portfolio increased $492.8 million and our acquired loan and lease portfolio increased $685.5 million during the first nine months of 2018. The growth in the originated loan and lease portfolio was primarily driven by increases in commercial and industrial loans and leases. The growth in the acquired loan and lease portfolio was driven by the First Evanston acquisition.

We strive to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. The following table shows our allocation of originated, acquired impaired and acquired non-impaired loans as of the dates presented (dollars in thousands):

	September 30, 2018						December 31, 2017
	Amount			% of Total			Amount			% of Total
Originated loans and leases
Commercial real estate	$	619,767			17.9	%	$	513,622			22.5	%
Residential real estate		445,717			12.9	%		400,571			17.6	%
Construction, land development, and other land		140,391			4.1	%		97,638			4.3	%
Commercial and industrial		696,750			20.2	%		416,499			18.3	%
Installment and other		7,729			0.2	%		3,724			0.2	%
Leasing financing receivables		155,825			4.5	%		141,329			6.2	%
Total originated loans and leases	$	2,066,179			59.8	%	$	1,573,383			69.1	%
Acquired impaired loans and leases
Commercial real estate	$	154,108			4.5	%	$	166,712			7.3	%
Residential real estate		120,963			3.5	%		144,562			6.4	%
Construction, land development, and other land		4,203			0.1	%		5,946			0.3	%
Commercial and industrial		14,436			0.4	%		10,008			0.4	%
Installment and other		458			0.0	%		462			0.0	%
Total acquired impaired loans and leases	$	294,168			8.5	%	$	327,690			14.4	%
Acquired non-impaired loans and leases
Commercial real estate	$	498,329			14.4	%	$	211,359			9.3	%
Residential real estate		138,516			4.0	%		32,085			1.4	%
Construction, land development, and other land		37,111			1.1	%		1,845			0.1	%
Commercial and industrial		384,260			11.1	%		94,731			4.1	%
Installment and other		4,007			0.1	%		42			0.0	%
Leasing financing receivables		33,232			1.0	%		36,357			1.6	%
Total acquired non-impaired loans and leases	$	1,095,455			31.7	%	$	376,419			16.5	%
Total loans and leases	$	3,455,802			100.0	%	$	2,277,492			100.0	%
Allowance for loan and lease losses		(23,424	)					(16,706	)
Total loans, net of allowance for loan and lease losses	$	3,432,378					$	2,260,786

Loans collateralized by real estate comprised 62.5% and 69.1% of the loan and lease portfolio at September 30, 2018 and December 31, 2017, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of September 30, 2018 and December 31, 2017 and totaled $1.3 billion, or 58.9%, of real estate loans and 36.8% of the total loan and lease portfolio at September 30, 2018. At December 31, 2017, commercial real estate loans totaled $891.7 million and comprised 56.6% of real estate loans and 39.2% of the total loan and lease portfolio. Acquired impaired commercial real estate loans decreased from $166.7 million as of December 31, 2017 to $154.1 million as of September 30, 2018, or 7.6%. At September 30, 2018 and December 31, 2017, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 349.7% and 346.2%, respectively. Non-owner occupied commercial real estate loans were $1.3 billion, or 253.3% of total capital, at September 30, 2018.

Residential real estate loans totaled $705.2 million at September 30, 2018 compared to $577.2 million at December 31, 2017, an increase of $128.0 million or 22.2%. The residential real estate loan portfolio comprised 32.7% and 36.7% of real

estate loans as of September 30, 2018 and December 31, 2017, respectively, and 20.4% and 25.3% of total loans and leases at September 30, 2018 and December 31, 2017, respectively. Acquired impaired residential real estate loans continue to decrease from $144.6 million as of December 31, 2017 to $121.0 million as of September 30, 2018, or 16.3%.

Construction, land development and other land loans totaled $181.7 million at September 30, 2018 compared to $105.4 million at December 31, 2017, an increase of $76.3 million or 72.3%. The construction, land development and other land loan portfolio comprised 8.4% and 6.7% of real estate loans as of September 30, 2018 and December 31, 2017, respectively, and 5.3% and 4.6% of the total loan and lease portfolio as of September 30, 2018 and December 31, 2017, respectively.

Commercial and industrial loans totaled $1.1 billion and $521.2 million at September 30, 2018 and December 31, 2017, respectively, an increase of $574.2 million or 110.2% primarily due to organic growth and the First Evanston acquisition. The commercial and industrial loan portfolio comprised 31.7% and 22.9% of the total loan and lease portfolio as of September 30, 2018 and December 31, 2017, respectively.

Lease financing receivables comprised 5.5% and 7.8% of the loan and lease portfolio as of September 30, 2018 and December 31, 2017, respectively. Total lease financing receivables were $189.1 million and $177.7 million at September 30, 2018 and December 31, 2017, respectively, an increase of $11.4 million, or 6.4%, due to continued growth in our small-ticket vendor sales channels and our increased origination activities.

Loan and Lease Portfolio Maturities and Interest Rate Sensitivity

The following table shows our loan and lease portfolio by scheduled maturity at September 30, 2018 (dollars in thousands):

	Due in One Year or Less				Due after One Year Through Five Years				Due after Five Years
	Fixed Rate		Floating Rate		Fixed Rate		Floating Rate		Fixed Rate		Floating Rate		Total
Originated loans and leases
Commercial real estate	$	43,110	$	107,850	$	144,780	$	145,179	$	30,267	$	148,581	$	619,767
Residential real estate		13,881		15,938		85,769		66,070		232,125		31,934		445,717
Construction, land development, and other land		2,221		43,762		20,635		54,155		429		19,189		140,391
Commercial and industrial		1,422		139,632		48,489		282,383		30,714		194,110		696,750
Installment and other		631		5,954		697		10		437		—		7,729
Leasing financing receivables		3,135		—		138,926		—		13,764		—		155,825
Total originated loans and leases	$	64,400	$	313,136	$	439,296	$	547,797	$	307,736	$	393,814	$	2,066,179
Acquired impaired loans and leases
Commercial real estate	$	44,052	$	2,798	$	87,299	$	2,197	$	9,066	$	8,696	$	154,108
Residential real estate		22,506		2,425		73,588		3,270		18,613		561		120,963
Construction, land development, and other land		1,400		164		2,521		—		118		—		4,203
Commercial and industrial		220		3,875		3,025		1,828		2,432		3,056		14,436
Installment and other		70		—		162		—		226		—		458
Total acquired impaired loans and leases	$	68,248	$	9,262	$	166,595	$	7,295	$	30,455	$	12,313	$	294,168
Acquired non-impaired loans and leases
Commercial real estate	$	35,589	$	24,619	$	254,097	$	26,569	$	28,661	$	128,794	$	498,329
Residential real estate		10,251		11,139		50,275		58,534		2,602		5,715		138,516
Construction, land development, and other land		586		4,595		6,429		19,015		6,486		—		37,111
Commercial and industrial		6,806		146,734		102,485		50,487		14,213		63,535		384,260
Installment and other		439		2,288		1,178		—		102		—		4,007
Leasing financing receivables		4,308		—		28,224		—		700		—		33,232
Total acquired non-impaired loans and leases	$	57,979	$	189,375	$	442,688	$	154,605	$	52,764	$	198,044	$	1,095,455
Total loans and leases	$	190,627	$	511,773	$	1,048,579	$	709,697	$	390,955	$	604,171	$	3,455,802

At September 30, 2018, 47.2% of the loan and lease portfolio bears interest at fixed rates and 52.8% at floating rates. The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Because a portion of the portfolio is accounted for under ASC 310-30, the carrying value is significantly affected by estimates and it is impracticable to allocate scheduled payments for those loans based on those estimates. Consequently, the tables presented include information limited to contractual maturities of the underlying loans.

Allowance for Loan and Lease Losses

The ALLL is determined by us on a quarterly basis, although we are engaged in monitoring the appropriate level of the allowance on a more frequent basis. The ALLL reflects management’s estimate of probable incurred credit losses inherent in the loan and lease portfolios. The computation includes element of judgement and high levels of subjectivity.

Factors considered by us include, but are not limited to, actual loss experience, peer loss experience, changes in size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrower’s ability to repay, and evaluation of the prevailing economic conditions. Changes in conditions may necessitate revision of the estimate in future periods.

We assess the ALLL based on three categories: (i) originated loans and leases, (ii) acquired non-impaired loans and leases, and (iii) acquired impaired loans with further credit deterioration after the acquisition or recapitalization.

Total ALLL was $23.4 million at September 30, 2018 compared to $16.7 million at December 31, 2017, an increase of $6.7 million, or 40.2%. The increase was primarily due to an increase in specific reserve on a commercial loan relationship, additional specific impairment in the unguaranteed portion of the government guaranteed portfolio, and an increase to the general reserve driven by new loan and lease originations.

Total ALLL to total loans and leases held for investment, net before ALLL was 0.68% and 0.73% of total loans and leases at September 30, 2018 and December 31, 2017, respectively. The decrease was primarily driven by the acquisition of the First Evanston loan portfolio. This ratio is generally below the median of our peer banks, as we valued significant amounts of acquired loans at fair value at acquisition date as a result of our recapitalization, the Ridgestone acquisition, and the First Evanston acquisition, which, management believes, limits the amount of reserves needed to cover these loans as of September 30, 2018 and December 31, 2017, in accordance with applicable accounting guidance. Acquisition accounting adjustments remaining on loans from our recapitalization, the Ridgestone acquisition, and the First Evanston acquisition totaled $42.4 million and $31.7 million as of September 30, 2018 and December 31, 2017, respectively.

The following table presents an analysis of the allowance of the loan and lease losses for the periods presented (dollars in thousands):

	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land			Commercial and Industrial			Installment and Other			Lease Financing Receivables			Total
Balance at June 30, 2018	$	6,453		$	1,648		$	332		$	8,369		$	30		$	2,855		$	19,687
Provision (release) for acquired impaired loans		223			107			(22	)		13			—			—			321
Provision (release) for acquired non-impaired loans and leases		1,049			(93	)		(1	)		1,453			4			(11	)		2,401
Provision for originated loans		433			15			81			2,113			8			470			3,120
Total provision	$	1,705		$	29		$	58		$	3,579		$	12		$	459		$	5,842
Charge-offs for acquired impaired loans		(10	)		—			—			(67	)		—			—			(77	)
Charge-offs for acquired non-impaired loans and leases		(615	)		—			—			(790	)		(4	)		(13	)		(1,422	)
Charge-offs for originated loans and leases		(111	)		—			—			(1	)		—			(810	)		(922	)
Total charge-offs	$	(736	)	$	—		$	—		$	(858	)	$	(4	)	$	(823	)	$	(2,421	)
Recoveries for acquired impaired loans		—			—			—			—			—			—			—
Recoveries for acquired non-impaired loans and leases		—			—			—			75			—			32			107
Recoveries for originated loans and leases		—			—			—			—			—			209			209
Total recoveries	$	—		$	—		$	—		$	75		$	—		$	241		$	316
Less: net charge-offs		736			—			—			783			4			582			2,105
Acquired impaired loans		1,715			457			—			820			3			—			2,995
Acquired non-impaired loans and leases		2,858			81			2			2,451			—			480			5,872
Originated loans and leases		2,849			1,139			388			7,894			35			2,252			14,557
Balance at September 30, 2018	$	7,422		$	1,677		$	390		$	11,165		$	38		$	2,732		$	23,424
Ending ALLL balance
Acquired impaired loans	$	1,715		$	457		$	—		$	820		$	3		$	—		$	2,995
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		2,294			70			—			4,044			14			—			6,422
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		3,413			1,150			390			6,301			21			2,732			14,007
Loans and leases ending balance
Acquired impaired loans	$	154,108		$	120,963		$	4,203		$	14,436		$	458		$	—		$	294,168
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		13,612			1,941			—			19,962			14			—			35,529
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,104,484			582,292			177,502			1,061,048			11,722			189,057			3,126,105
Total loans and leases at September 30, 2018, gross	$	1,272,204		$	705,196		$	181,705		$	1,095,446		$	12,194		$	189,057		$	3,455,802
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.00	%		0.00	%		0.00	%		0.01	%		0.00	%		0.00	%		0.01	%
Acquired non-impaired loans and leases		0.07	%		0.00	%		0.00	%		0.08	%		0.00	%		0.00	%		0.15	%
Originated loans and leases		0.01	%		0.00	%		0.00	%		0.00	%		0.00	%		0.07	%		0.08	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		4.46	%		3.50	%		0.12	%		0.42	%		0.01	%		0.00	%		8.51	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.39	%		0.06	%		0.00	%		0.58	%		0.00	%		0.00	%		1.03	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		31.96	%		16.85	%		5.14	%		30.70	%		0.34	%		5.47	%		90.46	%

	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land			Commercial and Industrial			Installment and Other			Lease Financing Receivables			Total
Balance at December 31, 2017	$	4,794		$	1,638		$	222		$	7,418		$	41		$	2,593		$	16,706
Provision (release) for acquired impaired loans		191			24			341			(329	)		19			—			246
Provision (release) for acquired non-impaired loans and leases		2,208			(110	)		-			3,156			2			(78	)		5,178
Provision for originated loans		1,576			125			245			6,132			12			1,399			9,489
Total provision	$	3,975		$	39		$	586		$	8,959		$	33		$	1,321		$	14,913
Charge-offs for acquired impaired loans		(404	)		—			(418	)		(269	)		(34	)		—			(1,125	)
Charge-offs for acquired non-impaired loans and leases		(693	)		—			—			(2,775	)		(2	)		(151	)		(3,621	)
Charge-offs for originated loans and leases		(250	)		—			—			(2,495	)		—			(1,737	)		(4,482	)
Total charge-offs	$	(1,347	)	$	—		$	(418	)	$	(5,539	)	$	(36	)	$	(1,888	)	$	(9,228	)
Recoveries for acquired impaired loans		—			—			—			—			—			—			—
Recoveries for acquired non-impaired loans and leases		—			—			—			81			—			193			274
Recoveries for originated loans and leases		—			—			—			246			—			513			759
Total recoveries	$	—		$	—		$	—		$	327		$	—		$	706		$	1,033
Less: net charge-offs		1,347			—			418			5,212			36			1,182			8,195
Acquired impaired loans		1,715			457			—			820			3			—			2,995
Acquired non-impaired loans and leases		2,858			81			2			2,451			—			480			5,872
Originated loans and leases		2,849			1,139			388			7,894			35			2,252			14,557
Balance at September 30, 2018	$	7,422		$	1,677		$	390		$	11,165		$	38		$	2,732		$	23,424
Ending ALLL balance
Acquired impaired loans	$	1,715		$	457		$	—		$	820		$	3		$	—		$	2,995
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		2,294			70			—			4,044			14			—			6,422
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		3,413			1,150			390			6,301			21			2,732			14,007
Loans and leases ending balance
Acquired impaired loans	$	154,108		$	120,963		$	4,203		$	14,436		$	458		$	—		$	294,168
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		13,612			1,941			—			19,962			14			—			35,529
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,104,484			582,292			177,502			1,061,048			11,722			189,057			3,126,105
Total loans and leases at September 30, 2018, gross	$	1,272,204		$	705,196		$	181,705		$	1,095,446		$	12,194		$	189,057		$	3,455,802
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.02	%		0.00	%		0.02	%		0.01	%		0.00	%		0.00	%		0.05	%
Acquired non-impaired loans and leases		0.03	%		0.00	%		0.00	%		0.13	%		0.00	%		0.00	%		0.16	%
Originated loans and leases		0.01	%		0.00	%		0.00	%		0.11	%		0.00	%		0.06	%		0.18	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		4.46	%		3.50	%		0.12	%		0.42	%		0.01	%		0.00	%		8.51	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.39	%		0.06	%		0.00	%		0.58	%		0.00	%		0.00	%		1.03	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		31.96	%		16.85	%		5.14	%		30.70	%		0.34	%		5.47	%		90.46	%

	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land			Commercial and Industrial			Installment and Other			Lease Financing Receivables			Total
Balance at June 30, 2017	$	3,668		$	1,835		$	327		$	5,689		$	344		$	2,106		$	13,969
Provision (release) for acquired impaired loans		493			45			36			375			5			—			954
Provision (release) for acquired non-impaired loans and leases		818			96			(18	)		613			5			78			1,592
Provision for originated loans		266			(89	)		(129	)		452			3			851			1,354
Total provision	$	1,577		$	52		$	(111	)	$	1,440		$	13		$	929		$	3,900
Charge-offs for acquired impaired loans		(186	)		(73	)		—			(136	)		—			—			(395	)
Charge-offs for acquired non-impaired loans and leases		—			(88	)		—			(627	)		(327	)		(33	)		(1,075	)
Charge-offs for originated loans and leases		—			—			—			—			—			(829	)		(829	)
Total charge-offs	$	(186	)	$	(161	)	$	—		$	(763	)	$	(327	)	$	(862	)	$	(2,299	)
Recoveries for acquired impaired loans		—			—			—			—			—			—			—
Recoveries for acquired non-impaired loans and leases		—			—			—			—			—			—			—
Recoveries for originated loans and leases		—			—			—			—			—			410			410
Total recoveries	$	—		$	—		$	—		$	—		$	—		$	410		$	410
Less: net charge-offs		186			161			—			763			327			452			1,889
Acquired impaired loans		2,029			313			61			1,392			18			—			3,813
Acquired non-impaired loans and leases		942			400			3			1,615			4			556			3,520
Originated loans and leases		2,088			1,013			152			3,359			8			2,027			8,647
Balance at September 30, 2017	$	5,059		$	1,726		$	216		$	6,366		$	30		$	2,583		$	15,980
Ending ALLL balance
Acquired impaired loans	$	2,029		$	313		$	61		$	1,392		$	18		$	—		$	3,813
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		1,186			176			—			1,585			2			—			2,949
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,844			1,237			155			3,389			10			2,583			9,218
Loans and leases ending balance
Acquired impaired loans	$	173,106		$	152,149		$	5,424		$	11,433		$	488		$	—		$	342,600
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		14,928			1,948			565			6,075			2			—			23,518
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		673,851			428,565			88,315			484,547			2,762			172,341			1,850,381
Total loans and leases at September 30, 2017, gross	$	861,885		$	582,662		$	94,304		$	502,055		$	3,252		$	172,341		$	2,216,499
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.03	%		0.01	%		0.00	%		0.02	%		0.00	%		0.00	%		0.07	%
Acquired non-impaired loans and leases		0.00	%		0.02	%		0.00	%		0.11	%		0.06	%		0.01	%		0.19	%
Originated loans and leases		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.08	%		0.08	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		7.81	%		6.86	%		0.24	%		0.52	%		0.02	%		0.00	%		15.46	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.67	%		0.09	%		0.03	%		0.27	%		0.00	%		0.00	%		1.06	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		30.40	%		19.34	%		3.98	%		21.86	%		0.12	%		7.78	%		83.48	%

	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land			Commercial and Industrial			Installment and Other			Lease Financing Receivables			Total
Balance at December 31, 2016	$	1,945		$	2,483		$	742		$	4,196		$	334		$	1,223		$	10,923
Provision (release) for acquired impaired loans		2,017			95			61			1,039			17			—			3,229
Provision for acquired non-impaired loans and leases		827			184			(7	)		2,500			3			519			4,026
Provision for originated loans		747			(679	)		(580	)		393			3			2,167			2,051
Total provision	$	3,591		$	(400	)	$	(526	)	$	3,932		$	23		$	2,686		$	9,306
Charge-offs for acquired impaired loans		(477	)		(229	)		—			(321	)		—			—			(1,027	)
Charge-offs for acquired non-impaired loans and leases		—			(128	)		—			(959	)		(327	)		(500	)		(1,914	)
Charge-offs for originated loans and leases		—			—			—			(482	)		—			(1,899	)		(2,381	)
Total charge-offs	$	(477	)	$	(357	)	$	—		$	(1,762	)	$	(327	)	$	(2,399	)	$	(5,322	)
Recoveries for acquired impaired loans		—			—			—			—			—			—			—
Recoveries for acquired non-impaired loans and leases		—			—			—			—			—			259			259
Recoveries for originated loans and leases		—			—			—			—			—			814			814
Total recoveries	$	—		$	—		$	—		$	—		$	—		$	1,073		$	1,073
Less: net charge-offs		477			357			—			1,762			327			1,326			4,249
Acquired impaired loans		2,029			313			61			1,392			18			—			3,813
Acquired non-impaired loans and leases		942			400			3			1,615			4			556			3,520
Originated loans and leases		2,088			1,013			152			3,359			8			2,027			8,647
Balance at September 30, 2017	$	5,059		$	1,726		$	216		$	6,366		$	30		$	2,583		$	15,980
Ending ALLL balance
Acquired impaired loans	$	2,029		$	313		$	61		$	1,392		$	18		$	—		$	3,813
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		1,186			176			—			1,585			2			—			2,949
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,844			1,237			155			3,389			10			2,583			9,218
Loans and leases ending balance
Acquired impaired loans	$	173,106		$	152,149		$	5,424		$	11,433		$	488		$	—		$	342,600
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		14,928			1,948			565			6,075			2			—			23,518
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		673,851			428,565			88,315			484,547			2,762			172,341			1,850,381
Total loans and leases at September 30, 2017, gross	$	861,885		$	582,662		$	94,304		$	502,055		$	3,252		$	172,341		$	2,216,499
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.03	%		0.01	%		0.00	%		0.02	%		0.00	%		0.00	%		0.06	%
Acquired non-impaired loans and leases		0.00	%		0.01	%		0.00	%		0.06	%		0.02	%		0.01	%		0.10	%
Originated loans and leases		0.00	%		0.00	%		0.00	%		0.03	%		0.00	%		0.07	%		0.10	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		7.81	%		6.86	%		0.24	%		0.52	%		0.02	%		0.00	%		15.46	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.67	%		0.09	%		0.03	%		0.27	%		0.00	%		0.00	%		1.06	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		30.40	%		19.34	%		3.98	%		21.86	%		0.12	%		7.78	%		83.48	%

Non-Performing Assets

Non-performing loans and leases include loans and leases 90 days past due and still accruing, loans and leases accounted for on a non-accrual basis and accruing restructured loans. Non-performing assets consist of non-performing loans and leases plus other real estate owned. Non-accrual loans and leases as of September 30, 2018 and December 31, 2017 totaled $28.6 million and $15.8 million, respectively. The increase of non-performing assets from December 31, 2017 to September 30, 2018 was primarily driven by one downgraded commercial loan relationship and downgraded government guaranteed loans, partially offset by a decrease in other real estate owned of $5.7 million. Non-performing assets consisted of $7.3 million and $4.5 million of government guaranteed balances at September 30, 2018 and December 31, 2017, respectively.

Total OREO held by us was $4.9 million as of September 30, 2018, a decrease of $5.7 million from December 31, 2017. The decrease in OREO resulted from dispositions of $6.8 million, offset by net additions to OREO through loan foreclosures totaling $1.5 million.

The following table sets forth the amounts of non-performing loans and leases, non-performing assets, and OREO at the dates indicated (dollars in thousands):

	September 30, 2018			December 31, 2017
Nonperforming assets:
Non-accrual loans and leases^(1)(2)(3)	$	28,643		$	15,763
Past due loans and leases 90 days or more and still accruing interest		291			—
Accruing troubled debt restructured loans		1,230			1,061
Total non-performing loans and leases		30,164			16,824
Other real estate owned		4,891			10,626
Total non-performing assets	$	35,055		$	27,450
Total non-performing loans as a percentage of total loans and leases		0.87	%		0.74	%
Total non-performing assets as a percentage of total assets		0.71	%		0.82	%
Allowance for loan and lease losses as a percentage of non-performing loans and leases		77.66	%		99.30	%

Nonperforming assets guaranteed by U.S. government:
Non-accrual loans guaranteed	$	6,830		$	4,543
Past due loans 90 days or more and still accruing interest guaranteed		—			—
Accruing troubled debt restructured loans guaranteed		431			—
Total non-performing loans guaranteed		7,261			4,543
Other real estate owned guaranteed		—		—
Total non-performing assets guaranteed	$	7,261		$	4,543
Total non-performing loans and leases not guaranteed as a percentage of total loans and leases		0.66	%		0.54	%
Total non-performing assets not guaranteed as a percentage of total assets		0.57	%		0.68	%

(1)	Includes $7.4 million and $1.6 million of non-accrual restructured loans at September 30, 2018 and December 31, 2017.

(2)	For the nine months ended September 30, 2018, $1.4 million in interest income would have been recorded had non-accrual loans been current.

(3)	For the nine months ended September 30, 2018, $216,000 in interest income would have been recorded had troubled debt restructurings included within non-accrual loans been current.

Acquired impaired loans (accounted for under ASC 310-30) that are delinquent and/or on non-accrual status continue to accrue income provided the respective pool in which those assets reside maintains a discount and recognizes accretion income. The aforementioned loans are characterized as performing loans based on contractual delinquency. If the pool no longer has a discount and accretion income can no longer be recognized, any loan within that pool on non-accrual status will be classified as non-accrual for presentation purposes.

Total accruing loans past due increased to $15.8 million at September 30, 2018 compared to $15.2 million at December 31, 2017, an increase of $600,000, or 4.0%. Increases in commercial real estate and lease financing receivables are partially offset by a decrease in commercial and industrial.

The following table summarizes the recorded investment, unpaid principal balance, related allowance, average recorded investment, and interest income recognized for loans and leases considered impaired as of the periods indicated (dollars in thousands):

	September 30, 2018
	Unpaid Principal Balance of Impaired Loans		Impaired ASC 310-30 Pools with Specific Allowance Recorded		Impaired Non-ASC 310-30 Loans with a Specific Allowance		Impaired Non-ASC 310-30 Loans with no Specific Allowance Recorded		Specific Allowance Allocated to Impaired Loans		Average Recorded Investment in Impaired Loans		Interest Income Recognized on Impaired Loans
Commercial real estate	$	14,985	$	16,768	$	5,173	$	8,439	$	2,294	$	14,463	$	248
Residential real estate		1,908		38,931		252		1,689		70		2,240		27
Construction, land development, and other land		—		—		—		—		—		—		15
Commercial and industrial		22,229		4,073		9,991		9,971		4,044		17,065		678
Installment and other		14		3		14		—		14		14		9
Total impaired loans held in portfolio, net	$	39,136	$	59,775	$	15,430	$	20,099	$	6,422	$	33,782	$	977

	December 31, 2017
	Unpaid Principal Balance of Impaired Loans		Impaired ASC 310-30 Pools with Specific Allowance Recorded		Impaired Non-ASC 310-30 Loans with a Specific Allowance		Impaired Non-ASC 310-30 Loans with no Specific Allowance Recorded		Specific Allowance Allocated to Impaired Loans		Average Recorded Investment in Impaired Loans		Interest Income Recognized on Impaired Loans
Commercial real estate	$	15,570	$	14,786	$	2,459	$	11,425	$	1,101	$	12,470	$	712
Residential real estate		2,397		2,386		354		2,075		158		2,203		78
Construction, land development, and other land	—			404	—		—		—			309		2
Commercial and industrial		16,498		8,776		9,314		5,470		2,692		6,335		751
Installment and other		14		41		14	—			14		162		12
Total impaired loans held in portfolio, net	$	34,479	$	26,393	$	12,141	$	18,970	$	3,965	$	21,479	$	1,555

Deposits

Total deposits at September 30, 2018 were $3.7 billion, representing an increase of $1.3 billion, or 53.1%, compared to December 31, 2017. Non-interest bearing deposits were $1.2 billion or 31.4% of total deposits, at September 30, 2018, an increase of $414.3 million or 54.5% compared to $760.9 million at December 31, 2017 or 31.1% of total deposits. Interest bearing transaction accounts increased $481.6 million during 2018. Time deposits increased $401.5 million, or 56.6%, from $708.8 million at December 31, 2017 to $1.1 billion at September 30, 2018. Core deposits remained stable at 82.6% of total deposits at September 30, 2018.

The increase in time deposits was driven by the implementation of promotional campaigns during the first quarter of 2018 along with time deposits assumed as a result of the First Evanston acquisition. Our cost of average deposits was 64 basis points during the third quarter of 2018 compared to 33 basis points during the third quarter of 2017. This increase was primarily attributed to slightly higher rates on interest bearing deposits and growth in deposits from the First Evanston acquisition, slightly offset by an increase in non-interest bearing demand deposits. We had $10.0 million brokered time deposits as of September 30, 2018 and no brokered deposits as of December 31, 2017. Deposits assumed from the First Evanston acquisition were recorded at fair value using the acquisition method of accounting in accordance with ASC Topic 805.

We gather deposits primarily through each of our 58 branch locations in the Chicago metropolitan area and one branch in Brookfield, Wisconsin. Through our branch network, online, mobile and direct banking channels, we offer a variety of deposit products including demand deposit accounts, interest-bearing products, savings accounts, and certificates of deposit. We offer competitive online, mobile and direct banking channels. Small businesses are a significant source of low cost deposits as they value convenience, flexibility and access to local decision makers that are responsive to their needs.

The following table shows the average balance amounts and the average rates paid on our deposits for the periods indicated (dollars in thousands):

	For the Three Months Ended September 30, 2018					For the Three Months Ended September 30, 2017
	Average Balance		Average Rate			Average Balance		Average Rate
Non-interest bearing demand deposits	$	1,175,523		0.00	%	$	748,523		0.00	%
Interest checking		316,394		0.48	%		186,447		0.06	%
Money market accounts		618,213		0.77	%		388,365		0.28	%
Other savings		479,837		0.12	%		441,096		0.07	%
Time deposits (below $100,000)		447,125		1.28	%		394,984		0.77	%
Time deposits ($100,000 and above)		637,425		1.74	%		363,534		1.05	%
Total	$	3,674,517		0.64	%	$	2,522,949		0.33	%

	For the Nine Months Ended September 30, 2018					For the Nine Months Ended September 30, 2017
	Average Balance		Average Rate			Average Balance		Average Rate
Non-interest bearing demand deposits	$	938,423		0.00	%	$	736,982		0.00	%
Interest checking		244,088		0.30	%		185,409		0.06	%
Money market accounts		478,607		0.66	%		376,751		0.25	%
Other savings		457,179		0.09	%		445,082		0.07	%
Time deposits (below $100,000)		407,957		1.15	%		400,927		0.70	%
Time deposits ($100,000 and above)		487,545		1.51	%		381,745		0.84	%
Total	$	3,013,799		0.54	%	$	2,526,896		0.29	%

The following table shows time deposits of $100,000 or more by time remaining until maturity:

	At September 30, 2018
	Time Deposits
Three months or less	$	99,504
Over three months through six months		158,339
Over six months through 12 months		181,720
Over 12 months		212,758
Total	$	652,321

Borrowed Funds

In addition to deposits, we also utilize FHLB advances as a supplementary funding source to finance our operations. The Bank’s advances from the FHLB are collateralized by residential and multi-family real estate loans and securities. At September 30, 2018 and December 31, 2017, our bank had maximum borrowing capacity from the FHLB of $1.2 billion and $795.0 million, respectively, subject to the availability of collateral. At September 30, 2018, outstanding FHLB advances increased to $425.0 million, from $361.5 million at December 31, 2017.

The following table sets forth certain information regarding our short-term borrowings at the dates and for the periods indicated (dollars in thousands):

	Nine Months Ended September 30,
	2018			2017
Federal Home Loan Bank advances:
Average balance outstanding	$	367,098		$	249,630
Maximum outstanding at any month-end period during the year		460,000			374,487
Balance outstanding at end of period		425,000			234,559
Weighted average interest rate during period		1.62	%		1.22	%
Weighted average interest rate at end of period		2.30	%		1.32	%
Line of credit:
Average balance outstanding	$	—		$	12,287
Maximum outstanding at any month-end period during the year		—			20,650
Balance outstanding at end of period		—			—
Weighted average interest rate during period	N/A				3.92	%
Weighted average interest rate at end of period	N/A				4.25	%

At September 30, 2018, FHLB advances have maturities ranging from October 2018 to December 2018.

Customer Repurchase Agreements (Sweeps)

Securities sold under agreements to repurchase represent a demand deposit product offered to customers that sweep balances in excess of the FDIC insurance limit into overnight repurchase agreements. We pledge securities as collateral for the repurchase agreements. Securities sold under agreements to repurchase totaled $24.4 million at September 30, 2018, a decrease of $6.7 million compared to December 31, 2017.

Liquidity

We manage liquidity based upon factors that include the amount of core deposits as a percentage of total deposits, the level of diversification of our funding sources, the amount of non-deposit funding used to fund assets, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash and liquid securities we hold and the re-pricing characteristics and maturities of our assets when compared to the re-pricing characteristics of our liabilities, the ability to securitize and sell certain pools of assets and other factors.

Our liquidity needs are primarily met by cash and investment securities positions, growth in deposits, cash flow from amortizing loan portfolios, and borrowings from the FHLB. For additional information regarding our operating, investing, and financing cash flows, please see “Consolidated Statements of Cash Flows” in our Unaudited Interim Condensed Consolidated Financial Statements included elsewhere in this report.

As of September 30, 2018, we held $144.8 million in cash and cash equivalents. We maintain an investment securities portfolio of various holdings, types and maturities. We had securities available-for-sale of $795.4 million and securities held-to-maturity of $102.7 million as of September 30, 2018, including total unpledged securities of $627.3 million.

As of September 30, 2018, Byline Bank had maximum borrowing capacity from the FHLB of $1.2 billion and from the Federal Reserve Bank of $310.3 million. As of September 30, 2018, Byline Bank had open advances of $425.0 million and open letters of credit of $34.3 million, resulting in available aggregate borrowing capacity of $1.1 billion. In addition, Byline Bank had uncommitted federal funds lines available of $55.0 million.

As of December 31, 2017, Byline Bank had maximum borrowing capacity from the FHLB of $1.2 billion and from the Federal Reserve Bank of $144.2 million. As of December 31, 2017, Byline Bank had open advances of $361.5 million and no open letters of credit, leaving us with available aggregate borrowing capacity of $637.2 million. In addition, Byline Bank had an uncommitted federal funds line available of $55.0 million.

On October 13, 2016, we entered into a $30.0 million revolving 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 of credit with credit availability up to $5.0 million until maturity. In July 2017, we repaid the outstanding balance, in full, under this line of credit of $16.2 million with proceeds from our initial public offering. As of December 31, 2017, this revolving line of credit had no outstanding balance. 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. As of September 30, 2018, the Company had no balance outstanding on the line of credit.

There are regulatory limitations that affect the ability of Byline Bank to pay dividends to the Company. See Note 21 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2017, for additional information. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.

Capital Resources

Stockholders’ equity at September 30, 2018 was $629.9 million compared to $458.6 million at December 31, 2017, an increase of $171.3 million, or 37.4%. The increase was primarily driven by the acquisition of First Evanston, the issuance of common stock upon the exercise of stock options as well as retained earnings, offset by an increase to other comprehensive loss.

The Company and Byline Bank are subject to various regulatory capital requirements administered by federal banking regulators. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by federal banking regulators that, if undertaken, could have a direct material effect on our financial statements.

Under applicable bank regulatory capital requirements, each of the Company and Byline Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as

calculated under regulatory accounting practices. Byline Bank must also meet certain specific capital guidelines under the prompt corrective action framework. The capital amounts and classification are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Byline Bank to maintain minimum amounts and ratios of Common Equity Tier 1 (‘CET1”) Capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, (referred to as the “leverage ratio”), as defined under these capital requirements.

As of September 30, 2018, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized”. There have been no conditions or events since September 30, 2018 that management believes have changed Byline Bank’s classifications.

The regulatory capital ratios for the Company and Byline Bank to meet the minimum capital adequacy standards and for Byline Bank to be considered well capitalized under the prompt corrective action framework and the Company’s and Byline Bank’s actual capital amounts and ratios are set forth in the following tables as of the periods indicated (dollars in thousands):

	Actual					Minimum Capital Required					Required for the Bank to be Considered Well Capitalized
September 30, 2018	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk weighted assets:
Company	$	526,630		13.37	%	$	315,218		8.00	%	N/A		N/A
Bank		503,886		12.77	%		315,620		8.00	%	$	394,525		10.00	%
Tier 1 capital to risk weighted assets:
Company	$	500,761		12.71	%	$	236,414		6.00	%	N/A		N/A
Bank		478,017		12.12	%		236,715		6.00	%	$	315,620		8.00	%
Common Equity Tier 1 (CET1) to risk weighted assets:
Company	$	443,823		11.26	%	$	177,310		4.50	%	N/A		N/A
Bank		478,017		12.12	%		177,536		4.50	%	$	256,441		6.50	%
Tier 1 capital to average assets:
Company	$	500,761		10.78	%	$	185,737		4.00	%	N/A		N/A
Bank		478,017		10.28	%		185,975		4.00	%	$	232,468		5.00	%

	Actual					Minimum Capital Required					Required for the Bank to be Considered Well Capitalized
December 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk weighted assets:
Company	$	410,831		15.98	%	$	205,661		8.00	%	N/A		N/A
Bank		367,972		14.28	%		206,083		8.00	%	$	257,604		10.00	%
Tier 1 capital to risk weighted assets:
Company	$	392,520		15.27	%	$	154,246		6.00	%	N/A		N/A
Bank		349,662		13.57	%		154,562		6.00	%	$	206,083		8.00	%
Common Equity Tier 1 (CET1) to risk weighted assets:
Company	$	353,995		13.77	%	$	115,684		4.50	%	N/A		N/A
Bank		349,662		13.57	%		115,922		4.50	%	$	167,442		6.50	%
Tier 1 capital to average assets:
Company	$	392,520		12.25	%	$	128,178		4.00	%	N/A		N/A
Bank		349,662		10.89	%		128,409		4.00	%	$	160,511		5.00	%

The Company and Byline Bank must maintain a capital conservation buffer consisting of CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The capital conservation buffer requirement began to be

phased in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increases each year until the buffer requirement is fully implemented on January 1, 2019. As of January 1, 2018 the capital conservation buffer requirement was 1.875%. The conservation buffers for the Company and Byline Bank exceed the fully phased in minimum capital requirement as of September 30, 2018.

Provisions of state and federal banking regulations may limit, by statute, the amount of dividends that may be paid to the Company by Byline Bank without prior approval of Byline Bank’s regulatory agencies. The Company is economically dependent on the cash dividends received from Byline Bank. These dividends represent the primary cash flow from operating activities used to service obligations. For the nine months ended September 30, 2018, the Company received $2.1 million in cash dividends from Byline Bank in order to pay the required interest on its outstanding junior subordinated debentures in connection with its trust preferred securities interest, dividends on the Series B preferred stock outstanding, and other Company activities. For the year ended December 31, 2017, the Company received $2.8 million in cash dividends from Byline Bank to pay interest on the line of credit, interest payments on its trust preferred securities, and dividends on its preferred stock.

Contractual Obligations

FHLB advances are fully described in Note 12 of our Unaudited Interim Condensed Consolidated Financial Statements, included elsewhere in this report. Operating lease obligations are in place for facilities and land on which banking facilities are located. See Note 15 of our Interim Unaudited Condensed Consolidated Financial Statements, included elsewhere in this report for additional information.

Off-Balance Sheet Items and Other Financing Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, commercial letters of credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

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

Letters of credit are conditional commitments issued by Byline Bank to guarantee 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.

Our exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. We use the same credit policies in making commitments and conditional obligations as for funded instruments. We do not anticipate any material losses as a result of the commitments and standby letters of credit.

During the nine months ended September 30, 2018 and for the year ended December 31, 2017, we entered into interest rate swaps that are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. We also entered into interest

rate swaps with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently entered into mirror-image derivatives with a third party counterparty.

We recognize derivative financial instruments at fair value regardless of the purpose or intent for holding the instrument. We record derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition within other assets and other liabilities, respectively. Because the derivative assets and liabilities recorded on the balance sheet at September 30, 2018 do not represent the amounts that may ultimately be paid under these contracts, these assets and liabilities are listed in the table below (dollars in thousands):

	September 30, 2018
			Fair Value
	Notional		Asset		Liability
Interest rate contracts—pay fixed, receive floating	$	250,000	$	10,883	$	—
Other interest rate swaps—pay fixed, receive floating		236,916		2,737		2,766
Other credit derivatives		4,504		—		3

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in our “Selected Financial Data” are not measures of financial performance in accordance with GAAP. Our management uses the non‑GAAP financial measures set forth below in its analysis of our performance:

•

“Adjusted net income” and “adjusted diluted earnings per share” exclude certain significant items, which include incremental income tax benefit related to Illinois corporate income tax rate increases, incremental income tax expense or benefit related to federal corporate income tax reductions, impairment charges on assets held for sale, merger related expenses, and core system conversion expenses adjusted for applicable income tax. Management believes the significant items are not indicative of or useful to measure the Company’s operating performance on an ongoing basis.

•

“Adjusted non-interest expense” is non-interest expense excluding certain significant items, which include impairment charges on assets held for sale, merger-related expenses, and core system conversion expenses.

•

“Adjusted efficiency ratio” is adjusted non-interest expense less amortization of intangible assets divided by net interest income and non-interest income. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Adjusted non-interest expense to average assets” is adjusted non-interest expense divided by average assets. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Adjusted return on average stockholders’ equity” is adjusted net income divided by average stockholders’ equity. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Adjusted return on average assets” is adjusted net income divided by average assets. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Non-interest income to total revenues” is non-interest income divided by net interest income plus non-interest income. Management believes that it is standard practice in the industry to present non-interest income as a percentage of total revenue. Accordingly, management believes providing these measures may be useful for peer comparison.

•

“Pre‑tax pre‑provision net income” is pre‑tax income plus the provision for loan and lease losses. Management believes this metric is important due to the tax benefit resulting from the reversal of the deferred tax asset valuation allowance, the decrease in the federal corporate income tax rate, and the increase in the Illinois state corporate income tax rate. The metric demonstrates income excluding the tax provision or benefit and excludes the provision for loan and lease losses.

•

“Adjusted pre-tax pre-provision net income” is pre-tax pre-provision net income excluding certain significant items. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Pre‑tax pre‑provision return on average assets” is pre-tax income plus the provision for loan and lease losses, divided by average assets. Management believes this metric is important due to the change in tax expense or benefit resulting from the recent decrease in the federal corporate income tax rate and the recent increase in the Illinois state income tax rate. The ratio demonstrates profitability excluding the tax provision or benefit and excludes the provision for loan and lease losses. “Adjusted pre-tax pre-provision return on average assets” excludes certain significant items, which include impairment charges on assets held for sale, merger related expenses, and core system conversion expenses.

•

“Tangible common equity” is defined as total stockholders’ equity reduced by preferred stock and goodwill and other intangible assets. Management does not consider servicing assets as an intangible asset for purposes of this calculation.

•

“Tangible assets” is defined as total assets reduced by goodwill and other intangible assets. Management does not consider servicing assets as an intangible asset for purposes of this calculation.

•

“Tangible book value per share” is calculated as tangible common equity, which is stockholders’ equity reduced by preferred stock and goodwill and other intangible assets, divided by total shares of common stock outstanding. Management believes this metric is important due to the relative changes in the book value per share exclusive of changes in intangible assets.

•

“Tangible common equity to tangible assets” is calculated as tangible common equity divided by tangible assets, which is total assets reduced by goodwill and other intangible assets. Management believes this metric is important to investors and analysts interested in relative changes in the ratio of total stockholders’ equity to total assets, each exclusive of changes in intangible assets.

•

“Tangible net income available to common stockholders” is net income available to common stockholders excluding after-tax intangible asset amortization.

•

“Adjusted tangible net income” is tangible net income available to common stockholders excluding certain significant items. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Return on average tangible common stockholders’ equity” is tangible net income available to common stockholders divided by average tangible common stockholders’ equity. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Adjusted return on average tangible common stockholders’ equity is adjusted tangible net income available to common stockholders divided by average tangible common stockholders’ equity. Management believes the metric is an important measure of the Company’s operating performance on an ongoing basis.

•

“Net interest margin excluding loan accretion” is calculated as reported net interest margin less the effect of accretion income net of contractual interest collected on acquired loans. Management believes that this metric is important as it illustrates the impact of net accretion income from acquired loans on the net interest margin.

We believe that these non‑GAAP financial measures provide useful information to its management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non‑GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP financial measures that we and other companies use. Management also uses these measures for peer comparison.

Reconciliations of Non-GAAP Financial Measures

	As of or for the Three Months Ended September 30,						As of or for the Nine Months Ended September 30,
(dollars in thousands, except share and per share data)	2018			2017			2018			2017
Net income and earnings per share excluding significant items
Reported Net Income	$	14,536		$	9,755		$	24,072		$	22,461
Significant items:
Incremental income tax benefit of state tax rate change		—			(4,790	)		—			(4,790	)
Incremental income tax benefit attributed to federal income tax reform		—			—			(724	)		—
Impairment charges on assets held for sale		139			951			256			951
Merger-related expense		150			—			1,790			—
Core system conversion expense		213			—			9,222			—
Tax benefit on significant items		(112	)		(386	)		(2,978	)		(386	)
Adjusted Net Income	$	14,926		$	5,530		$	31,638		$	18,236
Reported Diluted Earnings per Share	$	0.39		$	0.32		$	0.71		$	0.43
Significant items:
Incremental income tax benefit of state tax rate change		—			(0.16	)		—			(0.18	)
Incremental income tax benefit attributed to federal income tax reform		—			—			(0.02	)		—
Impairment charges on assets held for sale		—			0.03			—			0.03
Merger-related expense		—			—			0.05			—
Core system conversion expense		0.01			—			0.28			—
Tax benefit on significant items		—			(0.01	)		(0.09	)		(0.01	)
Adjusted Diluted Earnings per Share	$	0.40		$	0.18		$	0.93		$	0.27

	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
(dollars in thousands, except share and per share data)	2018			2017			2018			2017
Net interest margin:
Reported net interest margin		4.73	%		4.18	%		4.56	%		4.07	%
Effect of accretion income on acquired loans		(0.74	)%		(0.29	)%		(0.52	)%		(0.28	)%
Net interest margin excluding accretion		3.99	%		3.89	%		4.04	%		3.79	%
Total revenues:
Net interest income	$	52,593		$	31,412		$	125,344		$	90,761
Add: non-interest income		11,143			11,918			37,073			37,419
Total revenues	$	63,736		$	43,330		$	162,417		$	128,180
Adjusted efficiency ratio:
Non-interest expense excluding amortization of intangible assets	$	36,058		$	30,296		$	111,850		$	86,858
Total revenues		63,736			43,330			162,417			128,180
Efficiency ratio		56.57	%		69.92	%		68.87	%		67.76	%
Less: significant adjusted items		502			951			11,268			951
Adjusted efficiency ratio		55.78	%		67.73	%		61.93	%		67.02	%
Adjusted non-interest expense to average assets:
Total average assets	$	4,809,939		$	3,307,186		$	4,016,915		$	3,301,941
Non-interest expense		37,956		$	31,065		$	115,645		$	89,165
Less: significant adjusted items		502			951			11,268			951
Adjusted non-interest expense to average assets		3.09	%		3.61	%		3.47	%		3.57	%
Adjusted return on average stockholders' equity:
Average stockholders' equity	$	625,621		$	458,442		$	535,176		$	415,219
Net income		14,536		$	9,755			24,072			22,461
Less: significant adjusted items		390			(4,225	)		7,566			(4,225	)
Adjusted return on average stockholders' equity		9.47	%		4.79	%		7.90	%		5.87	%
Adjusted return on average assets:
Total average assets	$	4,809,939		$	3,307,186		$	4,016,915		$	3,301,941
Net income		14,536		$	9,755		$	24,072		$	22,461
Less: significant adjusted items		390			(4,225	)		7,566			(4,225	)
Adjusted return on average assets		1.23	%		0.66	%		1.05	%		0.74	%
Non-interest income to total revenues:
Non-interest income	$	11,143		$	11,918		$	37,073		$	37,419
Total revenues		63,736			43,330			162,417			128,180
Non-interest income to total revenues		17.48	%		27.51	%		22.83	%		29.19	%
Pre-tax pre-provision net income:
Pre-tax income	$	19,938		$	8,365		$	31,859		$	29,709
Add: Provision for loan and lease losses		5,842			3,900			14,913			9,306
Pre-tax pre-provision net income	$	25,780		$	12,265		$	46,772		$	39,015

	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
(dollars in thousands, except share and per share data)	2018			2017			2018			2017
Pre-tax pre-provision return on average assets:
Total average assets	$	4,809,939		$	3,307,186		$	4,016,915		$	3,301,941
Pre-tax pre-provision net income		25,780			12,265			46,772			39,015
Pre-tax pre-provision return on average assets		2.13	%		1.47	%		1.56	%		1.58	%
Adjusted Pre-tax pre-provision return on average assets:
Total average assets	$	4,809,939		$	3,307,186		$	4,016,915		$	3,301,941
Pre-tax pre-provision net income		25,780			12,265			46,772			39,015
Less: significant adjusted items		502			951			11,268			951
Adjusted Pre-tax pre-provision return on average assets:		2.17	%		1.59	%		1.93	%		1.62	%
Tangible common equity:
Total stockholders' equity	$	629,861		$	459,533		$	629,861		$	459,533
Less: Preferred stock		10,438			10,438			10,438			10,438
Less: Goodwill		127,536			51,975			127,536			51,975
Less: Core deposit intangibles and other intangibles		35,248			17,522			35,248			17,522
Tangible common equity	$	456,639		$	379,598		$	456,639		$	379,598
Tangible assets:
Total assets	$	4,917,409		$	3,305,442		$	4,917,409		$	3,305,442
Less: Goodwill		127,536			51,975			127,536			51,975
Less: Core deposit intangibles and other intangibles		35,248			17,522			35,248			17,522
Tangible assets	$	4,754,625		$	3,235,945		$	4,754,625		$	3,235,945
Tangible book value per share:
Tangible common equity	$	456,639		$	379,598		$	456,639		$	379,598
Shares of common stock outstanding		36,279,600			29,305,400			36,279,600			29,305,400
Tangible book value per share	$	12.59		$	12.95		$	12.59		$	12.95
Tangible common equity to tangible assets:
Tangible common equity	$	456,639		$	379,598		$	456,639		$	379,598
Tangible assets		4,754,625			3,235,945			4,754,625			3,235,945
Tangible common equity to tangible assets		9.60	%		11.73	%		9.60	%		11.73	%
Tangible net income available to common stockholders:
Net income to common stockholders	$	14,340		$	9,560		$	23,485		$	11,380
Add: after-tax intangible asset amortization		1,369			457			2,738			1,370
Tangible net income available to common stockholders	$	15,709		$	10,017		$	26,223		$	12,750
Return on average tangible common stockholders' equity:
Average tangible common stockholders' equity	$	451,203		$	378,059		$	412,206		$	324,158
Tangible net income available to common stockholders		15,709			10,017			26,223			12,750
Return on average tangible common stockholders' equity:		13.81	%		10.51	%		8.51	%		5.26	%
Adjusted return on average tangible common stockholders' equity:
Average tangible common stockholders' equity	$	451,203		$	378,059		$	412,206		$	324,158
Less: significant adjusted items		390			(4,225	)		7,566			(4,225	)
Adjusted return on average tangible common stockholders' equity		14.16	%		6.08	%		10.96	%		3.52	%

Forward-Looking Statements

This communication may contain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements about Byline’s expectations, beliefs, plans, strategies, predictions, forecasts, objectives or assumptions of future events or performance are not historical facts and may be forward-looking. These statements include, but are not limited to, the expected completion date, financial benefits and other effects of the proposed merger of Byline and Oak Park River Forest Bankshares, Inc. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “expects,” “can,” “could,” “may,” “predicts,” “potential,” “opportunity,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “seeks,” “intends” and similar words or phrases. Accordingly, these statements involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual strategies, actions or results to differ materially from those expressed in them, and are not guarantees of timing, future results or other events or performance. Because forward-looking statements are necessarily only estimates of future strategies, actions or results, based on management’s current expectations, assumptions and estimates on the date hereof, and there can be no assurance that actual strategies, actions or results will not differ materially from expectations, readers are cautioned not to place undue reliance on such statements. Factors that may cause such a difference include, but are not limited to, the reaction to the transaction of the companies’ customers, employees and counterparties; customer disintermediation; inflation; expected synergies, cost savings and other financial benefits of the proposed transaction might not be realized within the expected timeframes or might be less than projected; the requisite stockholder and regulatory approvals for the proposed transaction might not be obtained; credit and interest rate risks associated with Byline’s and Oak Park River Forest Bankshares, Inc.’s respective businesses, customers, borrowings, repayment, investment, and deposit practices; general economic conditions, either nationally or in the market areas in which Byline and Oak Park River Forest Bankshares, Inc. operate or anticipate doing business, are less favorable than expected; new regulatory or legal requirements or obligations; and other risks. Certain risks and important factors that could affect Byline’s future results are identified in its Annual Report on Form 10-K for the year ended December 31, 2017 and other reports filed with the Securities and Exchange Commission, including among other things, under the heading “Risk Factors” in such Annual Report on Form 10-K. Any forward-looking statement speaks only as of the date on which it is made, and Byline undertakes no obligation to update any forward-looking statement, whether to reflect events or circumstances after the date on which the statement is made, to reflect new information or the occurrence of unanticipated events, or otherwise.

Our ability to predict results or the actual effects of future plans, strategies or events is inherently uncertain. Factors which could cause actual results or conditions to differ materially from those reflected in forward-looking statements include:

•

uncertainty regarding geopolitical developments and the United States and global economic outlook that may continue to impact market conditions or affect demand for certain banking products and services;

•

unforeseen credit quality problems or changing economic conditions that could result in charge-offs greater than we have anticipated in our allowance for loan and lease losses or changes in the value of our investments;

•

commercial real estate market conditions in the Chicago metropolitan area and southern Wisconsin;

•

deterioration in the financial condition of our borrowers resulting in significant increases in our loan and lease losses and provisions for those losses and other related adverse impacts to our results of operations and financial condition;

•

estimates of fair value of certain of our assets and liabilities, which could change in value significantly from period to period;

•

competitive pressures in the financial services industry relating to both pricing and loan structures, which may impact our growth rate;

•

unanticipated developments in pending or prospective loan and/or lease transactions or greater-than-expected pay downs or payoffs of existing loans and leases;

•

inaccurate assumptions in our analytical and forecasting models used to manage our loan and lease portfolio;

•

unanticipated changes in monetary policies of the Federal Reserve or significant adjustments in the pace of, or market expectations for, future interest rate changes;

•

availability of sufficient and cost-effective sources of liquidity or funding as and when needed;

•

our ability to retain or the loss of key personnel or an inability to recruit appropriate talent cost-effectively;

•

adverse effects on our information technology systems resulting from failures, human error or cyberattack, including the potential impact of disruptions or security breaches at our third-party service providers, any of which could result in an information or security breach, the disclosure or misuse of confidential or proprietary information, significant legal and financial losses and reputational harm;

•

greater-than-anticipated costs to support the growth of our business, including investments in technology, process improvements or other infrastructure enhancements, or greater-than-anticipated compliance or regulatory costs and burdens;

•

greater-than-anticipated costs related to our core processing system migration and the possibility that any of the anticipated benefits will not be realized or will not be realized within the expected time period;

•

the impact of possible future acquisitions, if any, including the costs and burdens of integration efforts;

•

the ability of the Company to receive dividends from its subsidiaries;

•

changes in Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) government guaranteed lending rules, regulations and loan products, including specifically the SBA Section 7(a) program, changes in SBA or USDA standard operating procedures or changes to the status of Byline Bank as an SBA Preferred Lender;

•

changes in accounting principles, policies and guidelines applicable to bank holding companies and banking generally;

•

the impact of possible further changes in the federal or state income tax rate on our deferred tax assets and provision for income tax expense;

•

the possibility that any of the anticipated benefits of acquisitions will not be realized or will not be realized within the expected time period;

•

the risk that the integration of acquisition operations will be materially delayed or will be more costly or difficult than expected;

•

the effect of mergers on customer relationships and operating results; or

•

other risks detailed from time to time in filings made by us with the SEC.

These factors should be considered in evaluating forward-looking statements, and you should not place undue reliance on any forward-looking statements, which speak only as of the date they are made. You should also consider the risks, assumptions and uncertainties set forth in the “Risk Factors” section of this Form 10-Q and in our Form 10-K, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Form 10-Q, as well as those set forth in our subsequent periodic and current reports filed with the SEC. We assume no obligation to update any of these statements in light of new information, future events or otherwise unless required under the federal securities laws.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Our primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates.

We seek to measure and manage the potential impact of interest rate risk. Interest rate risk occurs when interest-earning assets and interest-bearing liabilities mature or re-price at different times, on a different basis or in unequal amounts. Interest rate risk also arises when our assets, liabilities and off-balance sheet contracts each respond differently to changes in interest rates, including as a result of explicit and implicit provisions in agreements related to such assets and liabilities and in off-balance sheet contracts that alter the applicable interest rate and cash flow characteristics as interest rates change. The two primary examples of such provisions that we are exposed to are the duration and rate sensitivity associated with indeterminate-maturity deposits (e.g., non-interest-bearing checking accounts, negotiable order of withdrawal accounts, savings accounts and money market deposits accounts and the rate of prepayment associated with fixed-rate lending and mortgage-backed securities. Interest rates may also affect loan demand, credit losses, mortgage origination volume and other items affecting earnings.

We are also exposed to interest rate risk through the retained portion of the government guaranteed loans we make and the related servicing rights. Our government guaranteed loan portfolio is comprised primarily of SBA 7(a) loans, virtually all of which are quarterly or monthly adjustable with the prime rate. The SBA portfolio reacts differently in a rising rate environment than our other non-guaranteed portfolios. Generally, when interest rates rise, the prepayments in the SBA portfolio tend to increase.

Our management of interest rate risk is overseen by Byline Bank’s asset liability committee, and is chaired by its Treasurer, based on a risk management infrastructure approved by our board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets, calculated monthly, for various metrics, including our economic value sensitivity, our economic value of equity and net interest income simulations involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. Our risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, non-interest-bearing and interest-bearing demand deposit durations based on historical analysis and the targeted investment term of capital.

We manage the interest rate risk associated with our interest-bearing liabilities by managing the interest rates and tenors associated with our borrowings from the FHLB and deposits from our customers that we rely on for funding. In particular, from time to time we use special offers on deposits to alter the interest rates and tenors associated with our interest-bearing liabilities. We manage the interest rate risk associated with our interest-earning assets by managing the interest rates and tenors associated with our investment and loan portfolios, from time to time purchasing and selling investment securities and selling residential mortgage loans in the secondary market.

We utilize interest rate swaps to hedge our interest rate exposure on commercial loans when it meets our customers’ and Byline Bank’s needs. Typically, customer interest rate swaps are for terms of more than 5 years. As of September 30, 2018, we had a notional amount of $486.9 million of interest rate swaps outstanding which includes customer swaps and those on Byline Bank’s balance sheet. The overall effectiveness of our hedging strategies is subject to market conditions, the quality of our execution, the accuracy of our valuation assumptions, the associated counterparty credit risk and changes in interest rates.

We do not engage in speculative trading activities relating to interest rates, foreign exchange rates, commodity prices, equities or credit.

We are also subject to credit risk. Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent credit review process that assesses compliance with commercial, real estate and other credit policies, risk ratings, SBA requirements, and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We understand and evaluate our customers’ borrowing needs and capacity to repay, in conjunction with their character and history.

Evaluation of Interest Rate Risk

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least monthly and compare these results against a scenario with no changes in interest rates. Our net interest income simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market-rate-sensitive instruments on and off balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices, (5) the effect of interest rate limitations in our assets, such as floors and caps, (6) the effect of our interest rate swaps and (7) overall growth and repayment rates and product mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

The potential change to our net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2018 is presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points and (2) gradual shifts downward of 100 basis points over 12 months and gradual shifts upward of 100 and 200 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide meaningful results. In a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline below 0%. For the dynamic balance sheet and rate shift scenarios, we assume interest rates follow a forward yield curve and then increase it by 1/12th of the total change in rates each month for twelve months.

	Estimated Increase (Decrease) in Net Interest Income
	Twelve Months Ending			Twelve Months Ending
Change in Market Interest Rates as of September 30, 2018	September 30, 2019			September 30, 2020
Immediate Shifts
+400 basis points		15.2	%		17.5	%
+300 basis points		11.7	%		13.4	%
+200 basis points		8.1	%		9.2	%
+100 basis points		4.3	%		4.9	%
-100 basis points		(6.0	)%		(7.7	)%

Dynamic Balance Sheet and Rate Shifts
+200 basis points		5.5	%
+100 basis points		2.8	%
-100 basis points		(3.0	)%

The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads, would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.

Item 4. Controls and Procedures.

The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)), as of the end of the period covered by this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of September 30, 2018, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting during the quarter ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

PART II-OTHER INFORMATION

Item 1. Legal Proceedings.

We operate in a highly regulated environment. From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in the “Risk Factors” section included in our Form 10-K for our fiscal year ended December 31, 2017 that was filed with the SEC on March 30, 2018, except as noted below.

We may be adversely affected by risks associated with our planned core banking system conversion, including failure to realize anticipated benefits and to overcome integration risks, which could adversely affect our growth, profitability, and customer experience.

In order to support our continued growth and to continue to provide first-rate banking products and services to our customers, we have decided to convert our core bank processing platform to FIS’s Integrated Banking Services. We anticipate that the final conversion will occur during 2019. There can be no assurance that we will be able to realize the full anticipated benefits of the conversion and overcome associated integration risks.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.


		EXHIBIT
Number		Description
3.1		Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
3.2		Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
3.3		Certificate of Designations of Noncumulative Perpetual Preferred Stock, Series A (filed as Exhibit 3.3 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
3.4		Form of Repurchase Agreement for Noncumulative Perpetual Preferred Stock, Series A (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K (File No. 001-38139) filed on July 17, 2017 and incorporated herein by reference)
3.5		Certificate of Elimination of Noncumulative Perpetual Preferred Stock, Series A (filed as Exhibit 3.5 to the Company’s Quarterly Report on Form 10-Q (file No. 001-38139) filed on August 13, 2018 and incorporated herein by reference)

3.6		Certificate of Designations of 7.50% Fixed-to-Floating Noncumulative Perpetual Preferred Stock, Series B (filed as Exhibit 3.4 to the Company’s Registration Statement on Form S-1, as amended (File No. 333-218362) filed on June 19, 2017 and incorporated herein by reference)
4.1		Certain instruments defining the rights of holders of long-term debt securities of the registrant and its subsidiaries are omitted pursuant to Item 601(b)(4)(iii) of Regulation S-K. The registrant hereby undertakes to furnish to the SEC, upon request, copies of any such instruments.
10.1		Third amendment to Revolving Credit Agreement (filed as Exhibit 10.1 to the Company’s current report on Form 8-K (File No. 001-38139) filed on October 16, 2018 and incorporated herein by reference)

31.1		Certification of the Chief Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of the Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, and Section 302 of the Sarbanes-Oxley Act of 2002
32.1^(a)		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


101		Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Condition; (ii) Consolidated Statements of Operations; (iii) Consolidated Statements of Comprehensive Income (Loss); (iv) Consolidated Statements of Changes in Stockholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements

(a) This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Byline Bancorp, Inc.
Date: November 9, 2018	By:	/s/	Alberto J. Paracchini
			Alberto J. Paracchini
			President and Chief Executive Officer
			(Principal Executive Officer)

Date: November 9, 2018	By:	/s/	Lindsay Corby
			Lindsay Corby
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)