BYLINE BANCORP, INC. - Quarter Report: 2020 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, 2020

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

For the transition period from ______to ______

Commission File Number 001-38139

Byline Bancorp, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

36-3012593

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification Number)

180 North LaSalle Street, Suite 300

Chicago, Illinois 60601

(Address of Principal Executive Offices)

(773) 244-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	BY	New York Stock Exchange

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Common Stock, $0.01 par value, 38,583,901 shares outstanding as of November 5, 2020

BYLINE BANCORP, INC.

FORM 10-Q

September 30, 2020

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
	Condensed Consolidated Statements of Financial Condition at September 30, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited)	8
	Notes to Unaudited Interim Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	91
Item 4.	Controls and Procedures	93

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	94
Item 4.	Mine Safety Disclosures	94
Item 5.	Other Information	94
Item 6.	Exhibits	95

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)


(dollars in thousands, except share data)	September 30, 2020			December 31, 2019
ASSETS
Cash and due from banks	$	47,433		$	48,228
Interest bearing deposits with other banks		53,645			32,509
Cash and cash equivalents		101,078			80,737
Equity and other securities, at fair value		8,335			8,031
Securities available-for-sale, at fair value		1,509,211			1,186,292
Securities held-to-maturity, at amortized cost (fair value at September 30, 2020—$4,589, December 31, 2019—$4,498)		4,400			4,412
Restricted stock, at cost		9,652			22,127
Loans held for sale		49,049			11,732
Loans and leases:
Loans and leases		4,374,517			3,785,661
Allowance for loan and lease losses		(61,258	)		(31,936	)
Net loans and leases		4,313,259			3,753,725
Servicing assets, at fair value		21,267			19,471
Premises and equipment, net		94,638			96,140
Other real estate owned, net		8,150			9,896
Goodwill and other intangible assets, net		174,523			180,255
Bank-owned life insurance		9,952			9,750
Deferred tax assets, net		35,945			38,315
Accrued interest receivable and other assets		157,054			100,926
Total assets	$	6,496,513		$	5,521,809
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Non-interest-bearing demand deposits	$	1,718,682		$	1,279,641
Interest-bearing deposits		3,091,563			2,867,936
Total deposits		4,810,245			4,147,577
Other borrowings		710,560			539,638
Subordinated notes, net		73,299			—
Junior subordinated debentures issued to capital trusts, net		36,331			37,334
Accrued interest payable and other liabilities		71,382			47,145
Total liabilities		5,701,817			4,771,694
STOCKHOLDERS’ EQUITY
Preferred stock		10,438			10,438
Common stock		383			379
Additional paid-in capital		586,057			580,965
Retained earnings		180,162			159,033
Treasury stock, at cost		(1,668	)		—
Accumulated other comprehensive income (loss), net of tax		19,324			(700	)
Total stockholders’ equity		794,696			750,115
Total liabilities and stockholders’ equity	$	6,496,513		$	5,521,809

	September 30, 2020				December 31, 2019

	Preferred Shares		Common Shares		Preferred Shares		Common Shares
Par value	$	0.01	$	0.01	$	0.01	$	0.01
Shares authorized		50,000		150,000,000		50,000		150,000,000
Shares issued		10,438		38,687,402		10,438		38,256,500
Shares outstanding		10,438		38,568,916		10,438		38,256,500
Treasury shares		—		118,486		—		—

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(dollars in thousands, except share and per share data)	2020		2019			2020			2019
INTEREST AND DIVIDEND INCOME
Interest and fees on loans and leases	$	51,036	$	63,391		$	155,347		$	177,298
Interest on securities		7,070		7,040			22,616			19,807
Other interest and dividend income		128		598			1,342			1,794
Total interest and dividend income		58,234		71,029			179,305			198,899
INTEREST EXPENSE
Deposits		2,760		9,618			14,810			27,000
Other borrowings		465		2,835			2,838			7,266
Subordinated notes and debentures		1,485		738			2,699			2,262
Total interest expense		4,710		13,191			20,347			36,528
Net interest income		53,524		57,838			158,958			162,371
PROVISION FOR LOAN AND LEASE LOSSES		15,740		5,931			45,713			16,321
Net interest income after provision for loan and lease losses		37,784		51,907			113,245			146,050
NON-INTEREST INCOME
Fees and service charges on deposits		1,603		1,612			4,731			4,823
Loan servicing revenue		2,936		2,692			8,674			7,861
Loan servicing asset revaluation		1,122		(1,610	)		(2,653	)		(4,094	)
ATM and interchange fees		1,028		973			3,089			2,635
Net gains on sales of securities available-for-sale		1,037		178			2,412			1,151
Change in fair value of equity securities, net		154		(15	)		301			1,035
Net gains on sales of loans		12,671		9,405			23,900			23,110
Wealth management and trust income		693		653			1,970			1,874
Other non-interest income		1,008		918			1,789			2,582
Total non-interest income		22,252		14,806			44,213			40,977
NON-INTEREST EXPENSE
Salaries and employee benefits		23,126		24,537			67,197			71,081
Occupancy and equipment expense, net		5,220		4,512			16,103			14,530
Loan and lease related expenses		2,053		1,949			4,624			5,367
Legal, audit and other professional fees		2,390		4,066			6,802			9,113
Data processing		2,661		4,062			8,152			11,055
Net loss recognized on other real estate owned and other related expenses		349		95			1,324			543
Other intangible assets amortization expense		1,947		2,003			5,732			5,735
Other non-interest expense		3,959		4,224			12,310			12,657
Total non-interest expense		41,705		45,448			122,244			130,081
INCOME BEFORE PROVISION FOR INCOME TAXES		18,331		21,265			35,214			56,946
PROVISION FOR INCOME TAXES		5,260		5,923			10,038			15,796
NET INCOME		13,071		15,342			25,176			41,150
Dividends on preferred shares		196		196			587			587
INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	12,875	$	15,146		$	24,589		$	40,563
EARNINGS PER COMMON SHARE
Basic	$	0.34	$	0.40		$	0.65		$	1.09
Diluted	$	0.34	$	0.39		$	0.64		$	1.07

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2020			2019			2020			2019
Net income	$	13,071		$	15,342		$	25,176		$	41,150
Securities available-for-sale
Unrealized holding gains arising during the period		33			3,992			30,100			24,954
Reclassification adjustments for net gains included in net income		(1,037	)		(178	)		(2,412	)		(1,151	)
Tax effect		280			(1,062	)		(7,710	)		(6,762	)
Net of tax		(724	)		2,752			19,978			17,041
Cash flow hedges
Unrealized holding losses arising during the period		—			(251	)		—			(5,484	)
Reclassification adjustments for net losses (gains) included in net income		22			(363	)		64			(1,643	)
Tax effect		(7	)		171			(18	)		1,985
Net of tax		15			(443	)		46			(5,142	)
Total other comprehensive income (loss)		(709	)		2,309			20,024			11,899
Comprehensive income	$	12,362		$	17,651		$	45,200		$	53,049

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

										Additional						Accumulated Other					Total
	Preferred Stock				Common Stock					Paid-In			Retained			Comprehensive			Treasury		Stockholders’
(dollars in thousands, except share data)	Shares		Amount		Shares			Amount		Capital			Earnings			Income (Loss)			Stock		Equity
Balance, January 1, 2019		10,438	$	10,438		36,343,239		$	361	$	546,849		$	102,522		$	(9,498	)	$	—	$	650,672
Net income		—		—		—			—		—			12,597			—			—		12,597
Other comprehensive income, net of tax		—		—		—			—		—			—			4,519			—		4,519
Issuance of common stock upon exercise of stock options		—		—		50,662			1		635			—			—			—		636
Restricted stock activity		—		—		(8,500	)		—		—			—			—			—		—
Issuance of common stock in connection with employee stock purchase plan		—		—		12,743			—		291			—			—			—		291
Cumulative-effect adjustment (ASU 2016-01)		—		—		—			—		—			1,440			(1,440	)		—		—
Cash dividends declared on preferred stock		—		—		—			—		—			(196	)		—			—		(196	)
Share-based compensation expense		—		—		—			—		230			—			—			—		230
Balance, March 31, 2019		10,438	$	10,438		36,398,144		$	362	$	548,005		$	116,363		$	(6,419	)	$	—	$	668,749
Net income		—		—		—			—		—			13,211			—			—		13,211
Other comprehensive income, net of tax		—		—		—			—		—			—			5,071			—		5,071
Issuance of common stock upon exercise of stock options		—		—		116,048			1		1,668			—			—			—		1,669
Issuance of common stock due to business combination, net of issuance costs		—		—		1,464,558			15		28,877			—			—			—		28,892
Restricted stock activity		—		—		136,469			—		—			—			—			—		—
Cash dividends declared on preferred stock		—		—		—			—		—			(195	)		—			—		(195	)
Share-based compensation expense		—		—		—			—		278			—			—			—		278
Balance, June 30, 2019		10,438	$	10,438		38,115,219		$	378	$	578,828		$	129,379		$	(1,348	)	$	—	$	717,675
Net income		—		—		—			—		—			15,342			—			—		15,342
Other comprehensive income, net of tax		—		—		—			—		—			—			2,309			—		2,309
Issuance of common stock upon exercise of stock options		—		—		3,472			—		54			—			—			—		54
Issuance cost in connection with business combination		—		—		—			—		(157	)		—			—			—		(157	)
Restricted stock activity		—		—		36,350			—		—			—			—			—		—
Issuance of common stock in connection with employee stock purchase plan		—		—		14,085			—		289			—			—			—		289
Cash dividends declared on preferred stock		—		—		—			—		—			(196	)		—			—		(196	)
Share-based compensation expense		—		—		—			—		550			—			—			—		550
Balance, September 30, 2019		10,438	$	10,438		38,169,126		$	378	$	579,564		$	144,525		$	961		$	—	$	735,866
Net income		—		—		—			—		—			15,852			—			—		15,852
Other comprehensive loss, net of tax		—		—		—			—		—			—			(1,661	)		—		(1,661	)
Issuance of common stock upon exercise of stock options		—		—		71,029			—		787			—			—			—		787
Restricted stock activity		—		—		16,345			1		(1	)		—			—			—		—
Cash dividends declared on preferred stock		—		—		—			—		—			(196	)		—			—		(196	)
Cash dividends declared on common stock ($0.03 per share)		—		—		—			—		—			(1,148	)		—			—		(1,148	)
Share-based compensation expense		—		—		—			—		615			—			—			—		615
Balance, December 31, 2019		10,438	$	10,438		38,256,500		$	379	$	580,965		$	159,033		$	(700	)	$	—	$	750,115

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2020

(UNAUDITED)

										Additional						Accumulated Other						Total
	Preferred Stock				Common Stock					Paid-In			Retained			Comprehensive			Treasury			Stockholders’
(dollars in thousands, except share data)	Shares		Amount		Shares			Amount		Capital			Earnings			Income (Loss)			Stock			Equity
Balance, January 1, 2020		10,438	$	10,438		38,256,500		$	379	$	580,965		$	159,033		$	(700	)	$	—		$	750,115
Net income		—		—		—			—		—			2,966			—			—			2,966
Other comprehensive income, net of tax		—		—		—			—		—			—			11,048			—			11,048
Issuance of common stock upon exercise of stock options		—		—		55,402			1		676			—			—			—			677
Restricted stock activity		—		—		174,036			—		—			—			—			—			—
Issuance of common stock in connection with employee stock purchase plan		—		—		15,569			—		268			—			—			—			268
Cash dividends declared on preferred stock		—		—		—			—		—			(196	)		—			—			(196	)
Cash dividends declared on common stock ($0.03 per share)		—		—		—			—		—			(1,151	)		—			—			(1,151	)
Repurchase of common stock		—		—		(118,486	)		—		—			—			—			(1,668	)		(1,668	)
Share-based compensation expense		—		—		—			—		608			—			—			—			608
Balance, March 31, 2020		10,438	$	10,438		38,383,021		$	380	$	582,517		$	160,652		$	10,348		$	(1,668	)	$	762,667
Net income		—		—		—			—		—			9,139			—			—			9,139
Other comprehensive income, net of tax		—		—		—			—		—			—			9,685			—			9,685
Issuance of common stock upon exercise of stock options		—		—		5,196			—		56			—			—			—			56
Restricted stock activity		—		—		—			1		(1	)		—			—			—			—
Cash dividends declared on preferred stock		—		—		—			—		—			(195	)		—			—			(195	)
Cash dividends declared on common stock ($0.03 per share)		—		—		—			—		—			(1,152	)		—			—			(1,152	)
Share-based compensation expense		—		—		—			—		735			—			—			—			735
Balance, June 30, 2020		10,438	$	10,438		38,388,217		$	381	$	583,307		$	168,444		$	20,033		$	(1,668	)	$	780,935
Net income		—		—		—			—		—			13,071			—			—			13,071
Other comprehensive loss, net of tax		—		—		—			—		—			—			(709	)		—			(709	)
Issuance of common stock upon exercise of stock options		—		—		165,375			1		1,814			—			—			—			1,815
Restricted stock activity		—		—		(5,886	)		—		—			—			—			—			—
Issuance of common stock in connection with employee stock purchase plan		—		—		21,210			1		268			—			—			—			269
Cash dividends declared on preferred stock		—		—		—			—		—			(196	)		—			—			(196	)
Cash dividends declared on common stock ($0.03 per share)		—		—		—			—		—			(1,157	)		—			—			(1,157	)
Share-based compensation expense		—		—		—			—		668			—			—			—			668
Balance, September 30, 2020		10,438	$	10,438		38,568,916		$	383	$	586,057		$	180,162		$	19,324		$	(1,668	)	$	794,696

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
(dollars in thousands)	2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	25,176		$	41,150
Adjustments to reconcile net income to net cash from operating activities:
Provision for loan and lease losses		45,713			16,321
Impairment loss on assets held for sale		747			459
Depreciation and amortization of premises and equipment		4,849			4,701
Change in fair value of equity securities, net		(301	)		(1,035	)
Net amortization of securities		5,445			1,756
Net gains on sales of securities available-for-sale		(2,412	)		(1,151	)
Net loss on disposal of premises and equipment		157			—
Net gains on sales of assets held for sale		—			(82	)
Net gains on sales of loans		(23,900	)		(23,110	)
Originations of U.S. government guaranteed loans		(301,177	)		(226,465	)
Proceeds from U.S. government guaranteed loans sold		232,251			229,617
Accretion of premiums and discounts on acquired loans, net		(10,754	)		(17,771	)
Net change in servicing assets		(1,796	)		(246	)
Net valuation adjustments on other real estate owned		1,043			189
Net gains on sales of other real estate owned		(44	)		(11	)
Amortization of intangible assets		5,732			5,735
Amortization of time deposit premium		(56	)		(145	)
Amortization of subordinated notes issuance cost		41			—
Accretion of junior subordinated debentures discount		385			439
Share-based compensation expense		2,011			1,058
Deferred tax provision, net of valuation		2,643			2,366
Increase in cash surrender value of bank owned life insurance		(202	)		(253	)
Loss on redemption of junior subordinated debentures		112			—
Changes in assets and liabilities:
Accrued interest receivable		(3,052	)		(2,826	)
Other assets		(109	)		(13,788	)
Accrued interest payable		(1,153	)		1,213
Accrued expenses and other liabilities		21,705			(5,955	)
Net cash provided by operating activities		3,054			12,166
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale		(742,303	)		(310,950	)
Proceeds from maturities and calls of securities available-for-sale		173,581			76,800
Proceeds from paydowns of securities available-for-sale		189,913			69,255
Proceeds from sales of securities available-for-sale		80,509			92,103
Purchases of Federal Home Loan Bank stock		(52,585	)		(28,170	)
Federal Home Loan Bank stock repurchases		65,060			23,455
Proceeds from other loans sold		—			710
Net change in loans and leases		(596,536	)		(64,290	)
Purchases of premises and equipment		(4,148	)		(2,291	)
Proceeds from sales of premises and equipment		32			—
Proceeds from sales of assets held for sale		—			1,373
Proceeds from sales of other real estate owned		874			1,619
Net cash received in acquisition of business		—			4,306
Proceeds from bank owned life insurance death benefit		69			—
Net cash used in investing activities		(885,534	)		(136,080	)

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(UNAUDITED)

	Nine Months Ended
	September 30,
(dollars in thousands)	2020			2019
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits	$	662,724		$	40,372
Proceeds from short-term borrowings		6,407,800			6,364,280
Repayments of short-term borrowings		(6,682,800	)		(6,294,235	)
Proceeds from Paycheck Protection Program Liquidity Facility (PPPFL) advances		449,889			—
Repayments of PPPLF advances		(279	)		—
Proceeds from subordinated notes, net		73,258			—
Repayments of junior subordinated debentures		(1,500	)		—
Net decrease in securities sold under agreements to repurchase		(3,688	)		(1,876	)
Dividends paid on preferred stock		(587	)		(587	)
Dividends paid on common stock		(3,412	)		—
Proceeds from issuance of common stock upon exercise of stock options		2,548			2,359
Proceeds from issuance of common stock		537			580
Repurchases of common stock		(1,668	)		—
Net cash provided by financing activities		902,822			110,893
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		20,341			(13,021	)
CASH AND CASH EQUIVALENTS, beginning of period		80,737			121,860
CASH AND CASH EQUIVALENTS, end of period	$	101,078		$	108,839
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest	$	21,130		$	35,021
Cash paid during the period for taxes	$	7,697		$	16,090
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Transfer of securities from held-to-maturity to available-for-sale	$	—		$	94,837
Reclassification of equity and other securities	$	—		$	6,609
Delayed payments of mortgage-backed securities	$	492		$	720
Due from counterparties	$	82,980		$	47,045
Total assets acquired from acquisition	$	—		$	323,914
Value ascribed to goodwill	$	—		$	17,461
Total liabilities assumed from acquisition	$	—		$	305,892
Common stock issued due to acquisition of business	$	—		$	29,320
Common dividend declared, not paid	$	1,196		$	—

See accompanying Notes to Unaudited Interim Condensed Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 1—Basis of Presentation

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

These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). In preparing these financial statements, the Company has evaluated events and transactions subsequent to September 30, 2020 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, 2019, 2018, and 2017.

In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, “Subsequent Events,” the Company’s management has evaluated subsequent events for potential recognition or disclosure through the date of the issuance of these condensed consolidated financial statements.

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

No subsequent events were identified that would have required a change to the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.

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

Note 2—Accounting Pronouncements Recently Adopted or Issued

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

Adopted Accounting Pronouncement

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 fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. 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. Given our emerging growth status, the Company adopted these amendments on January 1, 2020 in conjunction with ASU No. 2017-08, which did not have a material impact on the Company’s Consolidated Financial Statements.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Issued Accounting Pronouncements Pending Adoption

Leases (Topic 842)—In February 2016, FASB issued ASU No. 2016‑02, Leases. The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. 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. In November 2019, FASB issued ASU No. 2019-10, Effective Dates, which delays the effective date of this ASU for entities not classified as Public Business Entities (PBEs). Our status as an emerging growth company makes us eligible for this deferral. Assuming the Company remains an emerging growth company, the new authoritative guidance is effective for fiscal years beginning after December 15, 2020, and interim periods with fiscal years beginning after December 15, 2021. The Company expects an increase in assets and liabilities as a result of recognizing additional right-of-use assets and liabilities under lease contracts in which the Company is lessee. While the Company has not quantified the impact of this ASU on its direct financing lease portfolio, it does not expect a material change in its accounting for the initial direct costs related to these leases.

Financial Instruments—Credit Losses (Topic 326)—In June 2016, FASB issued ASU No. 2016‑13, Measurement of Credit Losses on Financial Instruments. Current GAAP requires an “incurred loss” methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more useful to users of the financial statements. In November 2019, FASB issued ASU No. 2019-10, Effective Dates, which delays the effective date of the ASU for entities not classified as PBEs. Assuming the Company remains an emerging growth company, the new authoritative guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is in the process of implementation and determining the impact that this ASU will have on the Company’s Consolidated Financial Statements.

Income Taxes (Topic 740)—In December 2019, FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. The amendments in the ASU simplify the accounting for income taxes by removing the following: the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items; the exception to the requirement to or not to recognize a deferred tax liability for a foreign entity when it becomes an equity method investment or it becomes a subsidiary, respectively; and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. The amendments in the ASU changes current authoritative guidance by requiring the recognition of franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring an evaluation when a step up in the tax basis of goodwill should be considered part the of business combination; specifying that it is not required to allocate the consolidated amount of current and deferred tax expense to a legal entity that is not subject to tax in its separate financial statements; and requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

enactment date. The amendments are effective for annual periods beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. 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, 2022. The Company is currently evaluating the provisions of ASU No. 2019-12 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

Reference Rate Reform (Topic 848)—In March 2020, FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The amendments in the ASU provide optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders during the global market-wide reference rate transition period. The amendments in the ASU will be in effect for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the provisions of ASU No. 2020-04 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

Note 3—Acquisition

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

At the effective time of the merger (the “OPRF Effective Time”), each share of Oak Park River Forest’s common stock was converted into the right to receive: (1) 7.9321 shares of Byline’s common stock, and (2) an amount in cash equal to $6.2 million divided by the number of outstanding shares of Oak Park River Forest common stock as of the closing date, with cash paid in lieu of any fractional shares. The per share cash consideration was based on the total $6.2 million divided by the outstanding shares of Oak Park River Forest common stock, or $33.375 per outstanding share. Based on the closing price of the Company’s common stock of $20.02, as reported by the New York Stock Exchange, and 1,464,558 shares of common stock issued with respect to the outstanding shares of Oak Park River Forest common stock, the stock consideration was valued at $29.3 million. Options to acquire 35,870 shares of Oak Park River Forest common stock that were outstanding at the OPRF Effective Time were cancelled, at the option holders election, in exchange for a cash payment in accordance with the OPRF Merger agreement of $4.2 million, to be paid after the closing date. The value of the total merger consideration at closing was $35.5 million before issuance costs of $585,000.

The transaction resulted in goodwill of $20.2 million, which is nondeductible for tax purposes, as this acquisition was a nontaxable transaction. Goodwill represents the premium paid over the fair value of the net tangible and intangible assets acquired and reflects related synergies expected from the combined operations. The Company incurred Oak Park River Forest merger-related expenses, including acquisition advisory expenses, of $2.3 million for the year ended December 31, 2019, including $2.3 million for the nine months ended September 30, 2019. The Company incurred merger-related income of $135,000 for the three months ended September 30, 2019, resulting from a legal fee credit. Core system conversion expenses were $2.0 million related to the Oak Park River Forest acquisition for the year ended December 31, 2019. Core system conversion expenses of $1.2 million and $1.9 million related to the Oak Park River Forest acquisition were recognized during the three and nine months ended September 30, 2019, respectively. These expenses are reflected in non-interest expense on the Consolidated Statements of Operations.

The acquisition of Oak Park River Forest was accounted for using the acquisition method of accounting in accordance with ASC Topic 805. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities involves significant judgment regarding methods and assumptions used to calculate estimated fair values. The fair value adjustments associated with this transaction were finalized during the first quarter of 2020.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Assets
Cash and cash equivalents	$	10,469
Securities available-for-sale		30,343
Restricted stock		414
Loans		257,423
Premises and equipment		3,488
Other real estate owned		2,201
Other intangible assets		6,220
Bank-owned life insurance		3,485
Deferred tax assets, net		5,925
Other assets		1,231
Total assets acquired		321,199
Liabilities
Deposits		290,171
Line of credit		5,655
Federal Home Loan Bank advances		5,300
Accrued expenses and other liabilities		4,766
Total liabilities assumed		305,892
Net assets acquired	$	15,307
Consideration paid
Common stock (1,464,558 shares issued at $20.02 per share)		29,320
Cash paid		6,163
Total consideration paid		35,483
Goodwill	$	20,176

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

Fair value	$	204,496
Gross contractual amounts receivable		254,755
Estimate of contractual cash flows not expected to be collected⁽¹⁾		12,987
Estimate of contractual cash flows expected to be collected		241,768

(1)	Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default.

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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table provides the unaudited pro forma information for the results of operations for the nine months ended September 30, 2019, as if the acquisition had occurred on January 1, 2019. The pro forma results combine the historical results of Oak Park River Forest into the Company’s Consolidated Statements of Operations, including the impact of certain acquisition accounting adjustments, which includes loan discount accretion, intangible assets amortization, deposit premium accretion, and borrowings, net of discount amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2019. No assumptions have been applied to the pro forma results of operations regarding possible revenue enhancements, provision for credit losses, expense efficiencies or asset dispositions. The acquisition-related expenses that have been recognized are included in net income in the following table for the nine months ended September 30, 2019.

	For the Nine Months Ended
	September 30,
	2019
Total revenues (net interest income and non-interest income)	$	208,519
Net income	$	43,160
Earnings per share—basic	$	1.13
Earnings per share—diluted	$	1.11

Revenues and earnings of the acquired company since the acquisition date has not been disclosed as it is not practicable as Oak Park River Forest 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, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury Notes	$	25,456	$	495	$	—		$	25,951
U.S. Government agencies		104,253		814		(357	)		104,710
Obligations of states, municipalities, and political subdivisions		103,895		4,417		—			108,312
Residential mortgage-backed securities
Agency		807,798		16,594		(355	)		824,037
Non-agency		62,775		1,321		—			64,096
Commercial mortgage-backed securities
Agency		256,830		7,415		(513	)		263,732
Non-agency		11,215		428		—			11,643
Corporate securities		56,059		1,364		(215	)		57,208
Asset-backed securities		50,354		89		(921	)		49,522
Total	$	1,478,635	$	32,937	$	(2,361	)	$	1,509,211

September 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	4,400	$	189	$	—	$	4,589
Total	$	4,400	$	189	$	—	$	4,589

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available-for-sale
U.S. Treasury Notes	$	41,403	$	427	$	—		$	41,830
U.S. Government agencies		165,162		542		(754	)		164,950
Obligations of states, municipalities, and political subdivisions		92,806		2,075		(49	)		94,832
Residential mortgage-backed securities
Agency		490,427		2,163		(2,354	)		490,236
Non-agency		109,501		593		(272	)		109,822
Commercial mortgage-backed securities
Agency		159,650		1,092		(1,041	)		159,701
Non-agency		31,144		130		—			31,274
Corporate securities		48,796		571		(37	)		49,330
Asset-backed securities		44,515		—		(198	)		44,317
Total	$	1,183,404	$	7,593	$	(4,705	)	$	1,186,292

December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	4,412	$	86	$	—	$	4,498
Total	$	4,412	$	86	$	—	$	4,498

The Company did not classify securities as trading during the three or nine months ended September 30, 2020 or during 2019.

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, 2020 and December 31, 2019, are summarized as follows:

			Less than 12 Months					12 Months or Longer					Total
September 30, 2020	# of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale
U.S. Government agencies		7	$	50,779	$	(357	)	$	—	$	—		$	50,779	$	(357	)
Obligations of states, municipalities and political subdivisions		1		126		—			—		—			126		—
Residential mortgage-backed securities
Agency		11		116,877		(349	)		503		(6	)		117,380		(355	)
Commercial mortgage-backed securities
Agency		7		59,474		(513	)		—		—			59,474		(513	)
Corporate securities		7		12,304		(215	)		—		—			12,304		(215	)
Asset-backed securities		8		19,239		(301	)		19,200		(620	)		38,439		(921	)
Total		41	$	258,799	$	(1,735	)	$	19,703	$	(626	)	$	278,502	$	(2,361	)

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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, 2019	# of Securities		Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Available-for-sale
U.S. Government agencies		8	$	49,318	$	(662	)	$	20,283	$	(92	)	$	69,601	$	(754	)
Obligations of states, municipalities and political subdivisions		7		13,309		(45	)		1,419		(4	)		14,728		(49	)
Residential mortgage-backed securities
Agency		50		132,703		(666	)		193,363		(1,688	)		326,066		(2,354	)
Non-agency		9		36,902		(206	)		10,126		(66	)		47,028		(272	)
Commercial mortgage-backed securities
Agency		13		67,649		(563	)		32,678		(478	)		100,327		(1,041	)
Corporate securities		4		6,103		(37	)		—		—			6,103		(37	)
Asset-backed securities		8		37,738		(198	)		—		—			37,738		(198	)
Total		99	$	343,722	$	(2,377	)	$	257,869	$	(2,328	)	$	601,591	$	(4,705	)

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The Company evaluated the securities that had an unrealized loss for other than temporary impairment and determined all declines in value to be temporary. There were 41 securities available-for-sale with unrealized losses at September 30, 2020. There were no securities held-to-maturity with unrealized losses at September 30, 2020. 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, 2020 and 2019 are listed below:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Proceeds	$	35,092	$	32,509	$	80,509	$	92,103
Gross gains		1,037		225		2,494		1,274
Gross losses		—		47		82		123

There were $1.0 million and $2.4 million in net gains reclassified from accumulated other comprehensive income into earnings for the three and nine months ended September 30, 2020, respectively. There were $178,000 and $1.2 million in net gains reclassified from accumulated other comprehensive income into earnings for the three and nine months ended September 30, 2019, respectively.

Securities posted as collateral were $994.1 million and $552.4 million at September 30, 2020 and December 31, 2019, respectively, of which carrying amounts of $407.9 million and $301.1 million were pledged at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020 and December 31, 2019, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $346.4 million and $240.4 million, respectively, and for customer repurchase agreements of $56.4 million and $55.7 million, respectively. At September 30, 2020 and December 31, 2019, there were no securities pledged for advances from the Federal Home Loan Bank. Other securities were pledged for derivative positions, letters of credit and for purposes required or permitted by law. At September 30, 2020 and December 31, 2019, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2020, 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	$	26,009	$	26,278
Due from one to five years		46,331		48,014
Due from five to ten years		163,361		166,150
Due after ten years		104,316		105,261
Mortgage-backed securities		1,138,618		1,163,508
Total	$	1,478,635	$	1,509,211
Held-to-maturity
Due in one year or less	$	502	$	505
Due from one to five years		3,898		4,084
Total	$	4,400	$	4,589

Note 5—Loan and Lease Receivables

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

	September 30,			December 31,
	2020			2019
Commercial real estate	$	1,345,060		$	1,275,058
Residential real estate		632,890			711,499
Construction, land development, and other land		239,694			279,403
Commercial and industrial		1,326,059			1,330,418
Paycheck Protection Program ("PPP")		635,378			—
Installment and other		3,072			6,484
Lease financing receivables		196,977			177,774
Total loans and leases		4,379,130			3,780,636
Net unamortized deferred fees and costs		(7,725	)		2,289
Initial direct costs		3,112			2,736
Allowance for loan and lease losses		(61,258	)		(31,936	)
Net loans and leases	$	4,313,259		$	3,753,725

	September 30,			December 31,
	2020			2019
Lease financing receivables
Net minimum lease payments	$	209,606		$	193,359
Unguaranteed residual values		5,207			1,347
Unearned income		(17,836	)		(16,932	)
Total lease financing receivables		196,977			177,774
Initial direct costs		3,112			2,736
Lease financial receivables before allowance for lease losses	$	200,089		$	180,510

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases. At September 30, 2020 and December 31, 2019, total loans and leases included the guaranteed amount of U.S. government guaranteed loans of $765.7 million and $119.8 million, respectively. At September 30, 2020 and December 31, 2019, the discount on the unguaranteed portion of U.S. government guaranteed loans was $25.7 million and $23.1 million, respectively, which are included in total loans and leases. At September 30, 2020 and December 31, 2019, installment and other loans included overdraft deposits of $301,000 and $852,000, respectively, which were reclassified as loans. At September 30, 2020 and December 31, 2019, loans and leases and loans held for sale pledged as security for borrowings were $2.4 billion and $1.8 billion, respectively.

The minimum annual lease payments for lease financing receivables as of September 30, 2020 are summarized as follows:

	Minimum Lease Payments
2020	$	18,955
2021		73,625
2022		55,426
2023		35,413
2024		18,775
Thereafter		7,412
Total	$	209,606

Originated loans and leases represent originations excluding loans initially acquired in a business combination. However, once an acquired non-impaired loan reaches its maturity date, and is re-underwritten and renewed, it is internally classified as an originated loan. Acquired impaired loans are loans acquired from a business combination with evidence of credit quality deterioration and are accounted for under ASC Topic 310-30. Acquired non-impaired loans and leases represent loans and leases acquired from a business combination without more than insignificant evidence of credit quality deterioration and are accounted for under ASC Topic 310-20. Acquired leases and revolving loans having evidence of credit quality deterioration do not qualify to be accounted for as acquired impaired loans and are accounted for under ASC Topic 310-20. The following tables summarize the balances for each respective loan and lease category as of September 30, 2020 and December 31, 2019:

September 30, 2020	Originated		Acquired Impaired		Acquired Non-Impaired		Total
Commercial real estate	$	919,862	$	117,114	$	310,879	$	1,347,855
Residential real estate		458,364		84,197		90,835		633,396
Construction, land development, and other land		234,017		4,804		213		239,034
Commercial and industrial		1,214,099		10,489		104,221		1,328,809
Paycheck Protection Program		622,191		—		—		622,191
Installment and other		2,346		214		583		3,143
Lease financing receivables		185,700		—		14,389		200,089
Total loans and leases	$	3,636,579	$	216,818	$	521,120	$	4,374,517

December 31, 2019	Originated		Acquired Impaired		Acquired Non-Impaired		Total
Commercial real estate	$	792,263	$	135,914	$	348,365	$	1,276,542
Residential real estate		483,072		100,223		128,527		711,822
Construction, land development, and other land		235,794		5,373		37,490		278,657
Commercial and industrial		1,160,996		16,909		153,660		1,331,565
Installment and other		5,372		249		944		6,565
Lease financing receivables		158,155		—		22,355		180,510
Total loans and leases	$	2,835,652	$	258,668	$	691,341	$	3,785,661

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Acquired impaired loans—As part of the Oak Park River Forest acquisition, the Bank acquired impaired loans in the amount of $52.9 million. Refer to Note 3—Acquisition for additional information regarding the transaction. 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 April 30, 2019:

Undiscounted contractual cash flows	$	74,092
Undiscounted cash flows not expected to be collected (non-accretable difference)		(11,401	)
Undiscounted cash flows expected to be collected		62,691
Accretable yield at acquisition		(9,764	)
Estimated fair value of impaired loans acquired at acquisition	$	52,927

The unpaid principal 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 $5.0 million and $2.8 million, at September 30, 2020 and December 31, 2019, respectively.

	September 30, 2020				December 31, 2019
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial real estate	$	163,146	$	117,114	$	189,969	$	135,914
Residential real estate		132,232		84,197		151,641		100,223
Construction, land development, and other land		14,085		4,804		14,841		5,373
Commercial and industrial		16,287		10,489		23,330		16,909
Installment and other		934		214		1,099		249
Total acquired impaired loans	$	326,684	$	216,818	$	380,880	$	258,668

The following table summarizes the changes in accretable yield for acquired impaired loans for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Beginning balance	$	31,868		$	46,538		$	40,009		$	37,115
Additions		—			—			—			8,501
Accretion to interest income		(5,763	)		(7,703	)		(15,420	)		(17,772	)
Reclassification from nonaccretable difference, net		5,727			5,153			7,243			16,144
Ending balance	$	31,832		$	43,988		$	31,832		$	43,988

Acquired non-impaired loans and leases—The Company acquired non-impaired loans as part of the Oak Park River Forest acquisition in the amount of $204.5 million in 2019. Refer to Note 3—Acquisition for additional information regarding the transaction.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The unpaid principal balance and carrying value for acquired non-impaired loans and leases at September 30, 2020 and December 31, 2019 were as follows:

	September 30, 2020				December 31, 2019
	Unpaid Principal Balance		Carrying Value		Unpaid Principal Balance		Carrying Value
Commercial real estate	$	318,725	$	310,879	$	356,787	$	348,365
Residential real estate		91,947		90,835		130,412		128,527
Construction, land development, and other land		280		213		38,416		37,490
Commercial and industrial		107,558		104,221		159,599		153,660
Installment and other		602		583		971		944
Lease financing receivables		15,930		14,389		23,976		22,355
Total acquired non-impaired loans and leases	$	535,042	$	521,120	$	710,161	$	691,341

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 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, 2020 and 2019 are as follows:

September 30, 2020	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land			Commercial and Industrial			Paycheck Protection Program		Installment and Other			Lease Financing Receivables			Total
Allowance for loan and lease losses
Three months ended
Beginning balance	$	14,110		$	3,741		$	1,491		$	30,108		$	—	$	36		$	1,814		$	51,300
Provisions		6,421			291			1,029			7,603			—		1			395			15,740
Charge-offs		(1,566	)		(250	)		(701	)		(3,254	)		—		—			(374	)		(6,145	)
Recoveries		19			8			53			83			—		—			200			363
Ending balance	$	18,984		$	3,790		$	1,872		$	34,540		$	—	$	37		$	2,035		$	61,258
Nine months ended
Beginning balance	$	7,965		$	1,990		$	610		$	19,377		$	—	$	50		$	1,944		$	31,936
Provisions		14,149			2,031			1,910			26,844			—		(13	)		792			45,713
Charge-offs		(3,206	)		(259	)		(701	)		(12,057	)		—		—			(1,392	)		(17,615	)
Recoveries		76			28			53			376			—		—			691			1,224
Ending balance	$	18,984		$	3,790		$	1,872		$	34,540		$	—	$	37		$	2,035		$	61,258
Ending balance:
Individually evaluated for impairment	$	4,516		$	77		$	—		$	10,189		$	—	$	—		$	—		$	14,782
Collectively evaluated for impairment		11,825			3,413			1,685			22,450			—		37			2,035			41,445
Loans acquired with deteriorated credit quality		2,643			300			187			1,901			—		—			—			5,031
Total allowance for loan and lease losses	$	18,984		$	3,790		$	1,872		$	34,540		$	—	$	37		$	2,035		$	61,258

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2020	Commercial Real Estate		Residential Real Estate		Construction, Land Development, and Other Land		Commercial and Industrial		Paycheck Protection Program		Installment and Other		Lease Financing Receivables		Total
Loans and leases ending balance:
Individually evaluated for impairment	$	39,001	$	1,636	$	—	$	37,253	$	—	$	—	$	—	$	77,890
Collectively evaluated for impairment		1,191,740		547,563		234,230		1,281,067		622,191		2,929		200,089		4,079,809
Loans acquired with deteriorated credit quality		117,114		84,197		4,804		10,489		—		214		—		216,818
Total loans and leases	$	1,347,855	$	633,396	$	239,034	$	1,328,809	$	622,191	$	3,143	$	200,089	$	4,374,517

September 30, 2019	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land		Commercial and Industrial			Installment and Other			Lease Financing Receivables			Total
Allowance for loan and lease losses
Three months ended
Beginning balance	$	8,934		$	2,171		$	691	$	17,126		$	67		$	2,143		$	31,132
Provisions		1,075			74			125		4,198			(12	)		471			5,931
Charge-offs		(1,459	)		—			—		(3,561	)		(1	)		(665	)		(5,686	)
Recoveries		3			6			—		20			1			178			208
Ending balance	$	8,553		$	2,251		$	816	$	17,783		$	55		$	2,127		$	31,585
Nine months ended
Beginning balance	$	7,540		$	1,751		$	466	$	12,932		$	49		$	2,463		$	25,201
Provisions		4,212			230			350		10,550			10			969			16,321
Charge-offs		(3,628	)		(9	)		—		(5,740	)		(5	)		(1,932	)		(11,314	)
Recoveries		429			279			—		41			1			627			1,377
Ending balance	$	8,553		$	2,251		$	816	$	17,783		$	55		$	2,127		$	31,585
Ending balance:
Individually evaluated for impairment	$	2,728		$	39		$	—	$	6,795		$	—		$	—		$	9,562
Collectively evaluated for impairment		4,458			1,612			802		10,169			53			2,127			19,221
Loans acquired with deteriorated credit quality		1,367			600			14		819			2			—			2,802
Total allowance for loan and lease losses	$	8,553		$	2,251		$	816	$	17,783		$	55		$	2,127		$	31,585

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

September 30, 2019	Commercial Real Estate		Residential Real Estate		Construction, Land Development, and Other Land		Commercial and Industrial		Installment and Other		Lease Financing Receivables		Total
Loans and leases ending balance:
Individually evaluated for impairment	$	24,071	$	2,374	$	—	$	26,731	$	—	$	—	$	53,176
Collectively evaluated for impairment		1,139,782		637,320		276,437		1,257,082		9,087		183,184		3,502,892
Loans acquired with deteriorated credit quality		142,435		109,409		4,562		18,349		267		—		275,022
Total loans and leases	$	1,306,288	$	749,103	$	280,999	$	1,302,162	$	9,354	$	183,184	$	3,831,090

The Company increased the allowance for loan and lease losses by $10.0 million and $29.3 million for the three and nine months ended September 30, 2020, respectively, and by $453,000 and $6.4 million for the three and nine months ended September 30, 2019, respectively. For acquired impaired loans, the Company increased the allowance for loan and lease losses by $295,000 and $2.3 million for the three and nine months ended September 30, 2020, respectively. The Company decreased the allowance for loan and lease losses by $480,000 and increased them by $260,000 for the three and nine months ended September 30, 2019, respectively.

For loans individually evaluated for impairment, the Company increased the allowance for loan and lease losses by $768,000 and $4.1 million for the three and nine months ended September 30, 2020, respectively, and by $276,000 and $2.9 million for the three and nine months ended September 30, 2019, respectively. For loans collectively evaluated for impairment, the Company increased the allowance for loan and lease losses by $8.9 million and $23.0 million for the three and nine months ended September 30, 2020, respectively, and by $850,000 and $3.4 million for the three and nine months ended September 30, 2019, respectively.

An allowance for loan and lease loss allocation has not been made for Paycheck Protection Program (“PPP”) loans as the loans have a 100% SBA guarantee. On a quarterly basis, the Company assesses the collectability of its government guarantee using historical experience.

The following tables summarize the recorded investment, unpaid principal balance, and related allowance for loans and leases considered impaired as of September 30, 2020 and December 31, 2019, which exclude acquired impaired loans. 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.

September 30, 2020	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial real estate	$	26,129	$	27,378	$	—
Residential real estate		1,364		1,451		—
Commercial and industrial		19,010		20,698		—
With an allowance recorded
Commercial real estate		12,872		14,624		4,516
Residential real estate		272		274		77
Commercial and industrial		18,243		19,738		10,189
Total impaired loans	$	77,890	$	84,163	$	14,782

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2019	Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded
Commercial real estate	$	16,556	$	19,808	$	—
Residential real estate		2,165		2,253		—
Construction, land development, and other land		2,644		3,000		—
Commercial and industrial		19,211		20,398		—
With an allowance recorded
Commercial real estate		9,840		10,691		2,614
Residential real estate		233		233		124
Commercial and industrial		18,092		19,285		7,952
Total impaired loans	$	68,741	$	75,668	$	10,690

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:

September 30, 2020	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial real estate	$	22,511	$	927
Residential real estate		1,615		26
Construction, land development, and other land		2,984		220
Commercial and industrial		16,991		493
With an allowance recorded
Commercial real estate		13,329		526
Residential real estate		460		21
Commercial and industrial		21,352		1,078
Total impaired loans	$	79,242	$	3,291

September 30, 2019	Average Recorded Investment		Interest Income Recognized
With no related allowance recorded
Commercial real estate	$	9,379	$	761
Residential real estate		1,914		60
Commercial and industrial		11,889		482
With an allowance recorded
Commercial real estate		8,238		479
Residential real estate		207		7
Commercial and industrial		13,543		668
Total impaired loans	$	45,170	$	2,457

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2020 and December 31, 2019:

September 30, 2020	Commercial Real Estate		Residential Real Estate		Construction, Land Development, and Other Land		Commercial and Industrial		Paycheck Protection Program		Installment and Other		Lease Financing Receivables		Total
Pass	$	987,053	$	516,858	$	203,630	$	981,626	$	622,191	$	2,664	$	195,623	$	3,509,645
Watch		165,769		26,674		29,171		251,750		—		264		50		473,678
Special Mention		36,614		3,583		1,429		51,891		—		—		2,475		95,992
Substandard		41,305		2,084		—		33,053		—		1		1,464		77,907
Doubtful		—		—		—		—		—		—		477		477
Loss		—		—		—		—		—		—		—		—
Total	$	1,230,741	$	549,199	$	234,230	$	1,318,320	$	622,191	$	2,929	$	200,089	$	4,157,699

December 31, 2019	Commercial Real Estate		Residential Real Estate		Construction, Land Development, and Other Land		Commercial and Industrial		Installment and Other		Lease Financing Receivables		Total
Pass	$	984,881	$	584,363	$	247,775	$	1,087,856	$	6,013	$	177,696	$	3,088,584
Watch		99,803		21,856		18,181		159,282		302		8		299,432
Special Mention		27,484		3,648		4,684		26,944		—		1,799		64,559
Substandard		28,460		1,732		2,644		40,574		1		728		74,139
Doubtful		—		—		—		—		—		279		279
Loss		—		—		—		—		—		—		—
Total	$	1,140,628	$	611,599	$	273,284	$	1,314,656	$	6,316	$	180,510	$	3,526,993

The following tables summarize contractual delinquency information for acquired non-impaired and originated loans and leases by category at September 30, 2020 and December 31, 2019:

September 30, 2020	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	$	282	$	458	$	—	$	21,067	$	21,807	$	1,208,934	$	1,230,741
Residential real estate		1,038		974		—		1,843		3,855		545,344		549,199
Construction, land development, and other land		2,035		—		—		—		2,035		232,195		234,230
Commercial and industrial		3,417		106		—		19,048		22,571		1,295,749		1,318,320
Paycheck Protection Program		—		—		—		—		—		622,191		622,191
Installment and other		7		—		—		1		8		2,921		2,929
Lease financing receivables		893		776		—		1,237		2,906		197,183		200,089
Total	$	7,672	$	2,314	$	—	$	43,196	$	53,182	$	4,104,517	$	4,157,699

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

December 31, 2019	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and Accruing		Non- accrual		Total Past Due		Current		Total
Commercial real estate	$	14,269	$	5,153	$	—	$	12,274	$	31,696	$	1,108,932	$	1,140,628
Residential real estate		3,187		460		—		1,371		5,018		606,581		611,599
Construction, land development, and other land		—		4,460		—		—		4,460		268,824		273,284
Commercial and industrial		7,789		3,594		—		22,151		33,534		1,281,122		1,314,656
Installment and other		133		2		—		1		136		6,180		6,316
Lease financing receivables		585		532		—		475		1,592		178,918		180,510
Total	$	25,963	$	14,201	$	—	$	36,272	$	76,436	$	3,450,557	$	3,526,993

Trouble debt restructurings (“TDRs”) are granted due to borrower financial difficulty and provide for a modification of loan repayment terms. TDRs are treated in the same manner as impaired loans for purposes of calculating the allowance for loan and lease losses. The tables below present TDRs by loan category as of September 30, 2020 and December 31, 2019:

September 30, 2020	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserves
Accruing:
Commercial real estate		7	$	2,013	$	2,013	$	—	$	104
Commercial and industrial		2		119		119		—		120
Residential real estate		2		161		161		—		—
Total accruing		11		2,293		2,293		—		224
Non-accruing:
Commercial real estate		6		2,441		2,075		366		427
Commercial and industrial		12		4,991		4,136		855		3,003
Residential real estate		1		84		84		—		—
Total non-accruing		19		7,516		6,295		1,221		3,430
Total troubled debt restructurings		30	$	9,809	$	8,588	$	1,221	$	3,654

December 31, 2019	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Charge-offs		Specific Reserves
Accruing:
Commercial real estate		5	$	1,451	$	1,451	$	—	$	223
Commercial and industrial		2		129		129		—		118
Residential real estate		2		191		191		—		—
Total accruing		9		1,771		1,771		—		341
Non-accruing:
Commercial real estate		6		2,777		2,600		177		513
Commercial and industrial		11		8,048		6,096		1,952		1,312
Residential real estate		1		104		104		—		—
Total non-accruing		18		10,929		8,800		2,129		1,825
Total troubled debt restructurings		27	$	12,700	$	10,571	$	2,129	$	2,166

In addition, there was no commitment outstanding on troubled debt restructurings at September 30, 2020, and a $500,000 commitment outstanding on troubled debt restructurings at December 31, 2019.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Loans modified as troubled debt restructurings that occurred during the three and nine months ended September 30, 2020 and 2019 were:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Accruing:
Beginning balance	$	3,151		$	1,529		$	1,771		$	1,813
Additions		604			—			604			113
Net payments		(1,462	)		(242	)		(1,538	)		(291	)
Net transfers from non-accrual		—			917			1,456			569
Ending balance		2,293			2,204			2,293			2,204
Non-accruing:
Beginning balance		7,449			7,834			8,800			7,314
Additions		—			2,893			5,633			4,321
Net payments		(302	)		(540	)		(1,688	)		(1,266	)
Charge-offs		(852	)		(62	)		(4,994	)		(592	)
Net transfers to accrual		—			(917	)		(1,456	)		(569	)
Ending balance		6,295			9,208			6,295			9,208
Total troubled debt restructurings	$	8,588		$	11,412		$	8,588		$	11,412

There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the three and nine months ended September 30, 2020. There were no troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the three months ended September 30, 2019 and $348,000 during the nine months ended September 30, 2019.

At September 30, 2020 and December 31, 2019, the reserve for unfunded commitments was $2.4 million and $1.2 million, respectively. During the three and nine months ended September 30, 2020, the provision for unfunded commitments was $519,000 and $1.2 million, respectively. During the three and nine months ended September 30, 2019, the provision for unfunded commitments was $51,000 and $78,000, respectively. There were no charge-offs or recoveries related to the reserve for unfunded commitments during the periods.

Note 7—Servicing Assets

Activity for servicing assets and the related changes in fair value for the three and nine months ended September 30, 2020 and 2019 was as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020			2019
Beginning balance	$	18,351	$	19,760		$	19,471		$	19,693
Additions, net		1,794		1,789			4,449			4,340
Changes in fair value		1,122		(1,610	)		(2,653	)		(4,094	)
Ending balance	$	21,267	$	19,939		$	21,267		$	19,939

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2020 and December 31, 2019 were as follows:

	September 30,		December 31,
	2020		2019
Loan portfolios serviced for:
SBA guaranteed loans	$	1,333,598	$	1,231,959
USDA guaranteed loans		121,650		119,047
Total	$	1,455,248	$	1,351,006

Loan servicing revenue totaled $2.9 million and $2.7 million for the three months ended September 30, 2020 and 2019, respectively. Loan servicing revenue totaled $8.7 million and $7.9 million for the nine months ended September 30, 2020 and 2019, respectively. Loan servicing asset revaluation, which represents the changes in fair value of servicing assets, resulted in an upward valuation of $1.1 million for three months ended September 30, 2020 and a downward valuation of $1.6 million for three months ended September 30, 2019, respectively. Loan servicing asset revaluation resulted in downward valuations of $2.7 million and $4.1 million for the nine months ended September 30, 2020 and 2019, respectively.

The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in secondary market premiums contribute to the change in fair value of servicing rights while prepayment speed assumptions have the most significant impact on the fair value of servicing rights.

Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which may result in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the conditions existing and the assumptions used as of a particular point in time, and those assumptions may change over time. Refer to Note 15—Fair Value Measurement for further details.

Note 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, 2020 and 2019:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Beginning balance	$	8,652		$	6,531		$	9,896		$	5,041
Acquisitions of OREO through business combination		—			—			—			2,201
Net additions to OREO		41			704			127			1,240
Proceeds from sales of OREO		(224	)		(745	)		(874	)		(1,802	)
Gains (losses) on sales of OREO		(41	)		38			44			11
Valuation adjustments		(278	)		(26	)		(1,043	)		(189	)
Ending balance	$	8,150		$	6,502		$	8,150		$	6,502

At September 30, 2020 and December 31, 2019, the balance of real estate owned included $1.1 million and $1.5 million, respectively, of foreclosed residential real estate properties recorded as a result of obtaining physical possession of the property.

At September 30, 2020 and December 31, 2019, the recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process was $3.4 million and $2.1 million, respectively.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

There were no internally financed sales of OREO for the three and nine months ended September 30, 2020. Proceeds from internally financed sales of OREO were $183,000 for the nine months ended September 30, 2019. There were no internally financed sales of OREO for the three months ended September 30, 2019.

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, 2020 and 2019:

	For the Three Months Ended September 30,
	2020								2019
	Goodwill		Core Deposit Intangible			Customer Relationship Intangible			Goodwill		Core Deposit Intangible			Customer Relationship Intangible
Beginning balance	$	148,353	$	25,459		$	2,658		$	145,638	$	32,982		$	2,926
Amortization		—		(1,825	)		(122	)		—		(1,936	)		(67	)
Ending balance	$	148,353	$	23,634		$	2,536		$	145,638	$	31,046		$	2,859
Accumulated amortization	N/A		$	31,832		$	680		N/A		$	24,420		358
Weighted average remaining amortization period	N/A		5.8 Years			9.7 Years			N/A		6.7 Years			10.7 Years

	Nine Months Ended September 30,
	2020								2019
	Goodwill		Core Deposit Intangible			Customer Relationship Intangible			Goodwill		Core Deposit Intangible			Customer Relationship Intangible
Beginning balance	$	148,353	$	29,111		$	2,791		$	128,177	$	30,360		$	3,059
Additions		—		—			—			17,461		6,220			—
Amortization		—		(5,477	)		(255	)		—		(5,534	)		(200	)
Ending balance	$	148,353	$	23,634		$	2,536		$	145,638	$	31,046		$	2,859
Accumulated amortization	N/A		$	31,832		$	680		N/A		$	24,420		358
Weighted average remaining amortization period	N/A		5.8 Years			9.7 Years			N/A		6.7 Years			10.7 Years

The Company added additional goodwill and core deposit intangible assets in conjunction with the Oak Park River Forest acquisition. Please refer to Note 3—Acquisition for further details.

The following table presents the estimated amortization expense for core deposit intangible and customer relationship intangible assets remaining at September 30, 2020:

	Estimated Amortization
2020	$	1,894
2021		6,998
2022		6,426
2023		4,370
2024		2,286
Thereafter		4,196
Total	$	26,170

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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, 2020 and 2019 was 28.5% and 27.7%, respectively. The Company recorded discrete income tax provision of $231,000 and a benefit of $64,000 related to the exercise of stock options and vesting of restricted shares for the nine months ended September 30, 2020 and 2019, respectively.

Net deferred tax assets decreased to $35.9 million at September 30, 2020 compared to $38.3 million at December 31, 2019. The net decrease in the total net deferred tax assets recorded as of September 30, 2020 was a result of an increase in unrealized gains on available-for-sale securities and decreases in net operating losses and tax credits, partially offset by an increase in allowance for loan and lease losses, and unearned processing fees related to PPP originations.

Note 11—Deposits

The composition of deposits was as follows as of September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
Non-interest-bearing demand deposits	$	1,718,682	$	1,279,641
Interest-bearing checking accounts		584,682		338,185
Money market demand accounts		1,153,433		881,387
Other savings		542,741		475,839
Time deposits (below $250,000)		622,328		916,723
Time deposits ($250,000 and above)		188,379		255,802
Total deposits	$	4,810,245	$	4,147,577

Time deposits of $250,000 or more included $35.0 million and $41.0 million of brokered deposits at September 30, 2020 and December 31, 2019, respectively.

Note 12—Other Borrowings

The following is a summary of the Company’s other borrowings as of September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
Paycheck Protection Program Liquidity Facility	$	449,610	$	—
Line of credit		—		—
Federal Home Loan Bank advances		215,000		490,000
Securities sold under agreements to repurchase		45,950		49,638
Total	$	710,560	$	539,638

On April 21, 2020, the Bank entered into a Letter Agreement with the Federal Reserve Bank of Chicago that allows the Bank to access the Paycheck Protection Program Liquidity Facility (the “PPPLF”). Under the terms of the PPPLF, the Bank will pledge loans originated under the PPP to the Federal Reserve Bank of Chicago as collateral for available advances under the PPPLF. Advances under the PPPLF will be an amount equal to the aggregate principal amount of PPP loans pledged by Byline Bank, carry an interest rate of 35 basis points and mature on the maturity date of the PPP loans pledged as collateral for the advance. As of September 30, 2020, the PPPLF had $449.6 million with an interest rate of 0.35% with various maturity dates in April 2022 and May 2022.

Byline Bank has the capacity to borrow funds from the discount window of the Federal Reserve System. As of September 30, 2020 and December 31, 2019, there were no outstanding advances under the Federal Reserve Bank discount window line. The Company pledges loans and leases as collateral for the Federal Reserve Bank discount window borrowing. Refer to Note 5—Loan and Lease Receivables for additional discussion.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2020, fixed-rate Federal Home Loan Bank (“FHLB”) advances totaled $215.0 million, with interest rates ranging from 0.00% to 0.25% and maturities ranging from October 2020 and May 2021. Advances from the FHLB are collateralized by residential real estate loans, commercial real estate loans, and securities. The Bank’s maximum borrowing capacity is limited to 35% of total assets. Required investment in FHLB stock is $4.50 for every $100 in advances.

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

On October 13, 2016, the Company entered into a $30.0 million revolving credit agreement with a correspondent bank. Through subsequent amendments, the revolving credit agreement was reduced to $15.0 million and the maturity of the credit facility was extended to October 9, 2020. The amended revolving line of credit bears interest at either the London Interbank Offered Rate (“LIBOR”) plus 195 basis points or the Prime Rate minus 75 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 75 basis points. At September 30, 2020 and December 31, 2019, the line of credit had no outstanding balance. On October 9, 2020, the Company extended the maturity of the credit facility to October 8, 2021.

The Company hedges interest rates on borrowed funds using interest rate swaps through which the Company receives variable amounts and pays fixed amounts. Refer to Note 16—Derivative Instruments and Hedging Activities for additional discussion.

The following table presents short-term credit lines available for use as of September 30, 2020 and December 31, 2019:

	September 30,		December 31,
	2020		2019
Available federal funds lines ⁽¹⁾	$	115,000	$	115,000
Federal Reserve Bank discount window line		968,693		547,798
Federal Home Loan Bank line		1,999,298		1,390,698

(1)

The Company did not have an outstanding balance on its federal funds lines as of September 30, 2020 and December 31, 2019.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 13—Subordinated Notes and Junior Subordinated Debentures

On June 26, 2020, the Company issued $50.0 million in 6.00% fixed-to-floating subordinated notes that mature on July 1, 2030. On August 3, 2020, the Company issued an additional $25.0 million as part of the same series of notes as the $50.0 million issued on June 26, 2020. The subordinated notes bear a fixed interest rate of 6.00% until July 1, 2025 and a floating interest rate equal to a benchmark rate, which is expected to be three-month Secured Overnight Financing Rate plus 588 basis points thereafter until maturity. These transactions resulted in debt issuance costs of approximately $1.7 million that will be amortized over 10 years.

As of September 30, 2020, the net liability outstanding of the subordinated notes was $73.3 million The Company may, at its option, redeem the notes, in whole or in part, on a semi-annual basis beginning on July 1, 2025, subject to obtaining the prior approval of the Federal Reserve to the extent such approval is then required. The subordinated notes are intended to qualify as Tier 2 capital for regulatory capital purposes

At September 30, 2020 and December 31, 2019, the Company’s junior subordinated debentures by issuance were as follows:

Name of Trust	Aggregate Principal Amount September 30, 2020			Aggregate Principal Amount December 31, 2019			Stated Maturity	Contractual Rate at September 30, 2020			Interest Rate Spread
Metropolitan Statutory Trust 1	$	35,000		$	35,000		March 17, 2034		3.03	%	Three-month LIBOR + 2.79%
RidgeStone Capital Trust I		—			1,500		June 30, 2033	n/a			Five-year LIBOR + 3.50%
First Evanston Bancorp Trust I		10,000			10,000		March 15, 2035		2.03	%	Three-month LIBOR + 1.78%
Total liability, at par		45,000			46,500
Discount		(8,669	)		(9,166	)
Total liability, at carrying value	$	36,331		$	37,334

In 2004, the Company’s predecessor, Metropolitan Bank Group, Inc., issued $35.0 million floating rate junior subordinated debentures to Metropolitan Statutory Trust 1, which was formed for the issuance of trust preferred securities. The debentures bear interest at three-month LIBOR plus 2.79% (3.03% and 4.69% at September 30, 2020 and December 31, 2019, 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 $43,000 and $71,000 as of September 30, 2020 and December 31, 2019, respectively.

As part of the Ridgestone acquisition, the Company assumed the obligations to RidgeStone Capital Trust I of $1.5 million in principal amount, which was formed for the issuance of trust preferred securities. Beginning on June 30, 2008, the interest rate reset to the five-year LIBOR plus 3.50% (6.38% at December 31, 2019), which was in effect until June 30, 2023 and updated every five years. Interest was paid on a quarterly basis. The Company had the right to redeem the debentures, in whole or in part, on any interest payment date on or after June 30, 2008. There was no accrued interest payable as of December 31, 2019. On February 25, 2020 the Company notified the trustee of RidgeStone Capital Trust I of its intent to redeem the debentures. On June 30, 2020, the Company redeemed the debentures, in whole and at the par value of $1.5 million and recognized a charge of $112,000 to non-interest income for the remaining discount.

As part of the First Evanston acquisition, the Company assumed the obligations to First Evanston Bancorp Trust I of $10.0 million in principal amount, which was formed for the issuance of trust preferred securities. Beginning on March 15, 2010, the interest rate reset to the three-month LIBOR plus 1.78% (2.03% and 3.67% at September 30, 2020 and December 31, 2019, respectively), which is in effect until the debentures mature in 2035. Interest is paid on a quarterly basis. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after March 2010. The Company has the option to defer interest payments on the debentures from time to time for a period not to exceed five consecutive years. Accrued interest payable was $9,000 and $17,000 as of September 30, 2020 and December 31, 2019, respectively.

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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.

Note 14—Commitments and Contingent Liabilities

Legal contingencies—In the ordinary course of business, the Company and Bank have various outstanding commitments and contingent liabilities that are not recognized in the accompanying consolidated financial statements. In addition, the Company may be a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is currently not expected to have a material adverse effect on the Company’s Consolidated Financial Statements.

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

The minimum annual rental commitments for operating leases subsequent to September 30, 2020, exclusive of taxes and other charges, are summarized as follows:

	Minimum Rental Commitments
2020	$	1,114
2021		4,148
2022		2,380
2023		1,382
2024		1,249
Thereafter		2,148
Total	$	12,421

The Company’s rental expenses for the three months ended September 30, 2020 and 2019 were $1.6 million and $1.4 million respectively, and for the nine months ended September 30, 2020 and 2019 were $4.9 million and $4.2 million, respectively. During the three months ended September 30, 2020 and 2019, the Company received $184,000 and $190,000 respectively in sublease income that is included in the Consolidated Statements of Operations as a reduction of occupancy expense. For the nine months ended September 30, 2020 and 2019, the Company received $549,000 and $560,000, respectively, in sublease income. The total amount of minimum rentals to be received in the future on these subleases is approximately $808,000, 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.

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

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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following table summarizes the contract or notional amount of outstanding loan and lease commitments at September 30, 2020 and December 31, 2019:

	September 30, 2020						December 31, 2019
	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	85,886	$	962,547	$	1,048,433	$	55,852	$	908,382	$	964,234
Letters of credit		580		61,863		62,443		724		65,514		66,238
Total	$	86,466	$	1,024,410	$	1,110,876	$	56,576	$	973,896	$	1,030,472

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

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

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 1.25% to 18.00% and maturities up to 2050. Variable rate loan commitments have interest rates ranging from 1.25% to 8.25% and maturities up to 2048.

Note 15—Fair Value Measurement

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

These types of inputs create the following fair value hierarchy:

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

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:

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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 2020 and 2019, all of the ratings derived by the Company were “BBB” or better with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined, the Company obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets.

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

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

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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The following tables summarize the Company’s financial assets and liabilities that were measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019:

			Fair Value Measurements Using
September 30, 2020	Fair Value		Level 1		Level 2		Level 3
Financial assets
Securities available-for-sale
U.S. Treasury Notes	$	25,951	$	25,951	$	—	$	—
U.S. Government agencies		104,710		—		104,710		—
Obligations of states, municipalities, and political subdivisions		108,312		—		108,312		—
Mortgage-backed securities; residential
Agency		824,037		—		824,037		—
Non-Agency		64,096		—		64,096		—
Mortgage-backed securities; commercial
Agency		263,732		—		263,732		—
Non-Agency		11,643		—		11,643		—
Corporate securities		57,208		—		57,208		—
Asset-backed securities		49,522		—		49,522		—
Equity and other securities, at fair value
Mutual funds		2,992		2,992		—		—
Equity securities		5,343		—		4,659		684
Servicing assets		21,267		—		—		21,267
Derivative assets		19,133		—		19,133		—
Financial liabilities
Derivative liabilities		20,327		—		20,327		—

			Fair Value Measurements Using
December 31, 2019	Fair Value		Level 1		Level 2		Level 3
Financial assets
Securities available-for-sale
U.S. Treasury Notes	$	41,830	$	41,830	$	—	$	—
U.S. Government agencies		164,950		—		164,950		—
Obligations of states, municipalities, and political subdivisions		94,832		—		94,832		—
Mortgage-backed securities; residential
Agency		490,236		—		490,236		—
Non-Agency		109,822		—		109,822		—
Mortgage-backed securities; commercial
Agency		159,701		—		159,701		—
Non-Agency		31,274		—		31,274		—
Corporate securities		49,330		—		49,330		—
Asset-backed securities		44,317		—		44,317		—
Equity and other securities, at fair value
Mutual funds		2,952		2,952		—		—
Equity securities		5,079		—		4,379		700
Servicing assets		19,471		—		—		19,471
Derivative assets		7,960		—		7,960		—
Financial liabilities
Derivative liabilities		8,519		—		8,519		—

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

The Company did not have any transfers to or from Level 3 of the fair value hierarchy during the nine months ended September 30, 2020 and 2019.

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,
	2020			2019		2020			2019
	Investment Securities					Servicing Assets
Balance, beginning of period	$	700		$	886	$	19,471		$	19,693
Additions, net		—			—		4,449			4,340
Amortization		—			4		—			—
Change in fair value		(16	)		1		(2,653	)		(4,094	)
Balance, end of period	$	684		$	891	$	21,267		$	19,939

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, 2020:

Financial Instruments

Valuation Technique

Unobservable Inputs

Range of

Inputs

Weighted

Average

Range

Impact to

Valuation from an

Increased or

Higher Input Value

Single issuer trust preferred

Discounted cash flow

Discount rate

4.4% - 6.4%

5.3

Decrease

Servicing assets

Discounted cash flow

Prepayment speeds

3.2% - 31.0%

16.0

Decrease

Discount rate

0.1% - 43.3%

8.9

Decrease

Expected weighted

average loan life

0.1 - 8.6 years

3.7 years

Increase

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

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

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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2020 and December 31, 2019:

			Fair Value Measurements Using
September 30, 2020	Fair Value		Level 1		Level 2		Level 3
Non-recurring
Impaired loans (excluding acquired impaired loans)
Commercial real estate	$	34,485	$	—	$	—	$	34,485
Residential real estate		1,559		—		—		1,559
Commercial and industrial		27,064		—		—		27,064
Assets held for sale		15,232		—		—		15,232
Other real estate owned		8,150		—		—		8,150

			Fair Value Measurements Using
December 31, 2019	Fair Value		Level 1		Level 2		Level 3
Non-recurring
Impaired loans (excluding acquired impaired loans)
Commercial real estate	$	23,782	$	—	$	—	$	23,782
Residential real estate		2,274		—		—		2,274
Construction, land development, and other land		2,644		—		—		2,644
Commercial and industrial		29,351		—		—		29,351
Assets held for sale		15,362		—		—		15,362
Other real estate owned		9,896		—		—		9,896

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

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

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

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

Loans held for 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.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Loan and lease receivables, net—For certain variable rate loans that reprice frequently and with no significant changes in credit risk, fair value is estimated at carrying value. The fair value of other types of loans is estimated using an exit price notion. It is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits—The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows, using rates currently offered for deposits of similar remaining maturities.

Paycheck Protection Program Liquidity Facility—The carrying amount approximates fair value.

Federal Home Loan Bank advances—The fair value of FHLB advances is estimated by discounting the agreements based on maturities using rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date.

Securities sold under agreements to repurchase—The carrying amount approximates fair value due to maturities of less than ninety days.

Subordinated notes—The fair value is based on available market prices.

Junior subordinated debentures—The fair value of junior subordinated debentures, in the form of trust preferred securities, is determined using rates currently available to the Company for debt with similar terms and remaining maturities.

Accrued interest receivable and payable—The carrying amount approximates fair value.

Commitments to extend credit and letters of credit—The fair values of these off-balance sheet commitments to extend credit and commercial and letters of credit are not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.

The estimated fair values of financial instruments not carried at fair value and levels within the fair value hierarchy are as follows:

			September 30,				December 31,
	Fair Value		2020				2019
	Hierarchy Level		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets
Cash and due from banks		1	$	47,433	$	47,433	$	48,228	$	48,228
Interest bearing deposits with other banks		2		53,645		53,645		32,509		32,509
Securities held-to-maturity		2		4,400		4,589		4,412		4,498
Other restricted stock		2		9,652		9,652		22,127		22,127
Loans held for sale		3		49,049		54,801		11,732		12,935
Loans and lease receivables, net (less impaired loans at fair value		3		4,250,151		4,237,748		3,695,674		3,661,724
Accrued interest receivable		3		18,311		18,311		13,283		13,283
Financial liabilities
Non-interest-bearing deposits		2		1,718,682		1,718,682		1,279,641		1,279,641
Interest-bearing deposits		2		3,091,563		3,093,703		2,867,936		2,873,380
Accrued interest payable		2		2,460		2,460		3,677		3,677
Paycheck Protection Program Liquidity Facility		2		449,610		449,610		—		—
Federal Home Loan Bank advances		2		215,000		215,000		490,000		490,000
Securities sold under repurchase agreement		2		45,950		45,950		49,638		49,638
Subordinated notes		2		73,299		77,441		—		—
Junior subordinated debentures		3		36,331		40,414		37,334		42,881

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 16—Derivative Instruments and Hedge Activities

As required by ASC 815, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. The Company records derivative assets and derivative liabilities on the 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, 2020 and December 31, 2019:

	September 30, 2020						December 31, 2019
			Fair Value						Fair Value
	Notional Amount		Other Assets		Other Liabilities		Notional Amount		Other Assets		Other Liabilities
Derivatives not designated as hedging instruments
Other interest rate derivatives	$	373,782	$	19,133	$	20,307	$	332,056	$	7,960	$	8,507
Other credit derivatives		8,653		—		20		9,302		—		12
Total derivatives	$	382,435	$	19,133	$	20,327	$	341,358	$	7,960	$	8,519

Interest rate swaps designated as cash flow hedges—There were no cash flow hedges outstanding at September 30, 2020 and December 31, 2019. In September 2019, the Company terminated $250.0 million interest rate swaps designated as cash flow hedges of interest payments associated with certain FHLB advances, which were executed to reduce interest rate risk in a declining rate environment. The transaction resulted in a net loss of $383,000, net of tax, which was the clean value at the termination date. As of September 30, 2020, the remaining balance in accumulated other comprehensive loss was $320,000, which is being amortized over the original life of the cash flow hedge. At September 30, 2020, the Company estimates $92,000 of the unrealized loss to be reclassified as an increase to interest expense during the next twelve months.

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, 2020

September 30, 2019

Amount of

Loss

Recognized in

OCI

Amount of

Loss

Reclassified

from OCI to

Income as an

Increase to

Interest

Expense

Amount of

Gain (Loss)

Recognized in

Other

Non-Interest

Income

Amount of

Loss

Recognized in

OCI

Amount of

Gain

Reclassified

from OCI to

Income as a

Decrease to

Interest

Expense

Amount of

Gain (Loss)

Recognized in

Other

Non-Interest

Income

Interest rate swaps

—

(64

)

—

(5,484

)

1,643

—

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements and/or the Company has not elected to apply hedge accounting. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

Other interest rate derivatives— The Company also enters into derivative transactions through products with its commercial customers and simultaneously enters into an offsetting interest rate derivative transaction with third-parties. These transactions allow the Company's borrowers to effectively convert a variable rate loan into a fixed rate loan. The total combined notional amount was $373.8 million as of September 30, 2020 with maturities ranging from January 2022 to March 2030. The fair values of the interest rate derivative agreements are reflected in other assets and other liabilities with corresponding gains or losses reflected in non-interest income. During the three months ended September 30, 2020 and 2019, there were $41,000 and $170,000 of transaction fees, respectively, included in other non-interest income, related to these derivative instruments. During the nine months ended September 30, 2020 and 2019, there were $700,000 and $886,000 of transaction fees, respectively, included in other non-interest income, related to these derivative instruments.

These instruments are inherently subject to market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the Company’s risk of loss when the counterparty to a derivative contract fails to perform according to the terms of the agreement. Market and credit risks are managed and monitored as part of the Company’s overall asset-liability management process. The credit risk related to derivatives entered into with certain qualified borrowers is managed through the Company’s loan underwriting process. The Company’s loan underwriting process also approves the Bank’s swap counterparty used to mirror the borrowers’ swap. The Company has a bilateral agreement with each swap counterparty that provides that fluctuations in derivative values are to be fully collateralized with either cash or securities.

The following table reflects other interest rate derivatives as of September 30, 2020:

Notional amounts	$	373,782
Derivative assets fair value		19,133
Derivative liabilities fair value		20,307
Weighted average pay rates		4.48	%
Weighted average receive rates		2.31	%
Weighted average maturity	6.1 years

Other credit derivatives— The Company has entered into risk participation agreements with counterparty banks to assume a portion of the credit risk related to borrower transactions. The credit risk related to these other credit derivatives is managed through the Company’s loan underwriting process. The total notional amount was $8.7 million and $9.3 million as of September 30, 2020 and December 31, 2019, respectively. The fair value of the other credit derivatives are reflected in other liabilities with corresponding gains or losses reflected in non-interest income.

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

The following table reflects amounts included in non-interest income in the Consolidated Statements of Operations relating to derivative instruments that are not designated in a hedging relationship for the three and nine months ended September 30, 2020 and 2019:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2020		2019			2020			2019
Other interest rate derivatives	$	113	$	(220	)	$	(627	)	$	(592	)
Other credit derivatives		3		66			(8	)		62
Total	$	116	$	(154	)	$	(635	)	$	(530	)

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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, 2020						December 31, 2019
	Derivative Assets Fair Value			Derivative Liabilities Fair Value			Derivative Assets Fair Value			Derivative Liabilities Fair Value
Gross amounts recognized	$	19,133		$	20,327		$	7,960		$	8,519
Less: Amounts offset in the Consolidated Statements of Financial Condition		—			—			—			—
Net amount presented in the Consolidated Statements of Financial Condition	$	19,133		$	20,327		$	7,960		$	8,519
Gross amounts not offset in the Consolidated Statements of Financial Condition
Offsetting derivative positions		—			—			(1	)		(1	)
Collateral posted		(19,133	)		(20,327	)		(7,959	)		(8,518	)
Net credit exposure	$	—		$	—		$	—		$	—

As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $20.3 million. The Company has posted $20.9 collateral related to these agreements as of September 30, 2020. If the Company had breached any of these provisions at September 30, 2020, it could have been required to settle its obligations under the agreements at their termination value of $20.3 million. For purposes of this disclosure, the amount of posted collateral by the counterparties is limited to the amount offsetting the derivative asset and derivative liability.

Note 17 – Share-Based Compensation

In June 2017, the Company adopted the 2017 Omnibus Incentive Compensation Plan (the “Omnibus Plan”) in connection with our IPO. The Omnibus Plan provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights and other equity-based, equity-related or cash-based awards. A total of 1,550,000 shares of our common stock have been reserved for issuance under the Omnibus Plan. As of September 30, 2020, there were 1,001,731 shares available for future grants under the Omnibus Plan.

On July 6, 2017, in conjunction with the completion of the IPO, the Company granted 58,900 restricted shares of the Company’s common stock to certain key employees, pursuant to the Omnibus Plan. These shares fully vested on July 6, 2020. A total of 11,898 restricted shares were also granted during the year ended December 31, 2017 in connection with the recruitment of employees. These restricted shares vest ratably over a four year period.

During 2018, the Company granted 131,157 shares of restricted common stock, par value $0.01 per share. Of this total, 101,559 restricted shares will vest ratably over four years on each anniversary of the grant date and 14,380 restricted shares will vest ratably over three years on each anniversary of the grant date, all subject to continued employment. A total of 4,053 restricted shares have vested.

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 2018 award, 25% of the shares will be earned at threshold performance, 100% will be earned at target and 50th percentile performance, and up to 125% of the shares with above target and 75th percentile performance. Any earned performance shares will vest on the third anniversary of the grant date.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

During 2019, the Company granted 210,622 shares of restricted common stock, par value $0.01 per share. Of this total, 111,823 restricted shares will vest ratably over four years on each anniversary of the grant date, and 72,570 restricted shares will vest ratably over three years on each anniversary of the grant date, all subject to continued employment. A total of 5,254 share have vested.

In addition, 20,975 performance-based restricted shares were included in the 2019 grants. The number of shares which may be earned under the award is dependent upon the Company’s return on average assets, weighted equally, over a three-year period ending December 31, 2021, measured against a peer group consisting of publicly-traded bank holding companies. Results will be measured cumulatively at the end of the three years. Any earned shares will vest on the third anniversary of the grant date.

During 2020, the Company granted 175,493 shares of restricted common stock, par value $0.01 per share. Of this total, 104,779 restricted shares will vest ratably over four years on each anniversary of the grant date and 38,786 restricted shares will vest ratably over three years on each anniversary of the grant date, all subject to continued employment.

In addition, 31,928 performance-based restricted shares were included in the February 2020 grant. The number of shares which may be earned under the award is dependent upon the Company’s return on average assets, weighted equally, over a three-year period ending December 31, 2022, measured against a peer group consisting of publicly-traded bank holding companies. Results will be measured cumulatively at the end of the three years. Any earned shares will vest on the third anniversary of the grant date

The following table discloses the changes in restricted shares for the nine months ended September 30, 2020:

	Omnibus Plan
	Number of Shares			Weighted Average Grant Date Fair Value
Beginning balance, January 1, 2020		328,653		$	19.94
Granted		175,493			17.52
Vested		(104,364	)		20.38
Forfeited		(7,343	)		18.21
Ending balance outstanding at September 30, 2020		392,439		$	18.77

A total of 104,364 restricted shares vested during the nine months ended September 30, 2020. A total of 48,491 restricted shares vested during the year ended December 31, 2019. The fair value of restricted shares that vested during the nine months ended September 30, 2020 was $1.2 million. The fair value of restricted shares that vested during the year ended December 31, 2019 was $900,000.

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

The following table summarizes restricted stock compensation expense for the nine months ended September 30, 2020 and 2019:

	Nine Months Ended September 30,
	2020		2019
Total share-based compensation	$	2,019	$	1,357
Income tax benefit		562		378
Unrecognized compensation expense		5,566		4,917
Weighted-average amortization period remaining	2.4 years		2.8 years

The fair value of the unvested restricted stock awards at September 30, 2020 was $4.4 million.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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; the Company did not grant any stock options during 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 1,390,579 shares remain outstanding under the BYB Plan at September 30, 2020.

The types of stock options granted under the BYB Plan were Time Options and Performance Options. The exercise price of each option is equal to the fair value of the stock as of the date of grant. These option awards have vesting periods ranging from one to five years and have 10-year contractual terms. Stock volatility was computed as the average of the volatilities of peer group companies.

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

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

The following table discloses the activity in shares subject to options and the weighted average exercise prices, in actual dollars, for the nine months ended September 30, 2020:

	BYB Plan
	Number of Shares			Weighted Average Exercise Price		Intrinsic Value		Weighted Average Remaining Contractual Term (in Years)
Beginning balance, January 1, 2020		1,410,075		$	11.38	$	11,542		5.4
Exercised		(19,496	)		13.00	$	139
Expired		—
Ending balance outstanding at September 30, 2020		1,390,579		$	11.36	$	134		4.7
Exercisable at September 30, 2020		1,390,579		$	11.36	$	134		4.7

A total of 19,496 stock options were exercised during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, proceeds from the exercise of stock options were $253,000 and related tax benefit was $39,000. A total of 127,997 stock options were exercised during the year ended December 31, 2019. During the year ended December 31, 2019, proceeds from the exercise of stock options were $1.9 million and related tax benefit was $145,000. A total of 20,000 stock options vested during the nine months ended September 30, 2020.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED 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, 2020 and 2019:

	Nine Months Ended September 30,
	2020		2019
Total share-based compensation (benefit) - stock options	$	7	$	(119	)
Income tax benefit (expense)		2		(33	)
Unrecognized compensation expense - stock options		—		21
Weighted-average amortization period remaining	0.0 years		0.5 years

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

The following table discloses the activity in shares subject to options under the FEB Plan and the weighted average exercise prices, in actual dollars, for the nine months ended September 30, 2020:

	FEB Plan
	Number of Shares			Weighted Average Exercise Price		Intrinsic Value		Weighted Average Remaining Contractual Term (in Years)
Beginning balance, January 1, 2020		511,169		$	11.35	$	4,204		4.4
Exercised		(206,477	)	$	11.12	$	591
Expired		(18,900	)	$	12.70
Ending balance outstanding at September 30, 2020		285,792		$	11.42	$	80		3.8
Exercisable at September 30, 2020		285,792		$	11.42	$	80		3.8

A total of 206,477 stock options were exercised during the nine months ended September 30, 2020. During the nine months ended September 30, 2020, proceeds from the exercise of stock options were $2.3 million and related tax benefit was $165,000. A total of 113,214 stock options were exercised during the year ended December 31, 2019. During the year ended December 31, 2019, proceeds from the exercise of stock options were $1.3 million and related tax benefit was $253,000.

On April 30, 2019, the Company completed the acquisition of Oak Park River Forest. On May 15, 2019, the Company made a cash payment of $4.2 million for 35,870 outstanding Oak Park River Forest options to participants who elected to receive a cash payment in lieu of converting the options to the Omnibus plan.

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Note 18—Earnings per Share

A reconciliation of the numerators and denominators for earnings per common share computations is presented below. Incremental shares represent outstanding stock options for which the exercise price is less than the average market price of the Company’s common stock during the periods presented. Options to purchase 1,676,371 and 1,992,273 shares of common stock were outstanding as of September 30, 2020 and 2019, respectively. There were 392,439 and 323,489 restricted stock awards outstanding at September 30, 2020 and 2019, respectively. For the three and nine months ended September 30, 2020, stock options outstanding of 105,657 and 50,000, respectively, were excluded from the calculation of diluted earnings per common share, as their effect would have been anti-dilutive.

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,
	2020		2019		2020		2019
Net income	$	13,071	$	15,342	$	25,176	$	41,150
Less: Dividends on preferred shares		196		196		587		587
Net income available to common stockholders	$	12,875	$	15,146	$	24,589	$	40,563
Weighted-average common stock outstanding:
Weighted-average common stock outstanding (basic)		38,057,350		37,831,356		37,973,694		37,094,083
Incremental shares		191,985		655,824		278,269		724,785
Weighted-average common stock outstanding (dilutive)		38,249,335		38,487,180		38,251,963		37,818,868
Basic earnings per common share	$	0.34	$	0.40	$	0.65	$	1.09
Diluted earnings per common share	$	0.34	$	0.39	$	0.64	$	1.07

Note 19—Stockholders’ Equity

A summary of the Company’s preferred and common stock at September 30, 2020 and December 31, 2019 is as follows:

	September 30,		December 31,
	2020		2019
Series B 7.5% fixed to floating non-cumulative perpetual preferred stock
Par value	$	0.01	$	0.01
Shares authorized		50,000		50,000
Shares issued		10,438		10,438
Shares outstanding		10,438		10,438
Common stock, voting
Par value	$	0.01	$	0.01
Shares authorized		150,000,000		150,000,000
Shares issued		38,687,402		38,256,500
Shares outstanding		38,568,916		38,256,500
Treasury shares		118,486		—

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

BYLINE BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

For the three months ended September 30, 2020 and 2019, the Company declared and paid dividends on the Series B preferred stock of $196,000. For the nine months ended September 30, 2020 and 2019, the Company declared and paid dividends on the Series B preferred stock of $587,000.

The Company repurchased 118,486 shares at a cost of $1.7 million under this program in the first quarter of 2020. Repurchased shares are recorded as treasury shares on the trade date using the treasury stock method, and the cash paid is recorded as treasury stock. Treasury stock acquired is recorded at cost and is carried as a reduction of stockholders’ equity in the Consolidated Statement of Financial Condition.

On September 8, 2020, the Company’s Board of Directors declared a cash dividend of $0.03 per share payable on October 6, 2020 to stockholders of record of the Company’s common stock as of September 22, 2020. No cash dividends were declared to common stockholders during the third quarter of 2019.

Note 20—Consolidated Statements of Changes in Accumulated Other Comprehensive Income (Loss)

The following table summarizes the changes in accumulated other comprehensive income (loss) for the nine months ended September 30, 2020 and 2019:

(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, 2020	$	(366	)	$	(334	)	$	(700	)
Other comprehensive income, net of tax		46			19,978			20,024
Balance, September 30, 2020	$	(320	)	$	19,644		$	19,324

Balance, January 1, 2019	$	4,763		$	(14,261	)	$	(9,498	)
Adoption of ASU 2016-01		—			(1,440	)		(1,440	)
Other comprehensive income (loss), net of tax		(5,142	)		17,041			11,899
Balance, September 30, 2019	$	(379	)	$	1,340		$	961

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

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

Overview

Our business

We are a bank holding company headquartered in Chicago, Illinois and conduct all our business activities through our subsidiary, Byline Bank, a full service commercial bank, and Byline Bank’s subsidiaries. Through Byline Bank, we offer a broad range of banking products and services to small and medium sized businesses, commercial real estate and financial sponsors and to consumers who generally live or work near our branches. In addition to our traditional commercial banking business, we provide small ticket equipment leasing solutions through Byline Financial Group, a wholly-owned subsidiary of Byline Bank, headquartered in Bannockburn, Illinois with sales offices in Illinois and New York, and sales representatives in Illinois, Michigan, New Jersey, and New York. We also participate in U.S. government guaranteed lending programs and originate U.S. government guaranteed loans. Byline Bank was the second 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, 2020. Additionally, we provide trust and wealth management services to our customers. As of September 30, 2020, we had consolidated total assets of $6.5 billion, total gross loans and leases outstanding of $4.4 billion, total deposits of $4.8 billion, and total stockholders’ equity of $794.7 million.

Oak Park River Forest Acquisition

On April 30, 2019, we completed the acquisition of Oak Park River Forest Bankshares, Inc. (“Oak Park River Forest”), the parent company of Community Bank of Oak Park River Forest, under the terms of a definitive merger agreement. As a result of the merger, Oak Park River Forest’s wholly owned bank subsidiary, Community Bank of Oak Park River Forest, was merged with and into Byline Bank. As of the acquisition date, Oak Park River Forest had $329.8 million in assets, including $30.5 million of securities, $274.7 million of loans, and $290.2 million of deposits.

At the effective time of the merger, each share of Oak Park River Forest’s common stock was converted into the right to receive: (1) 7.9321 shares of Byline’s common stock, and (2) an amount in cash equal to $6.2 million divided by the number of outstanding shares of Oak Park River Forest common stock as of the closing date, with cash paid in lieu of fractional shares. Options to acquire Oak Park River Forest common stock that were outstanding at the Effective Time were paid in cash based on elections made by option holders, resulting in an aggregate stock options transaction value of $4.2 million. In the aggregate, Byline paid $6.2 million in cash and issued 1,464,558 shares of its common stock in respect of the outstanding shares of Oak Park River Forest common stock. The value of the total merger consideration at closing was approximately $35.5 million before issuance costs of $585,000.

Strategic Branch Consolidation

We continually perform strategic reviews of our existing banking footprint. With technology improvements and changes to customers’ banking preferences, we examine branch growth potential, customer usage, branch profitability, services provided, markets served and proximity to other locations with a goal of minimizing customer impact and deposit runoff. Since our recapitalization, which occurred in June 2013, our branch network has been reduced from 88 to 57, including eight branches added through the acquisition of First Evanston Bancorp, Inc. (“First Evanston”) and its subsidiary bank, First Bank & Trust in 2018 and three branches added through the Oak Park River Forest acquisition in 2019. During 2018 and 2019, we consolidated seven branches and two other facilities within our current network that had a minimal impact on our customer service levels, convenience, and business development capabilities. Additionally, during the first quarter of 2020, we consolidated another three branches and repurposed one with minimal customer impact, service levels, and overall convenience. These activities resulted in a one-time charge of approximately $437,000. We expect to generate $1.3 million in annual cost savings as a result of this consolidation, a portion of which we will seek to reinvest back into the business.

On September 18, 2020, we announced plans to optimize our branch network as part of efforts to accommodate changing customer behaviors while also recognizing operating efficiencies. We plan to consolidate 11 of our 57 full-service offices, or approximately 20% of our branch network. Most of the impacted branches are located within two miles of another Byline Bank branch that will continue to operate within the respective market. These branch consolidations are scheduled to

commence on December 31, 2020 and will result in a one-time charge of approximately $5.9 million, including $696,000 recognized during the third quarter 2020 related to salaries and employee benefit expenses. We anticipate annualized cost savings of approximately $4.3 million beginning in 2021, an estimated 25% of which will be utilized to increase investment in our digital banking platform and the continued renovation and upgrading of other retail branches.

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

Response to COVID-19 Pandemic

The coronavirus disease 2019 (“COVID-19”) pandemic has caused health and economic concerns in the United States and globally. In March 2020, U.S. President Trump declared a public health and national emergency due to COVID-19, which resulted in mandatory stay-at-home orders in most U.S. states, including Illinois and Wisconsin. The impacts associated with the COVID-19 pandemic continue to have destabilizing and negative effects on global, national, and local economic and business activity. In response to this economic disruption, federal and state governments have recently enacted laws intending to stimulate the economy during this time. President Trump has signed into law three economic stimulus packages, including the $2.0 trillion Coronavirus Relief and Economic Security Act (the “CARES Act”) on March 27, 2020, which, among other things, initiated the Paycheck Protection Program (the “PPP”) under the Small Business Administration (“SBA”). PPP loans originated before June 5, 2020 have a two-year term and bear an interest rate of 1.0%, however borrowers can request an extension to five-years. PPP loans originated after June 5, 2020 have a five-year term and bear an interest rate of 1.0%. On April 16, 2020, the original $349.0 billion of funding for loans to small businesses under the PPP was depleted, and on April 27, 2020 the Federal government funded an additional $310.0 billion to the PPP. As a preferred SBA lender, we assisted our customers in participating in both the initial and second round of funding appropriations approved by Congress for the PPP, which was designed to help small businesses maintain their workforce during the COVID-19 pandemic. We were able to provide our customers with access to the PPP, and through September 30, 2020, we registered over 3,700 loans totaling $635.4 million. The Company received fee income from the Federal government of approximately $22.7 million. This fee income is deferred over the life of the PPP loan and before costs incurred by the Company, including technology costs for loan application and processing and loan servicing costs.

The CARES Act also temporarily eases the guidance applicable to loan modifications and the effect on assessing TDRs related to the COVID-19 pandemic. Modifications within the scope of this relief include arrangements that defer or delay payments of principal and/or interest and extend until the earlier of the following: 1) 60 days after the date on which the national emergency related to the COVID-19 outbreak is terminated; or 2) December 31, 2020. Through September 30, 2020, we approved approximately $631.8 million in COVID-19 related payment deferrals, or 16.8% of loans and leases, excluding PPP loans at September 30, 2020, primarily relating to our commercial banking customers. At September 30, 2020 we had $27.9 million in active COVID-19 related payment deferrals, or 0.74% of loans and leases, excluding PPP loans. We expect payment deferral requests from borrowers to continue throughout the COVID-19 pandemic, including our borrowers who have SBA 7(a) loans, and possibly beyond. We have also assisted our customers’ cash flow needs by waiving or refunding certain fees, including early withdrawal fees on time deposits.

As part of the CARES Act, the SBA is required to pay six months of principal, interest and any associated fees that borrowers owe for all current 7(a), 504, and Microloans in regular servicing status as well as new 7(a), 504, and Microloans disbursed prior to September 27, 2020. The payments to be made by the SBA are not deferments. These payments will be forgiven, and borrowers will not be expected to make these payments at a later date. At September 30, 2020, we have $87.1 million in SBA 7(a) loans that are receiving principal and interest payments under the CARES Act.

We have also initiated a series of measures to ensure the safety of employees, customers, and communities, to support customer needs, and to limit operational disruptions. We maximized social distancing protocols by augmenting business hours and the locations of employee teams. All of our non-retail employees have the ability to work from home and have done so during this time since mid-March 2020. We have temporarily closed 16 branches, converted 15 branches to drive-thru only locations, opened 15 hub branch locations allowing regular lobby traffic, and kept 11 full service branches

with lobby hours by appointment. We continue to proactively engage with our customers to assist them through these uncertain times.

Critical Accounting Policies and Significant Estimates

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

These critical accounting policies and estimates include (i) acquisition‑related fair value computations, (ii) the carrying value of loans and leases, (iii) determining the provision and allowance for loan and lease losses, (iv) the valuation of intangible assets such as goodwill, servicing assets and core deposit intangibles, (v) the determination of fair value for financial instruments, including other-than-temporary-impairment losses, (vi) the valuation of real estate held for sale, and (vii) the valuation of or recognition of deferred tax assets and liabilities. An increase was made to the provision for loan and lease losses as a result of increases in qualitative factors relative to the COVID-19 pandemic.

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

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of our audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, that we filed with the Securities and Exchange Commission (“SEC”) on March 12, 2020.

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 non-refundable loan

origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the new loans using methods which approximate the level yield method. Discounts and premiums are amortized or accreted to interest income over the estimated term of the new loans using methods that approximate the effective yield method. Interest income on new loans is accrued based on the unpaid principal balance outstanding. Additionally, once an acquired non-impaired loan reaches its contractual maturity date, it is re-underwritten, and if renewed, it is classified as an originated loan.

Acquired Loans and Leases

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

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

Provision and Allowance for Loan and Lease Losses

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

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

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

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

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 non-accrual, as well as loans classified as troubled debt restructurings (“TDR”), are reviewed individually for impairment on a quarterly basis.

In March 2020, CARES Act was signed into law. Section 4013 of the CARES Act temporarily eases the guidance applicable to loan modifications and the effect on assessing TDRs related to the COVID-19 pandemic. Modifications within the scope of this relief include arrangements that defer or delay payments of principal or interest and extend until the earlier of the following: 1) sixty days after the date on which the national emergency related to the COVID-19 outbreak is terminated; or 2) December 31, 2020.

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. Given recent events involving the declaration of federal and state emergencies as a result of the COVID-19 pandemic, we qualitatively evaluated goodwill and determined goodwill was not impaired as of September 30, 2020.

The ongoing impact of the COVID-19 pandemic may cause an additional and sustained decline in our common stock price, which may require added qualitative and quantitative analysis and may result in an impairment charge being recorded in a future period. If we should conclude that all or a portion of our goodwill is impaired, we would record a non-cash charge to earnings for the amount of such impairment. Such a charge would have no impact on tangible capital or regulatory capital. At September 30, 2020, we had goodwill of $148.4 million, or approximately 18.7% of equity.

Servicing Assets. Servicing assets are recognized separately when they are acquired through sales of loans or when the rights to service loans are purchased. When loans are sold with servicing rights retained, servicing assets are recorded at fair value in accordance with ASC Topic 860, Transfers and Servicing (“ASC 860”). Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in the prepayment speed and discount rate assumptions have the most significant impact on the fair value of servicing rights. See Note 7 and Note 15 of our Unaudited Interim Condensed Consolidated Financial Statements as of September 30, 2020, included in this report, for additional information.

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

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

Fair value of Financial Instruments

ASC Topic 820, Fair Value Measurement defines fair value as the price that would be received to sell a financial asset or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date.

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs

becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.

See Note 15 of our Unaudited Interim Condensed Consolidated Financial Statements as of September 30, 2020, included in this report, for a complete discussion of our use of fair value of financial assets and liabilities and their related measurement practices.

Valuation of Real Estate Held for Sale

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

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

Income Taxes

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

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

A deferred tax valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some of the deferred tax asset will not be realized. See Note 11 of the notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2019, for further information on income taxes.

Recently Issued Accounting Pronouncements

Refer to Note 2 of our Unaudited Interim Condensed Consolidated Financial Statements as of September 30, 2020, 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 report may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of other financial services companies, given our limited operating history and strategic acquisitions since our recapitalization.

Results of Operations

Overview

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

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)	2020			2019			2020			2019
Summary of Operations
Net interest income	$	53,524		$	57,838		$	158,958		$	162,371
Provision for loan and lease losses		15,740			5,931			45,713			16,321
Non-interest income		22,252			14,806			44,213			40,977
Non-interest expense		41,705			45,448			122,244			130,081
Income before provision for income taxes		18,331			21,265			35,214			56,946
Provision for income taxes		5,260			5,923			10,038			15,796
Net income		13,071			15,342			25,176			41,150
Dividends on preferred shares		196			196			587			587
Income available to common stockholders	$	12,875		$	15,146		$	24,589		$	40,563
Common Share Data
Basic earnings per common share	$	0.34		$	0.40		$	0.65		$	1.09
Diluted earnings per common share	$	0.34		$	0.39		$	0.64		$	1.07
Adjusted diluted earnings per share⁽¹⁾⁽³⁾	$	0.34		$	0.41		$	0.65		$	1.20
Weighted-average common shares outstanding (basic)		38,057,350			37,831,356			37,973,694			37,094,083
Weighted-average common shares outstanding (diluted)		38,249,335			38,487,180			38,251,963			37,818,868
Common shares outstanding		38,568,916			38,169,126			38,568,916			38,169,126
Cash dividends per common share	$	0.03		N/A			$	0.09		N/A
Dividend payout ratio on common stock		8.82	%	N/A				14.06	%	N/A
Tangible book value per common share⁽¹⁾	$	15.81		$	14.30		$	15.81		$	14.30
Key Ratios and Performance Metrics (annualized where applicable)
Net interest margin		3.60	%		4.62	%		3.81	%		4.52	%
Average cost of deposits		0.22	%		0.94	%		0.43	%		0.91	%
Efficiency ratio⁽²⁾		52.47	%		59.81	%		57.35	%		61.15	%
Adjusted efficiency ratio^(1)(2)(3)		52.43	%		58.17	%		56.98	%		57.87	%
Non-interest expense to average assets		2.59	%		3.32	%		2.70	%		3.33	%
Adjusted non-interest expense to average assets⁽¹⁾⁽³⁾		2.59	%		3.23	%		2.68	%		3.16	%
Return on average stockholders' equity		6.57	%		8.34	%		4.33	%		7.91	%
Adjusted return on average stockholders' equity⁽¹⁾⁽³⁾		6.58	%		8.78	%		4.42	%		8.86	%
Return on average assets		0.81	%		1.12	%		0.56	%		1.05	%
Adjusted return on average assets⁽¹⁾⁽³⁾		0.81	%		1.18	%		0.57	%		1.18	%
Non-interest income to total revenues⁽¹⁾		29.37	%		20.38	%		21.76	%		20.15	%
Pre-tax pre-provision return on average assets⁽¹⁾		2.12	%		1.98	%		1.79	%		1.87	%
Adjusted pre-tax pre-provision return on average assets⁽¹⁾		2.12	%		2.07	%		1.80	%		2.04	%
Return on average tangible common stockholders' equity⁽¹⁾		9.39	%		12.22	%		6.51	%		11.66	%
Adjusted return on average tangible common stockholders' equity⁽¹⁾⁽³⁾		9.40	%		12.82	%		6.63	%		12.94	%
Non-interest-bearing deposits to total deposits		35.73	%		29.93	%		35.73	%		29.93	%
Loans and leases held for sale and loans and leases held for investment to total deposits		91.96	%		94.07	%		91.96	%		94.07	%
Deposits to total liabilities		84.36	%		86.77	%		84.36	%		86.77	%
Deposits per branch	$	84,390		$	66,890		$	84,390		$	66,890
Asset Quality Ratios
Non-performing loans and leases to total loans and leases held for investment		0.99	%		1.03	%		0.99	%		1.03	%
ALLL to total loans and leases held for investment		1.40	%		0.82	%		1.40	%		0.82	%
Net charge-offs to average total loans and leases held for investment		0.53	%		0.56	%		0.53	%		0.36	%
Acquisition accounting adjustments⁽⁴⁾	$	17,133		$	31,053		$	17,133		$	31,053
Capital Ratios
Common equity to total assets		12.07	%		13.34	%		12.07	%		13.34	%
Tangible common equity to tangible assets⁽¹⁾		9.64	%		10.38	%		9.64	%		10.38	%
Leverage ratio		10.93	%		11.14	%		10.93	%		11.14	%
Common equity tier 1 capital ratio		12.55	%		12.12	%		12.55	%		12.12	%
Tier 1 capital ratio		13.77	%		13.43	%		13.77	%		13.43	%
Total capital ratio		16.67	%		14.19	%		16.67	%		14.19	%

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

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

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

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

Our results for the first nine months of 2020 were impacted by additional provision for loan and lease losses, leading to an increase in the allowance for loan and lease losses to reflect the weakening economic conditions and uncertainty due to the COVID-19 pandemic.

We reported consolidated net income of $13.1 million for the three months ended September 30, 2020 compared to net income of $15.3 million for the three months ended September 30, 2019, a decrease of $2.3 million or 14.8%. The decrease in net income was primarily attributable to a $9.8 million increase in provision for loan and lease losses, and a $4.3 million decrease in net interest income, offset by a $7.4 million increase in non-interest income, a $3.7 million decrease in non-interest expense, and a $663,000 decrease in provision for income taxes.

The decrease in net interest income during the three months ended September 30, 2020 was mainly a result of decreased average yields on securities and loans and leases, partly offset by decreased cost of funds. The increase in provision for loan and lease losses reflects specific impairment provided for non-performing loans as well as qualitative allocations to address the impact of the COVID-19 pandemic. The increase in non-interest income was principally driven by an increase in loan servicing asset valuation and net gains on sale of loans. The decrease in non-interest expense was mostly due to a decrease in salaries and employee benefits, a decrease in legal, audit, and other professional fees and data processing expenses. The decrease in provision for income taxes was driven by a decrease in net income before provision for income taxes during the period.

Net income available to common stockholders was $12.9 million, or $0.34 per basic and diluted common share, for the three months ended September 30, 2020 compared to $15.1 million, or $0.40 per basic and $0.39 per diluted common share, for the three months ended September 30, 2019. Dividends on preferred shares were $196,000 for the three months ended September 30, 2020 and 2019.

Our annualized return on average assets was 0.81% for the three months ended September 30, 2020 compared to 1.12% for the three months ended September 30, 2019. Our annualized return on average stockholders’ equity was 6.57% for the three months ended September 30, 2020 compared to 8.34% for the three months ended September 30, 2019. Our efficiency ratio was 52.47% for the three months ended September 30, 2020 compared to 59.81% for the three months ended September 30, 2019.

We reported consolidated net income of $25.2 million for the nine months ended September 30, 2020 compared to net income of $41.2 million for the nine months ended September 30, 2019, a decrease of $16.0 million, or 38.8%. The decrease in net income was primarily attributable to a $29.4 million increase in provision for loan and lease losses and a $3.4 million decrease in net interest income, offset by a $3.2 million increase in non-interest income, a $7.8 million decrease in non-interest expense, and a $5.8 million decrease in provision for income taxes.

The decrease in net interest income was mostly due to a decrease in interest and fees on loans and leases, which was partially offset by a decrease in interest expense, primarily attributable to interest expense on deposits. The increase in provision for loan and lease losses reflects specific impairment provided for non-performing loans as well as qualitative allocations to address the impact of the COVID-19 pandemic. The increase in non-interest income was driven by an increase in loan servicing asset revaluation, net gains on sales of securities available-for sale, and loan servicing revenue. The decrease in non-interest expense was a result of a decrease in salaries and employee benefits as a result of an increase in deferred costs for the origination of PPP loans, a decrease in data processing expense, and a decrease in legal, audit and other professional fees. The decrease in provision for income taxes was due to a decrease in net income before provision for income taxes during the period.

Net income available to common stockholders was $24.6 million, or $0.65 per basic and $0.64 per diluted common share, for the nine months ended September 30, 2020 compared to $40.6 million, or $1.09 per basic and $1.07 per diluted common share, for the nine months ended September 30, 2019. Dividends on preferred shares were $587,000 for the nine months ended September 30, 2020 and 2019.

Our annualized return on average assets was 0.56% for the nine months ended September 30, 2020 compared to 1.05% for the nine months ended September 30, 2019. Our annualized return on average stockholders’ equity was 4.33% for the nine months ended September 30, 2020 compared to 7.91% for the nine months ended September 30, 2019. Our efficiency ratio was 57.35% for the nine months ended September 30, 2020 compared to 61.15% for the nine months ended September 30, 2019.

Net Interest Income

Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which include loans, leases and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, which include interest-bearing deposits, subordinated debt, 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 bank acquisitions, 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, 2020, acquired loans with evidence of credit deterioration accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality, represented 5.0% of our total loan portfolio compared to 6.8% at December 31, 2019.

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

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

	Three Months Ended September 30,
	2020								2019
	Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate			Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate
ASSETS
Cash and cash equivalents	$	48,678		$	25		0.20	%	$	34,225		$	253		2.93	%
Loans and leases⁽¹⁾		4,360,203			51,036		4.66	%		3,860,770			63,391		6.51	%
Taxable securities		1,364,516			6,341		1.85	%		996,750			6,899		2.75	%
Tax-exempt securities⁽²⁾		143,157			832		2.31	%		76,161			486		2.53	%
Total interest-earning assets	$	5,916,554		$	58,234		3.92	%	$	4,967,906		$	71,029		5.67	%
Allowance for loan and lease losses		(53,964	)							(32,246	)
All other assets		538,700								500,102
TOTAL ASSETS	$	6,401,290							$	5,435,762
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Interest checking	$	565,917		$	226		0.16	%	$	358,185		$	524		0.58	%
Money market accounts		1,202,016			634		0.21	%		735,724			1,917		1.03	%
Savings		535,396			64		0.05	%		475,417			114		0.10	%
Time deposits		870,227			1,836		0.84	%		1,270,050			7,063		2.21	%
Total interest-bearing deposits		3,173,556			2,760		0.35	%		2,839,376			9,618		1.34	%
Other borrowings		538,237			465		0.34	%		563,026			2,834		2.00	%
Subordinated notes and debentures		100,756			1,485		5.86	%		37,109			739		7.89	%
Total borrowings		638,993			1,950		1.21	%		600,135			3,573		2.36	%
Total interest-bearing liabilities	$	3,812,549		$	4,710		0.49	%	$	3,439,511		$	13,191		1.52	%
Non-interest-bearing demand deposits		1,742,787								1,223,556
Other liabilities		54,843								42,914
Total stockholders’ equity		791,111								729,781
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,401,290							$	5,435,762
Net interest spread⁽³⁾							3.43	%							4.15	%
Net interest income				$	53,524							$	57,838
Net interest margin⁽⁴⁾							3.60	%							4.62	%

Net loan accretion impact on margin				$	3,911		0.26	%				$	7,703		0.62	%

(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.

	Nine Months Ended September 30,
	2020								2019
	Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate			Average Balance⁽⁵⁾			Interest Inc / Exp		Average Yield / Rate
ASSETS
Cash and cash equivalents	$	48,861		$	207		0.57	%	$	45,327		$	798		2.35	%
Loans and leases⁽¹⁾		4,148,465			155,347		5.00	%		3,719,323			177,298		6.37	%
Taxable securities		1,261,458			21,678		2.30	%		966,449			19,546		2.70	%
Tax-exempt securities⁽²⁾		115,161			2,073		2.40	%		66,635			1,257		2.52	%
Total interest-earning assets	$	5,573,945		$	179,305		4.30	%	$	4,797,734		$	198,899		5.54	%
Allowance for loan and lease losses		(43,584	)							(28,626	)
All other assets		522,321								457,383
TOTAL ASSETS	$	6,052,682							$	5,226,491
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
Interest checking	$	432,785		$	651		0.20	%	$	328,558		$	1,390		0.57	%
Money market accounts		1,126,588			3,794		0.45	%		682,020			5,166		1.01	%
Savings		509,001			186		0.05	%		474,815			371		0.10	%
Time deposits		986,419			10,179		1.38	%		1,248,258			20,073		2.15	%
Total interest-bearing deposits		3,054,793			14,810		0.81	%		2,733,651			27,000		1.32	%
Other borrowings		531,395			2,838		0.71	%		498,249			7,266		1.95	%
Subordinated notes and debentures		59,591			2,699		6.05	%		36,964			2,262		8.18	%
Total borrowings		590,986			5,537		1.25	%		535,213			9,528		2.38	%
Total interest-bearing liabilities	$	3,645,779		$	20,347		0.75	%	$	3,268,864		$	36,528		1.49	%
Non-interest-bearing demand deposits		1,578,704								1,221,375
Other liabilities		50,677								40,705
Total stockholders’ equity		777,522								695,547
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	6,052,682							$	5,226,491
Net interest spread⁽³⁾							3.55	%							4.05	%
Net interest income				$	158,958							$	162,371
Net interest margin⁽⁴⁾							3.81	%							4.52	%

Net loan accretion impact on margin				$	10,754		0.26	%				$	17,772		0.50	%

(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.

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, 2020 compared to Three Months Ended September 30, 2019
	Increase (Decrease) Due to
	Volume			Rate			Total
Interest income
Cash and cash equivalents	$	8		$	(235	)	$	(227	)
Loans and leases⁽¹⁾		5,599			(17,954	)		(12,355	)
Taxable securities		1,696			(2,255	)		(559	)
Tax-exempt securities		388			(42	)		346
Total interest income	$	7,691		$	(20,486	)	$	(12,795	)
Interest expense
Deposits
Interest checking	$	80		$	(378	)	$	(298	)
Money market accounts		233			(1,516	)		(1,283	)
Savings		10			(60	)		(50	)
Time deposits		(853	)		(4,374	)		(5,227	)
Total interest-bearing deposits		(530	)		(6,328	)		(6,858	)
Other borrowings		(20	)		(2,349	)		(2,369	)
Subordinated notes and debentures		935			(189	)		746
Total borrowings		915			(2,538	)		(1,623	)
Total interest expense	$	385		$	(8,866	)	$	(8,481	)
Net interest income	$	7,306		$	(11,620	)	$	(4,314	)

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

Net interest income for the three months ended September 30, 2020 was $53.5 million compared to $57.8 million during the same period in 2019, a decrease of $4.3 million, or 7.5%. Interest income decreased $12.8 million for the three months ended September 30, 2020 compared to the same period in 2019 primarily a result of decreased average yields on loans and leases as market interest rates decreased from a year ago partly offset by loan and lease growth through originations. Interest expense decreased by $8.5 million for the three months ended September 30, 2020 compared to the same period in 2019 mostly due to decreases in the average rates paid on deposits and other borrowings as well as a change in deposit mix.

	Nine Months Ended September 30, 2020 compared to Nine Months Ended September 30, 2019
	Increase (Decrease) Due to
	Volume			Rate			Total
Interest income
Cash and cash equivalents	$	13		$	(604	)	$	(591	)
Loans and leases⁽¹⁾		16,195			(38,146	)		(21,951	)
Taxable securities		5,026			(2,894	)		2,132
Tax-exempt securities		876			(60	)		816
Total interest income	$	22,110		$	(41,704	)	$	(19,594	)
Interest expense
Deposits
Interest checking	$	171		$	(910	)	$	(739	)
Money market accounts		1,487			(2,859	)		(1,372	)
Savings		(7	)		(178	)		(185	)
Time deposits		(2,698	)		(7,196	)		(9,894	)
Total interest-bearing deposits		(1,047	)		(11,143	)		(12,190	)
Other borrowings		197			(4,625	)		(4,428	)
Subordinated notes and debentures		1,026			(589	)		437
Total borrowings		1,223			(5,214	)		(3,991	)
Total interest expense	$	176		$	(16,357	)	$	(16,181	)
Net interest income	$	21,934		$	(25,347	)	$	(3,413	)

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

Net interest income for the nine months ended September 30, 2020 was $159.0 million compared to $162.4 million during the same period in 2019, a decrease of $3.4 million, or 2.1%. Interest income decreased $19.6 million for the nine months ended September 30, 2020 compared to the same period in 2019 primarily a result of decreased average yields on loans and leases as market interest rates decreased from a year ago as well as lower-yielding PPP loan balances partly offset by loan and lease growth through origination and purchases of mortgage-backed securities. Interest expense decreased by $16.2 million for the nine months ended September 30, 2020 compared to the same period in 2019 mostly due to decreases in the average rates paid on deposits and borrowings as well as a change in deposit mix.

The net interest margin for the three months ended September 30, 2020 was 3.60%, a decrease of 102 basis points compared to 4.62% for the three months ended September 30, 2019. The net interest margin for the nine months ended September 30, 2020 was 3.81%, a decrease of 71 basis points compared to 4.52% for the nine months ended September 30, 2019. The primary driver of the decrease for the three and nine month periods was a decrease in average loan and lease yields resulting from decreased market interest rates, lower-yielding PPP loan balances, and decreased loan accretion. Those decreases were partly offset by a lower cost of funds resulting from decreased market interest rates and the access of funds available to borrow at a lower cost as well as higher non-interest-bearing demand deposit balances.

Net loan accretion income was $3.9 million for the three months ended September 30, 2020 compared to $7.7 million for the three months ended September 30, 2019, a decrease of $3.8 million, or 49.2%. Net loan accretion income was $10.8 million for the nine months ended September 30, 2020 compared to $17.8 million for the nine months ended September 30, 2019, a decrease of $7.0 million, or 39.5%. Total net loan accretion on acquired loans contributed 26 basis points to the net interest margin for the three months ended September 30, 2020 compared to 62 basis points for the three months ended September 30, 2019. Total net loan accretion on acquired loans contributed 26 basis points to the net interest margin for the nine months ended September 30, 2020 compared to 50 basis points for the nine months ended September 30, 2019. Projected accretion income as of September 30, 2020 is summarized as follows:

	Estimated Projected Accretion⁽¹⁾⁽²⁾
Last three months of 2020	$	1,799
2021		7,147
2022		4,705
2023		1,709
2024		1,046
Thereafter		1,129
Total	$	17,535
(1) Estimated projected accretion excludes contractual interest income on ASC 310-310 loans. (2) Projections are updated quarterly, assume no prepayments, and are subject to change; including the Company’s expected adoption of ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments.

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 were $15.7 million and $5.9 million for the three months ended September 30, 2020 and 2019, respectively, an increase of $9.8 million, or 165.4%. Provisions for loan and lease losses were $45.7 million and $16.3 million for the nine months ended September 30, 2020 and 2019, respectively, an increase of $29.4 million, or 180.1%. The increase reflects specific impairment provided for non-performing loans, including the unguaranteed portion of U.S. government guaranteed loans and increases to our general reserves, including allocations of $8.4 million and $22.0 million, for the three and nine months ended September 30, 2020, respectively, to address the uncertainty and impact of the COVID-19 pandemic. The ALLL as a percentage of loans and leases increased from 0.84% at December 31, 2019 to 1.40% at September 30, 2020. The ALLL as a percentage of loans and leases excluding PPP loans was 1.63% at September 30, 2020.

Non-Interest Income

Non-interest income was $22.3 million for the three months ended September 30, 2020 compared to $14.8 million for the three months ended September 30, 2019, an increase of $7.4 million, or 50.3%. The increase was primarily due to an increase in net gains on sale of loans and an increase in loan servicing asset revaluation.

Non-interest income was $44.2 million for the nine months ended September 30, 2020 compared to $41.0 million for the nine months ended September 30, 2019, an increase of $3.2 million, or 7.9%. The increase was primarily due to an increase in loan servicing asset revaluation and an increase in net gains on securities available-for-sale.

	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2020		2019			2020			2019
Fees and service charges on deposits	$	1,603	$	1,612		$	4,731		$	4,823
Loan servicing revenue		2,936		2,692			8,674			7,861
Loan servicing asset revaluation		1,122		(1,610	)		(2,653	)		(4,094	)
ATM and interchange fees		1,028		973			3,089			2,635
Net gain on sales of securities available-for-sale		1,037		178			2,412			1,151
Change in fair value of equity securities, net		154		(15	)		301			1,035
Net gains on sales of loans		12,671		9,405			23,900			23,110
Wealth management and trust income		693		653			1,970			1,874
Other non-interest income		1,008		918			1,789			2,582
Total non-interest income	$	22,252	$	14,806		$	44,213		$	40,977

Fees and service charges on deposits represent amounts charged to customers for banking services, such as fees on deposit accounts, and include, but are not limited to, maintenance fees, insufficient fund fees, overdraft protection fees, wire transfer fees, and other charges. Fees and service charges on deposits were $1.6 million for the three months ended September 30, 2020 compared to $1.6 million for the three months ended September 30, 2019, a decrease of $9,000, or 0.5%. Fees and service charges on deposits were $4.7 million for the nine months ended September 30, 2020 compared to $4.8 million for the nine months ended September 30, 2019, a decrease of $92,000, or 1.9%.

While portions of the loans that we originate are sold and generate gains on sale revenue, servicing rights for the majority of loans that we sell are retained by us. In exchange for continuing to service loans that have been sold, we receive servicing revenue from a portion of the interest cash flow of the loan. We generated $2.9 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the three months ended September 30, 2020 compared to $2.7 million for the three months ended September 30, 2019, an increase of $244,000 or 9.1%. We generated $8.7 million in loan servicing revenue on the sold portion of the U.S. government guaranteed loans for the nine months ended September 30, 2020 compared to $7.9 million for the nine months ended September 30, 2019, an increase of $813,000 or 10.4%. The increase was mainly driven by an increase in total loans serviced due to additional U.S government guaranteed loans sold with retained servicing rights during the periods. At September 30, 2020 and 2019, the outstanding balance of guaranteed loans serviced was $1.5 billion and $1.3 billion, respectively.

Loan servicing asset revaluation represents net changes in the fair value of our servicing assets. Loan servicing asset revaluation had a upward adjustment of $1.1 million for the three months ended September 30, 2020 compared to a downward adjustment of $1.6 million for the three months ended September 30, 2019, an increase of $2.7 million, or 169.8%, due to a decrease in discount rate as a result of improving secondary market pricing during third quarter of 2020 and slower prepayment speeds. Loan servicing asset revaluation had a downward adjustment of $2.7 million for the nine months ended September 30, 2020 compared to $4.1 million for the nine months ended September 30, 2019, a decrease of $1.4 million, or 35.2%, due to secondary market volatility late in the first quarter of 2020 and early in the second quarter 2020 as a result of the COVID-19 pandemic.

ATM and interchange fees were $1.0 million for the three months ended September 30, 2020 compared to $973,000 for the three months ended September 30, 2019, an increase of $55,000, or 5.7%. The increase was mostly due to higher third-party merchant fees. ATM and interchange fees were $3.1 million for the nine months ended September 30, 2020 compared to $2.6 million for the nine months ended September 30, 2019, an increase of $454,000, or 17.2%. The increase was mainly driven by higher interchange income as a result of a signing bonus for a new payment processing merchant.

Net gains on sales of securities were $1.0 million during the three months ended September 30, 2020 compared to $178,000 for the three months ended September 30, 2019. Net gains on sales of securities were $2.4 million during the nine months ended September 30, 2020 compared to $1.2 million for the nine months ended September 30, 2019, an increase of $1.3 million, or 109.6%. We sold $80.5 million of securities during the nine months ended September 30, 2020 and $92.1 million during the nine months ended September 30, 2019.

Change in fair value of equity securities, net, was a $154,000 increase and a $15,000 decrease in fair value for the three months ended September 30, 2020 and 2019, respectively. Change in fair value of equity securities, net, was a $301,000 and $1.0 million increase in fair value for the nine months ended September 30, 2020 and 2019, respectively. The amount recorded during the periods were a result of the increase or decrease in the fair value of these securities.

Net gains on sales of loans were $12.7 million for the three months ended September 30, 2020 compared to $9.4 million for the three months ended September 30, 2019, an increase of $3.3 million, or 34.7%. We sold $121.2 million of U.S. government guaranteed loans during the three months ended September 30, 2020 compared to $93.3 million during the three months ended September 30, 2019. Net gains on sales of loans were $23.9 million for the nine months ended September 30, 2020 compared to $23.1 million for the nine months ended September 30, 2019, an increase of $790,000, or 3.4%. We sold $260.9 million of U.S. government guaranteed loans during the nine months ended September 30, 2020 compared to $234.7 million during the nine months ended September 30, 2019. The increase in net gains on sales was mainly driven by increased demand for U.S. government guaranteed loans.

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 $693,000 for the three months ended September 30, 2020 compared to $653,000 for the three months ended September 30, 2019. Wealth management and trust income was $2.0 million for the nine months ended September 30, 2020 compared to $1.9 million for the nine months ended September 30, 2019. Assets under management were $557.9 million and $566.0 million as of September 30, 2020 and 2019, respectively. The variances were mostly driven by market conditions.

Other non-interest income was $1.0 million for the three months ended September 30, 2020 compared to $918,000 for the three months ended September 30, 2019, an increase of $90,000 or 9.7%. Other non-interest income was $1.8 million for the nine months ended September 30, 2020 compared to $2.6 million for the nine months ended September 30, 2019, a decrease of $793,000 or 30.7%. The primary driver of the decrease in the period was decreased swap and other operating income.

Non-Interest Expense

Non-interest expense was $41.7 million for the three months ended September 30, 2020 compared to $45.4 million for the three months ended September 30, 2019, a decrease of $3.7 million, or 8.2%. The decrease was primarily due to a decrease in decrease in legal, audit, and other professional fees and data processing expenses. Non-interest expense was $122.2 million for the nine months ended September 30, 2020 compared to $130.1 million for the nine months ended September 30, 2019, a decrease of $7.8 million, or 6.0%. The decrease was primarily due to a decrease in salaries and employee benefits as a result of an increase in deferred costs for the origination of PPP loans and a decrease data processing expenses.

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,
	2020		2019		2020		2019
Salaries and employee benefits	$	23,126	$	24,537	$	67,197	$	71,081
Occupancy and equipment expense, net		5,220		4,512		16,103		14,530
Loan and lease related expenses		2,053		1,949		4,624		5,367
Legal, audit and other professional fees		2,390		4,066		6,802		9,113
Data processing		2,661		4,062		8,152		11,055
Net loss recognized on other real estate owned and other related expenses		349		95		1,324		543
Other intangible assets amortization expense		1,947		2,003		5,732		5,735
Other non-interest expense		3,959		4,224		12,310		12,657
Total non-interest expense	$	41,705	$	45,448	$	122,244	$	130,081

Salaries and employee benefits, the single largest component of our non-interest expense, totaled $23.1 million for the three months ended September 30, 2020 compared to $24.5 million for the three months ended September 30, 2019, a decrease of $1.4 million, or 5.8%. Salaries and employee benefits totaled $67.2 million for the nine months ended September 30, 2020 compared to $71.1 million for the nine months ended September 30, 2019, a decrease of $3.9 million, or 5.5%. The decrease resulted from an increase in deferred costs for the origination of PPP loans partly offset by organizational growth and increased employer costs related to benefits.

Occupancy and equipment expense was $5.2 million for the three months ended September 30, 2020 compared to $4.5 million for the three months ended September 30, 2019, an increase of $708,000, or 15.1%. Occupancy and equipment expense was $16.1 million for the nine months ended September 30, 2020 compared to $14.5 million for the nine months ended September 30, 2019, an increase of $1.6 million, or 10.8%. The increase in the periods was a result of our additional branches resulting from the bank acquisition in the second quarter of 2019. The increase was also a result of increased real estate taxes and increased investment in equipment and technology assets.

Loan and lease related expenses were $2.1 million for the three months ended September 30, 2020 compared to $1.9 million for the three months ended September 30, 2019, an increase of $104,000, or 5.3%. Loan and lease related expenses were $4.6 million for the nine months ended September 30, 2020 compared to $5.4 million for the nine months ended September 30, 2019, a decrease of $743,000, or 13.8%. The decrease was principally driven by higher loan expense reimbursements from borrowers in the periods.

Legal, audit, and other professional fees were $2.4 million for the three months ended September 30, 2020 compared to $4.1 million for the three months ended September 30, 2019, a decrease of $1.7 million, or 41.2%. Legal, audit, and other professional fees were $6.8 million for the nine months ended September 30, 2020 compared to $9.1 million for the nine

months ended September 30, 2019, a decrease of $2.3 million, or 25.4%. The decrease reflects the merger expenses and other strategic projects in the third quarter of 2019.

Data processing expense was $2.7 million for the three months ended September 30, 2020 compared to $4.1 million for the three months ended September 30, 2019, a decrease of $1.4 million, or 34.5%. The decrease was primarily due to expenses in connection with the Oak Park River Forest core system conversion during the third quarter of 2019. Data processing expense was $8.2 million for the nine months ended September 30, 2020 compared to $11.1 million for the nine months ended September 30, 2019, a decrease of $2.9 million, or 26.3%. The decrease reflects the merger expenses related to the Oak Park River Forest acquisition and the core system integration expenses in the second quarter of 2019.

Net loss recognized on other real estate owned and other related expenses was $349,000 for the three months ended September 30, 2020 compared to $94,000 for the three months ended September 30, 2019, an increase of $255,000, or 271.3%. Net loss recognized on other real estate owned and other related expenses was $1.3 million for the nine months ended September 30, 2020 compared to $543,000 for the nine months ended September 30, 2019, an increase in expense of $781,000, or 117.6%. These increases were primarily due to impairments of other real estate owned.

Other intangible assets amortization expense was $1.9 million for the three months ended September 30, 2020 compared to $2.0 million for the three months ended September 30, 2019, a decrease of $56,000, or 2.8%. Other intangible assets amortization expense was $5.7 million for the nine months ended September 30, 2020 compared to $5.7 million for the nine months ended September 30, 2019, a decrease of $3,000, or 0.1%.

Other non-interest expense was $4.0 million for the three months ended September 30, 2020 compared to $4.2 million for the three months ended September 30, 2019, a decrease of $263,000 or 6.2%. The decrease was mostly due to lower advertising expense and other operating expenses. Other non-interest expense was $12.3 million for the nine months ended September 30, 2020 and $12.7 million for the nine months ended September 30, 2019, a decrease of $347,000, or 2.7%. This decrease is principally attributed to a decrease in advertising expense offset by an increase in FDIC insurance assessment.

Our efficiency ratio was 52.47% for the three months ended September 30, 2020 compared to 59.81% for the three months ended September 30, 2019. The improvement in our efficiency ratio for the three months ended September 30, 2020 was driven by both a decrease in our non-interest expense and an increase in our non-interest income. Our adjusted efficiency ratio was 52.43% for the three months ended September 30, 2020 compared to 58.17% for the three months ended September 30, 2019. Our efficiency ratio was 57.35% for the nine months ended September 30, 2020 compared to 61.15% for the nine months ended September 30, 2019. The improvement in our efficiency ratio for the nine months ended September 30, 2020 was driven by decreased non-interest expense. Our adjusted efficiency ratio was 56.98% for the nine months ended September 30, 2020 compared to 57.87% for the nine months ended September 30, 2019. Please refer to the “Reconciliation of Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.

Income Taxes

Our provision for income taxes for the three months ended September 30, 2020 totaled $5.3 million compared to $5.9 million for the three months ended September 30, 2019. The decrease in income tax expense was principally due to decreased income before provision for income taxes during the period. Our effective tax rate was 28.7% for the three months ended September 30, 2020 and 27.9% for the three months ended September 30, 2019.

Our provision for income taxes for the nine months ended September 30, 2020 totaled $10.0 million compared to $15.8 million for the nine months ended September 30, 2019. The decrease in income tax expense was principally due to decreased income before provision for income taxes during the period. Our effective tax rate was 28.5% for the nine months ended September 30, 2020 and 27.7% for the nine months ended September 30, 2019.

Financial Condition

Balance Sheet Analysis

Our total assets increased by $974.7 million, or 17.7%, to $6.5 billion at September 30, 2020 compared to $5.5 billion at December 31, 2019. The increase in total assets includes an increase of $588.9 million, or 15.6%, in loans and leases from $3.8 billion at December 31, 2019 to $4.4 billion at September 30, 2020. Our originated loan and lease portfolio increased by $800.9 million and our acquired loan and lease portfolio decreased by $212.1 million. The increase in our originated portfolio was primarily attributed to organic loan and lease growth, mostly PPP loans, and renewals of acquired non-impaired loans that are now reflected with originated loans. The decrease in our acquired portfolio was attributed to renewals reflected in originated loans, payoffs, and pay downs during the period.

Total liabilities increased by $930.1 million, or 19.5%, to $5.7 billion at September 30, 2020 compared to $4.8 billion at December 31, 2019. Total deposits increased by $662.7 million, or 16.0%, driven by growth in non-interest-bearing deposits, money market demand deposits, and interest-bearing checking accounts, partly offset by a decrease in time deposits. Borrowings increased by $243.2 million, or 42.4%.

Investment Portfolio

Our investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no securities classified as trading in our investment portfolio as of September 30, 2020 or December 31, 2019. 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 $322.9 million, or 27.2%, from $1.2 billion at December 31, 2019 to $1.5 billion at September 30, 2020. The increase was mainly attributed to purchases of mortgage-backed securities.

At September 30, 2020, our held-to-maturity securities portfolio consists of obligations of states, municipalities and political subdivisions. We carry these securities at amortized cost. Securities held-to-maturity were $4.4 million at September 30, 2020 and December 31, 2019.

We had no securities that were classified as having other-than-temporary-impairment (“OTTI”) as of September 30, 2020 or December 31, 2019.

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, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available-for-sale
U.S. Treasury Notes	$	25,456	$	25,951	$	41,403	$	41,830
U.S. Government agencies		104,253		104,710		165,162		164,950
Obligations of states, municipalities, and political subdivisions		103,895		108,312		92,806		94,832
Residential mortgage-backed securities
Agency		807,798		824,037		490,427		490,236
Non-agency		62,775		64,096		109,501		109,822
Commercial mortgage-backed securities
Agency		256,830		263,732		159,650		159,701
Non-agency		11,215		11,643		31,144		31,274
Corporate securities		56,059		57,208		48,796		49,330
Asset-backed securities		50,354		49,522		44,515		44,317
Total	$	1,478,635	$	1,509,211	$	1,183,404	$	1,186,292

	September 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	4,400	$	4,589	$	4,412	$	4,498
Total	$	4,400	$	4,589	$	4,412	$	4,498

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At September 30, 2020, we evaluated the securities which had an unrealized loss for OTTI and determined all declines in value to be temporary. There were 41 investment securities with unrealized losses at September 30, 2020. 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 tables (dollars in thousands) set 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, 2020
	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	$	16,991		2.49	%	$	8,465		2.51	%	$	—		0.00	%	$	—		0.00	%
U.S. government agencies		498		2.42	%		1,973		2.80	%		82,558		1.31	%		19,224		2.08	%
Obligations of states, municipalities, and political subdivisions		6,022		2.26	%		27,166		2.40	%		25,177		2.74	%		45,530		2.49	%
Residential mortgage-backed securities
Agency		—		0.00	%		1,129		1.36	%		82,328		1.40	%		724,341		1.65	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		62,775		2.72	%
Commercial mortgage-backed securities
Agency		—		0.00	%		7,480		3.35	%		3,033		2.19	%		246,317		2.14	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		11,215		2.56	%
Corporate securities		2,498		3.25	%		8,727		3.09	%		44,834		4.06	%		—		0.00	%
Asset-backed securities		—		0.00	%		—		0.00	%		10,792		2.29	%		39,562		1.81	%
Total	$	26,009		2.51	%	$	54,940		2.65	%	$	248,722		2.03	%	$	1,148,964		1.87	%

	Maturity as of September 30, 2020
	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⁾
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	502		1.50	%	$	3,898		2.62	%	$	—		0.00	%	$	—		0.00	%
Total	$	502		1.50	%	$	3,898		2.62	%	$	—		0.00	%	$	—		0.00	%

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

	Maturity as of December 31, 2019
	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	$	17,975		2.54	%	$	23,428		2.51	%	$	—		0.00	%	$	—		0.00	%
U.S. government agencies		19,940		2.27	%		38,739		1.97	%		74,614		2.69	%		31,869		2.85	%
Obligations of states, municipalities, and political subdivisions		5,851		2.13	%		27,556		2.39	%		30,476		2.91	%		28,923		2.89	%
Residential mortgage-backed securities
Agency		—		0.00	%		2,562		1.92	%		38,609		1.98	%		449,256		2.48	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		109,501		3.14	%
Commercial mortgage-backed securities
Agency		—		0.00	%		7,410		3.35	%		3,047		1.97	%		149,193		2.62	%
Non-agency		—		0.00	%		—		0.00	%		—		0.00	%		31,144		2.60	%
Corporate securities		7,525		2.96	%		9,348		3.26	%		31,923		4.00	%		—		0.00	%
Asset-backed securities		—		0.00	%		—		0.00	%		—		0.00	%		44,515		3.36	%
Total	$	51,291		2.45	%	$	109,043		2.40	%	$	178,669		2.80	%	$	844,401		2.67	%

	Maturity as of December 31, 2019
	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⁾
Held-to-maturity
Obligations of states, municipalities, and political subdivisions	$	—		0.00	%	$	3,800		2.45	%	$	612		2.75	%	$	—		0.00	%
Total	$	—		0.00	%	$	3,800		2.45	%	$	612		2.75	%	$	—		0.00	%

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

Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $77.4 million at September 30, 2020, an increase of $7.1 million from December 31, 2019.

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, 2020 or December 31, 2019.

Restricted Stock

As a member of the Federal Home Loan Bank system, Byline Bank is required to maintain an investment in the capital stock of the FHLB. No market exists for this stock, and it has no quoted market value. The stock is redeemable at par by the FHLB and is, therefore, carried at cost. In addition, Byline Bank owns stock of Bankers’ Bank that was acquired as part of a bank acquisition. The stock is redeemable at par and carried at cost. As of September 30, 2020 and December 31, 2019, we held $9.7 million and $22.1 million, respectively, in FHLB and Bankers’ Bank stock. We evaluate impairment of our investment in FHLB and Bankers’ Bank based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We did not identify any indicators of impairment of FHLB and Bankers’ Bank stock as of September 30, 2020 and December 31, 2019.

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, 2020 and December 31, 2019 were $4.4 billion and $3.8 billion, respectively, an increase of $588.9 million, or 15.6%. Originated loans were $3.6 billion at September 30, 2020, an

increase of $800.9 million, or 28.2%, compared to $2.8 billion at December 31, 2019. Acquired impaired loans and acquired non-impaired loans and leases were $737.9 million at September 30, 2020, a decrease of $212.1 million, or 22.3%, compared to $950.0 million at December 31, 2019. The increase in our originated portfolio was primarily attributed to organic loan and lease growth, primarily PPP loans, and renewals of acquired non-impaired loans that are now reflected with originated loans. The decrease in our acquired portfolio is attributed to renewals reflected in originated loans, payoffs, and pay downs during the period.

We strive to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. Loans, excluding leases, are typically made to real estate, manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and operations. The Company's exposure to certain industries as of September 30, 2020 represents the following percentages of the portfolio: 27.4% real estate, 15.1% manufacturing, 7.9% consumer, 6.5% wholesale trade, 5.9% accommodation and food service, 6.5% retail trade, and all other industries individually represent less than 5% of the portfolio or 9.5% of the total loan portfolio. As of September 30, 2020, the loan portfolio included $396.0 million of unguaranteed 7(a) SBA and USDA loans with exposure to the following top three industries: 18.3% food services, 15.4% retail trade, and 13.0% manufacturing. The following table shows our allocation of originated, acquired impaired and acquired non-impaired loans and leases as of the dates presented (dollars in thousands):

	September 30, 2020						December 31, 2019
	Amount			% of Total			Amount			% of Total
Originated loans and leases
Commercial real estate	$	919,862			21.0	%	$	792,263			20.9	%
Residential real estate		458,364			10.5	%		483,072			12.8	%
Construction, land development, and other land		234,017			5.3	%		235,794			6.2	%
Commercial and industrial		1,214,099			27.8	%		1,160,996			30.7	%
Paycheck Protection Program		622,191			14.2	%		—			0.0	%
Installment and other		2,346			0.1	%		5,372			0.1	%
Leasing financing receivables		185,700			4.2	%		158,155			4.2	%
Total originated loans and leases	$	3,636,579			83.1	%	$	2,835,652			74.9	%
Acquired impaired loans
Commercial real estate	$	117,114			2.7	%	$	135,914			3.6	%
Residential real estate		84,197			1.9	%		100,223			2.7	%
Construction, land development, and other land		4,804			0.1	%		5,373			0.1	%
Commercial and industrial		10,489			0.3	%		16,909			0.4	%
Installment and other		214			0.0	%		249			0.0	%
Total acquired impaired loans	$	216,818			5.0	%	$	258,668			6.8	%
Acquired non-impaired loans and leases
Commercial real estate	$	310,879			7.1	%	$	348,365			9.2	%
Residential real estate		90,835			2.1	%		128,527			3.4	%
Construction, land development, and other land		213			0.0	%		37,490			1.0	%
Commercial and industrial		104,221			2.4	%		153,660			4.1	%
Installment and other		583			0.0	%		944			0.0	%
Leasing financing receivables		14,389			0.3	%		22,355			0.6	%
Total acquired non-impaired loans and leases	$	521,120			11.9	%	$	691,341			18.3	%
Total loans and leases	$	4,374,517			100.0	%	$	3,785,661			100.0	%
Allowance for loan and lease losses		(61,258	)					(31,936	)
Total loans and leases, net of allowance for loan and lease losses	$	4,313,259					$	3,753,725

Loans collateralized by real estate comprised 50.7% and 59.8% of the loan and lease portfolio at September 30, 2020 and December 31, 2019, respectively. Commercial real estate loans comprised the largest portion of the real estate loan portfolio as of September 30, 2020 and December 31, 2019 and totaled $1.3 billion, or 60.7%, of real estate loans and 30.8% of the total loan and lease portfolio at September 30, 2020. At December 31, 2019, commercial real estate loans totaled $1.3 billion and comprised 56.3% of real estate loans and 33.7% of the total loan and lease portfolio. Acquired impaired

commercial real estate loans decreased from $135.9 million as of December 31, 2019 to $117.1 million as of September 30, 2020, or 13.8%. At September 30, 2020 and December 31, 2019, commercial real estate loans, including both owner-occupied and non-owner occupied, as a percentage of total capital were 288.1% and 308.1%, respectively. Non-owner occupied commercial real estate loans were $483.9 million and $459.9 million, or 73.7% and 76.3% of total capital, at September 30, 2020 and December 31, 2019, respectively.

Residential real estate loans totaled $633.4 million at September 30, 2020 compared to $711.8 million at December 31, 2019, a decrease of $78.4 million, or 11.0%. The residential real estate loan portfolio comprised 28.5% and 31.4% of real estate loans as of September 30, 2020 and December 31, 2019, respectively, and 14.5% and 18.8% of total loans and leases at September 30, 2020 and December 31, 2019, respectively. Acquired impaired residential real estate loans decreased from $100.2 million at December 31, 2019 to $84.2 million at September 30, 2020, or 16.0%.

Construction, land development, and other land loans totaled $239.0 million at September 30, 2020 compared to $278.7 million at December 31, 2019, an decrease of $39.6 million, or 14.2%. The construction, land development and other land loan portfolio comprised 10.8% and 12.3% of real estate loans at September 30, 2020 and December 31, 2019, respectively, and 5.4% and 7.3% of the total loan and lease portfolio at September 30, 2020 and December 31, 2019, respectively.

Commercial and industrial loans totaled $1.3 billion and $1.3 billion at September 30, 2020 and December 31, 2019, respectively, an decrease of $2.8 million, or 0.2%. The commercial and industrial loan portfolio comprised 30.5% and 35.2% of the total loan and lease portfolio at September 30, 2020 and December 31, 2019, respectively.

Lease financing receivables comprised 4.5% and 4.8% of the loan and lease portfolio at September 30, 2020 and December 31, 2019, respectively. Total lease financing receivables were $200.1 million and $180.5 million at September 30, 2020 and December 31, 2019, respectively, an increase of $19.6 million, or 10.8%.

In support of our customers impacted by the COVID-19 pandemic and keeping with regulatory guidance, we began offering relief through payment deferrals during the first quarter of 2020. Through September 30, 2020, we cumulatively approved approximately $637.8 million in payment deferrals, or 16.8% of loans and leases excluding PPP loans at September 30, 2020. As of September 30, 2020 we had $27.9 million in active deferrals, or 0.7% of loans and leases excluding PPP loans. The following table shows active deferrals by bucket and category at September 30, 2020 (dollars in thousands):

	30 Days				60 Days				90 + Days				Totals
	Balance		Count		Balance		Count		Balance		Count		Balance		Count
Commercial
Principal and Interest	$	—		—	$	—		—	$	21,364		16	$	21,364		16
Principal Only		—		—		—		—		1,663		3		1,663		3
Total commercial deferrals	$	—		—	$	—		—	$	23,027		19	$	23,027		19
Consumer
Interest Only	$	—		—	$	—		—	$	284		3	$	284		3
Principal and Interest		—		—		—		—		1,661		9		1,661		9
Total consumer deferrals	$	—		—	$	—		—	$	1,945		12	$	1,945		12
Leasing
Principal and Interest	$	445		8	$	1,221		35	$	163		4	$	1,829		47
Total leasing deferrals	$	445		8	$	1,221		35	$	163		4	$	1,829		47
Government Guaranteed Lending
Principal and Interest	$	—		—	$	—		—	$	1,142		3	$	1,142		3
Total SBC deferrals	$	—		—	$	—		—	$	1,142		3	$	1,142		3
Total deferrals	$	445		8	$	1,221		35	$	26,277		38	$	27,943		81

We have identified certain industries that we believe have shown early impact as a result of the COVID-19 pandemic. As of September 30, 2020, these industries represent approximately 9.9% of our loan and lease portfolio, excluding PPP loans. These industries include restaurants and food services loans of $133.9 million, accommodation loans of $47.3 million, amusement and recreation loans of $47.9 million, nursing and senior residential care loans of $49.9 million, truck transportation loans of $40.1 million, faith-based and not-for-profit loans of $40.6 million, performing arts and spectator sports loans of $10.0 million, and air transportation loans of $2.0 million. As of September 30, 2020, we have approximately $6.4 million of active payment deferrals on loans in these select industries.

Loan and Lease Portfolio Maturities and Interest Rate Sensitivity

The following table shows our loan and lease portfolio by scheduled maturity at September 30, 2020 (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	$	59,890	$	55,467	$	350,461	$	165,759	$	109,314	$	178,971	$	919,862
Residential real estate		26,024		40,712		63,523		49,171		188,944		89,990		458,364
Construction, land development, and other land		3,440		62,086		22,108		140,632		2,453		3,298		234,017
Commercial and industrial		4,383		288,316		135,844		382,328		135,251		267,977		1,214,099
Paycheck protection program		—		—		622,191		—		—		—		622,191
Installment and other		214		520		1,294		17		301		—		2,346
Leasing financing receivables		7,698		—		160,082		—		17,920		—		185,700
Total originated loans and leases	$	101,649	$	447,101	$	1,355,503	$	737,907	$	454,183	$	540,236	$	3,636,579
Acquired impaired loans
Commercial real estate	$	41,225	$	5,361	$	61,489	$	1,510	$	3,804	$	3,725	$	117,114
Residential real estate		21,145		2,503		37,883		769		18,051		3,846		84,197
Construction, land development, and other land		1,837		1,988		979		—		—		—		4,804
Commercial and industrial		4,772		95		3,514		90		1,601		417		10,489
Installment and other		5		—		29		—		180		—		214
Total acquired impaired loans	$	68,984	$	9,948	$	103,894	$	2,368	$	23,636	$	7,988	$	216,818
Acquired non-impaired loans and leases
Commercial real estate	$	32,195	$	9,040	$	131,601	$	31,337	$	32,441	$	74,265	$	310,879
Residential real estate		5,677		11,484		26,610		32,037		4,040		10,987		90,835
Construction, land development, and other land		-		—		213		—		—		—		213
Commercial and industrial		5,805		9,824		35,888		28,712		3,757		20,235		104,221
Installment and other		54		41		392		96		—		—		583
Leasing financing receivables		1,050		—		13,339		—		—		—		14,389
Total acquired non-impaired loans and leases	$	44,781	$	30,389	$	208,043	$	92,182	$	40,238	$	105,487	$	521,120
Total loans and leases	$	215,414	$	487,438	$	1,667,440	$	832,457	$	518,057	$	653,711	$	4,374,517

At September 30, 2020, 54.9% of the loan and lease portfolio bears interest at fixed rates and 45.1% at floating rates. In addition, $607.2 million, or 13.9%, of the loan and lease portfolio has interest rate floors of which $508.0 million were at the interest rate floor as of September 30, 2020. 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 elements 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 acquisitions or our recapitalization.

Total ALLL was $61.3 million at September 30, 2020 compared to $31.9 million at December 31, 2019, an increase of $29.3 million, or 91.8%. The increase was primarily due to increases in the general reserve driven by newly originated loans and leases and renewals of acquired non-impaired loans that are also reflected within originated loans and leases, and specific impairments in the unguaranteed portion of the U.S. government guaranteed portfolio as well as commercial loan relationships. The increase also includes allocations of $22.0 million to address the estimated impact of the uncertainty caused by the COVID-19 pandemic. Economic factors considered in recognizing the additional allocation includes the impact that an increased unemployment rate due to sheltering in place had on a borrowers’ ability to repay loans; and an increase in watch and classified loans.

Total ALLL to total loans and leases held for investment, net before ALLL, was 1.40% and 0.84% of total loans and leases at September 30, 2020 and December 31, 2019, respectively. The increase was primarily driven by an increase in specific impairments on non-performing loans, including the unguaranteed portion of U.S. government guaranteed loans, and increases to our general reserve to address the impact of the COVID-19 pandemic and the continued economic uncertainty.

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			Paycheck Protection Program			Installment and Other			Lease Financing Receivables			Total
Balance at June 30, 2020	$	14,110		$	3,741		$	1,491		$	30,108		$	—		$	36		$	1,814		$	51,300
Provision (release) for acquired impaired loans		947			(465	)		100			472			—			—			—			1,054
Provision (release) for acquired non-impaired loans and leases		1,170			20			(43	)		(1,214	)		—			—			(51	)		(118	)
Provision for originated loans		4,304			736			972			8,345			—			1			446			14,804
Total provision	$	6,421		$	291		$	1,029		$	7,603		$	—		$	1		$	395		$	15,740
Charge-offs for acquired impaired loans		(314	)		—			—			(460	)		—			—			—			(774	)
Charge-offs for acquired non-impaired loans and leases		(32	)		—			—			(169	)		—			—			(82	)		(283	)
Charge-offs for originated loans and leases		(1,220	)		(250	)		(701	)		(2,625	)		—			—			(292	)		(5,088	)
Total charge-offs	$	(1,566	)	$	(250	)	$	(701	)	$	(3,254	)	$	—		$	—		$	(374	)	$	(6,145	)
Recoveries for acquired impaired loans		1			2			—			12			—			—			—			15
Recoveries for acquired non-impaired loans and leases		—			—			—			—			—			—			114			114
Recoveries for originated loans and leases		18			6			53			71			—			—			86			234
Total recoveries	$	19		$	8		$	53		$	83		$	—		$	—		$	200		$	363
Less: Net charge-offs		1,547			242			648			3,171			—			—			174			5,782
Acquired impaired loans		2,009			763			87			1,877			—			—			—			4,736
Acquired non-impaired loans and leases		2,411			106			43			3,902			—			3			165			6,630
Originated loans and leases		9,690			2,872			1,361			24,329			—			33			1,649			39,934
Balance at September 30, 2020	$	14,110		$	3,741		$	1,491		$	30,108		$	—		$	36		$	1,814		$	51,300
Ending ALLL balance
Acquired impaired loans	$	2,643		$	300		$	187		$	1,901			—		$	—		$	—		$	5,031
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		4,516			77			—			10,189			—			—			—			14,782
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		11,825			3,413			1,685			22,450			—			37			2,035			41,445
Balance at September 30, 2020	$	18,984		$	3,790		$	1,872		$	34,540		$	—		$	37		$	2,035		$	61,258
Loans and leases ending balance
Acquired impaired loans	$	117,114		$	84,197		$	4,804		$	10,489		$	—		$	214		$	—		$	216,818
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		39,001			1,636			—			37,253			—			—			—			77,890
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,191,740			547,563			234,230			1,281,067			622,191			2,929			200,089			4,079,809
Total loans and leases at September 30, 2020, gross	$	1,347,855		$	633,396		$	239,034		$	1,328,809		$	622,191		$	3,143		$	200,089		$	4,374,517
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.03	%		0.00	%		0.00	%		0.04	%		0.00	%		0.00	%		0.00	%		0.07	%
Acquired non-impaired loans and leases		0.00	%		0.00	%		0.00	%		0.02	%		0.00	%		0.00	%		0.00	%		0.02	%
Originated loans and leases		0.11	%		0.02	%		0.06	%		0.23	%		0.00	%		0.00	%		0.02	%		0.45	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		2.68	%		1.92	%		0.11	%		0.24	%		0.00	%		0.00	%		0.00	%		4.96	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.89	%		0.04	%		0.00	%		0.85	%		0.00	%		0.00	%		0.00	%		1.78	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		27.24	%		12.52	%		5.35	%		29.28	%		14.22	%		0.07	%		4.57	%		93.26	%

	Commercial Real Estate			Residential Real Estate			Construction, Land Development, and Other Land			Commercial and Industrial			Paycheck Protection Program			Installment and Other			Lease Financing Receivables			Total
Balance at December 31, 2019	$	7,965		$	1,990		$	610		$	19,377		$	—		$	50		$	1,944		$	31,936
Provision (release) for acquired impaired loans		2,013			(382	)		161			1,255			—			—			—			3,047
Provision (release) for acquired non-impaired loans and leases		2,662			111			(16	)		563			—			1			(194	)		3,127
Provision (release) for originated loans		9,474			2,302			1,765			25,026			—			(14	)		986			39,539
Total provision	$	14,149		$	2,031		$	1,910		$	26,844		$	—		$	(13	)	$	792		$	45,713
Charge-offs for acquired impaired loans		(328	)		—			—			(539	)		—			—			—			(867	)
Charge-offs for acquired non-impaired loans and leases		(1,059	)		—			—			(714	)		—			—			(145	)		(1,918	)
Charge-offs for originated loans and leases		(1,819	)		(259	)		(701	)		(10,804	)		—			—			(1,247	)		(14,830	)
Total charge-offs	$	(3,206	)	$	(259	)	$	(701	)	$	(12,057	)	$	—		$	—		$	(1,392	)	$	(17,615	)
Recoveries for acquired impaired loans		21			7			—			47			—			—			—			75
Recoveries for acquired non-impaired loans and leases		22			—			—			10			—			—			145			177
Recoveries for originated loans and leases		33			21			53			319			—			—			546			972
Total recoveries	$	76		$	28		$	53		$	376		$	—		$	—		$	691		$	1,224
Less: Net charge-offs		3,130			231			648			11,681			—			—			701			16,391
Acquired impaired loans		2,643			300			187			1,901			—			—			—			5,031
Acquired non-impaired loans and leases		3,549			126			—			2,519			—			3			146			6,343
Originated loans and leases		12,792			3,364			1,685			30,120			—			34			1,889			49,884
Balance at September 30, 2020	$	18,984		$	3,790		$	1,872		$	34,540		$	—		$	37		$	2,035		$	61,258
Ending ALLL balance
Acquired impaired loans	$	2,643		$	300		$	187		$	1,901			—		$	—		$	—		$	5,031
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		4,516			77			—			10,189			—			—			—			14,782
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		11,825			3,413			1,685			22,450			—			37			2,035			41,445
Balance at September 30, 2020	$	18,984		$	3,790		$	1,872		$	34,540		$	—		$	37		$	2,035		$	61,258
Loans and leases ending balance
Acquired impaired loans	$	117,114		$	84,197		$	4,804		$	10,489		$	—		$	214		$	—		$	216,818
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		39,001			1,636			—			37,253			—			—			—			77,890
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,191,740			547,563			234,230			1,281,067			622,191			2,929			200,089			4,079,809
Total loans and leases at September 30, 2020, gross	$	1,347,855		$	633,396		$	239,034		$	1,328,809		$	622,191		$	3,143		$	200,089		$	4,374,517
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.01	%		0.00	%		0.00	%		0.02	%		0.00	%		0.00	%		0.00	%		0.04	%
Acquired non-impaired loans and leases		0.03	%		0.00	%		0.00	%		0.02	%		0.00	%		0.00	%		0.00	%		0.09	%
Originated loans and leases		0.06	%		0.01	%		0.02	%		0.35	%		0.00	%		0.00	%		0.02	%		0.69	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		2.68	%		1.92	%		0.11	%		0.24	%		0.00	%		0.00	%		0.00	%		4.96	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.89	%		0.04	%		0.00	%		0.85	%		0.00	%		0.00	%		0.00	%		1.78	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		27.24	%		12.52	%		5.35	%		29.28	%		14.22	%		0.07	%		4.57	%		93.26	%

	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, 2019	$	8,934		$	2,171		$	691		$	17,126		$	67		$	2,143		$	31,132
Provision (release) for acquired impaired loans		9			10			(1	)		(83	)		—			—			(65	)
(Release) for acquired non-impaired loans and leases		(71	)		(1	)		(1	)		(277	)		(1	)		(54	)		(405	)
Provision for originated loans		1,137			65			127			4,558			(11	)		525			6,401
Total provision (release)	$	1,075		$	74		$	125		$	4,198		$	(12	)	$	471		$	5,931
Charge-offs for acquired impaired loans		(368	)		—			—			(240	)		—			—			(608	)
Charge-offs for acquired non-impaired loans and leases		(4	)		—			—			—			—			—			(4	)
Charge-offs for originated loans and leases		(1,087	)		—			—			(3,321	)		(1	)		(665	)		(5,074	)
Total charge-offs	$	(1,459	)	$	—		$	—		$	(3,561	)	$	(1	)	$	(665	)	$	(5,686	)
Recoveries for acquired impaired loans		—			—			—			—			—			—			—
Recoveries for acquired non-impaired loans and leases		—			—			—			—			—			22			22
Recoveries for originated loans and leases		3			6			—			20			1			156			186
Total recoveries	$	3		$	6		$	—		$	20		$	1		$	178		$	208
Less: Net charge-offs (recoveries)		1,456			(6	)		—			3,541			—			487			5,478
Acquired impaired loans		1,367			600			14			819			2			—			2,802
Acquired non-impaired loans and leases		2,166			15			21			2,791			—			268			5,261
Originated loans and leases		5,020			1,636			781			14,173			53			1,859			23,522
Balance at September 30, 2019	$	8,553		$	2,251		$	816		$	17,783		$	55		$	2,127		$	31,585
Ending ALLL balance
Acquired impaired loans	$	1,367		$	600		$	14		$	819		$	2		$	—		$	2,802
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		2,728			39			—			6,795			—			—			9,562
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		4,458			1,612			802			10,169			53			2,127			19,221
Balance at September 30, 2019	$	8,553		$	2,251		$	816		$	17,783		$	55		$	2,127		$	31,585
Loans and leases ending balance
Acquired impaired loans	$	142,435		$	109,409		$	4,562		$	18,349		$	267		$	—		$	275,022
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		24,071			2,374			—			26,731			—			—			53,176
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,139,782			637,320			276,437			1,257,082			9,087			183,184			3,502,892
Total loans and leases at September 30, 2019, gross	$	1,306,288		$	749,103		$	280,999		$	1,302,162		$	9,354		$	183,184		$	3,831,090
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.04	%		0.00	%		0.00	%		0.03	%		0.00	%		0.00	%		0.06	%
Acquired non-impaired loans and leases		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Originated loans and leases		0.11	%		0.00	%		0.00	%		0.35	%		0.00	%		0.05	%		0.51	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		3.72	%		2.86	%		0.12	%		0.47	%		0.01	%		0.00	%		7.18	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.63	%		0.06	%		0.00	%		0.70	%		0.00	%		0.00	%		1.39	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		29.75	%		16.64	%		7.22	%		32.81	%		0.24	%		4.78	%		91.43	%

	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, 2018	$	7,540		$	1,751		$	466		$	12,932		$	49		$	2,463		$	25,201
Provision (release) for acquired impaired loans		203			(37	)		14			599			—			—			779
Provision (release) for acquired non-impaired loans and leases		1,478			(96	)		4			856			—			(278	)		1,964
Provision for originated loans		2,531			363			332			9,095			10			1,247			13,578
Total provision	$	4,212		$	230		$	350		$	10,550		$	10		$	969		$	16,321
Charge-offs for acquired impaired loans		(478	)		—			—			(907	)		—			—			(1,385	)
Charge-offs for acquired non-impaired loans and leases		(1,755	)		—			—			(1,379	)		—			—			(3,134	)
Charge-offs for originated loans and leases		(1,395	)		(9	)		—			(3,454	)		(5	)		(1,932	)		(6,795	)
Total charge-offs	$	(3,628	)	$	(9	)	$	—		$	(5,740	)	$	(5	)	$	(1,932	)	$	(11,314	)
Recoveries for acquired impaired loans		398			270			—			4			—			—			672
Recoveries for acquired non-impaired loans and leases		28			2			—			19			—			142			191
Recoveries for originated loans and leases		3			7			—			18			1			485			514
Total recoveries	$	429		$	279		$	—		$	41		$	1		$	627		$	1,377
Less: Net charge-offs (recoveries)		3,199			(270	)		—			5,699			4			1,305			9,937
Acquired impaired loans		1,367			600			14			819			2			—			2,802
Acquired non-impaired loans and leases		2,166			15			21			2,791			—			268			5,261
Originated loans and leases		5,020			1,636			781			14,173			53			1,859			23,522
Balance at September 30, 2019	$	8,553		$	2,251		$	816		$	17,783		$	55		$	2,127		$	31,585
Ending ALLL balance
Acquired impaired loans	$	1,367		$	600		$	14		$	819		$	2		$	—		$	2,802
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		2,728			39			—			6,795			—			—			9,562
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		4,458			1,612			802			10,169			53			2,127			19,221
Balance at September 30, 2019	$	8,553		$	2,251		$	816		$	17,783		$	55		$	2,127		$	31,585
Loans and leases ending balance
Acquired impaired loans	$	142,435		$	109,409		$	4,562		$	18,349		$	267		$	—		$	275,022
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		24,071			2,374			—			26,731			—			—			53,176
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		1,139,782			637,320			276,437			1,257,082			9,087			183,184			3,502,892
Total loans and leases at September 30, 2019, gross	$	1,306,288		$	749,103		$	280,999		$	1,302,162		$	9,354		$	183,184		$	3,831,090
Ratio of net charge-offs to average loans and leases outstanding during the period (annualized)
Acquired impaired loans		0.00	%		0.00	%		0.00	%		0.03	%		0.00	%		0.00	%		0.03	%
Acquired non-impaired loans and leases		0.06	%		0.00	%		0.00	%		0.05	%		0.00	%		0.00	%		0.11	%
Originated loans and leases		0.05	%		0.00	%		0.00	%		0.13	%		0.00	%		0.05	%		0.23	%
Loans and leases ending balance as a percentage of total loans and leases, gross
Acquired impaired loans		3.72	%		2.86	%		0.12	%		0.47	%		0.01	%		0.00	%		7.18	%
Acquired non-impaired loans and leases and originated loans individually evaluated for impairment		0.63	%		0.06	%		0.00	%		0.70	%		0.00	%		0.00	%		1.39	%
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment		29.75	%		16.64	%		7.22	%		32.81	%		0.24	%		4.78	%		91.43	%

Non-Performing Assets

Non-performing loans and leases include loans and leases 90 days past due and still accruing and loans and leases accounted for on a non-accrual basis. Non-performing assets consist of non-performing loans and leases plus other real estate owned. Non-performing assets at September 30, 2020 and December 31, 2019 totaled $51.3 million and $46.2 million, respectively, an increase of $5.1 million, or 11.2%, due to the increase in non-accrual loans.

Total non-accrual loans and leases increased by $6.9 million, or 19.1%, between December 31, 2019 and September 30, 2020 mostly due to a net increase of $8.8 million in commercial real estate loans. The U.S. government guaranteed portion of non-performing loans totaled $3.7 million at September 30, 2020 and $4.2 million at December 31, 2019.

Total OREO decreased from $9.9 million at December 31, 2019 to $8.2 million at September 30, 2020. The $1.7 million decrease in OREO resulted mostly from sales and valuation adjustments.

Total accruing loans past due decreased from $40.2 million at December 31, 2019 to $10.0 million at September 30, 2020. This represents a decrease of $30.2 million, or 75.1%, and can be attributed to decreases in commercial real estate loans, commercial and industrial loans, and construction, land development, and other land loans, primarily as a result of SBA CARES Act payments and payment deferrals granted to assist customers with their short-term cash flow needs during the COVID-19 pandemic. See Note 6 of our Unaudited Interim Condensed Consolidated Financial Statements, included in this report, for further information.

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, 2020			December 31, 2019
Non-performing assets:
Non-accrual loans and leases^(1)(2)(3)	$	43,196		$	36,272
Past due loans and leases 90 days or more and still accruing interest		—			—
Total non-performing loans and leases		43,196			36,272
Other real estate owned		8,150			9,896
Total non-performing assets	$	51,346		$	46,168
Total non-performing loans and leases as a percentage of total loans and leases		0.99	%		0.96	%
Total non-performing assets as a percentage of total assets		0.79	%		0.84	%
Allowance for loan and lease losses as a percentage of non-performing loans and leases		141.81	%		88.05	%
Accruing troubled debt restructured loans	$	2,293		$	1,771

Non-performing assets guaranteed by U.S. government:
Non-accrual loans guaranteed	$	3,749		$	4,232
Past due loans 90 days or more and still accruing interest guaranteed		—			—
Total non-performing loans guaranteed	$	3,749		$	4,232
Total non-performing loans and leases not guaranteed as a percentage of total loans and leases		0.90	%		0.85	%
Total non-performing assets not guaranteed as a percentage of total assets		0.73	%		0.76	%
Accruing troubled debt restructured loans guaranteed	$	—		$	—

(1)	Includes $6.3 million and $8.8 million of non-accrual restructured loans at September 30, 2020 and December 31, 2019.

(2)	For the nine months ended September 30, 2020, $1.9 million in interest income would have been recorded had non-accrual loans been current.

(3)	For the nine months ended September 30, 2020, $359,000 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.

Deposits

Our loan and lease growth is funded primarily through core deposits. We gather deposits primarily through each of our 56 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.

Total deposits at September 30, 2020 were $4.8 billion, representing an increase of $662.7 million, or 16.0%, compared to $4.1 billion at December 31, 2019, driven by an increase in customer liquidity. Non-interest-bearing deposits were $1.7 billion, or 35.7% of total deposits, at September 30, 2020, an increase of $439.0 million, or 34.3%, compared to $1.3 billion at December 31, 2019, or 30.9% of total deposits. Core deposits were 89.9% and 83.1% of total deposits at September 30, 2020 and December 31, 2019, respectively.

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

	For the Three Months Ended September 30, 2020					For the Three Months Ended September 30, 2019
	Average Balance		Average Rate			Average Balance		Average Rate
Non-interest-bearing demand deposits	$	1,742,787		0.00	%	$	1,223,556		0.00	%
Interest checking		565,917		0.16	%		358,185		0.58	%
Money market accounts		1,202,016		0.21	%		735,724		1.03	%
Savings		535,396		0.05	%		475,417		0.10	%
Time deposits (below $100,000)		363,956		0.62	%		494,933		2.00	%
Time deposits ($100,000 and above)		506,271		1.00	%		775,117		2.34	%
Total	$	4,916,343		0.22	%	$	4,062,932		0.94	%

	For the Nine Months Ended September 30, 2020					For the Nine Months Ended September 30, 2019
	Average Balance		Average Rate			Average Balance		Average Rate
Non-interest-bearing demand deposits	$	1,578,704		0.00	%	$	1,221,375		0.00	%
Interest checking		432,785		0.20	%		328,558		0.57	%
Money market accounts		1,126,588		0.45	%		682,020		1.01	%
Savings		509,001		0.05	%		474,815		0.10	%
Time deposits (below $100,000)		405,889		1.17	%		487,116		1.87	%
Time deposits ($100,000 and above)		580,530		1.53	%		761,142		2.33	%
Total	$	4,633,497		0.43	%	$	3,955,026		0.91	%

Our average cost of deposits was 0.22% during the third quarter of 2020 compared to 0.94% during the third quarter of 2019. Our average cost of deposits was 0.43% during the nine months ended September 30, 2020 compared to 0.91% during the nine months ended September 30, 2019. These decreases were principally attributed to lower rates on interest-bearing deposits as a result the interest rate environment and an improved deposit mix. Our average non-interest bearing deposits to total deposits ratios were 35.4% during the third quarter of 2020 compared to 30.1% during the third quarter of 2019. We had $35.0 million and $41.0 million of brokered time deposits at September 30, 2020 and December 31, 2019, respectively. Our loan and lease to deposit ratio was 91.96% at September 30, 2020 compared to 91.56% at December 31, 2019.

The following table shows time deposits and other time deposits of $100,000 or more by time remaining until maturity (dollars in thousands):

	At September 30, 2020
	Time Deposits
Three months or less	$	106,241
Over three months through six months		169,763
Over six months through 12 months		183,440
Over 12 months		25,893
Total	$	485,337

Borrowed Funds

On June 26, 2020, the Company issued $50.0 million in 6.00% fixed-to-floating subordinated notes that mature on July 1, 2030. On August 3, 2020, the Company issued an additional $25.0 million. The subordinated notes bear a fixed interest rate of 6.00% until July 1, 2025 and a floating interest rate equal to a benchmark rate, which is expected to be three-month Secured Overnight Financing Rate (“SOFR”) plus 588 basis points thereafter until maturity (or earlier redemption). The Company may, at its option, redeem the notes, in whole or in part, on a semi-annual basis beginning on July 1, 2025, subject to obtaining the prior approval of the Federal Reserve to the extent such approval is then required. The subordinated notes are intended to qualify as Tier 2 capital for regulatory capital purposes. The transaction resulted in debt issuance costs of approximately $1.7 million that will be amortized over 10 years.

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, 2020 and December 31, 2019, we had maximum borrowing capacity from the FHLB of $2.0 billion and $1.9 billion subject to the availability of collateral, respectively. At September 30, 2020, the Company had $215.0 million of FHLB advances with a maturities ranging from October 2020 to May 2021.

The Company has the capacity to borrow funds from the discount window of the Federal Reserve System. The Company utilized the discount window to lower its cost of funds during the nine months ended September 30, 2020. There were no borrowings outstanding under the Federal Reserve Bank discount window line as of September 30, 2020 and December 31, 2019. The Company pledges loans as collateral for any borrowings under the Federal Reserve Bank discount window.

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

	Nine Months Ended September 30,
	2020			2019
Federal Reserve Bank discount window borrowing:
Average balance outstanding	$	65,839		$	—
Maximum outstanding at any month-end period during the year		350,000			—
Balance outstanding at end of period		—			—
Weighted average interest rate during period		0.25	%	N/A
Weighted average interest rate at end of period	N/A			N/A
Federal Home Loan Bank advances:
Average balance outstanding	$	244,518		$	463,645
Maximum outstanding at any month-end period during the year		499,000			550,000
Balance outstanding at end of period		215,000			506,000
Weighted average interest rate during period		1.16	%		2.03	%
Weighted average interest rate at end of period		0.23	%		2.05	%
Line of credit:
Average balance outstanding	$	55		$	645
Maximum outstanding at any month-end period during the year		1,550			5,680
Balance outstanding at end of period		—			—
Weighted average interest rate during period		51.11	%		5.64	%
Weighted average interest rate at end of period⁽¹⁾	N/A			N/A

(1)

Our credit agreement with a third-party lender matures on October 2021. The line of credit bears interest at either the LIBOR Rate plus 195 basis points or the Prime Rate minus 75 basis points, based on our election, which is required to be communicate to the lender at least three business days prior to the commencement of an interest period. If we fail to provide timely notification, the interest rate will be Prime Rate minus 75 basis points.

Customer Repurchase Agreements (Sweeps)

Securities sold under agreements to repurchase represent a demand deposit product offered to customers that sweep balances in excess of the FDIC insurance limit into overnight repurchase agreements. We pledge securities as collateral for the repurchase agreements. Securities sold under agreements to repurchase decreased by $3.7 million, from $49.6 million at December 31, 2019 to $45.9 million at September 30, 2020.

Liquidity

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

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

As of September 30, 2020, Byline Bank had maximum borrowing capacity from the FHLB of $2.0 billion and $1.4 billion from the Federal Reserve Bank (“FRB”). As of September 30, 2020, Byline Bank had open FHLB advances of $215.0 million and open letters of credit of $21.5 million, leaving us with available aggregate borrowing capacity of $930.9 million. In addition, Byline Bank had uncommitted federal funds lines available of $115.0 million and $968.7 million available under the Federal Reserve Bank discount window line at September 30, 2020.

As of December 31, 2019, Byline Bank had maximum borrowing capacity from the FHLB of $1.9 billion and $547.8 million from the FRB. As of December 31, 2019, Byline Bank had open advances of $490.0 million and open letters of credit of $20.8 million, leaving us with available aggregate borrowing capacity of $1.4 billion. In addition, Byline Bank had an uncommitted federal funds line available of $115.0 million and $547.8 million available under the Federal Reserve Bank discount window line at December 31, 2019.

On October 13, 2016, the Company entered into a $30.0 million revolving credit agreement with a correspondent bank. Through subsequent amendments, the revolving credit agreement was reduced to $15.0 million and the maturity was extended to October 8, 2021. The amended revolving line of credit bears interest at either the London Interbank Offered Rate (“LIBOR”) plus 195 basis points or the Prime Rate minus 75 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 75 basis points. At September 30, 2020 and December 31, 2019, the line of credit had no outstanding balance.

There are regulatory limitations that affect the ability of Byline Bank to pay dividends to the Company. See Note 21 of our Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2019 for additional information. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.

We expect that our cash and liquidity resources will be generated by the operations of Byline Bank, which we expect to be sufficient to satisfy our liquidity and capital requirements for at least the next twelve months.

On April 21, 2020, Byline Bank entered into a Letter Agreement with the Federal Reserve Bank of Chicago that allows the Bank to access the Paycheck Protection Program Liquidity Facility (the “PPPLF”). Under the terms of the PPPLF, the Bank will pledge PPP loans funded under the CARES Act, to the Federal Reserve Bank of Chicago as collateral for available advances under the PPPLF. PPP loans pledged as collateral will be valued at an amount equal to the principal amount of the PPP loan outstanding at the time the PPP loan is pledged. Advances under the PPPLF will be an amount equal to the aggregate principal amount of PPP loans pledged by Byline Bank, will carry an interest rate of 0.35%, and mature on the maturity date of the corresponding PPP loans pledged as collateral. The Bank had $449.6 million outstanding under the PPPLF at September 30, 2020.

Capital Resources

Stockholders’ equity at September 30, 2020 was $794.7 million compared to $750.1 million at December 31, 2019, an increase of $44.6 million, or 5.9%. The increase was primarily driven by the increase in accumulated other comprehensive income reflecting the unrealized gains in our available-for-sale securities portfolio in addition to net income generated during the nine months ended September 30, 2020, less dividends declared.

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

Under applicable bank regulatory capital requirements, each of the Company and Byline Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Byline Bank must also meet certain specific capital guidelines under the prompt corrective action framework. The capital amounts and classification are subject to qualitative judgments by the federal banking regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Byline Bank to maintain minimum amounts and ratios of

CET1 Capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, (referred to as the “leverage ratio”), as defined under these capital requirements.

As of September 30, 2020, Byline Bank exceeded all applicable regulatory capital requirements and was considered “well-capitalized.” There have been no conditions or events since September 30, 2020 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 to be Considered Well Capitalized
September 30, 2020	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk weighted assets:
Company	$	757,133		16.67	%	$	363,274		8.00	%	N/A		N/A
Bank		656,395		14.50	%		362,063		8.00	%	$	452,579		10.00	%
Tier 1 capital to risk weighted assets:
Company	$	625,287		13.77	%	$	272,456		6.00	%	N/A		N/A
Bank		599,736		13.25	%		271,547		6.00	%	$	362,063		8.00	%
Common Equity Tier 1 (CET1) to risk weighted assets:
Company	$	569,849		12.55	%	$	204,342		4.50	%	N/A		N/A
Bank		599,736		13.25	%		203,661		4.50	%	$	294,176		6.50	%
Tier 1 capital to average assets:
Company	$	625,287		10.93	%	$	228,874		4.00	%	N/A		N/A
Bank		599,736		10.49	%		228,729		4.00	%	$	285,912		5.00	%

	Actual					Minimum Capital Required					Required to be Considered Well Capitalized
December 31, 2019	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk weighted assets:
Company	$	627,573		14.43	%	$	347,835		8.00	%	N/A		N/A
Bank		602,684		13.87	%		347,564		8.00	%	$	434,454		10.00	%
Tier 1 capital to risk weighted assets:
Company	$	594,477		13.67	%	$	260,876		6.00	%	N/A		N/A
Bank		569,588		13.11	%		260,673		6.00	%	$	347,564		8.00	%
Common Equity Tier 1 (CET1) to risk weighted assets:
Company	$	537,539		12.36	%	$	195,657		4.50	%	N/A		N/A
Bank		569,588		13.11	%		195,504		4.50	%	$	282,395		6.50	%
Tier 1 capital to average assets:
Company	$	594,477		11.39	%	$	208,771		4.00	%	N/A		N/A
Bank		569,588		10.92	%		208,647		4.00	%	$	260,809		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 conservation buffers for the Company and Byline Bank exceed the minimum capital requirement as of September 30, 2020.

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, 2020 and year ended December 31, 2019, the Company received $7.5 million and $13.5 million, respectively, 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 to fund other Company-related activities.

On November 1, 2019, the Company announced that its Board of Directors approved a stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of the Company’s outstanding common stock. The shares may, at the discretion of management, be repurchased from time to time in open market purchases as market conditions warrant or in privately negotiated transactions, including pursuant to a Rule 10b5-1 plan, all as effected to the extent permitted by applicable law, including pursuant to the safe harbor provided under Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The Company is not obligated to purchase any shares under the program, and the program may be discontinued at any time. The actual timing, number and share price of shares purchased under the repurchase program will be determined by the Company at its discretion and will depend on a number of factors, including the market price of the Company’s stock, general market and economic conditions and applicable legal requirements. The shares authorized to be repurchased represent approximately 3.3% of the Company’s currently outstanding common stock. Shares repurchased will be available for issuance under the Company’s equity incentive plans and for other general corporate purposes. The program will be in effect until December 31, 2020, unless terminated earlier. The Company repurchased 118,486 shares, or approximately $1.7 million, of stock during the first nine months of 2020 under this program, which were recorded as treasury shares on the trade date as a reduction in stockholders’ equity. This program was paused in March 2020.

On September 8, 2020, the Company announced that its Board of Directors declared a cash dividend on its common stock of $0.03 per share for the third quarter of 2020, which totaled $1.2 million. The dividend was paid on October 6, 2020 to stockholders of record on September 22, 2020.

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 14 of our Unaudited Interim 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). At September 30, 2020, commercial line of credit usage was $1.2 billion, or 57.2% of available lines compared to $1.2 billion, or 58.7% of available lines at December 31, 2019.

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

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

We enter into interest rate swaps that are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. We also enter into interest rate swaps with certain qualified borrowers to facilitate the borrowers’ risk management strategies and concurrently entered into mirror-image derivatives with a third party counterparty.

We recognize derivative financial instruments at fair value regardless of the purpose or intent for holding the instrument. We record derivative assets and derivative liabilities on the 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, 2020 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, 2020
			Fair Value
	Notional		Asset		Liability
Interest rate contracts—pay fixed, receive floating	$	—	$	—	$	—
Other interest rate swaps—pay fixed, receive floating		373,782		19,133		20,307
Other credit derivatives		8,653		—		20

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 the reversal of the valuation allowance on our net deferred tax assets, 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 net 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 the provision for loan and lease losses, and enables investors and others to assess the Company’s ability to generate capital to cover credit losses through a credit cycle.

•

“Adjusted pre-tax pre-provision net income” is pre-tax pre-provision net income excluding certain significant items, which include impairment charges on assets held for sale, merger-related expenses, and core system conversion expenses. 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 common 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 available to common stockholders” 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.

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 per share data)	2020			2019			2020			2019
Net income and earnings per share excluding significant items
Reported Net Income	$	13,071		$	15,342		$	25,176		$	41,150
Significant items:
Impairment charges on assets held for sale		32			67			747			459
Merger-related expense		—			1,043			—			4,213
Core system conversion expense		—			77			—			2,001
Tax benefit on impairment charges and merger-related expenses		(9	)		(369	)		(208	)		(1,751	)
Adjusted Net Income	$	13,094		$	16,160		$	25,715		$	46,072
Reported Diluted Earnings per Share	$	0.34		$	0.39		$	0.64		$	1.07
Significant items:
Impairment charges on assets held for sale		—			—			0.02			0.01
Merger-related expense		—			0.03			—			0.11
Core system conversion expense		—			—			—			0.05
Tax benefit on impairment charges and merger-related expenses		—			(0.01	)		(0.01	)		(0.04	)
Adjusted Diluted Earnings per Share	$	0.34		$	0.41		$	0.65		$	1.20

	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
(dollars in thousands, except per share data)	2020			2019			2020			2019
Adjusted non-interest expense:
Non-interest expense	$	41,705		$	45,448		$	122,244		$	130,081
Less significant items:
Impairment charges on assets held for sale		32			67			747			459
Merger-related expense		—			1,043			—			4,213
Core system conversion expense		—			77			—			2,001
Adjusted non-interest expense	$	41,673		$	44,261		$	121,497		$	123,408
Adjusted non-interest expense excluding amortization of intangible assets:
Adjusted non-interest expense	$	41,673		$	44,261		$	121,497		$	123,408
Less: Amortization of intangible assets		1,947			2,003			5,732			5,735
Adjusted non-interest expense excluding amortization of intangible assets	$	39,726		$	42,258		$	115,765		$	117,673
Pre-tax pre-provision net income:
Pre-tax income	$	18,331		$	21,265		$	35,214		$	56,946
Add: Provision for loan and lease losses		15,740			5,931			45,713			16,321
Pre-tax pre-provision net income	$	34,071		$	27,196		$	80,927		$	73,267
Adjusted pre-tax pre-provision net income:
Pre-tax pre-provision net income	$	34,071		$	27,196		$	80,927		$	73,267
Impairment charges on assets held for sale		32			67			747			459
Merger-related expense		—			1,043			—			4,213
Core system conversion expense		—			77			—			2,001
Adjusted pre-tax pre-provision net income	$	34,103		$	28,383		$	81,674		$	79,940
Total revenues:
Net interest income	$	53,524		$	57,838		$	158,958		$	162,371
Add: non-interest income		22,252			14,806			44,213			40,977
Total revenues	$	75,776		$	72,644		$	203,171		$	203,348
Tangible common stockholders' equity:
Total stockholders' equity	$	794,696		$	735,866		$	794,696		$	735,866
Less: Preferred stock		10,438			10,438			10,438			10,438
Less: Goodwill and other intangibles		174,523			179,543			174,523			179,543
Tangible common stockholders' equity	$	609,735		$	545,885		$	609,735		$	545,885
Tangible assets:
Total assets	$	6,496,513		$	5,438,278		$	6,496,513		$	5,438,278
Less: Goodwill and other intangibles		174,523			179,543			174,523			179,543
Tangible assets	$	6,321,990		$	5,258,735		$	6,321,990		$	5,258,735
Average tangible common stockholders' equity:
Average total stockholders' equity	$	791,111		$	729,781		$	777,522		$	695,547
Less: Average preferred stock		10,438			10,438			10,438			10,438
Less: Average goodwill and other intangibles		175,443			180,740			177,426			172,373
Average tangible common stockholders' equity	$	605,230		$	538,603		$	589,658		$	512,736
Average tangible assets:
Average total assets	$	6,401,290		$	5,435,762		$	6,052,682		$	5,226,491
Less: Average goodwill and other intangibles		175,443			180,740			177,426			172,373
Average tangible assets	$	6,225,847		$	5,255,022		$	5,875,256		$	5,054,118
Tangible net income available to common stockholders:
Net income available to common stockholders	$	12,875		$	15,146		$	24,589		$	40,563
Add: After-tax intangible asset amortization		1,405			1,445			4,136			4,138
Tangible net income available to common stockholders	$	14,280		$	16,591		$	28,725		$	44,701
Adjusted Tangible net income available to common stockholders:
Tangible net income available to common stockholders	$	14,280		$	16,591		$	28,725		$	44,701
Impairment charges on assets held for sale		32			67			747			459
Merger-related expense		—			1,043			—			4,213
Core system conversion expense		—			77			—			2,001
Tax benefit on significant items		(9	)		(369	)		(208	)		(1,751	)
Adjusted tangible net income available to common stockholders	$	14,303		$	17,409		$	29,264		$	49,623

	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)	2020			2019			2020			2019
Pre-tax pre-provision return on average assets:
Pre-tax pre-provision net income	$	34,071		$	27,196		$	80,927		$	73,267
Average total assets		6,401,290			5,435,762			6,052,682			5,226,491
Pre-tax pre-provision return on average assets		2.12	%		1.98	%		1.79	%		1.87	%
Adjusted pre-tax pre-provision return on average assets:
Adjusted pre-tax pre-provision net income	$	34,103		$	28,383		$	81,674		$	79,940
Average total assets		6,401,290			5,435,762			6,052,682			5,226,491
Adjusted pre-tax pre-provision return on average assets:		2.12	%		2.07	%		1.80	%		2.04	%
Non-interest income to total revenues:
Non-interest income	$	22,252		$	14,806		$	44,213		$	40,977
Total revenues		75,776			72,644			203,171			203,348
Non-interest income to total revenues		29.37	%		20.38	%		21.76	%		20.15	%
Adjusted non-interest expense to average assets:
Adjusted non-interest expense	$	41,673		$	44,261		$	121,497		$	123,408
Average total assets		6,401,290			5,435,762			6,052,682			5,226,491
Adjusted non-interest expense to average assets		2.59	%		3.23	%		2.68	%		3.16	%
Adjusted efficiency ratio:
Adjusted non-interest expense excluding amortization of intangible assets	$	39,726		$	42,258		$	115,765		$	117,673
Total revenues		75,776			72,644			203,171			203,348
Adjusted efficiency ratio		52.43	%		58.17	%		56.98	%		57.87	%
Adjusted return on average assets:
Adjusted net income	$	13,094		$	16,160		$	25,715		$	46,072
Average total assets		6,401,290			5,435,762			6,052,682			5,226,491
Adjusted return on average assets		0.81	%		1.18	%		0.57	%		1.18	%
Adjusted return on average stockholders' equity:
Adjusted net income	$	13,094		$	16,160		$	25,715		$	46,072
Average stockholders' equity		791,111			729,781			777,522			695,547
Adjusted return on average stockholders' equity		6.58	%		8.78	%		4.42	%		8.86	%
Tangible common equity to tangible assets:
Tangible common equity	$	609,735		$	545,885		$	609,735		$	545,885
Tangible assets		6,321,990			5,258,735			6,321,990			5,258,735
Tangible common equity to tangible assets		9.64	%		10.38	%		9.64	%		10.38	%
Return on average tangible common stockholders' equity:
Tangible net income available to common stockholders	$	14,280		$	16,591		$	28,725		$	44,701
Average tangible common stockholders' equity		605,230			538,603			589,658			512,736
Return on average tangible common stockholders' equity:		9.39	%		12.22	%		6.51	%		11.66	%
Adjusted return on average tangible common stockholders' equity:
Adjusted tangible net income available to common stockholders	$	14,303		$	17,409		$	29,264		$	49,623
Average tangible common stockholders' equity		605,230			538,603			589,658			512,736
Adjusted return on average tangible common stockholders' equity		9.40	%		12.82	%		6.63	%		12.94	%
Tangible book value per share:
Tangible common equity	$	609,735		$	545,885		$	609,735		$	545,885
Common shares outstanding		38,568,916			38,169,126			38,568,916			38,169,126
Tangible book value per share	$	15.81		$	14.30		$	15.81		$	14.30

Forward-Looking Statements

This report contains certain “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, strategies, predictions, forecasts, objectives or assumptions of future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “expects,” “can,” “could,” “may,” “predicts,” “potential,” “opportunity,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “seeks,” “intends” and similar words or phrases. Accordingly, these statements involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual strategies, actions or results to differ materially from those expressed in such statements, and are not guarantees of future results or other events or performance. Because forward-looking statements are necessarily only estimates of future strategies, actions or results, based on management’s current expectations, assumptions and estimates on the date hereof, and there can be no assurance that actual strategies, actions or results will not differ materially from expectations, readers are cautioned not to place undue reliance on such statements.

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

•

the current and potential disruption to and impact on our business, capital, employees, financial condition, liquidity, operations, prospects and results of operations, including a decrease in revenue and an increase in expenses, as well as the trading price of our common stock as a result of the economic and other consequences, including the severity and duration, of the COVID-19 pandemic;

•

uncertainty regarding domestic and geopolitical developments and the United States and global economic outlook that may impact market conditions or affect demand for certain banking products and services, including as a result of the disruption of global, national, state and local economies associated with the COVID-19 pandemic, as well as federal, state and local government responses thereto, and the impact on our customers, which could impair the ability of our borrowers to repay outstanding loans and leases, impair collateral values and further increase our allowance for loan and lease losses, as well as result in possible goodwill impairment charges;

•

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, including as a result of the COVID-19 pandemic;

•

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 and lease 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 information and 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, including changes in response to the COVID-19 pandemic or otherwise;

•

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

•

our ability to attract, 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 new lines of business, products and services, or technology, process improvements or other infrastructure enhancements, or greater-than-anticipated compliance or regulatory costs and burdens;

•

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 Byline Bank;

•

legislative or regulatory changes, particularly changes in regulation of financial services companies and/or the products and services offered by financial services companies, including those changes that are in response to the COVID-19 pandemic, including without limitation the CARES Act and the rules and regulations that may be promulgated thereunder;

•

changes in Small Business Administration (“SBA”) and U.S. Department of Agriculture (“USDA”) U.S. government guaranteed lending rules, regulations, loan and lease products and funding limits, including specifically the SBA Section 7(a) program, including as a result of the COVID-19 pandemic, as well as, 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 a possible change in the federal or state income tax rate on our deferred tax assets and provision for income tax expense;

•

our ability to implement our growth strategy, including via acquisitions;

•

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; and

•

other risks detailed from time to time in filings we make with the SEC.

These risks and uncertainties should be considered in evaluating any forward-looking statements, and undue reliance should not be placed on such statements. Forward looking statements speak only as of the date they are made. You should also consider the risks, assumptions and uncertainties set forth in the “Risk Factors” section of this Form 10-Q, in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, 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 the reports we file with the SEC. We assume no obligation to update any of these statements in light of new information, future events or otherwise unless required under the federal securities laws.

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, and other items affecting earnings.

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

Our management of interest rate risk is overseen by our bank’s asset liability committee, and is chaired by Byline Bank’s 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 wholesale borrowing sources 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.

In addition, we manage our interest rate risk under different dynamic scenarios which we believe provides important information for our net interest income projections. This simulation allows us to monitor and seek to protect earnings in various interest rate cycles.

We utilize interest rate swaps to hedge our interest rate exposure on commercial loans when it meets our clients’ and Byline Bank’s needs. Typically, customer interest rate swaps are for terms of more than five years. As of September 30, 2020, we had a notional amount of $373.8 million of interest rate swaps outstanding. 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 and overseen by the Bank’s loan committee. 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, 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.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2020 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 and 300 basis points and (2) gradual shift 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, and 300 basis points does not provide us with 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 any further than 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, 2020	September 30, 2021			September 30, 2022
Immediate Shifts
+300 basis points		16.2	%		23.9	%
+200 basis points		10.6	%		16.0	%
+100 basis points		4.7	%		7.4	%
-100 basis points		(2.6	)%		(4.4	)%

Dynamic Balance Sheet and Rate Shifts
+200 basis points		5.5	%
+100 basis points		2.2	%
-100 basis points		(1.3	)%

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 substantially different repayment speeds in our loan portfolio than those assumed in the simulation model, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes.

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, 2020, 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, 2020, 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, 2019 that was filed with the SEC on March 12, 2020 or our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 that was filed with the SEC on May 5, 2020 and June 30, 2020 that was filed with the SEC on August 10, 2020.

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

On November 1, 2019, the Company announced that its Board of Directors approved a stock repurchase program authorizing the purchase of up to an aggregate of 1,250,000 shares of the Company’s outstanding common stock. The program will be in effect until December 31, 2020 unless terminated earlier. The Company determined to pause the program in March 2020. Accordingly, no shares were repurchases during the third quarter of 2020. The total remaining authorization under the program was 1,131,514 shares as of September 30, 2020

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.
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, 2020, formatted in Inline 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
104		Cover Page Interactive Data File – the cover page XBRL tags are embedded with the Inline XBRL document.

(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 6, 2020	By:	/s/	Alberto J. Paracchini
			Alberto J. Paracchini
			President and Chief Executive Officer
			(Principal Executive Officer)

Date: November 6, 2020	By:	/s/	Lindsay Corby
			Lindsay Corby
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)