As filed with the Securities and Exchange Commission on June 19, 2017.
Registration No. 333-218362
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Byline Bancorp, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
6022 | 36-3012593 | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(IRS Employer Identification Number) |
180 North LaSalle Street, Suite 300
Chicago, Illinois 60601
(773) 244-7000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants Principal Executive Offices)
Alberto J. Paracchini
Chief Executive Officer
Byline Bancorp, Inc.
180 North LaSalle Street, Suite 300
Chicago, Illinois 60601
(773) 244-7000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
Donald J. Toumey Catherine M. Clarkin Sullivan & Cromwell LLP 125 Broad Street New York, NY 10004 (212) 558-4000 |
Michael J. Zeidel Skadden, Arps, Slate, Meagher & Flom LLP 4 Times Square New York, NY 10036 (212) 735-3000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the Registration Statement.
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
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 | ☒ | (Do not check if a smaller reporting company) | 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 to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
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Title of each class of securities to be registered |
Amount to be
|
Proposed maximum
offering price per share (2) |
Proposed maximum aggregate offering price (2) |
Amount of registration fee (3) |
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Common Stock, par value $0.01 per share |
6,555,000 | $21.00 | $137,655,000 | $15,954.22 | ||||
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(1) | Includes 855,000 additional shares of common stock that the underwriters have the option to purchase from the registrant. |
(2) | Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933. |
(3) | Of this amount, $8,692.50 has previously been paid. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion
Preliminary Prospectus dated June 19, 2017
PROSPECTUS
5,700,000 Shares
Common Stock
This is Byline Bancorp, Inc.s initial public offering. We are selling 3,775,194 shares of our common stock and the selling stockholders are selling 1,924,806 shares of our common stock. We will not receive any proceeds from the sale of shares to be offered by the selling stockholders.
We expect the public offering price to be between $19.00 and $21.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the New York Stock Exchange under the symbol BY.
Investing in the common stock involves risks that are described in the Risk Factors section beginning on page 18 of this prospectus.
We are an emerging growth company under the federal securities laws and will be subject to reduced public company reporting requirements.
Per Share |
Total |
|||||||
Public offering price |
$ | $ | ||||||
Underwriting discounts and commissions (1) |
$ | $ | ||||||
Proceeds, before expenses, to us |
$ | $ | ||||||
Proceeds, before expenses, to the selling stockholders |
$ | $ |
(1) | See Underwriting for a description of the compensation payable to the underwriters. |
The underwriters may also exercise their option to purchase up to an additional 855,000 shares from us at the public offering price, less the underwriting discounts and commissions, for 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about , 2017.
Joint Book-Running Managers
BofA Merrill Lynch | Keefe, Bruyette & Woods | |
A Stifel Company |
Co-Managers
Piper Jaffray | Sandler ONeill + Partners, L.P. | Stephens Inc. |
The date of this prospectus is , 2017.
Obsess about our customers. Every single experience and interaction matters. Go to extraordinary lengths to convert customers into fans. Insist on excellence. And the highest ethical standards in everything we do. Embrace change. Change is constant. Without change, we cannot grow. Think like an owner. Be frugal. Take ownership of issues until they are resolved. Present new ideas. Know the numbers. Facts matter. We dont know our business if we dont know our numbers. Fast is better than slow. Speed matters in business. Get it done. Deliver results. Inspire. Respect, challenge and collaborate with each other every day. Teamwork is our greatest strength. Connected Things That Matter.
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Summary Historical Consolidated Financial and Operating Information |
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Unaudited Pro Forma Consolidated Financial Information and Other Data |
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Selected Historical Consolidated Financial and Operating Information |
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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Certain United States Federal Tax Consequences for Non-U.S. Holders of Our Common Stock |
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Certain Defined Terms
Unless we state otherwise or the context otherwise requires, references in this prospectus to:
| we, our, us, ourselves, Byline, the company and the Company refer to Byline Bancorp, Inc., a newly formed Delaware corporation, and its consolidated subsidiaries, after giving effect to the reincorporation transactions described in the section entitled Reincorporation. For all periods prior to the completion of such reincorporation transactions, these terms refer to Byline Bancorp, Inc., an Illinois corporation, and its consolidated subsidiaries; |
| Recapitalization refers to the $207 million recapitalization of our predecessor, Metropolitan Bank Group, Inc., on June 28, 2013; |
| Ridgestone refers to Ridgestone Financial Services, Inc.; |
| Ridgestone acquisition refers to Byline Bancorp, Inc.s purchase of all of Ridgestone Financial Services, Inc.s outstanding capital stock on October 14, 2016; |
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| our bank and Byline Bank refer to Byline Bank, an Illinois state-chartered bank, and a direct, wholly-owned subsidiary of Byline Bancorp, Inc.; |
| BHC Act refers to the U.S. Bank Holding Company Act of 1956, as amended; |
| Federal Reserve refers to the Board of Governors of the Federal Reserve System; |
| fiscal year refers to our fiscal year, which is based on a twelve-month period ending December 31 of each year ( e.g ., fiscal year 2016 refers to the twelve-month period ending December 31, 2016); |
| our stock refers to our common stock unless otherwise specified; and |
| Great Recession refers to the sharp decline in U.S. economic activity from approximately December 2007 to June 2009. |
About This Prospectus
We and the underwriters have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are not, and the underwriters are not, making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus. This prospectus includes references to information contained on, or that can be accessed through, our website. Information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus.
We have proprietary rights to trademarks and other intellectual property appearing in this prospectus that are important to our business. Solely for convenience, the trademarks appearing in this prospectus are without the ® symbol, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensors to these trademarks and other intellectual property. All trademarks appearing in this prospectus are the property of their respective owners.
Any discrepancies included in this prospectus between totals and the sums of the percentages and dollar amounts presented are due to rounding.
Industry and Market Data
Within this prospectus, we reference certain industry and sector information and statistics. We have obtained this information and statistics from various independent, third party sources. Nothing in the data used or derived from third party sources should be construed as advice. Some data and other information are also based on our good faith estimates, which are derived from our review of internal surveys and independent sources. We believe that these external sources and estimates are reliable, but have not independently verified them. Statements as to our market position are based on market data currently available to us. Although we are not aware of any misstatements regarding the demographic, economic, employment, industry and trade association data presented herein, these estimates involve inherent risks and uncertainties and are based on assumptions that are subject to change.
Implications of Being an Emerging Growth Company
As a company with less than $1,070,000,000 in revenues during our last fiscal year, we qualify as an emerging growth company under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An
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emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company:
| we may present only two years of audited financial statements and only two years of related management discussion and analysis of financial condition and results of operations; |
| we are exempt from the requirement to obtain an audit of our internal control over financial reporting under the Sarbanes-Oxley Act of 2002; |
| we are permitted to provide less extensive disclosure about our executive compensation arrangements; and |
| we are not required to give our stockholders non-binding advisory votes on executive compensation or golden parachute arrangements. |
We have elected to take advantage of the scaled disclosure requirements and other relief described above in this prospectus and may take advantage of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year.
In addition to scaled disclosure and the other relief described above, 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 prospectus, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
Reincorporation
In March 2017, Byline Bancorp, Inc., an Illinois corporation, or Byline Illinois, formed Byline Bancorp, Inc., a Delaware corporation, or Byline Delaware. On June 16, 2017, Byline Illinois merged with and into Byline Delaware, the registrant, with Byline Delaware surviving. In the merger, each share of Byline Illinois common stock issued and outstanding was converted automatically into the right to receive one fifth (0.20) of a share of common stock of Byline Delaware, with cash to be paid in lieu of fractional shares, and shares of each series of Byline Illinois preferred stock were converted into a substantially similar series of Byline Delaware preferred stock. Fractional shares will be paid in cash based on the initial public offering price of Byline Bancorp, Inc. common stock. We refer to these transactions as the Reincorporation. See Reincorporation for further information.
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This summary provides a brief overview of important information regarding key aspects of the offering contained elsewhere in this prospectus. This summary does not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including the more detailed information regarding the risks of purchasing our common stock in the sections titled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes thereto, before making an investment decision.
Our Company
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. We have been a part of the Chicago banking community for over 100 years and operate the fifth largest branch network in the City of Chicago with 56 branches in the Chicago metropolitan area. 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 and were the sixth most active Small Business Administration (SBA) lender in the United States as reported by the SBA for the year ended September 30, 2016. As of March 31, 2017, we had consolidated total assets of $3.3 billion, total gross loans and leases outstanding of $2.1 billion, total deposits of $2.6 billion and total stockholders equity of $389.7 million.
Our mission is to provide customers with a high degree of service, convenience and the products they need to achieve their financial objectives. We aim to do so one customer, one relationship and one neighborhood at a time. We believe that customers value convenience, prompt decision making and knowledge of the local market when choosing a banking partner. We distinguish ourselves from smaller competitors with the breadth and sophistication of our product capabilities, ranging from basic deposit accounts to cash-flow based loan facilities and cash management products; and we differentiate ourselves from larger competitors with our level of responsiveness, local decision making and the accessibility of our service. Given the large presence of out-of-state banks and the scarcity of local community banks that can competitively serve small and medium sized businesses, we see an attractive opportunity for Byline to be the bank that Chicago deserves.
Our culture is rooted in a set of core values that we refer to as the Things That Matter . These values underlie everything we do, including the way we engage with customers, collaborate with colleagues, do business and manage our resources. We believe our culture and the quality of our people have been catalysts of our success and will continue to propel our future.
In 2013, our predecessor, Metropolitan Bank Group, Inc. (Metropolitan), experienced significant credit and financial losses resulting primarily from the collapse of real estate prices during the Great Recession. Despite deterioration in asset quality and financial performance, Metropolitan maintained a high quality deposit base, an attractive branch network and strong customer loyalty, which made it an ideal candidate for a turnaround. Our Chief Executive Officer, Chief Financial Officer and Chairman led an investment group in the $207 million Recapitalization of Metropolitan, the largest recapitalization of a Chicago bank in over 25 years. Under a new leadership team headed by our Chief Executive Officer, Alberto Paracchini, we have built upon Metropolitans strengths and have restructured, refocused and rationalized Byline Bank to deliver growth and profitability. We also launched a new brand called Byline, which represented an important milestone in presenting our franchise under a unified name to our customers and employees.
Over the past four years, we have significantly improved our asset quality while adding $1.3 billion in net originated loans and leases to create a more diversified and balanced loan and lease portfolio. We
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aggressively reduced the level of troubled loans and other real estate owned in our portfolio, and our nonperforming assets, as a percentage of loans and real estate owned, declined to 1.0% as of March 31, 2017 from 28.2% as of March 31, 2013. In addition, we sought to optimize our deposit base by expanding the percentage of non-interest bearing deposits to total deposits, enhance online and mobile capabilities and broaden our cash management products to better meet our customers needs. During this period, we consolidated from 88 to 57 branches, reducing our costs with minimal deposit attrition, and improved our efficiency, including through the consolidation of multiple banking platforms into one. In addition to improving efficiency, consolidating our banking platforms allowed us to better monitor operations while strengthening our governance and controls.
The table below details our transformation:
What We Were |
What We Are |
|||||||
At and for
the three months ended 3/31/2013 |
At and for
the three
3/31/2017 |
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Deposit Franchise |
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# of Bank Brand Names |
12 | 1 | ||||||
# of Branches |
88 | 57 | ||||||
Non-interest bearing Deposits / Total Deposits |
26 | % | 28 | % | ||||
Cost of Deposits (1) |
0.27 | % | 0.24 | % | ||||
Deposits / Branch ($mm) |
$ | 26 | $ | 45 | ||||
Loan and Lease Portfolio |
|
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Total Loans and Leases (2) ($mm) |
$ | 1,542 | $ | 2,167 | ||||
Loans and Leases / Deposits (3) |
68 | % | 84 | % | ||||
Commercial & Industrial Loans / Total Loans & Leases |
3 | % | 21 | % | ||||
Non-performing Assets / Loans & Leases + Other Real Estate Owned (4) |
28.2 | % | 1.0 | % | ||||
Non-accrual & 90 Days or More Past Due Loans & Leases ($mm) |
$ | 258 | $ | 8 | ||||
Other Real Estate Owned ($mm) |
$ | 116 | $ | 13 | ||||
Capital |
|
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Common Equity ($mm) |
($ | 31 | ) | $ | 364 | |||
Common Equity/Assets |
(1.3 | %) | 11.1 | % | ||||
Tangible Common Equity ($mm) (5) |
($ | 43 | ) | $ | 293 | |||
Tangible Common Equity / Tangible Assets (5) |
(1.8 | %) | 9.1 | % | ||||
Profitability |
||||||||
Return on Average Assets |
(2.57 | %) | 0.80 | % | ||||
Non-interest Expense / Average Assets |
4.96 | % | 3.53 | % | ||||
Non-interest Income / Total Revenue |
(4.27 | %) | 29.41 | % |
Source: SNL Financial and company management. Financial information as of and for the three months ended March 31, 2013 is derived from Metropolitans historical Consolidated Financial Statements for Holding Companies filed with the Federal Reserve Bank on Form FR Y-9C. The FR Y-9C reports were prepared by Metropolitans management team prior to the Recapitalization and may not reflect similar assumptions or accounting standards used in our financial statements. The financial information as of and for the three months ended March 31, 2013 included in this table has not been reviewed or audited by our independent registered public accounting firm and may not be directly comparable to Bylines financial results for the quarter ended March 31, 2017.
(1) | Represents annualized (meaning, recalculated as an annual rate) interest expense for the quarter divided by average total deposits for the quarter. |
(2) | Represents total loans and leases held for sale and held for investment. |
(3) | Represents total loans and leases held for sale and held for investment divided by total deposits. |
(4) | Represents total non-performing assets, which includes nonaccrual loans and leases, troubled debt restructured loans and other real estate owned divided by total loans and leases held for investment and other real estate owned. |
(5) | Represents a non-GAAP financial measure. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. |
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We plan 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 allow 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.
Our Products and Services
We are a full-service, commercial-focused community bank. We offer a broad range of loan and deposit products to commercial customers and consumers through multiple distribution channels.
Lending and leasing. We offer a comprehensive range of commercial loan products and services to our customers, including term loans, revolving lines of credit, construction loans and treasury management products. Commercial lending is a fundamental component of our business model. We focus on lending to small and medium sized businesses in the Chicago metropolitan area across a diverse range of industries. Loans originated or managed by commercial lending represented $1.6 billion, or 73%, of our total gross loans outstanding as of March 31, 2017. Our commercial lending business is supported by a seasoned lending team of 20 commercial bankers, averaging more than 17 years in the business as of March 31, 2017.
In October 2016, we acquired Ridgestone Financial Services, Inc., one of the nations leading SBA lenders. Ridgestone was the sixth most active SBA lender in the country and the most active SBA lender in Illinois and Wisconsin, as reported by the SBA for the year ended September 30, 2016. Ridgestone originated $472 million in loans under Section 7(a) of the SBA program, or 7(a) loans, for the SBA fiscal year ended September 30, 2016 and generated significant fee income from the sales of the government guaranteed portions of loans and servicing.
In 2014, we acquired a team of leasing professionals and a small ticket leasing portfolio from Baytree National Bank & Trust Company and Wells Fargo Corporation. As of March 31, 2017, we had a $163 million small ticket equipment leasing portfolio. At origination, the average leasing tickets were between $50,000 and $60,000.
We also offer consumer lending products, including mortgage loans, home equity loans and other consumer loans to individuals through our branch network. As part of our portfolio diversification and excess liquidity deployment strategies since the Recapitalization, we have periodically purchased portfolios of 1-4 family residential mortgage loans to complement our internal loan production. Given our core focus on commercial lending, we believe it is likely that the percentage of 1-4 family residential mortgage loans within our total loan portfolio will decrease over time.
Deposits. We offer traditional retail deposit products through our branch network, along with online, mobile and direct banking channels. The wide variety of deposit products we offer include non-interest bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit. We also support our business clients with a variety of deposit and cash management products, along with a suite of business transaction accounts. We believe these tailored products allow us to provide a robust service offering to our clients and support their day-to-day funding needs.
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We Are Not Like the Other Guys
We believe the following strengths differentiate us from our competitors and will drive future growth:
Core deposit franchise and focus. The quality of our deposit franchise and access to stable funding are key components of our success. We have a strong deposit franchise characterized by a high level of core deposits, high proportion of non-interest bearing accounts and relatively low funding costs. As of March 31,
2017, deposits accounted for 89% of total liabilities and core deposits, which we define as all deposits excluding time deposits exceeding $100,000, constituted 84% of our deposit base. We increased our percentage of non-interest bearing deposits from 27% at December 31, 2013 to 28% at March 31, 2017. Our cost of deposits was 0.24% for the quarter ended March 31, 2017.
2017 Q1 Deposit Mix
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2017 Q1 Cost of Deposits
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|
Source: Company data and SNL Financial. Data as of March 31, 2017.
Our local presence and our scale are essential to the continued growth of our deposit base. Small businesses are a significant source of low cost deposits and represent opportunities for future growth. Small business owners value our ability to provide convenience and access to local, responsive decision makers. Commercial accounts also generally have higher deposit balances and transaction volumes than individual deposit accounts. As of March 31, 2017, commercial deposits represented 19% of total deposits.
Since the Recapitalization, we have consolidated from 88 to 57 branches, reducing our costs with minimal loss of deposits. Following the introduction of our Byline brand, customers now recognize us by a single name and we strive to deliver a consistent customer experience across our entire branch network. We have also enhanced our online and mobile capabilities and expanded our cash management products to meet our customers needs.
We believe that our Chicago branch network, service driven culture, diversified product offering and focus on small and medium sized businesses will allow us to accelerate deposit growth. We plan to continue investing in our brand, employees and product capabilities to further improve customer loyalty with a view toward growing our high quality deposit portfolio.
Seasoned management team and board of directors with a strong track record. Our seasoned executive management team has extensive local knowledge of the banking industry. Drawing on their experience and deep ties to the Chicago community, our management team successfully executed our turnaround strategy and guided our transformation while growing our franchise. Under their leadership, we have significantly improved asset
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quality, built a new, diversified loan and lease portfolio, strengthened our deposit base and improved our operating environment and controls, while also integrating two acquisitions. Our board of directors includes highly accomplished individuals with broad experience operating and working in the financial services industry and provides valuable insight to our business. We believe managements track record of performance, guided by our board and a culture dedicated to maintaining the highest business and ethical standards and practices, will drive the continued growth of our franchise.
Our executive management team is led by veteran banking executives:
| Alberto J. Paracchini, our President and Chief Executive Officer, has over 24 years of experience in the Chicago financial services industry, having spent over 16 years at Popular, Inc., where he held numerous leadership positions in both its banking and mortgage subsidiaries, and serving as Principal at BXM Holdings, Inc. (BXM), an investment fund specializing in community banks, where he was a member of the team that led the Recapitalization. |
| Lindsay Corby, our Executive Vice President and Chief Financial Officer, has over 16 years of experience in the financial services industry, including as a Principal and member of the team at BXM that led the Recapitalization, and as a Vice President in the investment banking group of Keefe, Bruyette & Woods, Inc. |
| Timothy C. Hadro, our Chief Credit Officer and Head of the Special Assets Group for Byline Bank, has more than 42 years of lending experience, more than 34 years of experience in the Chicago banking industry and 31 years of experience at JPMorgan Chase and its predecessor organizations. |
Our board of directors includes highly accomplished individuals with strong track records:
| Roberto R. Herencia, our Chairman, is also Chairman of First BanCorp, and a director of Banner Corporation. Mr. Herencia is the current President and Chief Executive Officer of BXM, former President and Chief Executive Officer of Midwest Banc Holdings, Inc., and former Executive Vice President of Popular Inc.; |
| L. Gene Beube, former Executive Vice President and Chief Credit Officer of Banco Popular North America; |
| Phillip R. Cabrera, former Vice President and International Treasurer of McDonalds Corporation; |
| Antonio del Valle Perochena, Chairman of Grupo Kaluz and Grupo Financiero BX+ and director of Elementia S.A.B. de C.V. and Mexichem, S.A.B. de C.V., holding companies for financial, industrial and construction enterprises, and former Executive Vice President of Insurance and Pensions of ING Group, Mexico; |
| Jaime Ruiz Sacristán, Founder and Chairman of the board of directors of BX+, director of Elementia S.A.B. de C.V., Mexichem, S.A.B. de C.V. and Banco Popular Español, S.A., Chairman of the Mexican Stock Exchange and former Chief Executive Officer of Grupo Financiero Bital; and |
| Steven M. Rull, Managing Director of Detalus Advisors, LLC and Detalus Securities, LLC and co-Founder of Manchester Partners. |
Attractive market opportunity. Chicago is the third largest metropolitan area in the U.S. and ranks in the top 10% of the U.S. by median household income. The city boasts a highly educated labor force with more than
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508,000 residents with bachelors degrees and an influx of approximately 158,000 college graduates annually. Due to its diversified economy, strong labor force and low cost of doing business compared to other large metropolitan areas, more than 400 major corporations are headquartered in Chicago, including 31 Fortune 500 companies. There are over 27,000 small and medium sized businesses in Chicago that generate between $5 million and $75 million in annual revenue, which we view as our target commercial customers. More recently, Chicago was named by KPMG as one of the top 10 technology innovation hubs worldwide, with Chicago based startups and tech companies having raised a combined $3.4 billion in capital in 2015 and 2016.
The graphs below show Chicagos diverse labor force and its lower cost of doing business as compared to other major U.S. cities.
Chicagos Diverse Labor Force | Cost of Doing Business Index | |
|
|
Source: Bureau of Labor Statistics State and Metro Area Employment and KPMG Competitive Alternatives 2016. Labor force data as of March 31, 2017. Business cost data as of December 31, 2016.
Note: Business costs are expressed as an index. An index below 100 indicates lower costs than the U.S. baseline. An index over 100 indicates higher costs than the U.S. baseline (e.g., an index of 95.0 represents costs 5.0% below the U.S. baseline). U.S. baseline is the average of the four largest U.S. metro areas.
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We believe the lack of similarly sized banks in the Chicago area creates a unique opportunity for us as we strive to provide broader and more sophisticated product capabilities than our smaller competitors while offering more responsive decision making and accessible service to local businesses and consumers than our larger competitors. The table below segments the Chicago bank landscape, which we believe illustrates the opportunity for smaller, local banks between $2 billion and $10 billion in assets:
Source: SNL Financial. Deposit and market share data as of June 30, 2016 (giving pro forma effect to pending bank acquisitions) and includes deposits at branches that were subsequently closed. Asset data as of March 31, 2017.
Note: Excludes Northern Trust from $10+bn in IL group.
The table below illustrates the fragmented banking environment in Chicago, demonstrated through a number of significantly smaller banks in our market and a lack of medium sized banks compared to other large metropolitan areas in the U.S.:
Chicago |
Top 10
U.S. MSA Avg |
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Percentage of Banks in Market <$1bn Assets |
81.6 | % | 69.1 | % | ||||
Percentage of Banks in Market $1 $10bn Assets |
12.8 | % | 23.8 | % | ||||
Market Share of Top 3 Banks |
45.7 | % | 54.3 | % | ||||
Market Share of Top 3 Local Banks |
11.1 | % | 18.1 | % |
Source: SNL Financial. Data as of March 31, 2017.
Given the large number of businesses, the attractive demographics and the lack of medium sized local banks capable of serving small and medium sized businesses in our target market, we believe we are well positioned to capitalize on growth opportunities in this market.
Diversified loan growth approach. Our ability to originate loans and leases across a range of industries and product types helps us maintain a diversified loan and lease portfolio. Prior to June 2013, Metropolitans loan portfolio was primarily concentrated in commercial real estate. Since the Recapitalization, we have substantially diversified our loan and lease portfolio across various sectors, including commercial and industrial lending, leasing, U.S. government guaranteed loans and real estate loans, allowing us to efficiently manage our
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credit exposures and capitalize on more lending opportunities. We have also enhanced our product and lending capabilities with the addition of experienced lending teams hired from larger banks. Throughout this growth period we have maintained strong credit quality, and we intend to continue diversifying both our origination sources and types of loans and leases in the future.
The graphs below show the increased diversification of our loan and lease portfolio from June 30, 2013 to March 31, 2017.
Breakdown of Loan and Lease Portfolio
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June 30, 2013 | March 31, 2017 | |
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The graph below shows the increasing credit quality of our loan portfolio from the fourth quarter of 2013 to the first quarter of 2017.
Loan Portfolio Over Time
($ in millions)
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Data as of December 31, 2013, December 31, 2014, December 31, 2015, December 31, 2016 and March 31, 2017.
(1) Workout loans are managed by our Special Assets Group.
Disciplined credit risk management framework. Risk management is a core competency of our business, demonstrated by the strong credit performance of loans originated since the Recapitalization. We have implemented comprehensive policies and procedures for credit underwriting and monitoring of our loan portfolio. The sound credit practices followed by our relationship bankers allow credit decisions to be made efficiently on a local basis consistent with our underwriting standards. We attribute our success to a strong credit culture, the continuous evaluation of risk and return and the strict separation between business development and credit decision making. We are committed to reviewing and monitoring limits set at the loan, relationship, product and portfolio levels. We believe our robust approach to risk management has enabled us to grow our loan and lease portfolio without compromising credit quality.
The graph below shows the decrease in nonperforming assets in our loan portfolio from the fourth quarter of 2013 to the first quarter of 2017.
Evolution of NPAs
($ in millions)
Data as of December 31, 2013, December 31, 2014, December 31, 2015, December 31, 2016 and March 31, 2017.
Premier SBA lending platform enhances fee income. Our acquisition of Ridgestone, completed in October 2016, provides us with a scalable lending platform focused on the origination and servicing of government guaranteed loans. Ridgestone was the most active originator of SBA loans in Illinois and Wisconsin, the second most active originator of SBA loans in Indiana and the sixth most active originator of SBA loans in the United States as reported by the SBA for the year ended September 30, 2016. Ridgestone originated $472 million in 7(a) loans for the SBA fiscal year ended September 30, 2016 and generated significant servicing fee income as well as income from sales of the government guaranteed portions of loans. We believe the combination of the talent, infrastructure and product knowledge we obtained through the acquisition provides us with significant opportunities for additional growth in the government guaranteed loan business throughout the country as Byline Small Business Capital.
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The graphs below show the diversification, by industry and geography, of our Small Business Capital lending portfolio.
Industry Concentration |
Geographic Concentration |
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Data for Small Business Capital as of March 31, 2017.
Our Growth Strategy
We believe we can continue to grow our business and create stockholder value by executing the following strategies:
Capitalize on the attractive Chicago banking opportunity. Chicago has been our home for over 100 years and we believe Chicago residents and businesses exhibit the same loyalty as we do toward our hometown. We have a deep understanding of our customers and the communities that we serve. Given the market opportunity for a commercial bank of our size and the scarcity of banks within the $2 billion to $10 billion asset range, we see a significant opportunity for Byline to gain market share in the Chicago area.
Focus on organic growth. We intend to grow our business organically in a focused and strategic manner. We also intend to maintain an asset sensitive balance sheet, which positions us to benefit in a rising interest rate environment. Our staff, systems and organizational structure have been built to support a larger organization. Over the past four years, we have hired new lending and leasing teams and expanded the breadth of our lending and leasing products. We believe that our overall capabilities, culture and opportunities for career growth will allow us to continue to attract talented new commercial and retail bankers to our business and enable our existing banking teams to drive loan growth. We also believe our bankers have further capacity to penetrate the markets and communities they serve as the brand awareness of Byline Bank continues to grow.
Consider opportunistic acquisitions. We are currently focused on organic growth, but we may consider smaller bank acquisitions that fit within the deposit strength and commercial orientation of our franchise, as well as other non-bank acquisitions. In the future, we may evaluate and act upon acquisition opportunities that we believe could produce attractive returns for our stockholders. In particular, we believe that there will be further bank consolidation in the Chicago metropolitan area and that we are well positioned to be a preferred partner for smaller institutions looking to exit. We have successfully completed two acquisitions in the past three years, both accretive to our franchise value. Our management team has over 82 years of combined experience, including structuring and integrating transactions, which we believe provides an advantage in identifying and executing on strategically and financially compelling opportunities that will supplement our organic growth strategy.
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Leverage our culture and talent. We have focused intensely on developing a distinct culture guided by a core set of values that we refer to as the Things That Matter . These values underlie everything we do and are designed to foster open communication and full transparency among our colleagues. Consistent with our belief that it is important to invest in our people, over the past four years, we have enhanced our compensation programs, employee benefits and training programs as well as upgraded our workspaces. We believe these investments will enable us to retain and attract talent that fits our team concept and culture. In connection with the Recapitalization, we replaced all senior management of Metropolitan and a significant majority of its lending staff. Many of our new employees hired since then have come from larger banks and have sophisticated product knowledge. We view our team as action-oriented and energized by the opportunities in our markets. We believe that our culture and the quality of our people have been catalysts of our success and will continue to propel our future.
Improve our operating leverage. We plan to focus on the following strategies to further drive our operating efficiency:
| Lower operating expenses related to legacy loan and owned real estate workout activities |
| Pursue opportunities to drive higher fee income from our account base through the increased use of our treasury management services and the sales of other products and services to loan and lease customers |
| Continue to increase our average deposits per branch while adapting to changing consumer behavior |
| Invest in technology to automate processes in order to gain scale and reduce unit costs |
Risks Related to Our Company
An investment in our common stock involves substantial risks and uncertainties. Investors should carefully consider all of the information in this prospectus, including the detailed discussion of these risks under Risk Factors beginning on page 18, prior to investing in our common stock. Some of the more significant risks include the following:
| Our business may be adversely affected by conditions in the financial markets and economic conditions in the markets in which we and our customers operate generally. |
| The City of Chicago and State of Illinois currently face significant financial difficulties, which could adversely affect our business. |
| Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage of our loan and lease portfolio is secured by real estate. |
| We may underestimate the credit losses inherent in our loan and lease portfolio and have credit losses in excess of the amount we provide for loan and lease losses. |
| Lack of seasoning of our loan and lease portfolio could increase the risk of credit defaults in the future. |
| We operate in a highly competitive and changing industry and market area. |
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| Our business is subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings. |
| U.S. government guaranteed lending is an important part of our business. Our U.S. government guaranteed lending program is dependent upon the federal government, and we face specific risks associated with originating U.S. government guaranteed loans. |
| Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations. |
| The occurrence of fraudulent activity, including events that occurred prior to the Recapitalization, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition and results of operations. |
| We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition. |
| We may not be able to maintain consistent growth, earnings or profitability. |
| We may not be able to attract and retain key personnel and other skilled employees. |
| Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income and the value of our deferred tax assets could be significantly reduced if corporate tax rates in the United States decline. |
| The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our operations. |
| Certain of our activities are restricted due to commitments entered into with the Federal Reserve by us and certain of our foreign national stockholders. |
| Adverse regulatory actions resulting from an examination by federal or state regulators could have a material adverse effect on our business, financial condition and results of operations. |
| Litigation and regulatory actions, including possible enforcement actions and investigations, could subject us to significant fines, penalties, judgments, publicity or other requirements resulting in increased expenses or restrictions on our business activities, diversion of management attention or damage to our reputation. |
| Our stock price may be volatile, and you could lose part or all of your investment as a result. |
Our Corporate Information
We were originally incorporated in Illinois on December 29, 1978 as North Community Bancorp, Inc., which owned Metropolitan Bank and Trust Company, a bank that was chartered in 1914. The name of the company was changed on December 28, 1987 to Illinois Financial Services, Inc., and again on July 18, 1995, to Metropolitan Bank Group, Inc. In 2015, we changed our name to Byline Bancorp, Inc. Prior to this offering, we reincorporated as a Delaware corporation.
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We are headquartered at 180 North LaSalle Street, Suite 300, Chicago, IL 60601 and our telephone number is (773) 244-7000. Our website address is www.bylinebank.com. Information contained on, or that can be accessed through, our website is not incorporated by reference into this prospectus, and you should not consider information on our website to be part of this prospectus.
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Common stock offered by us |
3,775,194 shares |
Common stock offered by selling stockholders |
1,924,806 shares |
Option to purchase additional shares |
855,000 shares from us |
Common stock to be outstanding after this offering |
28,391,900 shares of common stock (or 29,246,900 shares if the underwriters exercise in full their option to purchase additional shares from us) |
Use of proceeds |
We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $66.4 million, or approximately $82.4 million if the underwriters elect to exercise in full their option to purchase additional shares from us, assuming an initial public offering price of $20.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. We intend to use the net proceeds from this offering to repay the outstanding balance under our credit agreement of approximately $16.2 million as of June 19, 2017, to repurchase, subject to regulatory approval, all outstanding shares of our Series A Preferred Stock for approximately $26.8 million and for general corporate purposes. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See Use of Proceeds. |
Voting rights |
Each holder of our common stock will be entitled to one vote per share on all matters on which our stockholders generally are entitled to vote. See Description of Capital Stock for more information. |
Dividend policy |
We do not expect to pay cash dividends on our common stock in the near-term. Instead, we anticipate that all of our future earnings will be retained to support our operations and finance the growth and development of our business. Any future determination to pay dividends on our common stock will be made by our board of directors and will depend upon our results of operations, financial condition, capital requirements, regulatory and contractual restrictions, our business strategy and other factors that our board of directors deems relevant. See Dividend Policy and Dividends. |
Preemptive rights |
Purchasers of our common stock sold in this offering will not have any preemptive rights. |
Listing |
Our common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange (the NYSE), under the symbol BY. |
Reserved Share Program |
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this |
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prospectus for sale to the directors, senior management, existing stockholders, certain employees of Byline Bancorp, Inc. and Byline Bank and persons having relationships with us. If these persons purchase reserved shares, it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. |
Risk factors |
Investing in our common stock involves significant risks. See Risk Factors, beginning on page 18, for a discussion of certain factors that you should carefully consider before deciding to invest in our common stock. |
Unless we specifically state otherwise, all information in this prospectus is as of the date set forth on the front cover of this prospectus and:
| assumes no exercise of the underwriters option to purchase additional shares of our common stock; |
| assumes that the common stock to be sold in this offering is sold at $20.00 per share, which is the midpoint of the price range set forth on the front cover of this prospectus; |
| assumes no exercise of the 628,814 stock options that were outstanding and exercisable as of March 31, 2017; and |
| excludes shares of common stock that may be granted under our equity incentive plan we have adopted in connection with this offering, including grants to be made at the completion of this offering. |
We have reserved an aggregate of 1,750,000 shares of our common stock for issuance under our equity incentive plan and employee stock purchase plan. In connection with this offering, we intend to make a special one-time grant of restricted share awards under our equity incentive plan with approximately 58,900 shares of our common stock underlying the special one-time grant of restricted shares to be granted to certain of our employees, including certain of our named executives officers. These restricted shares will cliff vest on the third anniversary of the grant date, subject to continued employment. See Executive and Director Compensation Anticipated Changes to Our Compensation Program Following This Offering for additional information regarding our equity incentive plan and grants we intend to make at the completion of this offering.
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
You should read the summary historical consolidated financial and operating data set forth below in conjunction with the sections titled Managements Discussion and Analysis of Financial Condition and Results of Operations and Capitalization, as well as our consolidated financial statements and the related notes included elsewhere in this prospectus. The following table summarizes certain selected consolidated financial data for the periods presented. Our historical results may not be indicative of our future performance. The summary historical consolidated financial and operating information presented below contains financial measures that are not presented in accordance with accounting principles generally accepted in the United States (GAAP) and have not been audited. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.
Dollars in thousands except share and per share data |
(unaudited)
As of and for the quarter ended March 31, |
As of and for the year ended December 31, | ||||||||||||||||||
2017 | 2016 | 2016 | 2015 | 2014 | ||||||||||||||||
Income Statement Data |
||||||||||||||||||||
Interest income |
$ | 32,488 | $ | 22,877 | $ | 98,365 | $ | 83,263 | $ | 89,636 | ||||||||||
Interest expense |
2,950 | 1,757 | 7,747 | 6,631 | 5,546 | |||||||||||||||
Net interest income |
29,538 | 21,120 | 90,618 | 76,632 | 84,090 | |||||||||||||||
Provision for loan and lease losses |
1,891 | 2,513 | 10,352 | 6,966 | 5,711 | |||||||||||||||
Net interest income, after provision for loan and lease losses |
27,647 | 18,607 | 80,266 | 69,666 | 78,379 | |||||||||||||||
Non-interest income |
12,308 | 4,288 | 25,904 | 20,839 | 18,253 | |||||||||||||||
Non-interest expense |
28,851 | 24,487 | 100,686 | 105,172 | 97,919 | |||||||||||||||
Income (loss) before income taxes |
11,104 | (1,592 | ) | 5,484 | (14,667 | ) | (1,287 | ) | ||||||||||||
Provision (benefit) for income taxes |
4,544 | (240 | ) | (61,245 | ) | 307 | | |||||||||||||
Net income (loss) |
6,560 | (1,352 | ) | 66,729 | (14,974 | ) | (1,287 | ) | ||||||||||||
Basic earnings (loss) per share |
$ | 0.26 | ($ | 0.08 | ) | $ | 3.31 | ($ | 0.86 | ) | ($ | 0.07 | ) | |||||||
Diluted earnings (loss) per share |
$ | 0.25 | ($ | 0.08 | ) | $ | 3.27 | ($ | 0.86 | ) | ($ | 0.07 | ) | |||||||
Weighted-average outstanding shares (basic) |
24,616,706 | 17,522,226 | 20,141,630 | 17,332,775 | 17,332,775 | |||||||||||||||
Weighted-average outstanding shares (diluted) (1) |
25,078,427 | 17,522,226 | 20,430,783 | 17,332,775 | 17,332,775 | |||||||||||||||
Balance Sheet Data |
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Loans and leases held for investment, net before allowance for loan and lease losses (2) |
$ | 2,143,534 | $ | 1,503,495 | $ | 2,148,011 | $ | 1,345,437 | $ | 1,284,969 | ||||||||||
Loans and leases held for sale |
23,492 | 214 | 23,976 | 268 | 351 | |||||||||||||||
Allowance for loan and lease losses (ALLL) |
11,817 | 7,903 | 10,923 | 7,632 | 4,794 | |||||||||||||||
Acquisition accounting adjustments (3) |
41,024 | 19,566 | 43,242 | 19,171 | 69,834 | |||||||||||||||
Interest-bearing deposits in other banks |
67,726 | 28,694 | 28,798 | 23,572 | 133,281 | |||||||||||||||
Investment securities |
723,404 | 797,845 | 747,406 | 879,192 | 689,373 | |||||||||||||||
Assets held for sale |
13,666 | 2,259 | 14,748 | 2,259 | | |||||||||||||||
Other real estate owned, net |
13,173 | 24,466 | 16,570 | 26,715 | 56,181 | |||||||||||||||
Goodwill and other intangibles |
71,033 | 47,273 | 71,801 | 48,014 | 50,891 | |||||||||||||||
Servicing assets |
21,223 | | 21,091 | | | |||||||||||||||
Total assets |
3,284,713 | 2,561,081 | 3,295,830 | 2,479,870 | 2,376,449 | |||||||||||||||
Total deposits |
2,575,839 | 2,248,563 | 2,490,394 | 2,180,624 | 2,100,057 | |||||||||||||||
Total liabilities |
2,895,030 | 2,330,071 | 2,913,172 | 2,291,596 | 2,167,378 | |||||||||||||||
Total stockholders equity |
389,683 | 231,010 | 382,658 | 188,274 | 209,071 | |||||||||||||||
Book value per common share |
14.80 | 11.08 | 14.51 | 10.00 | 11.20 | |||||||||||||||
Tangible book value per common share (4) |
11.91 | 8.66 | 11.59 | 7.23 | 8.26 | |||||||||||||||
Performance Ratios |
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Net interest margin |
4.04 | % | 3.60 | % | 3.59 | % | 3.44 | % | 3.88 | % | ||||||||||
Efficiency ratio (5) |
67.11 | 93.44 | 83.83 | 104.84 | 92.78 | |||||||||||||||
Non-interest expense to average assets |
3.53 | 3.82 | 3.66 | 4.22 | 4.03 | |||||||||||||||
Pre-tax pre-provision return (loss) on average assets (4) |
1.59 | 0.14 | 0.57 | (0.31 | ) | 0.18 | ||||||||||||||
Return on average stockholders equity |
6.83 | (2.81 | ) | 27.93 | (7.21 | ) | (0.62 | ) | ||||||||||||
Return on average assets |
0.80 | (0.21 | ) | 2.42 | (0.60 | ) | (0.05 | ) |
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Dollars in thousands except share and per share data |
(unaudited)
As of and for the quarter ended March 31, |
As of and for the year ended December 31, | ||||||||||||||||||
2017 | 2016 | 2016 | 2015 | 2014 | ||||||||||||||||
Asset Quality Ratios |
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Non-performing loans and leases / total loans and leases held for investment, net before ALLL |
0.41 | % | 0.58 | % | 0.34 | % | 0.69 | % | 0.62 | % | ||||||||||
ALLL / total loans and leases held for investment, net before ALLL |
0.55 | 0.53 | 0.51 | 0.57 | 0.37 | |||||||||||||||
Net charge-offs (recoveries) / average total loans and leases held for investment, net before ALLL (7) |
0.19 | 0.62 | 0.42 | 0.33 | 0.14 | |||||||||||||||
Capital Ratios |
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Common equity to assets |
11.09 | % | 8.43 | % | 10.84 | % | 6.99 | % | 8.17 | % | ||||||||||
Tangible common equity to tangible assets (4) |
9.12 | 6.71 | 8.85 | 5.15 | 6.16 | |||||||||||||||
Leverage ratio |
9.59 | 8.83 | 10.07 | 7.85 | 8.08 | |||||||||||||||
Tier 1 common ratio (6) |
10.85 | 10.44 | 11.20 | 8.92 | 11.30 | |||||||||||||||
Tier 1 ratio |
12.94 | 13.43 | 12.78 | 12.00 | 13.37 | |||||||||||||||
Total capital ratio |
13.49 | 13.94 | 13.28 | 12.51 | 13.73 |
(1) | Due to losses in the first quarter 2016 and for the years ended December 31, 2015 and 2014, zero incremental shares are included because the effect would be anti-dilutive. |
(2) | Represents loans and leases, net of acquisition accounting adjustments, unearned deferred fees and costs and initial direct costs. |
(3) | Represents the remaining unamortized premium or unaccreted discount as a result of applying the fair value adjustment at the time of the business combination on acquired loans. |
(4) | Represents a non-GAAP financial measure. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. |
(5) | Represents non-interest expense less amortization of intangible assets divided by net interest income and non-interest income. |
(6) | Ratio not effective until January 1, 2015 but presented for comparison purposes only. |
(7) | Ratio annualized for the three month period ended March 31, 2017 and 2016. |
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Investing in our common stock involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before investing in our common stock, you should carefully consider the risks and uncertainties described below, in addition to the other information contained in this prospectus. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition or results of operations. As a result, the trading price of our common stock could decline, and you could lose some or all of your investment. Further, to the extent that any of the information in this prospectus constitutes forward-looking statements, the risk factors below are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See Cautionary Note Regarding Forward-Looking Statements.
Risks Related to Our Business
Credit and Interest Rate Risks
Our business depends on our ability to successfully manage credit risk.
The operation of our business requires us to manage credit risk. As a lender, we are exposed to the risk that our borrowers will be unable to repay their loans and leases according to their terms, and that the collateral securing repayment of their loans, if any, may not be sufficient to ensure repayment. In addition, there are risks inherent in making any loan, including risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers, including the risk that a borrower may not provide information to us about its business in a timely manner, and/or may present inaccurate or incomplete information to us, and risks relating to the value of collateral. In order to manage credit risk successfully, we must, among other things, maintain disciplined and prudent underwriting standards and ensure that our bankers follow those standards. The weakening of these standards for any reason, such as an attempt to attract higher yielding loans, a lack of discipline or diligence by our employees in underwriting and monitoring loans, the inability of our employees to adequately adapt policies and procedures to changes in economic or any other conditions affecting borrowers and the quality of our loan portfolio, may result in loan defaults, foreclosures and additional charge-offs and may necessitate that we significantly increase our allowance for loan and lease losses, each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have a material adverse effect on our business, financial condition or results of operations.
We may underestimate the credit losses inherent in our loan and lease portfolio and have credit losses in excess of the amount we provide for loan and lease losses.
The credit quality of our loan and lease portfolio can have a significant impact on our earnings. We maintain an allowance for loan and lease losses, which is a reserve established through a provision for loan and lease losses charged to expense representing managements best estimate of probable losses that may be incurred within our existing portfolio of loans and leases. The allowance, in the judgment of management, is necessary to reserve for estimated loan and lease losses and risks inherent in our loan and lease portfolio. The level of the allowance reflects managements continuing evaluation of specific credit risks; the quality of the loan and lease portfolio; the value of the underlying collateral; the level of non-accruing loans and leases; incurred losses inherent in the current loan and lease portfolio; and economic, political and regulatory conditions. Given our limited history in making loans since the Recapitalization, we do not have adequate historical data on loans made by Byline to calculate loan allowances primarily based on Bylines historical loan experience and, as a result, we calculate loan allowances and reserves, in part, based on industry and peer data, which could increase the subjectivity of the calculation. In accordance with GAAP for business combination accounting, the loans acquired through the Recapitalization and the acquisition of Ridgestone were recorded at their estimated fair
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value. Therefore, there was no allowance for loan losses associated with those loans at acquisition. Management continues to evaluate the allowance needed on the acquired loans factoring in the net remaining discount ($41.0 million at March 31, 2017).
For our loans and leases, we perform loan reviews and grade loans on an ongoing basis, and we estimate and establish reserves for credit risks and credit losses inherent in our credit exposure (including unfunded lending commitments). The objective of our loan review and grading procedures is to identify existing or emerging credit quality problems so that appropriate steps can be initiated to avoid or minimize future losses. This process, which is critical to our financial results and condition, requires difficult, subjective and complex judgments of loan collectability. As is the case with any such assessments, there is always the chance that we will fail to identify the proper factors or that we will fail to estimate accurately the impact of factors that we do identify.
Although we believe our allowance for loan and lease losses is adequate to absorb probable and reasonably estimable losses in our loan and lease portfolio, this allowance may not be sufficient. We could sustain credit losses that are significantly higher than the amount of our allowance for loan and lease losses. Higher credit losses could arise for a variety of reasons, such as changes in economic conditions affecting borrowers, new information regarding our loans and leases and other factors within and outside our control. If real estate values were to decline or if economic conditions in our markets were to deteriorate unexpectedly, additional loan and lease losses not incorporated in the existing allowance for loan and lease losses might occur. Losses in excess of the existing allowance for loan and lease losses will reduce our net income and could have a material adverse effect on our business, financial condition or results of operations. A severe downturn in the economy generally, in our markets specifically or affecting the business and assets of individual customers, would generate increased charge-offs and a need for higher reserves.
As of March 31, 2017, our allowance for loan and lease losses as a percentage of total loans and leases was 0.55% and as a percentage of total nonperforming loans and leases was 133.57%. Additional credit losses will likely occur in the future and may occur at a rate greater than we have previously experienced. We may be required to take additional provisions for loan and lease losses in the future further to supplement the allowance for credit losses, either due to managements assessment that the allowance is inadequate or requirements by our banking regulators. In addition, bank regulatory agencies will periodically review our allowance for loan and lease losses, the policies and procedures we use to determine the level of the allowance and the value attributed to nonperforming loans or to real estate acquired through foreclosure. Such regulatory agencies may require us to make further provisions or recognize future charge-offs. Further, if charge-offs in future periods exceed the allowance for loan and lease losses, we may need additional adjustments to increase the allowance for loan and lease losses.
In addition, in June 2016, the Financial Accounting Standards Board (the FASB) issued a new accounting standard that will replace the current approach under GAAP for establishing allowances for loan and lease losses, which generally considers only past events and current conditions, with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the collectability of financial assets. The new standard is expected to result in increases to allowance levels generally and will require the application of the revised methodology to existing financial assets through a one-time adjustment to retained earnings upon initial effectiveness. The standard will be effective for us in 2020 or, if we remain an emerging growth company and continue to elect not to opt out of the extended transition period for new accounting standards, 2021. See Note 2 of Bylines Consolidated Financial Statements as of December 31, 2016 and 2015 for additional information about the standard.
Any increases in our allowance for credit losses will result in a decrease in net income and may reduce retained earnings and capital and, therefore, have a material adverse effect on our business, financial condition and results of operations.
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Greater seasoning of our loan portfolio could increase risk of credit defaults in the future.
A significant portion of our loan portfolio is of relatively recent origin. The average age of our loans originated following the Recapitalization as of March 31, 2017 is 2.8 years. Normally, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time (which varies by loan duration and loan type), a process referred to as seasoning. As a result, a portfolio of more seasoned loans may more predictably follow a banks historical default or credit deterioration patterns than a newer portfolio. Because 61.4% of our portfolio has been originated since the Recapitalization, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned. If delinquencies and defaults increase, we may be required to increase our provision for loan and lease losses, which could have a material adverse effect on our business, financial condition and results of operations.
Our business, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold.
In addition to relying on borrowers to repay their loans and leases, we are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. A default by a significant market participant, or concerns that such a party may default, could lead to significant liquidity problems, losses or defaults by other parties, which in turn could adversely affect us.
We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. Deterioration in the credit quality of third parties whose securities or obligations we hold, including the Federal Home Loan Mortgage Corporation, Government National Mortgage Corporation and municipalities, could result in significant losses.
Our business is subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.
Fluctuations in interest rates may negatively affect our banking business and may weaken demand for some of our products. Our earnings and cash flows are largely dependent on net interest income, which is the difference between the interest income that we earn on interest earning assets, such as investment securities and loans, and the interest expense that we pay on interest-bearing liabilities, such as deposits and borrowings. Additionally, changes in interest rates also affect the premiums we may receive in connection with the sale of SBA and United States Department of Agriculture (USDA) (together, U.S. government guaranteed) loans in the secondary market, pre-payment speeds of loans for which we own servicing rights, our ability to fund our operations with customer deposits and the fair value of securities in our investment portfolio. Therefore, any change in general market interest rates, including changes in federal fiscal and monetary policies, can have a significant effect on our net interest income and results of operations.
We seek to mitigate our interest rate risk by entering into interest rate swaps and other interest rate derivative contracts from time to time with counterparties. Our hedging strategies rely on assumptions and projections regarding interest rates, asset levels and general market factors and subject us to counterparty risk. There is no assurance that our interest rate mitigation strategies will be successful and if our assumptions and projections prove to be incorrect or our hedging strategies do not adequately mitigate the impact of changes in interest rates, we may incur losses that could adversely affect our earnings.
Our interest earning assets and interest-bearing liabilities may react in different degrees to changes in market interest rates. Interest rates on some types of assets and liabilities may fluctuate prior to changes in broader market interest rates, while rates on other types of assets and liabilities may lag behind. The result of
these changes to rates may cause differing spreads on interest earning assets and interest-bearing liabilities. Although we take measures intended to manage the risks from changes in market interest rates, we cannot control or accurately predict changes in market rates of interest or be sure our protective measures are adequate.
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Interest rates are volatile and highly sensitive to many factors that are beyond our control, such as economic conditions and policies of various governmental and regulatory agencies, and, in particular U.S. monetary policy. For example, we face uncertainty regarding the interest rate risk, and resulting effect on our portfolio, that could result if the Board of Governors of the Federal Reserve System (the Federal Reserve) reduces the amount of securities it holds on its balance sheet. In recent years, it has been the policy of the Federal Reserve to maintain interest rates at historically low levels through a targeted federal funds rate and the purchase of U.S. Treasury and mortgage-backed securities. As a result, yields on securities we have purchased, and market rates on the loans we have originated, have been at levels lower than were available prior to the Great Recession. Consequently, the average yield on banks interest-earning assets has generally decreased during the current low interest rate environment. If a low interest rate environment persists, we may be unable to increase our net interest income.
As of March 31, 2017, we had $732.3 million of non-interest bearing transaction accounts and $192.3 million of interest-bearing transaction accounts. Current interest rates for interest-bearing accounts are very low due to current market conditions. However, we do not know what market rates will eventually be, especially as the Federal Reserve increases interest rates. If we need to offer higher interest rates on checking accounts to maintain current clients or attract new clients, our interest expense will increase, perhaps materially. Furthermore, if we fail to offer interest in a sufficient amount to keep these demand deposits, our core deposits may be reduced, which would require us to obtain funding in other ways or risk slowing our future asset growth.
The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, other real estate owned (OREO) and other repossessed assets may not accurately describe the fair value of the asset.
In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the fair value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of our OREO, and our allowance for loan and lease losses may not reflect accurate loan impairments. This could have a material adverse effect on our business, financial condition or results of operations.
We depend on the accuracy and completeness of information about customers and counterparties.
In deciding whether to extend credit or enter into other transactions, and in evaluating and monitoring our loan and lease portfolio on an ongoing basis, we may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. We may also rely on representations of those customers or counterparties or of other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate, incomplete, fraudulent or misleading financial statements, credit reports or other financial or business information, or the failure to receive such information on a timely basis, could result in loan losses, reputational damage or other effects that could have a material adverse effect on our business, financial condition or results of operations.
The value of the financial instruments we own may decline in the future.
As of March 31, 2017, we owned $723.4 million of investment securities, which consisted primarily of our positions in U.S. government and government-sponsored enterprises and federal agency obligations,
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mortgage and asset-backed securities and municipal securities. We evaluate our investment securities on at least a quarterly basis, and more frequently when economic and market conditions warrant such an evaluation, to determine whether any decline in fair value below amortized cost is the result of an other-than-temporary impairment. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairment in future periods, which could adversely affect our business, results of operations or financial condition.
In addition, an increase in market interest rates may affect the market value of our securities portfolio, potentially reducing accumulated other comprehensive income and/or earnings.
Concentrated exposures to individual obligors may unfavorably impact our operations.
We have cultivated relationships with certain individuals, businesses and institutions that could result in relatively large exposures to select single obligors. The failure to properly anticipate and address risks associated with any concentrated exposures could have a material adverse effect on our business, financial condition or results of operations.
Funding Risks
Liquidity risks could affect operations and jeopardize our business, financial condition and results of operations.
Liquidity risk is the risk that we will not be able to meet our obligations, including financial commitments, as they come due and is inherent in our operations. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Deposit balances can decrease for a variety of reasons, including when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds. This loss would require us to seek other funding alternatives, including wholesale funding, in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash from operations and investment maturities, redemptions and sales. To a lesser extent, proceeds from the issuance and sale of securities to investors has become a source of funds and we may issue additional equity or debt securities following this offering. Additional liquidity is provided by brokered certificates of deposits and repurchase agreements and we have the ability to borrow from the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Chicago (FHLB). We also may borrow from third party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding and limit access to certain customary sources of capital, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve System. There is also the potential risk that collateral calls with respect to our repurchase agreements could reduce our available liquidity.
Any decline in available funding could adversely impact our ability to continue to implement our business plan, including originating loans, investing in securities, meeting our expenses or fulfilling obligations such as repaying our borrowings and meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
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Our liquidity is dependent on dividends from Byline Bank.
We are a legal entity separate and distinct from Byline Bank, our wholly-owned banking subsidiary. A substantial portion of our cash flow from operating activities, including cash flow to pay dividends on our preferred stock and principal and interest on any debt we may incur, comes from dividends from Byline Bank. Various federal and state laws and regulations limit the amount of dividends that our bank may pay to us. For example, Illinois law only permits Byline Bank to pay dividends out of its net profits then on hand, after first deducting the banks losses and any debts owed to Byline Bank on which interest is past due and unpaid for a period of six months or more, unless the same are well secured and in the process of collection. As of March 31, 2017, Byline Bank had the capacity to pay us a dividend of up to $66.4 million without the need to obtain prior regulatory approval. Also, our right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is subject to the prior claims of the subsidiarys creditors. In the event Byline Bank is unable to pay dividends to us, we may not be able to service any debt we may incur, pay obligations or pay dividends on our preferred stock, which could have a material adverse effect on our business, financial condition or results of operations.
Loss of deposits could increase our funding costs.
As do many banking companies, we rely on customer deposits to meet a considerable portion of our funding needs, and we continue to seek customer deposits to maintain this funding base. We accept deposits directly from consumer and commercial customers and, as of March 31, 2017, we had $2.6 billion in deposits. These deposits are subject to potentially dramatic fluctuations in availability or the price we must pay (in the form of interest) to obtain them due to certain factors outside our control, such as a loss of confidence by customers in us or the banking sector generally, customer perceptions of our financial health and general reputation, increasing competitive pressures from other financial services firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. The loss of customer deposits for any reason could increase our funding costs.
We may be adversely affected by changes in the actual or perceived soundness or condition of other financial institutions.
Financial services institutions that deal with each other are interconnected as a result of trading, investment, liquidity management, clearing, counterparty and other relationships. Concerns about, or a default by, one institution could lead to significant liquidity problems and losses or defaults by other institutions, as the commercial and financial soundness of many financial institutions is closely related as a result of these credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses or defaults by various institutions. This systemic risk may adversely affect financial intermediaries with which we interact on a daily basis or key funding providers such as the FHLB, any of which could have a material adverse effect on our access to liquidity or otherwise have a material adverse effect on our business, financial condition or results of operations.
We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
We may need to raise additional capital, in the form of debt or equity securities, in the future to have sufficient capital resources to meet our commitments and fund our business needs and future growth, particularly
if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that may limit our access to capital, such as a decline in the confidence of debt purchasers, depositors
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of our bank or counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition or results of operations.
Operational Risks
We may not be able to implement our growth strategy or manage costs effectively, resulting in lower earnings or profitability.
There can be no assurance that we will be able to continue to grow and to be profitable in future periods, or, if profitable, that our overall earnings will remain consistent or increase in the future. Our strategy focuses on organic growth, supplemented by opportunistic acquisitions.
Our growth requires that we increase our loan and deposit growth while managing risks by following prudent loan underwriting standards without increasing interest rate risk or compressing our net interest margin, maintaining more than adequate capital at all times, hiring and retaining qualified employees and successfully implementing strategic projects and initiatives. Even if we are able to increase our interest income, our earnings may nonetheless be reduced by increased expenses, such as additional employee compensation or other general and administrative expenses and increased interest expense on any liabilities incurred or deposits solicited to fund increases in assets. Additionally, if our competitors extend credit on terms we find to pose excessive risks, or at interest rates which we believe do not warrant the credit exposure, we may not be able to maintain our lending volume and could experience deteriorating financial performance.
Our inability to manage our growth successfully or to continue to expand into new markets could have a material adverse effect on our business, financial condition or results of operations.
The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition or results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyber-attacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our
clients may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.
We also face risks related to cyber-attacks and other security breaches in connection with debit card transactions that typically involve the transmission of sensitive information regarding our customers through
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various third parties, including retailers and payment processors. Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could affect us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them, including costs to replace compromised debit cards and address fraudulent transactions.
Information pertaining to us and our customers is maintained, and transactions are executed, on networks and systems maintained by us and certain third party partners, such as our online banking or reporting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our customers against fraud and security breaches and to maintain our customers confidence. Breaches of information security also may occur, through intentional or unintentional acts by those having access to our systems or our customers or counterparties confidential information, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-attacks and periodically test our security, our or our third party partners inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our customers; our loss of business and/or customers; damage to our reputation; the incurrence of additional expenses; disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liabilityany of which could have a material adverse effect on our business, financial condition or results of operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition or results of operations could be adversely affected.
We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. We outsource to third parties many of our major systems, such as data processing, loan servicing, deposit processing and internal audit systems. The failure of these systems, or the termination of a third party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third party systems, we could experience service denials if demand for such services exceeds capacity or such third party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial
condition and results of operations. In addition, failure of third parties to comply with applicable laws and regulations, or fraud or misconduct on the part of employees of any of these third parties could disrupt our options or adversely affect our reputation.
It may be difficult for us to replace some of our third party vendors, particularly vendors providing our core banking, debit card services and information services, in a timely manner if they are unwilling or unable to
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provide us with these services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such events could have a material adverse effect on our business, financial condition or results of operations.
Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cyber security breaches described above or herein, and the cyber security measures that they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.
As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. Although we review business continuity and backup plans for our vendors and take other safeguards to support our operations, such plans or safeguards may be inadequate. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.
Our use of third party vendors and our other ongoing third party business relationships is subject to increasing regulatory requirements and attention.
Our use of third party vendors for certain information systems is subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business relationships. In certain cases we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
We continually encounter technological change.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to serve customers better and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to effectively implement new, technology-driven products and services or be successful in marketing these products and services to our customers. In addition, the implementation of technological
changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. Failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition or results of operations.
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We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material adverse effect on our business, financial condition or results of operations.
Our limited operating history following the Recapitalization may make it difficult for investors to evaluate our financial trends, and also may impair our ability to accurately forecast our future performance.
We have a limited operating history following the Recapitalization transaction in 2013. In connection with the Recapitalization, we replaced all senior management of our predecessor and a significant majority of its lending staff. As a result, our limited operating history may not provide an adequate basis for investors to evaluate our business, financial condition and results of operations, and makes accurate financial forecasting more difficult for us. It may also be more difficult for us to evaluate trends that may affect our business. In addition, due to the application of the acquisition method of accounting to record, at fair value, all of the assets acquired and liabilities assumed at the time of the Recapitalization, financial information prior to the Recapitalization is not comparable to such information post-Recapitalization. Thus, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable business environment.
Current or former employee or predecessor misconduct could expose us to significant legal liability and reputational harm.
We are vulnerable to reputational harm because we operate in an industry in which integrity and the confidence of our customers are of critical importance. Our employees could engage, or our former directors, employees, or controlling stockholders could have engaged, in misconduct that adversely affects our business. For example, if such a person were to engage, or previously engaged, in fraudulent, illegal or suspicious activities, we could be subject to regulatory sanctions and suffer serious harm to our reputation (as a consequence of the negative perception resulting from such activities), financial position, customer relationships and ability to attract new customers. Our business often requires that we deal with confidential information. If our employees were to improperly use or disclose this information, or if former directors, employees, or controlling stockholders previously improperly used or disclosed this information, even if inadvertently, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to deter employee misconduct, and the precautions we take to detect and prevent this activity may not always be effective. Misconduct by our employees or former directors, employees, or controlling stockholders, or even unsubstantiated allegations of misconduct, could result in a material adverse effect on our business, financial condition or results of operations.
We may not be able to attract and retain key personnel and other skilled employees.
Our success depends, in large part, on the skills of our management team and our ability to retain, recruit and motivate key officers and employees. There is a limited number of qualified persons with requisite knowledge of, and experience in, certain of our specialized business lines, including our equipment leasing and U.S. government guaranteed lending businesses. A number of our employees have considerable tenure with
Byline Bank and some will be nearing retirement in the next few years, which makes succession planning important to the continued operation of our business. We need to continue to attract and retain key personnel and to recruit qualified individuals who fit our culture to succeed existing key personnel to ensure the continued growth and successful operation of our business. Leadership changes may occur from time to time, and we cannot predict whether significant retirements or resignations will occur or whether we will be able to recruit additional qualified personnel. Competition for senior executives and skilled personnel in the financial services
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and banking industry is intense, which means the cost of hiring, incentivizing and retaining skilled personnel may continue to increase. This could have a material adverse effect on our business, financial condition or results of operations. In addition, our ability to effectively compete for senior executives and other qualified personnel by offering competitive compensation and benefit arrangements may be restricted by applicable banking laws and regulations, including restrictions recently proposed for adoption by U.S. regulatory agencies, including the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). The loss of the services of any senior executive or other key personnel, the inability to recruit and retain qualified personnel in the future or the failure to develop and implement a viable succession plan, could have a material adverse effect on our business, financial condition or results of operations.
New lines of business, products, product enhancements or services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances in which the markets are not fully developed. In implementing, developing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources, although we may not assign the appropriate level of resources or expertise necessary to make these new lines of business, products, product enhancements or services successful or to realize their expected benefits. Further, initial timetables for the introduction and development of new lines of business, products, product enhancements or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also affect the ultimate implementation of a new line of business or offerings of new products, product enhancements or services. Furthermore, any new line of business, product, product enhancement or service or system conversion could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our business, financial condition or results of operations.
External Risks
Our business may be adversely affected by conditions in the financial markets and economic conditions generally.
Our financial performance generally, and in particular the ability of our borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services we offer, is highly dependent upon the business environment in the markets in which we operate and in the United States as a whole. Unlike larger banks that are more geographically diversified, we provide banking and financial services to customers primarily in the Chicago metropolitan area. The economic conditions in this local market may be different from, or worse than, the economic conditions in the United States as a whole. Some elements of the business environment that affect our financial performance include short-term and long-term interest rates, the prevailing yield curve, inflation and price levels, tax policy, monetary policy, unemployment and the strength of the domestic economy and the local economy in the markets in which we operate. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for loan and lease losses, adverse asset values and an overall material adverse effect on the quality of our loan and lease portfolio. Unfavorable or uncertain economic and
market conditions can be caused by, among other factors, declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; changes in inflation or interest rates; increases in real estate and other state and local taxes; high unemployment; natural disasters; or a combination of these or other factors.
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The City of Chicago and State of Illinois currently face significant financial difficulties, which could adversely affect our business.
We have significant loan exposure in the Chicago metropolitan area and both the City of Chicago and the State of Illinois currently face significant fiscal challenges, including large budget deficits, substantial unfunded pension obligations and low credit ratings compared to other local entities, which could negatively impact us to the extent this leads to declines in business activity and overall economic conditions in Illinois and the Chicago metropolitan area. These fiscal challenges may also lead to significant increases in real estate taxes on properties in the Chicago metropolitan area, which could negatively affect certain of our borrowers ability to make payments on our loans. In addition, the State of Illinois is currently operating without a budget, which has in some cases led to the State not meeting its financial obligations in a timely manner.
Some of our commercial loan borrowers are not-for-profit entities that may be dependent on the receipt of contractual payments and reimbursements from the State of Illinois for services rendered. To the extent the City of Chicago or State of Illinois, as applicable, delays or suspends these payments and reimbursements, this could adversely affect the ability of borrowers to meet their loan repayment obligations to us. Any resulting delinquencies and defaults on these loans would in turn adversely affect our financial condition and results of operations.
Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage of our loan portfolio is secured by real estate.
Many of the loans in our portfolio are secured by real estate. As of March 31, 2017, our real estate loans include $105 million of construction and development loans, $239 million of multifamily loans, $410 million of non-owner occupied commercial real estate (CRE) loans and $363 million of residential mortgage loans, with the majority of these real estate loans concentrated in the City of Chicago and the State of Illinois. Real property values in our market may be different from, and in some instances worse than, real property values in other markets or in the United States as a whole, and may be affected by a variety of factors outside of our control and the control of our borrowers, including national and local economic conditions, generally. The Chicago metropolitan area has experienced volatility in real estate values over the past decade. Declines in real estate values, including prices for homes and commercial properties in the Chicago metropolitan area, could result in a deterioration of the credit quality of our borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, and reduced demand for our products and services, generally. Our CRE loans may have a greater risk of loss than residential mortgage loans, in part because these loans are generally larger or more complex to underwrite. In particular, real estate construction and acquisition and development loans have certain risks not present in other types of loans, including risks associated with construction cost overruns, project completion risk, general contractor credit risk and risks associated with the ultimate sale or use of the completed construction. In addition, declines in real property values in the states in which we operate could reduce the value of any collateral we realize following a default on these loans and could adversely affect our ability to continue to grow our loan and lease portfolio consistent with our underwriting standards. We may have to foreclose on real estate assets if borrowers default on their loans, in which case we are required to record the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may affect the capital levels regulators believe are appropriate in light of the ensuing risk profile. Our failure to effectively mitigate these risks could have a material adverse effect on our business, financial condition or results of operations.
Our small business customers may lack the resources to weather a downturn in the economy.
One of our primary strategies is serving the banking and financial services needs of small and medium sized businesses. These businesses generally have fewer financial resources than larger entities and less access to capital sources and loan facilities. If economic conditions are generally unfavorable in our market areas, our small business borrowers may be disproportionately affected and their ability to repay outstanding loans may be negatively affected, resulting in an adverse effect on our results of operations and financial condition.
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We operate in a highly competitive and changing industry and market area and compete with both banks and non-banks.
We operate in the highly competitive financial services industry and face significant competition for customers from financial institutions located both within and beyond our principal markets. We compete with national commercial banks, regional banks, private banks, savings banks, credit unions, non-bank financial services companies and other financial institutions operating within or near the areas we serve, many of whom target the same customers we do in the Chicago metropolitan area. As customer preferences and expectations continue to evolve, technology has lowered barriers to entry and made it possible for banks to expand their geographic reach by providing services over the Internet and for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. The banking industry is experiencing rapid changes in technology, and, as a result, our future success will depend in part on our ability to address our customers needs by using technology. Customer loyalty can be influenced by a competitors new products, especially offerings that could provide cost savings or a higher return to the customer. Increased lending activity of competing banks following the Great Recession has also led to increased competitive pressures on loan rates and terms for high-quality credits. We may not be able to compete successfully with other financial institutions in our markets, particularly with larger financial institutions operating in our markets that have significantly greater resources than us, and we may have to pay higher interest rates to attract deposits, accept lower yields to attract loans and pay higher wages for new employees, resulting in lower net interest margins and reduced profitability. Many of our non-bank competitors are not subject to the same extensive regulations that govern our activities and may have greater flexibility in competing for business. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. In addition, some of our current commercial banking customers may seek alternative banking sources as they develop needs for credit facilities larger than we may be able to accommodate or more expansive product mixes offered by larger institutions. We also face increased competition in our U.S. government guaranteed lending business which can adversely affect our volume and the premium, if any, recognized on sales of the guaranteed portions of such U.S. government guaranteed loans. Our inability to compete successfully in the markets in which we operate could have a material adverse effect on our business, financial condition or results of operations.
Our ability to maintain, attract and retain customer relationships is highly dependent on our reputation.
We rely, in part, on the reputation of our bank to attract customers and retain our customer relationships. Damage to our reputation could undermine the confidence of our current and potential customers in our ability to provide high-quality financial services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks described in this prospectus, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, customer personal information and privacy issues, customer and other third party fraud, record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements. Maintaining our reputation also depends on our ability to successfully prevent third parties from infringing on the Byline Bank brand and associated trademarks and our other intellectual property. Defense of our reputation, trademarks and other intellectual property, including through litigation, could result in costs that could have a material adverse effect on our business, financial condition or results of operations.
Downgrades to the credit rating of the U.S. government or of its securities or any of its agencies by one or more of the credit ratings agencies could have a material adverse effect on general economic conditions, as well as our business.
On August 5, 2011, Standard & Poors cut the credit rating of the U.S. federal governments long-term sovereign debt from AAA to AA+, while also keeping its outlook negative. Moodys had lowered its own
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outlook for the same debt to Negative on August 2, 2011, and Fitch also lowered its outlook for the same debt to Negative, on November 28, 2011. In 2013, both Moodys and Standard & Poors revised their outlooks from Negative to Stable, and on March 21, 2014, Fitch revised its outlook from Negative to Stable. Further downgrades of the U.S. federal governments sovereign credit rating, and the perceived creditworthiness of U.S. government-backed obligations, could affect our ability to obtain funding that is collateralized by affected instruments and our ability to access capital markets on favorable terms. Such downgrades could also affect the pricing of funding, when funding is available. A downgrade of the credit rating of the U.S. government, or of its agencies, government-sponsored enterprises or related institutions or instrumentalities, may also adversely affect the market value of such instruments and, further, exacerbate the other risks to which we are subject and any related adverse effects on our business, financial condition or results of operations.
Severe weather, natural disasters, pandemics, acts of war or terrorism or other external events could significantly impact our business.
Severe weather, natural disasters, widespread disease or pandemics, acts of war or terrorism or other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans and leases, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue or cause us to incur additional expenses. The occurrence of any of these events in the future could have a material adverse effect on our business, financial condition or results of operations.
Guaranteed Loans Risks
Small Business Administration lending is an important part of our business. Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lenders Program (an SBA Preferred Lender), we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lenders SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience a material adverse effect to our financial results. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress may also have a material adverse effect on our business. In addition, any default by the U.S. government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could materially adversely affect our business, results of operations and financial condition.
The SBAs 7(a) Loan Program is the SBAs primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business purposes. Generally, we sell the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales result in premium income for us
at the time of sale and create a stream of future servicing income, as we retain the servicing rights to these loans. For the reasons described above, we may not be able to continue originating these loans or sell them in the secondary market. Furthermore, even if we are able to continue originate and sell SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors. When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any
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loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us. Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could materially adversely affect our business, financial condition or results of operations.
The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably.
The recognition of gains on the sale of loans and servicing asset valuations reflect certain assumptions.
We expect that gains on the sale of U.S. government guaranteed loans will comprise a significant component of our revenue. The gains on such sales recognized for the three months ended March 31, 2017 was $8.1 million. The determination of these gains is based on assumptions regarding the value of unguaranteed loans retained, servicing rights retained and deferred fees and costs, and net premiums paid by purchasers of the guaranteed portions of U.S. government guaranteed loans. The value of retained unguaranteed loans and servicing rights are determined based on market derived factors such as prepayment rates, current market conditions and recent loan sales. Deferred fees and costs are determined using internal analysis of the cost to originate loans. Significant errors in assumptions used to compute gains on sale of loans or servicing asset valuations could result in material revenue misstatements, which may have a material adverse effect on our business, results of operations and profitability. In addition, while we believe these valuations reflect fair value and such valuations are subject to validation by an independent third party, if such valuations are not reflective of fair market value then our business, results of operations and financial condition may be materially and adversely affected.
Legal, Accounting and Compliance Risks
Our accounting estimates and risk management processes and controls rely on analytical and forecasting techniques and models and assumptions, which may not accurately predict future events.
Our accounting policies and methods are fundamental to the manner in which we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with GAAP and reflect managements judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet which may result in our reporting materially different results than would have been reported under a different alternative.
Certain accounting policies are critical to presenting our financial condition and results of operations. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include the allowance for loan and lease losses, fair value measurements and income taxes. See Note 1 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 for further information. Because of the uncertainty of estimates involved in these matters, we may be required to do one or more of the following: significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the reserve provided; reduce the carrying value of an asset measured at fair value; or significantly increase our accrued tax liability. Any of these could have a material adverse effect on our business, financial condition or results of operations. See Managements Discussion and Analysis of Financial Condition and Results of Operations.
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Our internal controls, disclosure controls, processes and procedures, and corporate governance policies and procedures are based in part on certain assumptions and can provide only reasonable (not absolute) assurances that the objectives of the system are met. Furthermore, we currently outsource our internal audit function. Any failure or circumvention of our controls, processes and procedures or failure to comply with regulations related to controls, processes and procedures could necessitate changes in those controls, processes and procedures, which may increase our compliance costs, divert management attention from our business or subject us to regulatory actions and increased regulatory scrutiny. Any of these could have a material adverse effect on our business, financial condition or results of operations.
Our goodwill may become impaired, which may adversely impact our results of operations and financial condition and may limit Byline Banks ability to pay dividends to us, thereby causing liquidity issues.
As of March 31, 2017, we had goodwill of $52.0 million, or 13.3% of our total stockholders equity. The excess purchase consideration over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment has occurred. In testing for impairment, we conduct a qualitative assessment and we also estimate the fair value of net assets based on analyses of our market value, discounted cash flows and peer values. Consequently, the determination of the fair value of goodwill is sensitive to market-based economics and other key assumptions. Variability in market conditions or in key assumptions could result in impairment of goodwill, which is recorded as a non-cash adjustment to income. An impairment of goodwill could have a material adverse effect on our business, financial condition and results of operations.
The accounting for loans acquired in connection with our Recapitalization and acquisitions is based on numerous subjective determinations that may prove to be inaccurate and have a negative impact on our results of operations.
All loans acquired as part of the Recapitalization in 2013 as well as loans acquired in connection with our subsequent acquisitions, including the Ridgestone acquisition in October 2016, have been recorded at their estimated fair value on their acquisition date without a carryover of the related allowance for loan losses. The determination of estimated fair value of acquired loans requires management to make subjective determinations regarding discount rate, estimates of losses on defaults, market conditions and other factors that are highly subjective in nature. A risk exists that our estimate of the fair value of acquired loans will prove to be inaccurate and that we ultimately will not recover the amount at which we recorded such loans on our balance sheet, which would require us to recognize losses.
Loans acquired that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality . These credit-impaired loans, like non-credit-impaired loans acquired, have been recorded at estimated fair value on their acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan and lease losses. We evaluate these loans quarterly to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from non-accretable to accretable with a positive impact on interest income prospectively. Because the accounting for these loans is
based on subjective measures that can change frequently, we may experience fluctuations in our net interest income and provisions for loan losses attributable to these loans. These fluctuations could negatively affect our results of operations.
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Our ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income and could be significantly reduced if corporate tax rates in the U.S. decline.
We recognize the expected future tax benefit from deferred tax assets when it is more likely than not that the tax benefit will be realized. Otherwise, a valuation allowance is applied against deferred tax assets, reducing the value of such assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income from all sources, including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. Estimates of future taxable income are based on forecasted income from operations and the application of existing tax laws in each jurisdiction. The recent acquisition of Ridgestone and the improved risk profile of the Company are key components used in the determination of our ability to realize the expected future benefit of our deferred tax assets. To the extent that future taxable income differs significantly from estimates as a result of the interest rate environment and loan growth capabilities or other factors, our ability to realize the net deferred tax assets could be affected. Over the past several years, there have been discussions regarding decreasing the U.S. federal corporate tax rate, and such discussions have taken on a new focus and prominence given the new U.S. presidential administration and Congress. While we may benefit on a prospective net income basis from any decrease in corporate tax rates, a reduction in the corporate tax rate could result in certain deferred tax assets being re-measured and may result in some portion or all of a deferred tax asset not being expected to be fully utilized. As such, a material decrease in the value of our net deferred tax assets would also result in a valuation allowance being recognized which would result in a corresponding charge to earnings and a material reduction to our net income during the period in which the change is enacted. Our regulatory capital could also be reduced if the decrease in the value of our net deferred tax assets exceeds certain levels. Given the number of uncertainties relating to the ultimate form any corporate tax reform may take, it is not possible to quantify the potential negative impact to our income or regulatory capital that could result from any corporate tax reform.
Additionally, significant future issuances of common stock or common stock equivalents, or changes in the direct or indirect ownership of our common stock or common stock equivalents, could cause an ownership change and could limit our ability to utilize our net operating loss carryforwards and other tax attributes pursuant to Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended (the Code). We do not believe that this offering will cause such an ownership change. Future changes in tax law or changes in ownership structure could limit our ability to utilize our recorded net deferred tax assets. As of March 31, 2017 we did not have a valuation allowance against our net deferred tax assets for certain amounts related to U.S. net operating loss carryforwards, and our net deferred tax assets as of March 31, 2017 were $62.9 million. During 2016, the valuation allowance on our net deferred tax assets decreased by approximately $61.9 million. See Note 11 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 for further discussion of our deferred tax assets.
Changes in our accounting policies or in accounting standards could materially affect how we report our financial results and condition.
From time to time, the FASB and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. As a result of changes to financial accounting or reporting standards, whether promulgated or required by the FASB or other regulators, we could be required to change certain of the assumptions or estimates we have previously used in preparing our financial statements, which could negatively affect how we record and report our results of operations and financial condition generally. For example, in 2016, the FASB approved a new accounting standard that would require companies to include lease obligations on their balance sheets, which will be effective in 2019, or if we remain an emerging growth company and continue to elect not to opt out of the extended transition period for new accounting standards, 2020. This new standard will result in changes to our accounting presentation and could adversely affect our balance sheet.
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The banking industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a significant adverse effect on our operations.
The banking industry is extensively regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our stockholders and creditors. We are subject to regulation and supervision by the Federal Reserve, and our bank is subject to regulation and supervision by the FDIC and the State of Illinois Department of Financial and Professional Regulation (the IDFPR). The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept, maintenance of adequate capital and liquidity, changes in the control of us and our bank, restrictions on dividends and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities, and there is the risk that such approvals may not be obtained, either in a timely manner or at all. Our regulators also have the ability to compel us to take certain actions, or restrict us from taking certain actions entirely, such as actions that our regulators deem to constitute an unsafe or unsound banking practice. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties or damage to our reputation, all of which could have a material adverse effect on our business, financial condition or results of operations.
Since the Great Recession, federal and state banking laws and regulations, as well as interpretations and implementations of these laws and regulations, have undergone substantial review and change. In particular, the Dodd-Frank Act drastically revised the laws and regulations under which we operate. As an institution with less than $10 billion in assets, certain elements of the Dodd-Frank Act have not been applied to us. While we endeavor to maintain safe banking practices and controls beyond the regulatory requirements applicable to us, our internal controls may not match those of larger banking institutions that are subject to increased regulatory oversight.
Financial institutions generally have also been subjected to increased scrutiny from regulatory authorities. These changes and increased scrutiny have resulted and may continue to result in increased costs of doing business and may in the future result in decreased revenues and net income, reduce our ability to compete effectively to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal and state laws and regulations, as well as the interpretation and implementation of such laws and regulations, could affect us in substantial and unpredictable ways, including those listed above or other ways that could have a material adverse effect on our business, financial condition or results of operations. Recent political developments, including the change in administration in the United States, have increased additional uncertainty to the implementation, scope and timing of regulatory reforms.
There is uncertainty surrounding the potential legal, regulatory and policy changes by the new presidential administration in the U.S. that may directly affect financial institutions and the global economy.
The new presidential administration has indicated that it would like to see changes made to certain financial reform regulations, including the Dodd-Frank Act, which has resulted in increased regulatory uncertainty, and we are assessing the potential impact on financial and economic markets and on our business. Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. At this time, it is unclear what laws, regulations and policies may change and whether future changes or uncertainty surrounding future changes will adversely affect our operating environment and therefore our business, financial condition and results of operations.
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Certain of our activities are restricted due to commitments entered into with the Federal Reserve by us and certain of our foreign national stockholders.
Certain of our stockholders who invested in our Recapitalization are foreign nationals, and we and certain of these foreign national stockholders have entered into commitments with the Federal Reserve that restrict some of our activities. In particular, without approval of the Federal Reserve, we are restricted from engaging in certain transactions with these foreign national stockholders, their immediate families, and any company controlled by such foreign national stockholders or by their immediate families. Such transactions include (i) extensions of credit described in the Federal Reserves Regulation O, (ii) covered transactions described in sections 23A and 23B of the Federal Reserve Act and the Federal Reserves Regulation W, and (iii) subject to certain limited exceptions, business transactions or relationships with companies controlled by such foreign national stockholders or by their immediate families. For additional information about the commitments entered into with the Federal Reserve, see Certain Relationships and Related TransactionsForeign National Commitments and Passivity Commitments. These restrictions could prevent us from pursuing activities that would otherwise be in our and our other stockholders best interests. Moreover, if we were to fail to comply with any of these restrictions, we could be subject to enforcement and other legal actions by the Federal Reserve, including civil and criminal penalties, which could have a material adverse effect on our business, financial condition and results of operations.
We are required to act as a source of financial and managerial strength for our bank in times of stress.
As a bank holding company, we are required under federal law to act as a source of financial and managerial strength to our bank, and to commit resources to support our bank if necessary. We may be required to commit additional resources to our bank at times when we may not be in a financial position to provide such resources or when it may not be in our, or our stockholders or our creditors best interests to do so. Providing such support is more likely to be necessary during times of financial stress for us and our bank, which may make any capital we are required to raise to provide such support more expensive than it might otherwise be. In addition, any capital loans we make to our bank are subordinate in right of payment to depositors and to certain other indebtedness of our bank. In the event of our bankruptcy, any commitment by us to a federal banking regulator to maintain the capital of our bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
We are subject to capital adequacy requirements and may be subject to more stringent capital requirements.
We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, the regulators change these regulatory capital adequacy and liquidity guidelines. If we fail to meet these minimum capital adequacy and liquidity guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends and repurchasing or redeeming capital securities. See Supervision and RegulationRegulatory Capital Requirements for more information on the capital adequacy standards that we must meet and maintain.
In particular, the capital adequacy and liquidity requirements applicable to Byline Bancorp, Inc. and Byline Bank under the recently adopted capital rules implementing the Basel III capital framework in the United States (the Capital Rules) began to be phased-in starting in 2015. Basel III not only increases most of the required minimum regulatory capital ratios, it introduces a new Common Equity Tier 1 capital ratio and the concept of a capital conservation buffer. Basel III also expands the current definition of capital by establishing additional criteria that capital instruments must meet to be considered Additional Tier 1 and Tier 2 capital. In order to be a well-capitalized depository institution under the new regime, an institution must maintain a Common Equity Tier 1 capital ratio of 6.5% or more; a Tier 1 capital ratio of 8% or more; a total capital ratio of 10% or more; and a leverage ratio of 5% or more. Institutions must also maintain a capital conservation buffer consisting of common equity Tier 1 capital. The Basel III rules also generally preclude certain hybrid securities,
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such as trust preferred securities, from being counted as Tier 1 capital. However, we are permitted to include qualifying trust preferred securities issued prior to May 19, 2010 as Additional Tier 1 capital. The Basel III Capital Rules became effective as applied to us and Byline Bank on January 1, 2015 with a phase-in period that generally extends through January 1, 2019 for many of the changes.
While we currently meet the requirements of the Basel III-based Capital Rules, we may fail to do so in the future. The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and level of required deposit insurance assessments to the FDIC, our ability to pay dividends on our capital stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Federal and state regulators periodically examine our business, and we may be required to remediate adverse examination findings.
The Federal Reserve, the FDIC, and the IDFPR periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or our predecessor were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin unsafe or unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place our bank into receivership or conservatorship. Any regulatory action against us could have an adverse effect on our business, financial condition and results of operations.
Our ability to pay dividends may be limited and we do not intend to pay cash dividends on our common stock in the foreseeable future; consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
Holders of our common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. We expect that we will retain all earnings, if any, for operating capital, and we do not expect our board of directors to declare any dividends on our common stock in
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the foreseeable future. Even if we have earnings in an amount sufficient to pay cash dividends, our board of directors may decide to retain earnings for the purpose of financing growth. We cannot assure you that cash
dividends on our common stock will ever be paid. You should not purchase shares of common stock offered hereby if you need or desire dividend income from this investment.
In addition, we are a bank holding company, and our ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on capital stock only out of earnings, and only if prospective earnings retention is consistent with the organizations expected future needs, asset quality and financial condition.
Further, if we are unable to satisfy the capital requirements applicable to us for any reason, we may not be able to make, or may have to reduce or eliminate, the payment of dividends on our common stock in the event we decide to declare dividends. Any change in the level of our dividends or the suspension of the payment thereof could have a material adverse effect on the market price of our common stock.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act of 1977 (CRA) requires our bank, consistent with safe and sound operations, to ascertain and meet the credit needs of its entire community, including low and moderate income areas. Our banks failure to comply with the CRA could, among other things, result in the denial or delay of certain corporate applications filed by us or our bank, including applications for branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company. In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice, federal banking agencies, and other federal agencies are responsible for enforcing these laws and regulations. A challenge to an institutions compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also challenge an institutions performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Rulemaking changes implemented by the Consumer Financial Protection Bureau (CFPB) may result in higher regulatory and compliance costs that could adversely affect our results of operations.
The Dodd-Frank Act created a new, independent federal agency, the CFPB, which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws. The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. See Supervision and RegulationConsumer Financial Protection. Notwithstanding that insured depository institutions with assets of $10 billion or less (such as Byline Bank) will continue to be supervised and examined by their primary federal regulators, the ultimate impact of this heightened scrutiny is uncertain and could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, remediation efforts and possible penalties.
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Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.
Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal
prosecutors on banks and the financial services industry generally. This focus has only intensified since the Great Recession, with regulators and prosecutors focusing on a variety of financial institution practices and requirements, including foreclosure practices, compliance with applicable consumer protection laws, classification of held for sale assets and compliance with anti-money laundering statutes, the Bank Secrecy Act and sanctions administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (OFAC).
In the normal course of business, from time to time, we have in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. In addition, while the arbitration provisions in certain of our customer agreements historically have limited our exposure to consumer class action litigation, there can be no assurance that we will be successful in enforcing our arbitration clause in the future. Further, we have in the past, and may in the future be subject to consent orders with our regulators. We may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our current and/or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could be material to our business, results of operations, financial condition and cash flows depending on, among other factors, the level of our earnings for that period, and could have a material adverse effect on our business, financial condition or results of operations.
Non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations could result in fines or sanctions against us.
The USA PATRIOT Act of 2001 and the Bank Secrecy Act require financial institutions to design and implement programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the Financial Crimes Enforcement Network of the U.S. Department of the Treasury. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Federal and state bank regulators also have focused on compliance with Bank Secrecy Act and anti-money laundering regulations. Failure to comply with these regulations could result in fines or sanctions, including restrictions on conducting acquisitions or establishing new branches. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us, which could have a material adverse effect on our business, financial condition or results of operations.
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Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively affected by these laws. For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on
our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to opt out of any information sharing by us with nonaffiliated third parties (with certain exceptions) and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal banking regulators and states have also enacted data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Moreover, legislators and regulators in the United States are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. This includes increased privacy-related enforcement activity at the federal level, by the Federal Trade Commission and CFPB, as well as at the state level, such as with regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions or results of operations. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory or governmental investigations or actions, litigation, fines, sanctions and damage to our reputation, which could have a material adverse effect on our business, financial condition or results of operations.
Potential limitations on incentive compensation contained in proposed federal agency rulemaking may adversely affect our ability to attract and retain our highest performing employees.
During the second quarter of 2016, the Federal Reserve and the FDIC, along with other U.S. regulatory agencies, jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more in assets, such as Byline Bank. It cannot be determined at this time whether or when a final rule will be adopted and whether compliance with such a final rule will substantially affect the manner in which we structure compensation for our executives and other employees. Depending on the nature and application of the final rules, we may not be able to compete successfully with certain financial institutions and other companies that are not subject to some or all of the rules to retain and attract executives and other high performing employees. If this were to occur, relationships that we have established with our clients may be impaired and our business, financial condition and results of operations could be adversely affected, perhaps materially.
We are subject to environmental liability risk associated with our lending activities and with the properties we own.
A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans and there is a risk that hazardous
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or toxic substances could be found on these properties, notwithstanding our prior due diligence. We also own many of our branches and it is possible that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected propertys value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our
exposure to environmental liability. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our business, results of operations and financial condition.
Risks Related to Acquisition Activity
We may be adversely affected by risks associated with completed and potential acquisitions, including execution risks, failure to realize anticipated transaction benefits, and failure to overcome integration risks, which could adversely affect our growth and profitability.
We plan to grow our businesses organically but remain open to considering potential smaller bank or other acquisition opportunities that fit within the deposit strength and commercial orientation of our franchise and that we believe support our businesses and make financial and strategic sense. In the event that we do pursue acquisitions, we may have difficulty executing on acquisitions and may not realize the anticipated benefits of any transaction we complete. Any of the foregoing matters could materially and adversely affect us.
Generally, any acquisition of target financial institutions, branches or other banking assets by us will require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve and the FDIC as well as the IDFPR. In evaluating applications seeking approval of acquisitions, such regulators consider factors such as, among other things, the competitive effect and public benefits of the transaction, the capital position and managerial resources of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicants performance record under the CRA, the applicants compliance with fair housing and other consumer protection laws and the effectiveness of all organizations involved in combating money laundering activities. Such regulators could deny our application, which would restrict our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell branches as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may reduce the benefit of an acquisition.
As to any acquisition that we complete, including the Ridgestone acquisition, which took place in October 2016, we may fail to realize some or all of the anticipated transaction benefits if the integration process takes longer or is more costly than expected or otherwise fails to meet our expectations.
In addition, acquisition activities could be material to our business and involve a number of risks, including the following:
| incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business; |
| using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets; |
| actual results of the acquired business may vary significantly from projected results; |
| intense competition from other banking organizations and other inquirers for acquisitions, causing us to lose opportunities or overpay for acquisitions; |
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| potential exposure to unknown or contingent liabilities of banks and businesses we acquire; |
| unexpected asset quality problems; |
| the time and expense required to integrate the operations of the combined businesses, including the integration or replacement of information technology and other systems; |
| difficulties in integrating and retaining employees of acquired businesses; |
| higher operating expenses relative to operating income from the new operations; |
| creating an adverse short-term effect on our results of operations; |
| losing key employees or customers as a result of an acquisition that is poorly received; |
| significant problems relating to the conversion of the financial and customer data of the entity; |
| integration of acquired customers into our financial and customer product systems; |
| risk of assuming businesses with internal control deficiencies; or |
| risks of impairment to goodwill or other assets. |
Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval.
Also, acquisitions may involve the payment of a premium over book and market values and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Our inability to overcome these risks could have a material adverse effect on our profitability, return on equity and return on assets, our ability to implement our business strategy and enhance stockholder value, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Our Common Stock
No prior public market exists for our common stock, and one may not develop.
Before this offering, there has not been a public trading market for our common stock, and an active trading market may not develop or be sustained after this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive priceor at all. The initial public offering price for our common stock sold in this offering will be determined by us and the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering. The market price of our common stock may decline below the initial offering price, and you may not be able to sell your common stock at or above the price you paid in this offeringor at all.
Our stock price may be volatile, and you could lose part or all of your investment as a result.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find attractive. Our stock price may fluctuate significantly in response to a variety of factors including, among other things:
| actual or anticipated variations in our quarterly results of operations; |
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| recommendations or research reports about us or the financial services industry in general published by securities analysts; |
| the failure of securities analysts to cover, or continue to cover, us after this offering; |
| operating and stock price performance of other companies that investors deem comparable to us; |
| news reports relating to trends, concerns and other issues in the financial services industry; |
| perceptions in the marketplace regarding us, our competitors or other financial institutions; |
| future sales of our common stock; |
| departure of our management team or other key personnel; |
| new technology used, or services offered, by competitors; |
| significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors; |
| changes or proposed changes in laws or regulations, or differing interpretations thereof affecting our business, or enforcement of these laws and regulations; |
| litigation and governmental investigations; and |
| geopolitical conditions such as acts or threats of terrorism or military conflicts. |
If any of the foregoing occurs, it could cause our stock price to fall and may expose us to litigation that, even if our defense is successful, could distract our management and be costly to defend. General market fluctuations, industry factors and general economic and political conditions and eventssuch as economic slowdowns or recessions, interest rate changes or credit loss trendscould also cause our stock price to decrease regardless of operating results.
Our principal stockholder, MBG Investors I, L.P. will continue to have significant influence over us following the completion of this offering, and its interests could conflict with those of our other stockholders.
Prior to this offering, our principal stockholder, MBG Investors I, L.P., owned approximately 46.6% of the outstanding shares of our common stock. As a result, MBG Investors I, L.P. is able to influence matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other extraordinary transactions. MBG Investors I, L.P. may also have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. The concentration of ownership may also have the effect of delaying, preventing or deterring a change of control of the Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.
MBG Investors I, L.P. could sell its interest in us to a third party in a private transaction, which may not lead to your realization of any change-of-control premium on shares of our common stock and would subject us to the influence of a presently unknown third party.
Following the completion of this offering, MBG Investors I, L.P. will continue to beneficially own a large equity interest of our company. MBG Investors I, L.P. will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction, which, if sufficient in size, could result in another party gaining significant influence over our company.
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The ability of MBG Investors I, L.P. to sell its shares of our common stock privately, with no requirement for a concurrent offer to be made to acquire all of the shares of our outstanding common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may accrue to MBG Investors I, L.P. on its private sale of our common stock.
We are an emerging growth company within the meaning of the Securities Act of 1933 (the Securities Act) and because we have decided to take advantage of certain exemptions from various reporting and other requirements applicable to emerging growth companies, our common stock could be less attractive to investors.
For as long as we remain an emerging growth company, as defined in the JOBS Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), being permitted to have an extended transition period for adopting any new or revised accounting standards that may be issued by the Financial Accounting Standards Board or the SEC reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We have elected to, and expect to continue to, take advantage of certain of these and other exemptions until we are no longer an emerging growth company. Further, the JOBS Act allows us to present only two years of audited financial statements and only two years of related managements discussion and analysis of financial condition and results of operations and provide less than five years of selected financial data in this prospectus.
We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, and (iv) the end of the first fiscal year in which (A) the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year, (B) we have been a public reporting company under the Securities Exchange Act of 1934 (the Exchange Act) for at least twelve calendar months and (C) we have filed at least one annual report on Form 10-K.
Because we have elected to use the extended transition period for complying with new or revised accounting standards for an emerging growth company our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates.
We have elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Consequently, our financial statements may not be comparable to companies that comply with public company effective dates. Because our financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
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Fulfilling our public company financial reporting and other regulatory obligations and transitioning to a standalone public company will be expensive and time consuming and may strain our resources.
As a public company, we will be subject to the reporting requirements of the Exchange Act and will be required to implement specific corporate governance practices and adhere to a variety of reporting requirements under Sarbanes-Oxley and the related rules and regulations of the SEC, as well as the rules of the NYSE. The Exchange Act will require us to file annual, quarterly and current reports with respect to our business and
financial condition. Sarbanes-Oxley will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. Compliance with these requirements will place additional demands on our legal, accounting, finance and investor relations staff and on our accounting, financial and information systems and will increase our legal and accounting compliance costs as well as our compensation expense as we may be required to hire additional legal, accounting, tax, finance and investor relations staff. As a public company we may also need to enhance our investor relations and corporate communications functions and attract additional qualified board members. These additional efforts may strain our resources and divert managements attention from other business concerns, which could have a material adverse effect on our business, financial condition or results of operations. We expect to incur additional incremental ongoing and one-time expenses in connection with our transition to a public company. See Managements Discussion and Analysis of Financial Condition and Results of OperationsNon-interest Expense. The actual amount of the incremental expenses we will incur may be higher, perhaps significantly, from our current estimates.
In accordance with Section 404 of Sarbanes-Oxley, our management will be required to conduct an annual assessment of the effectiveness of our internal control over financial reporting and include a report on these internal controls in the annual reports we will file with the SEC on Form 10-K. Our independent registered public accounting firm will not be required to attest formally to the effectiveness of our internal controls until the later of the year following the first annual report required to be filed with the SEC and the date on which we are no longer an emerging growth company. When required, this process will require additional documentation of policies, procedures and systems, further review of that documentation by our third party internal auditing staff and internal accounting staff and our outside independent registered public accounting firm, and additional testing of our internal control over financial reporting by our third party internal auditing staff and internal accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. If our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the NYSE, the SEC or other regulatory authorities, which could require additional financial and management resources.
If we are not able to implement the requirements of Section 404 of Sarbanes-Oxley in a timely and capable manner, we may be subject to adverse regulatory consequences and there could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. This could have a material adverse effect on our business, financial condition or results of operations.
The financial reporting resources we have put in place may not be sufficient to ensure the accuracy of the additional information we are required to disclose as a publicly listed company.
As a result of becoming a publicly listed company, we will be subject to the heightened financial reporting standards under GAAP and SEC rules, including more extensive levels of disclosure. Complying with these standards requires enhancements to the design and operation of our internal control over financial reporting as well as additional financial reporting and accounting staff with appropriate training and experience in GAAP and SEC rules and regulations.
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If we are unable to meet the demands that will be placed upon us as a public company, including the requirements of Sarbanes-Oxley, we may be unable to report our financial results accurately, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with Sarbanes-Oxley, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses or other deficiencies occur, our ability to report our financial results accurately and timely could be impaired, which could result in late filings of our annual and quarterly
reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, suspension or delisting of our common stock from the NYSE, and could have a material adverse effect on our business, results of operations or financial condition. Even if we are able to report our financial statements accurately and in a timely manner, any failure in our efforts to implement the improvements or disclosure of material weaknesses in our future filings with the SEC could cause our reputation to be harmed and our stock price to decline significantly.
We have not performed an evaluation of our internal control over financial reporting, as contemplated by Section 404 of Sarbanes-Oxley, nor have we engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date reported in our financial statements. Had we performed such an evaluation or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, material weaknesses may have been identified. In addition, the JOBS Act provides that, so long as we qualify as an emerging growth company, we will be exempt from the provisions of Section 404(b) of Sarbanes-Oxley, which would require that our independent registered public accounting firm provide an attestation report on the effectiveness of our internal control over financial reporting. We may take advantage of this exemption so long as we qualify as an emerging growth company.
Investors in this offering will experience immediate and substantial dilution.
The initial public offering price is expected to be substantially higher than the net tangible book value per share of our common stock immediately following this offering. Therefore, if you purchase shares in the offering, you will experience immediate and substantial dilution in net tangible book value per share in relation to the price that you paid for your shares. We expect the dilution as a result of the offering to be $7.31 per share, based on an assumed initial offering price of $20.00 per share (the midpoint of the range set forth on the cover page of this prospectus) and our pro forma net tangible book value of $12.69 per share as of March 31, 2017. Accordingly, if we were liquidated at our pro forma net tangible book value, you would not receive the full amount of your investment.
Future sales of our common stock in the public market, including by our current stockholders, could lower our stock price, and any increase in shares issued as part of our equity-based compensation plans or for other purposes may dilute your ownership in us.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock available for sale after completion of this offering or from the perception that such sales could occur. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate. Upon completion of this offering, we will have a total of 28,391,900 outstanding shares of common stock, assuming the underwriters do not exercise their option to purchase additional shares. Of the outstanding shares, the 5,700,000 shares sold in this offering (or 6,555,000 shares if the underwriters exercise their option to purchase additional shares in full) will be freely tradable without restriction or further registration under the Securities Act, except that any shares purchased or held by our affiliates, as that term is defined under Rule 144 of the Securities Act, may be sold only in compliance with the limitations described in Shares Eligible for Future Sale. The remaining 22,691,900 shares outstanding will be restricted securities as defined under Rule 144 subject to certain restrictions on resale. Purchasers in the Reserved Share Program will agree not to sell shares purchased under the program for 180 days after the date of this prospectus. See UnderwritingLock-up Agreements for further information.
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We have agreed with the underwriters not to offer, pledge, sell or otherwise dispose of or hedge any shares of our common stock, subject to certain exceptions, for the 180-day period following the date of this prospectus, without the prior consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keefe, Bruyette & Woods, Inc. on behalf of the underwriters. Holders of a significant majority of our common stock and all of our officers and directors have entered into similar lock-up agreements with the underwriters, subject to de minimis exceptions. The underwriters may, at any time, release us or any of our officers or directors from this lock-up agreement and allow us to sell shares of our common stock within this 180-day period. In addition, any shares purchased through the reserved share program described in this prospectus are subject to the same 180-day lockup period.
Upon the expiration of the lock-up agreements described above, all of such shares will be eligible for resale in a public market, subject, in the case of shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144 or registration under the Securities Act.
We cannot predict the size of future issuances or sales of our common stock or the effect, if any, that future issuances or sales of shares of our common stock may have on the market price of our common stock. Sales or distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline.
Certain banking laws and certain provisions of our certificate of incorporation may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our stockholders. Acquisition of 10% or more of any class of voting stock of a bank holding company or depository institution, including shares of our common stock following completion of this offering, generally creates a rebuttable presumption that the acquirer controls the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including our bank.
There also are provisions in our amended and restated certificate of incorporation, which we refer to as our certificate of incorporation, and amended and restated bylaws, which we refer to as our bylaws, to be effective prior to the completion of this offering, such as limitations on the ability to call a special meeting of our stockholders, that may be used to delay or block a takeover attempt. In addition, our board of directors will be authorized under our certificate of incorporation to issue shares of our preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without stockholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of our common stock.
We have broad discretion in the use of the net proceeds from this offering, and our use of those proceeds may not yield a favorable return on your investment.
We intend to use the net proceeds generated by this offering to support our organic growth and for other general corporate purposes that may include, but are not limited to the repayment or refinancing of outstanding debt, working capital and other general purposes. Our management has broad discretion over how these proceeds are to be used and could spend the proceeds in ways with which you may not agree. In addition, we may not use the proceeds of this offering effectively or in a manner that increases our market value or enhances our profitability. We have not established a timetable for the effective deployment of the proceeds, and we cannot predict how long it will take to deploy the proceeds. Investing the offering proceeds in securities until we are able to deploy the proceeds will provide lower margins than we generally earn on loans, potentially adversely affecting stockholder returns, including earnings per share, return on assets and return on equity.
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An investment in our common stock is not an insured deposit and is subject to risk of loss.
Your investment in our common stock will not be a bank deposit and will not be insured or guaranteed by the FDIC or any other government agency. Your investment will be subject to investment risk, and you must be capable of affording the loss of your entire investment.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as may, might, should, could, predict, potential, believe, expect, continue, will, anticipate, seek, estimate, intend, plan, projection, would, annualized and outlook, or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, managements beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified in Risk Factors or Managements Discussion and Analysis of Financial Condition and Results of Operations or the following:
| the geographic concentration of our operations in the Chicago metropolitan area; |
| current and future business, economic and market conditions in the United States generally or in Illinois in particular; |
| the effects of the current low interest rate environment or changes in interest rates on our net interest income, net interest margin, our investments, and our loan originations, loan servicing rights and loans held for sale and our modeling estimates relating to interest rate changes; |
| our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due; |
| the effects of geopolitical instability, including war, terrorist attacks, and man-made and natural disasters; |
| our ability to maintain our banks reputation; |
| lack of seasoning in our loan portfolio; |
| our asset quality and any loan charge-offs; |
| our ability to attract and retain customer deposits; |
| changes in SBA and USDA rules, regulations and loan products, including specifically the SBAs Section 7(a) program, changes in SBA and USDA standard operating procedures or changes to the banks status as an SBA Preferred Lender; |
| our ability to achieve organic loan and deposit growth and the composition of such growth; |
| the composition of our loan portfolio; |
| time and effort necessary to resolve nonperforming assets; |
-49-
| our ability to attract and retain skilled employees or changes in our management personnel; |
| our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; |
| our ability to successfully develop and commercialize new or enhanced products and services; |
| changes in the demand for our products and services; |
| the effectiveness of our risk management and internal disclosure controls and procedures; |
| any failure or interruption of our information and communications systems; |
| our ability to identify and address cybersecurity risks; |
| our ability to keep pace with technological changes; |
| the effects of problems encountered by other financial institutions; |
| our access to sources of liquidity and capital to address our liquidity needs; |
| fluctuations in the values of our assets and liabilities and off-balance sheet exposures; |
| the effects of the failure of any component of our business infrastructure provided by a third party; |
| the impact of, and changes in applicable laws, regulations and accounting standards and policies; |
| possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; |
| our likelihood of success in, and the impact of, legal, regulatory or other actions, investigations or proceedings relating to our business or the operations of our predecessor; |
| environmental liability associated with our lending activities; |
| market perceptions associated with certain aspects of our business; |
| possible impairment of our goodwill and other intangible assets, or any adjustment of the valuation of our deferred tax assets; |
| changes in the scope and cost of FDIC deposit insurance premiums; |
| our limited operating history since the Recapitalization; |
| the one-time and incremental costs of operating as a standalone public company; |
| our ability to meet our obligations as a public company, including our obligations under Section 404 of Sarbanes-Oxley; and |
| damage to our reputation from any of the factors described above, in Risk Factors or in Managements Discussion and Analysis of Financial Condition and Results of Operations. |
-50-
The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in this prospectus. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
-51-
We estimate that the net proceeds to us from the sale of our common stock in this offering will be approximately $66.4 million, or approximately $82.4 million if the underwriters elect to exercise in full their option to purchase additional shares from us, assuming an initial public offering price of $20.00 per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us of this offering by $3.5 million, or $4.3 million if the underwriters elect to exercise in full their option to purchase additional shares, after deducting underwriting discounts and commissions and estimated offering expenses. We intend to use the net proceeds from this offering (i) to repay the outstanding balance under our line of credit of approximately $16.2 million as of June 19, 2017, (ii) to repurchase, subject to regulatory approval, all outstanding shares of our Series A Preferred Stock for approximately $26.8 million, and (iii) for general corporate purposes.
The indebtedness under our line of credit, which was incurred in connection with the Ridgestone acquisition, matures on October 12, 2017 and bears interest at a rate equal to the Prime rate, which is currently 4.25%. See Managements Discussion and Analysis of Financial Condition and Results of Operation for further information.
The aggregate purchase price of approximately $26.8 million that we expect to pay for the proposed repurchase of all outstanding shares of our Series A Preferred Stock is based on the assumed initial public offering price of $20.00 per share of our common stock (the midpoint of the price range set forth on the cover of this prospectus). Each $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the aggregate repurchase price of the Series A Preferred Stock by approximately $1.3 million.
We will not receive any proceeds from the sale of common stock by the selling stockholders.
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We do not intend to pay dividends on our common stock in the near-term. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination relating to our dividend policy will be made by our board of directors and will depend on a number of factors, including: (1) our historic and projected financial condition, liquidity and results of operations, (2) our capital levels and needs, (3) tax considerations, (4) any acquisitions or potential acquisitions that we may examine, (5) statutory and regulatory prohibitions and other limitations, (6) the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends, (7) general economic conditions and (8) other factors deemed relevant by our board of directors. We are not obligated to pay dividends on our common stock and are subject to restrictions on paying dividends on our common stock.
As a Delaware corporation, we will be subject to certain restrictions on dividends under the Delaware General Corporation Law (the DGCL). Generally, a Delaware corporation may only pay dividends either out of surplus or out of the current or the immediately preceding years net profits. Surplus is defined as the excess, if any, at any given time, of the total assets of a corporation over its total liabilities and statutory capital. The value of a corporations assets can be measured in a number of ways and may not necessarily equal their book value.
In addition, we are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. See Supervision and RegulationDividends; Stress Testing.
Because we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay dividends to our stockholders depends, in large part, upon our receipt of dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. See Supervision and RegulationDividends; Stress Testing.
-53-
In March 2017, Byline Bancorp, Inc., an Illinois corporation, or Byline Illinois, formed Byline Bancorp, Inc., a Delaware corporation, or Byline Delaware. On June 16, 2017, Byline Illinois merged with and into Byline Delaware, the registrant, with Byline Delaware surviving. In the merger, each share of Byline Illinois common stock issued and outstanding was converted automatically into the right to receive one fifth (0.20) of a share of common stock of Byline Delaware, with cash to be paid in lieu of fractional shares, and shares of each series of Byline Illinois preferred stock were converted into a substantially similar series of Byline Delaware preferred stock.
As a result of the merger, we reincorporated as a Delaware corporation. The Reincorporation did not result in any change of the business, management, jobs, fiscal year, assets, liabilities or location of the principal facilities of the Company.
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The following table shows our capitalization, including regulatory capital ratios, on a consolidated basis, as of March 31, 2017:
| on an actual basis, giving effect to the Reincorporation, but before payment of fractional shares of approximately $2,000; and |
| on an as adjusted basis after giving effect to (i) the net proceeds from the sale by us of our common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares from us) at an assumed initial public offering price of $20.00 per share, the midpoint of the price range on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, (ii) the repayment in full of the outstanding balance on our line of credit of approximately $16.2 million as of June 19, 2017 and (iii) the repurchase of all of our outstanding Series A Preferred Stock at an assumed aggregate purchase price of $26.8 million. See Use of Proceeds for additional information. |
You should read the following table in conjunction with the sections titled Use of Proceeds, Selected Historical Consolidated Financial and Operating Information and Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes appearing elsewhere in this prospectus.
At
March 31, 2017 |
As Adjusted (1) | |||||||
(dollars in thousands) | ||||||||
Cash and cash equivalents |
$ | 83,267 | $ | 104,641 | ||||
|
|
|
|
|||||
Debt: |
||||||||
Short-Term Borrowings |
||||||||
Line of credit (2) |
18,150 | | ||||||
Federal Home Loan Bank advances |
209,663 | 209,663 | ||||||
Securities sold under agreements to repurchase |
31,940 | 31,940 | ||||||
|
|
|
|
|||||
Total short-term borrowings |
259,753 | 241,603 | ||||||
Long-Term Borrowings |
||||||||
Junior subordinated debentures issued to capital trusts, net |
27,130 | 27,130 | ||||||
|
|
|
|
|||||
Total long-term borrowings |
27,130 | 27,130 | ||||||
Shareholders Equity |
||||||||
Preferred stock, par value $0.01 per share (25,000,000 shares authorized, 15,003 shares have been designated as Series A preferred stock and 50,000 shares have been designated as Series B preferred stock; 15,003 shares of our Series A preferred stock and 10,438 of our Series B preferred stock issued and outstanding on an actual basis and 0 shares of our Series A preferred stock and 10,438 shares of our Series B preferred stock issued and outstanding on an adjusted basis) |
25,441 | 10,438 | (3) | |||||
Common stock, voting, par value $0.01 per share (150,000,000 shares authorized, 24,616,706 and 28,391,900 shares outstanding on an actual and adjusted basis, respectively) |
311,994 | 378,364 | ||||||
Additional paid-in capital |
1,844 | 1,844 | ||||||
Retained earnings |
57,304 | 45,461 | ||||||
Accumulated other comprehensive loss, net of tax |
(6,900 | ) | (6,900 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
389,683 | 429,207 | ||||||
|
|
|
|
|||||
Total capitalization |
$ | 676,566 | $ | 697,940 | ||||
|
|
|
|
|||||
Capital Ratios |
||||||||
Common equity tier 1 capital ratio |
10.85 | % | 13.15 | % | ||||
Tier 1 capital ratio |
12.94 | % | 14.61 | % | ||||
Total capital ratio |
13.49 | % | 15.16 | % | ||||
Tier 1 leverage ratio |
9.59 | % | 10.75 | % | ||||
Common equity to assets |
11.09 | % | 12.67 | % | ||||
Tangible common equity to tangible assets (4) |
9.12 | % | 10.75 | % |
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(1) | A $1.00 increase (decrease) to the assumed initial public offering price of $20.00 per share, the midpoint of the range set forth on the front cover page of this prospectus would increase (decrease), on an as adjusted basis, each of cash and cash equivalents, common stock and additional paid-in capital, total stockholders equity (deficit) and total capitalization by approximately $3.5 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. The as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing. |
(2) | Subsequent to March 31, 2017, we repaid $2.0 million of the outstanding balance on the line of credit. |
(3) | The aggregate purchase price of approximately $26.8 million that we expect to pay for the proposed repurchase of all outstanding shares of our Series A Preferred Stock is based on the assumed initial public offering price of $20.00 per share of our common stock (the midpoint of the price range set forth on the cover of this prospectus). |
(4) | Tangible common equity to tangible assets is a non-GAAP financial measure. For more information on this financial measure, including a reconciliation to the most directly comparable financial measure, see GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. |
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If you invest in our common stock, your ownership interest will be diluted to the extent that the initial public offering price per share of our common stock exceeds the tangible book value per share of our common stock immediately following this offering. Tangible book value per common share is equal to our total stockholders equity, less intangible assets, divided by the number of common shares outstanding. The tangible book value of our common stock as of March 31, 2017 was $293.2 million, or $11.91 per share.
After giving further effect to our sale of 3,775,194 shares of common stock in this offering (assuming the underwriters do not exercise their option to purchase additional shares from us) at an assumed initial public offering price of $20.00 per share, which is the midpoint of the price range on the cover of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, the pro forma tangible book value of our common stock at March 31, 2017 would have been approximately $347.7 million, or $12.25 per share. Therefore, this offering will result in an immediate increase of $0.34 in the tangible book value per share of our common stock of existing stockholders and an immediate dilution of $7.75 in the tangible book value per share of our common stock to investors purchasing shares in this offering, or approximately 38.8% of the assumed public offering price of $20.00 per share (which is the midpoint of the price range on the cover of this prospectus).
A $1.00 increase (decrease) in the assumed initial public offering price of $20.00 per share would increase (decrease) each of cash and cash equivalents, common stock, total stockholders equity and total capitalization by $3.5 million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses. If the underwriters option to purchase additional shares from us is exercised in full, the pro forma as adjusted amount of each of cash and cash equivalents, additional paid-in capital, stockholders equity and total capitalization would increase by approximately $4.3 million, after deducting underwriting discounts and commissions and estimated offering expenses. Sales of shares by our selling stockholders in this offering do not affect our net tangible book value.
The following table illustrates the calculation of the amount of dilution per share that a purchaser of our common stock in this offering will incur given the assumptions above:
Assumed initial public offering price per share |
$ | 20.00 | ||||||
Tangible book value per common share at March 31, 2017 |
$ | 11.91 | ||||||
Increase in net tangible book value per common share attributable to new investors |
$ | 0.34 | ||||||
Pro forma tangible book value per common share upon completion of the offering |
$ | 12.25 | ||||||
Dilution per common share to new investors from offering |
$ | 7.75 |
The following table summarizes, as of March 31, 2017, the number of shares of common stock, the total consideration paid to us and the average price paid per share by existing stockholders and investors purchasing common stock in this offering, and the sale of the common stock offered hereby, as the assumed initial public offering price of $20.00 per share, the midpoint of the price range shown on the cover page of this prospectus (assuming the underwriters do not exercise their option to purchase additional shares from us).
Shares Purchased |
Total Consideration
(Dollars in thousands) |
Average Price
Per Share |
||||||||||||||||||
Number | Percent | Amount | Percent | |||||||||||||||||
Existing stockholders as of March 31, 2017 |
24,616,706 | 86.7 | % | $ | 313,838 | 80.6 | % | $ | 12.75 | |||||||||||
New investors for this offering |
3,775,194 | 13.3 | % | 75,504 | 19.4 | % | $ | 20.00 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
28,391,900 | 100.0 | % | $ | 389,342 | 100.0 | % | $ | 13.71 |
Assuming no shares are sold to existing stockholders in this offering, sales of shares of our common stock by the selling stockholders in this offering will reduce the number of shares of common stock held by existing stockholders to 22,691,900, or approximately 79.9% of the total shares of our common stock outstanding
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after this offering, and will result in new investors holding 5,700,000 shares, or approximately 20.1% of the total shares of our common stock after this offering.
A $1.00 increase (or decrease) in the assumed initial public offering price of $20.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus, would increase (or decrease) the total consideration paid by new investors to us, total consideration paid by all stockholders to us and average price per share paid by all stockholders to us by $3.8 million, $3.8 million and $0.13, respectively, assuming the number of shares offered by us, as set forth on the cover page remains the same.
The table above excludes shares of our common stock reserved for issuance under the Byline Bancorp Equity Incentive Plan and the 2017 Omnibus Incentive Compensation Plan. To the extent that other equity awards are issued under our incentive plan, investors participating in this offering will experience further dilution.
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA
The table below sets forth condensed consolidated financial information for each of Byline and Ridgestone as well as unaudited pro forma combined condensed consolidated financial information for the Company and Ridgestone reflecting the Ridgestone acquisition, in each case as of and for the year ended December 31, 2016. Except as otherwise noted in the footnotes to the table, (i) the financial information included under the Byline Historical column is derived from the audited financial statements of the Company as of and for the year ended December 31, 2016, and (ii) the financial information under the Ridgestone Historical column is derived from the audited financial statements of Ridgestone for the period from January 1, 2016 through October 14, 2016.
The unaudited pro forma combined condensed consolidated financial information has been prepared using the acquisition method of accounting, adjusted from our audited financial statements as of and for the year ended December 31, 2016 to give effect to Bylines acquisition of Ridgestone and the estimated acquisition accounting adjustments resulting from the acquisition (collectively, the Transaction). You should read such information in conjunction with our historical audited financial statements for the year ended December 31, 2016 and the related notes and Ridgestones historical audited financial statements for the year ended December 31, 2015 and for the period from January 1, 2016 through October 14, 2016, and the related notes. An unaudited pro forma consolidated statement of financial condition as of December 31, 2016 is not presented, as Ridgestones statements of financial condition, including related acquisition accounting adjustments, have already been included in our consolidated statement of financial condition and accompanying notes as of December 31, 2016 included elsewhere in this prospectus.
The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2016 is presented as if the Transaction occurred on January 1, 2016.
The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only and not necessarily indicative of the actual financial results that would have been achieved had the Transaction completed on an earlier date. The unaudited pro forma combined condensed consolidated financial statements also do not purport to project our consolidated statement of financial condition for any future period. The historical reclassification adjustments to Ridgestones historical financial information are presented to conform such financial information to the presentation of the Companys consolidated statement of operations. The pro forma adjustments are based on the preliminary acquisition accounting adjustments, which involve significant estimates and assumptions that are subject to change. See Note 3 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015.
In the opinion of the Companys management, the pro forma condensed consolidated financial statements include all significant necessary adjustments that can be factually supported to reflect the effects of the Transaction.
Dollars in thousands except per share data |
Byline Historical |
Ridgestone Historical |
Ridgestone Historical Reclassification Adjustments* |
Pro Forma Adjustments |
Byline & Ridgestone Combined Pro Forma |
|||||||||||||||
Interest and dividend income: |
||||||||||||||||||||
Interest and fees on loans and leases |
$ | 83,150 | $ | 21,645 | $ | 107 | $ | 556 | (1) | $ | 105,458 | |||||||||
Interest on securities |
14,822 | 347 | 3 | 9 | (2) | 15,181 | ||||||||||||||
Other interest and dividend income |
393 | 78 | 2 | | 473 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest and dividend income |
98,365 | 22,070 | 112 | 565 | 121,112 |
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Dollars in thousands except per share data |
Byline Historical |
Ridgestone Historical |
Ridgestone Historical Reclassification Adjustments* |
Pro Forma Adjustments |
Byline & Ridgestone Combined Pro Forma |
|||||||||||||||
Interest expense: |
||||||||||||||||||||
Interest on deposits |
4,580 | 2,521 | | (851 | ) (3) | 6,250 | ||||||||||||||
Interest on borrowings |
3,167 | 320 | | (72 | ) (4) | 3,415 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total interest expense |
7,747 | 2,841 | | (923 | ) | 9,665 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income |
90,618 | 19,229 | 112 | 1,488 | 111,447 | |||||||||||||||
Provision for loan and lease losses |
10,352 | 3,632 | | | 13,984 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net interest income after provision for loan and lease losses |
80,266 | 15,597 | 112 | 1,488 | 97,463 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other operating income: |
||||||||||||||||||||
Deposit fees and charges |
5,665 | 2,024 | (106 | ) | | 7,583 | ||||||||||||||
Net gains on sales of loans |
4,323 | 29,259 | | | 33,582 | |||||||||||||||
Other non-interest income |
15,916 | 3,296 | (130 | ) | | 19,082 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating income |
25,904 | 34,579 | (236 | ) | | 60,247 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other operating expense: |
||||||||||||||||||||
Salaries and employee benefits |
50,585 | 19,220 | 192 | (2,239 | ) (5) | 67,758 | ||||||||||||||
Occupancy and equipment |
17,098 | 845 | (35 | ) | (16 | ) (6) | 17,892 | |||||||||||||
Legal, audit and other professional fees |
5,862 | 2,727 | (88 | ) | (2,791 | ) (7) | 5,710 | |||||||||||||
Other intangible assets amortization expense |
3,003 | | | 74 | (8) | 3,077 | ||||||||||||||
Other non-interest expense |
24,138 | 6,224 | (193 | ) | (394 | ) (9) | 29,775 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total operating expense |
100,686 | 29,016 | (124 | ) | (5,366 | ) | 124,212 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Pre-tax income |
5,484 | 21,160 | | 6,854 | 33,498 | |||||||||||||||
Provision (benefit) for income taxes |
(61,245 | ) | 9,008 | | 2,744 | (10) | (49,493 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 66,729 | $ | 12,152 | $ | | $ | 4,110 | $ | 82,991 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Earnings per common share: |
||||||||||||||||||||
Basic |
$ | 3.31 | 3.54 | |||||||||||||||||
Diluted |
$ | 3.27 | 3.50 | |||||||||||||||||
Weighted average number of common shares outstanding: |
||||||||||||||||||||
Basic |
20,141,630 | 23,434,909 | ||||||||||||||||||
Diluted |
20,430,783 | 23,724,062 |
* | The historical reclassification adjustments to Ridgestones historical financial information are presented to conform such financial information to the presentation of the Companys consolidated statement of operations. |
(1) | Adjustments to interest and fees on loans and leases reflect the change in loan and lease interest income due to estimated discount accretion associated with fair value adjustments of $31.6 million to acquired loans, assuming the loans had been acquired as of January 1, 2016. The discount accretion was calculated on the effective yield method over the estimated life of the acquired loan portfolio of 6 years. |
(2) | Adjustments to interest on securities reflect the change in securities income due to estimated discount accretion associated with fair value adjustments of $171,000 to acquired securities, assuming the securities had been acquired as of January 1, 2016. The discount accretion was calculated on the effective yield method over the estimated lives of the acquired securities of 18 years. |
(3) |
Adjustments to interest on deposits reflect the change in deposit interest expense due to estimated premium amortization associated with fair value adjustments of $1.3 million to acquired time deposits, assuming the |
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time deposits had been acquired as of January 1, 2016. The premium amortization was calculated on the effective yield method over the weighted average estimated lives of the acquired time deposits of approximately six months. The adjustment reflects the amortization in addition to the amortization recorded by Byline during the period from October 14, 2016 through December 31, 2016. |
(4) | Adjustments to interest on borrowings reflect the change in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired borrowings and other debt, which include FHLB advances and junior subordinated debenture issued to capital trust. Adjustments reflect the change in interest expense for the year ended December 31, 2016 that would have resulted had the borrowings been acquired as of January 1, 2016. The premium amortization of the fair value adjustment associated with the FHLB advances of $272,000 was calculated on the effective yield method over the estimated lives of the acquired borrowings of two years. The discount accretion of the fair value adjustment associated with the junior subordinated debenture issued to capital trust of $161,000 was calculated on the effective yield method over the estimated lives of the acquired borrowings of 18 years. |
(5) | Adjustments to salaries and employee benefits reflect the reversal of the accelerated vesting of restricted stock units and expense related to a change in control payment, resulted directly from the Ridgestone acquisition, which are nonrecurring and will not have a continuing impact on the results of operations. |
(6) | Adjustments to occupancy and equipment expense reflect the discount accretion resulting from a fair value adjustment of an acquired building of $451,000. The amortization of the discount is calculated based on a straight-line basis over the useful life of 23 years. |
(7) | Adjustments are to exclude transaction costs (e.g., advisory and legal) of approximately $2.8 million directly related to the acquisition of Ridgestone, which are nonrecurring and will not have a continuing impact on the results of operations. |
(8) | Adjustments to other intangible assets amortization expense reflect the change in other expense that would have resulted from the amortization of the core deposit intangible of $486,000 had the deposits been acquired as at January 1, 2016. The amortization of the core deposit intangible was calculated on an accelerated basis over the estimated useful life of ten years. |
(9) | Adjustments to other non-interest expense are to reverse the termination expense related to the decommissioning of Ridgestones core operating system post acquisition, which are nonrecurring and will not have a continuing impact on the results of operations. |
(10) | Adjustments to provision (benefit) for income taxes reflect recognition of tax expense associated with the adjusted net taxable income before taxes assuming an effective tax rate of 40.04%. |
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
You should read the selected historical consolidated financial and operating data set forth below in conjunction with the sections titled Managements Discussion and Analysis of Financial Condition and Results of Operations and Capitalization, as well as our consolidated financial statements and the related notes included elsewhere in this prospectus. The following table summarizes certain selected consolidated financial data for the periods presented. Our historical results may not be indicative of our future performance. The selected historical consolidated financial and operating information presented below contains financial measures that are not presented in accordance with accounting principles generally accepted in the United States and have not been audited. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.
(unaudited)
As of and for the quarter ended March 31, |
As of and for the year ended December 31, | |||||||||||||||||||
Dollars in thousands except share and per share data | 2017 | 2016 | 2016 | 2015 | 2014 | |||||||||||||||
Income Statement Data |
||||||||||||||||||||
Interest income |
$ | 32,488 | $ | 22,877 | $ | 98,365 | $ | 83,263 | $ | 89,636 | ||||||||||
Interest expense |
2,950 | 1,757 | 7,747 | 6,631 | 5,546 | |||||||||||||||
Net interest income |
29,538 | 21,120 | 90,618 | 76,632 | 84,090 | |||||||||||||||
Provision for loan and lease losses |
1,891 | 2,513 | 10,352 | 6,966 | 5,711 | |||||||||||||||
Net interest income, after provision for loan and lease losses |
27,647 | 18,607 | 80,266 | 69,666 | 78,379 | |||||||||||||||
Non-interest income |
12,308 | 4,288 | 25,904 | 20,839 | 18,253 | |||||||||||||||
Non-interest expense |
28,851 | 24,487 | 100,686 | 105,172 | 97,919 | |||||||||||||||
Income (loss) before income taxes |
11,104 | (1,592 | ) | 5,484 | (14,667 | ) | (1,287 | ) | ||||||||||||
Provision (benefit) for income taxes |
4,544 | (240 | ) | (61,245 | ) | 307 | | |||||||||||||
Net income (loss) |
6,560 | (1,352 | ) | 66,729 | (14,974 | ) | (1,287 | ) | ||||||||||||
Basic earnings (loss) per share |
$ | 0.26 | ($ | 0.08 | ) | $ | 3.31 | ($ | 0.86 | ) | ($ | 0.07 | ) | |||||||
Diluted earnings (loss) per share |
$ | 0.25 | ($ | 0.08 | ) | $ | 3.27 | ($ | 0.86 | ) | ($ | 0.07 | ) | |||||||
Weighted-average outstanding shares (basic) |
24,616,706 | 17,522,226 | 20,141,630 | 17,332,775 | 17,332,775 | |||||||||||||||
Weighted-average outstanding shares (diluted) (1) |
25,078,427 | 17,522,226 | 20,430,783 | 17,332,775 | 17,332,775 | |||||||||||||||
Balance Sheet Data |
||||||||||||||||||||
Loans and leases held for investment, net before allowance for loan and lease losses (2) |
$ | 2,143,534 | $ | 1,503,495 | $ | 2,148,011 | $ | 1,345,437 | $ | 1,284,969 | ||||||||||
Loans and leases held for sale |
23,492 | 214 | 23,976 | 268 | 351 | |||||||||||||||
Allowance for loan and lease losses (ALLL) |
11,817 | 7,903 | 10,923 | 7,632 | 4,794 | |||||||||||||||
Acquisition accounting adjustments (3) |
41,024 | 19,566 | 43,242 | 19,171 | 69,834 | |||||||||||||||
Interest-bearing deposits in other banks |
67,726 | 28,694 | 28,798 | 23,572 | 133,281 | |||||||||||||||
Investment securities |
723,404 | 797,845 | 747,406 | 879,192 | 689,373 | |||||||||||||||
Assets held for sale |
13,666 | 2,259 | 14,748 | 2,259 | | |||||||||||||||
Other real estate owned, net |
13,173 | 24,466 | 16,570 | 26,715 | 56,181 | |||||||||||||||
Goodwill and other intangibles |
71,033 | 47,273 | 71,801 | 48,014 | 50,891 | |||||||||||||||
Servicing assets |
21,223 | | 21,091 | | | |||||||||||||||
Total assets |
3,284,713 | 2,561,081 | 3,295,830 | 2,479,870 | 2,376,449 | |||||||||||||||
Total deposits |
2,575,839 | 2,248,563 | 2,490,394 | 2,180,624 | 2,100,057 | |||||||||||||||
Total liabilities |
2,895,030 | 2,330,071 | 2,913,172 | 2,291,596 | 2,167,378 | |||||||||||||||
Total stockholders equity |
389,683 | 231,010 | 382,658 | 188,274 | 209,071 | |||||||||||||||
Book value per common share |
14.80 | 11.08 | 14.51 | 10.00 | 11.20 | |||||||||||||||
Tangible book value per common share (4) |
11.91 | 8.66 | 11.59 | 7.23 | 8.26 |
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(1) | Due to losses in the first quarter 2016 and for the years ended December 31, 2015 and 2014, zero incremental shares are included because the effect would be anti-dilutive. |
(2) | Represents loans and leases, net of acquisition accounting adjustments, unearned deferred fees and costs and initial direct costs. |
(3) | Represents the remaining unamortized premium or unaccreted discount as a result of applying the fair value adjustment at the time of the business combination on acquired loans. |
(4) | Represents a non-GAAP financial measure. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. |
(5) | Represents non-interest expense less amortization of intangible assets divided by net interest income and non-interest income. |
(6) | Ratio not effective until January 1, 2015 but presented for comparison purposes only. |
(7) | Ratio annualized for the three month period ended March 31, 2017 and 2016. |
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GAAP RECONCILIATION AND MANAGEMENT EXPLANATION OF NON-GAAP FINANCIAL
MEASURES
Some of the financial measures included in our Summary Historical Consolidated Financial and Operating Information and Selected Historical Consolidated Financial and Operating Information are not measures of financial performance recognized by GAAP. Our management uses the non-GAAP financial measures set forth below in its analysis of our performance.
| Pre-tax pre-provision return on average assets is pre-tax income plus the provision for loan and lease losses, divided by average assets. This metric is important due to the tax benefit resulting from the reversal of the deferred tax asset valuation allowance and demonstrates the profitability excluding the tax benefit and excludes the provision for loan loss. |
| Tangible common equity is defined as total stockholders equity reduced by preferred stock and goodwill and other intangible assets. Management does not consider loan servicing rights 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 loan servicing rights as an intangible asset for purposes of this calculation. |
| Tangible book value per share is tangible common equity divided by total shares of common stock outstanding. It is the ratio of tangible common stockholders equity to basic and diluted outstanding shares. 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. This measure is important to investors interested in relative changes in the ratio of total stockholders equity to total assets, each exclusive of changes in intangible assets. |
We believe that these non-GAAP financial measures provide useful information to 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 other companies use.
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The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures:
Dollars in thousands except per share data |
(unaudited)
As of and for the period ended
|
As of and for the year ended December 31, |
||||||||||||||||||
2017 |
2016 |
2016 |
2015 |
2014 |
||||||||||||||||
Pre-tax pre-provision net income: |
||||||||||||||||||||
Pre-tax income |
$ | 11,104 | ($ | 1,592 | ) | $ | 5,484 | ($ | 14,667 | ) | ($ | 1,287 | ) | |||||||
Add: provision for loan and lease losses |
1,891 | 2,513 | 10,352 | 6,966 | 5,711 | |||||||||||||||
Pre-tax pre-provision net income |
$ | 12,995 | $ | 921 | $ | 15,836 | ($ | 7,701 | ) | $ | 4,424 | |||||||||
Pre-tax pre-provision return on average assets: |
||||||||||||||||||||
Total average assets |
$ | 3,315,095 | $ | 2,577,438 | $ | 2,754,778 | $ | 2,490,241 | $ | 2,429,293 | ||||||||||
Pre-tax pre-provision net income |
12,995 | 921 | 15,836 | (7,701 | ) | 4,424 | ||||||||||||||
Pre-tax pre-provision return on average assets |
1.59 | % | 0.14 | % | 0.57 | % | (0.31 | %) | 0.18 | % | ||||||||||
Tangible common equity: |
||||||||||||||||||||
Total stockholders equity |
$ | 389,683 | $ | 231,010 | $ | 382,658 | $ | 188,274 | $ | 209,071 | ||||||||||
Less: Preferred stock |
25,441 | 15,003 | 25,441 | 15,003 | 15,003 | |||||||||||||||
Less: Goodwill |
51,975 | 25,688 | 51,975 | 25,688 | 25,613 | |||||||||||||||
Less: Core deposit intangibles and other intangibles |
19,058 | 21,585 | 19,826 | 22,326 | 25,278 | |||||||||||||||
Tangible common equity |
$ | 293,209 | $ | 168,734 | $ | 285,416 | $ | 125,257 | $ | 143,177 | ||||||||||
Tangible assets: |
||||||||||||||||||||
Total assets |
$ | 3,284,713 | $ | 2,561,081 | $ | 3,295,830 | $ | 2,479,870 | $ | 2,376,449 | ||||||||||
Less: Goodwill |
51,975 | 25,688 | 51,975 | 25,688 | 25,613 | |||||||||||||||
Less: Core deposit intangibles and other intangibles |
19,058 | 21,585 | 19,826 | 22,326 | 25,278 | |||||||||||||||
Tangible assets |
$ | 3,213,680 | $ | 2,513,808 | $ | 3,224,029 | $ | 2,431,856 | $ | 2,325,558 | ||||||||||
Tangible book value per share: |
||||||||||||||||||||
Tangible common equity |
$ | 293,209 | $ | 168,734 | $ | 285,416 | $ | 125,257 | $ | 143,177 | ||||||||||
Shares of common stock outstanding |
24,616,706 | 19,487,778 | 24,616,706 | 17,332,775 | 17,332,775 | |||||||||||||||
Tangible book value per share |
$ | 11.91 | $ | 8.66 | $ | 11.59 | $ | 7.23 | $ | 8.26 | ||||||||||
Tangible common equity to tangible assets: |
||||||||||||||||||||
Tangible common equity |
$ | 293,209 | $ | 168,734 | $ | 285,416 | $ | 125,257 | $ | 143,177 | ||||||||||
Tangible assets |
3,213,680 | 2,513,808 | 3,224,029 | 2,431,856 | 2,325,558 | |||||||||||||||
Tangible common equity to tangible assets |
9.12 | % | 6.71 | % | 8.85 | % | 5.15 | % | 6.16 | % |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected Historical Consolidated Financial Information, and our financial statements and related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from managements expectations. Factors that could cause such differences are discussed in the sections entitled Cautionary Note Regarding Forward-Looking Statements and Risk Factors. We assume no obligation to update any of these forward-looking statements.
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 Banks 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 core commercial banking products, 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 Texas, North Carolina, Florida, New York, Michigan and Arizona. Following our acquisition of Ridgestone in October 2016, we also participate in U.S. government guaranteed lending programs and originate U.S. government guaranteed loans. Ridgestone was the sixth most active originator of SBA loans in the country and the most active SBA lender in Illinois and Wisconsin, as reported by the SBA for the year ended September 30, 2016.
We offer traditional retail deposit products through our branch network, along with online, mobile and direct banking channels. The wide variety of deposit products we offer include non-interest bearing accounts, interest-bearing demand products, savings accounts, money market accounts and certificates of deposit with original maturities ranging from seven days to five years. We also offer consumer lending products, including mortgage loans, home equity loans and other consumer loans to individuals through our branch network.
Recapitalization
In 2013, our predecessor, Metropolitan, experienced significant credit and financial losses resulting primarily from the collapse of real estate prices during the Great Recession in addition to a number of regulatory and other operational challenges. Despite deterioration in asset quality and financial performance, Metropolitan maintained a high quality deposit base, an attractive branch network and strong customer loyalty, which made it an ideal candidate for a turnaround.
An investment group raised $206.7 million in equity capital to recapitalize and gain control of Metropolitan through a series of transactions by which Metropolitan merged its multiple subsidiary banks into one and an investor group acquired voting common stock and Series A Preferred Stock of Metropolitan. The investors formed BXM Holdings, Inc. for the purpose of identifying an investment opportunity in a troubled U.S. banking institution. MBG Investors I, L.P. was the lead investor in the Recapitalization and Mr. del Valle Perochena, a member of our board of directors, is the general partner of MBG Investors I, L.P. and possesses the voting and investment power with respect to the securities beneficially owned by MBG Investors I, L.P. BXM Holdings, Inc. hired Roberto Herencia, the Chairman of our board of directors, and Alberto Paracchini, our President, Chief Executive Officer and Director, to identify an investment opportunity and later to effectuate the Recapitalization. Lindsay Corby, our Executive Vice President and Chief Financial Officer, served as a Principal of BXM Holdings, Inc. at the time of the Recapitalization. BXM Holdings, Inc. no longer conducts any
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operations. At the time of the Recapitalization, Metropolitan owned five banking subsidiaries that operated under 12 different brand names in the Chicago metropolitan area.
We accounted for the Recapitalization as a business combination in accordance with Accounting Standards Codification Topic 805, Business Combinations (ASC 805). The transaction qualified as a recapitalization under Section 368(a)(1)(E) of the Code and resulted in carryover treatment of the existing tax bases and tax loss carryforwards treatment of the existing tax bases and tax loss carryforwards, although the utilization of tax attributes (including net operating loss carryforwards and tax credits) became subject to limitations under Sections 382 and 383 of the Code. Accordingly, the assets acquired and liabilities assumed were recorded at their fair value on the date of acquisition. Fair value amounts were determined in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements (ASC 820). In many cases, the determination of the fair value required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature.
As of the Recapitalization, we had $2.5 billion in assets that were measured at fair value, including $1.3 billion in loans, $212.2 million in investment securities, $84.0 million of OREO and $29.7 million of core deposit intangible assets. We also acquired $2.3 billion of liabilities at fair value, including $2.2 billion of deposits and $36.9 million of borrowings. The Recapitalization resulted in goodwill of $21.2 million as the estimated fair value of liabilities assumed and consideration paid exceeded the estimated fair value of assets acquired. The goodwill is included within Goodwill in our consolidated balance sheets.
As of the Recapitalization, approximately 76.5%, or $1.0 billion, of the loans acquired in the Recapitalization were accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality . We also acquired loans with a fair value of $310.3 million that are accounted for under ASC Topic 310-20, ReceivablesNonrefundable Fees and Other Costs , as these specific loans did not exhibit deteriorated credit quality since origination or were loans to borrowers that had revolving privileges at the acquisition date.
Since the Recapitalization, we have added $1.3 billion in net originated loans and leases while significantly improving our asset quality to create a more diversified and balanced loan and lease portfolio. We aggressively reduced the level of troubled loans and leases and other real estate owned in our portfolio as a percentage of loans and leases and real estate owned. This ratio declined to 1.0% as of March 31, 2017 and 1.1% as of December 31, 2016 from 28.2% as of March 31, 2013. In addition, we sought to optimize our deposit base by expanding the percentage of non-interest bearing deposits to total deposits, enhance online and mobile capabilities and broaden our cash management products to better meet our customers needs. Since the Recapitalization, we consolidated from 88 to 57 branches, reducing our costs with minimal deposit attrition, and improving our efficiency, including through the consolidation of multiple banking platforms into one. In addition to improving efficiency, consolidating our banking platforms allowed us to better manage our customer relationships and their banking activities while strengthening our governance and controls for compliance, legal and operational risk.
Small ticket leasing acquisition
On October 10, 2014, Byline Bank acquired certain assets and liabilities related to the small ticket leasing operation of Baytree National Bank and Trust Company and Baytree Leasing Company LLC (collectively, Baytree). The purchase was accounted for under the acquisition method of accounting in accordance with ASC 805 and resulted in lease financing receivables of $42.0 million and goodwill of $4.5 million. There are no contingent assets or liabilities remaining from the acquisition.
In a separate but related transaction, on September 3, 2014, Byline Bank purchased approximately $55.7 million of direct finance leases that Baytree had sold to a third party. We have grown the portfolio to $163.0 million as of March 31, 2017.
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Ridgestone acquisition
On October 14, 2016, we completed the Ridgestone acquisition under the terms of a definitive merger agreement (the Ridgestone Agreement). As of the acquisition date, Ridgestone had $447.4 million in assets, including $347.3 million of loans, $14.7 million of loans held for sale, $27.2 million of securities, $21.5 million of servicing assets and total deposits of $358.7 million. Ridgestones loan portfolio was primarily comprised of the retained unguaranteed portion of U.S. government guaranteed loans as a participant in the SBA and USDA lending programs. Ridgestone achieved an annualized return on equity (ROE) of 26.17%, return on assets (ROA) of 3.51% and net interest margin of 5.87% for the nine and a half months ended October 14, 2016. After tax earnings from the period of January 1, 2016 to October 14, 2016 were $12.2 million. For the year ended December 31, 2015, Ridgestone attained a ROE of 23.13%, ROA of 2.77% and net interest margin of 5.44%. Earnings after tax for the year ended December 31, 2015 were $11.4 million. Immediately prior to the closing of the acquisition, as of October 14, 2016, Ridgestones nonperforming loans totaled 1.74% of total loans and net charge offs to average loans on an annualized basis was 1.18%.
As a result of the acquisition, each share of Ridgestone common stock was converted into the right to receive, at the election of the stockholder and subject to proration under the terms of the Ridgestone Agreement, either cash or Company common stock, or a combination of both. Total consideration included aggregate cash consideration in the amount of $36.8 million and the issuance of 4,199,791 shares of the Companys common stock valued at $16.25 per common share. There were no contingent assets or liabilities arising from the acquisition.
As a result of the Ridgestone acquisition, the Company:
| Grew consolidated total assets from $2.8 billion to $3.3 billion as of October 14, 2016, after giving effect to acquisition accounting adjustments; |
| Increased total loans from $1.7 billion to $2.1 billion as of October 14, 2016; |
| Increased total deposits from $2.2 billion to $2.6 billion as of October 14, 2016; |
| Expanded its employee base from 684 full time equivalent employees to 834 full time equivalent employees as of October 14, 2016; and |
| Expanded its footprint through the addition of two full-service banking offices in Brookfield, Wisconsin, and Schaumburg, Illinois. In addition, Ridgestone had loan production offices located in Wisconsin (Green Bay and Wausau), Indiana (Indianapolis) and California (Newport Beach) that the Company continues to operate. |
We determined that the Ridgestone acquisition constitutes a business combination as defined by ASC 805. Accordingly, the assets acquired and liabilities assumed were recorded at their fair value amount on the date of acquisition. Fair value were determined in accordance with the guidance provided in ASC 820. The fair values may be adjusted through the end of the measurement period, which closes at the earlier of the Company receiving all necessary information to complete the acquisition or one year from the date of acquisition.
Strategic branch consolidation
During 2015 and 2016, we performed a strategic review of our existing core banking footprint. With technology improvements and changes to customers banking preferences, we examined 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 the Recapitalization, our branch network has been reduced from 88 to 57. We will continue to strategically evaluate our locations based on our growth and profitability standards.
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Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgements inherent in those policies, are critical in understanding our financial statements.
These policies 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 (OTTI) losses, (vi) the valuation of real estate held for sale and (vii) the valuation of or recognition of deferred tax assets and liabilities. Management has presented the application of these policies to the audit committee of our board of directors.
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 prospectus, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.
The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015.
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 the loans are new loans and leases, 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.
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Originated loans and leases
We account for originated loans and leases and purchased loans and leases not acquired through business combinations as originated loans. The new loans that management has the intent and ability to hold for the foreseeable future are reported at their outstanding principal balances net of any allowance for loan and lease losses, unamortized deferred fees and costs and unamortized premiums or discounts. The net amount of nonrefundable loan origination fees and certain direct costs associated with the lending process are deferred and amortized to interest income over the contractual lives of the new loans using methods which approximate the level yield method. Discounts and premiums are amortized or accreted to interest income over the estimated term of the new loans using methods that approximate the effective yield method. Interest income on new loans is accrued based on the unpaid principal balance outstanding.
Acquired loans and leases
Acquired loans and leases are recorded at fair value as of the acquisition date. Credit discounts are included in the determination of fair value; therefore, an allowance for loan and lease losses is not recorded at the acquisition date. Acquired loans are evaluated upon acquisition and classified as either acquired impaired or acquired non-impaired. Acquired impaired loans reflect evidence of credit deterioration since origination for which it is probable that all contractually required principal and interest will not be collected by the Company. Subsequent to acquisition, the Company periodically updates for changes in cash flow expectations, and is reflected in interest income over the life of the loan as accretable yield. Any subsequent decreases in expected cash flow attributable to credit deterioration are recognized by recording a provision for loan losses.
For acquired non-impaired loans and leases, the excess or deficit of the loan 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. Subsequent to acquisition, these loans are evaluated for credit deterioration and a provision for loan losses would be recorded when probable loss is incurred. These loans and leases are evaluated for impairment consistent with originated loans.
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 managements evaluation of the adequacy of general and specific loss reserves.
The ALLL is maintained at a level that management believes is appropriate to provide for known and inherent incurred loan and lease losses as of the date of the Consolidated Statements of Financial Condition and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are determined on an individual loan basis. We increase our ALLL by charging provisions for probable losses against our income and decreased by charge-offs, net of recoveries.
The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses available information to recognize losses on loans and leases, changes in economic or other conditions may necessitate revision of the estimate in future periods.
The ALLL is maintained at a level sufficient to provide for probable losses based upon an ongoing review of the originated and acquired non-impaired loan and lease portfolios by portfolio category, which include consideration of actual loss experience, peer loss experience, changes in the size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrowers ability to repay, and evaluation of prevailing economic conditions.
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For acquired impaired loans, a specific valuation allowance is established when it is probable that the Company 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.
Non-impaired acquired loans and originated loans are considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreements. All non-impaired acquired loans and originated loans of $250,000 or greater with an internal risk rating of substandard or below and on nonaccrual, as well as loans classified as TDR are reviewed individually for impairment on a quarterly basis.
Goodwill and intangible assets
Goodwill
Goodwill represents the excess of the purchase consideration over the fair value of net assets acquired in connection with the 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, IntangiblesGoodwill and Other (ASC 350).
Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. Our goodwill is allocated to Byline Bank, which is our only applicable reporting unit for the purposes of testing goodwill for impairment. We have selected November 30 as the date to perform the annual goodwill impairment test. Additionally, we perform a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists.
Servicing assets
Servicing assets are recognized separately when they are acquired through sales of loans or when the rights to service loans are purchased. When loans are sold, servicing assets are recorded at fair value in accordance with ASC Topic 860, Transfers and Servicing (ASC 860). Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in the prepayment speed and discount rate assumptions have the most significant impact on the fair value of servicing rights. See Note 7 and Note 18 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 for additional information.
Core deposit intangible
Other intangible assets primarily consist of core deposit intangible assets. In valuing core deposit intangibles, the Company considered 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, the Company 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 a ten year period.
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Fair value of financial instruments
ASC Topic 820, Fair Value Measurement (ASC 820) 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, the Company would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement.
See Note 18 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 for a complete discussion on the Companys use of fair value of financial assets and liabilities and their related measurement practices.
Valuation of real estate held for sale
Other real estate owned (OREO)
OREO includes real estate assets that have been acquired through, or in lieu of, loan foreclosure or repossession and are to be sold. OREO assets are initially recorded at fair value, less estimated costs to sell, of the collateral of the loan, on the date of foreclosure or repossession, establishing a new cost basis. Adjustments that reduce loan balances to fair value at the time of foreclosure or repossession are recognized as charge-offs in the allowance for loan and lease losses. Positive adjustments, if any, at the time of foreclosure or repossession are recognized in non-interest expense. After foreclosure or repossession, management periodically obtains new valuations and real estate or other assets may be adjusted to a lower carrying amount, determined by the fair value of the asset, less estimated costs to sell. Any subsequent write-downs are recorded as a decrease in the asset and charged against other real estate owned valuation adjustments. Operating expenses of such properties, net of related income, are included in non-interest expense, and gains and losses on their disposition are included in non-interest expense. Gains on internally financed other real estate owned sales are accounted for in accordance with the methods stated in ASC Topic 360-20 , Real Estate Sales (ASC 360-20). Any losses on the sales of other real estate owned properties are recognized immediately.
Assets held for sale
Assets held for sale consist of former branch locations and real estate purchased for expansion. Assets are considered held for sale when management has approved a plan to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based at the lower of its carrying value or its fair value, less estimated costs to sell. Adjustments to reduce the asset balances to fair value are recorded at the time of transfer and are recognized through a charge against income.
Income taxes
The Company uses 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 the Companys assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The Companys annual tax rate is based on its
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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. The Company reviews its deferred tax positions quarterly for changes which may impact realizability. The Company evaluates 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. The Company uses short and long-range business forecasts to provide additional information for its evaluation of the recoverability of deferred tax assets. It is the Companys 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 Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 for further information on income taxes.
Recently Issued Accounting Pronouncements
For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of December 31, 2016, see Note 2 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015.
Primary Factors Used to Evaluate Our Business
As a financial institution, we manage and evaluate various aspects of both our results of operations and our financial condition. We evaluate the levels and trends of the line items included in our consolidated balance sheet and income statement as well as various financial ratios that are commonly used in our industry. We analyze these ratios and financial trends against our own historical performance, our budgeted performance and the final condition and performance of comparable financial institutions in our region. Comparison of our financial performance against other financial institutions is impacted by the accounting for acquired non-impaired and acquired impaired loans.
These factors and metrics described in this prospectus may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of other financial services companies, given our limited operating history and strategic acquisitions since the Recapitalization.
Results of Operations
Overview
Our results of operations depend substantially on net interest income, which is the difference between interest income on interest-earning assets, consisting primarily of interest income on loans and lease receivables, including accretion income on loans and leases, investment securities and other short-term investments and interest expense on interest-bearing liabilities, consisting primarily of deposits and borrowings. Our results of operations are also dependent upon our generation of non-interest income, consisting primarily of income from fees and service charges on deposits, servicing fees, ATM and interchange fees, net gains or losses on sales of investment securities and loans and fees on mortgage loan sales. Other factors contributing to our results of operations include our provisions for loan and lease losses, income taxes, and non-interest expenses, such as salaries and employee benefits, occupancy and equipment expenses and other miscellaneous operating costs.
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We reported consolidated net income for the three months ended March 31, 2017 of $6.6 million compared to a net loss of $1.4 million for the three months ended March 31, 2016, an increase of $7.9 million. Consolidated net income for the three months ended March 31, 2017 includes the Small Business Capital operation acquired from Ridgestone for the full quarter. The increase in earnings was due to a $8.4 million increase in net interest income and a $8.0 million increase in non-interest income offset by a $4.4 million increase in non-interest expense and a $4.8 million increase in provision for income taxes. The increase in non-interest expense was primarily due to increases in salaries and employee benefits of $4.7 million as a result of the Ridgestone acquisition partially offset by lower net loss recognized on other real estate owned and related expenses. Provision for income taxes recognized was $4.5 million during the three months ended March 31, 2017 compared to a benefit for income taxes of $240,000 during same period in 2016.
The Companys results of operations for the three months ended March 31, 2017 produced an annualized return on average assets of 0.80% and an annualized return on average stockholders equity of 6.83%, compared to returns for the three months ended March 31, 2016 of -0.21% and -2.81%, respectively.
We reported consolidated net income for the year ended December 31, 2016 of $66.7 million compared to a loss of $15.0 million for the year ended December 31, 2015, an increase in of $81.7 million. The increase in net income was primarily attributable to a $61.9 million income tax benefit that was recognized for the year ended December 31, 2016 due to the reversal of the valuation allowance on the Companys deferred tax asset. The other factors contributing to the increase in net income were strategies implemented by management during 2015 and 2016 to develop organic loan growth with a high quality deposit base, implementation of a strategic branch consolidation, decreases in Special Assets Group workout expenses, and the Ridgestone acquisition.
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, including loans and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, including interest-bearing deposits, FHLB advances, junior subordinated debentures and other borrowings. To evaluate net interest income, we measure and monitor (i) yields on our loans and other interest-earning assets, (ii) the costs of our deposits and other funding sources, (iii) our net interest spread and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is calculated as the annualized net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders equity, also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources.
We also recognize income from the accretable discounts associated with the purchase of interest-earning assets. Because of our Recapitalization and the acquisition of Ridgestone, we derive a portion of our interest income from the accretable discounts on acquired loans. This accretion will continue to have an impact on our net interest income as long as loans acquired with evidence of credit deterioration at acquisition represent a meaningful portion of our interest-earning assets. As of March 31, 2017, acquired loans with evidence of credit deterioration accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality , represented 18.2% of our total loan portfolio.
Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. In addition, our interest income includes the accretion of the discounts on our acquired loans, which will also affect our net interest spread, net interest margin and net interest income.
The following tables present, for the periods indicated, information about (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields;
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(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).
(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) | Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities. |
(3) | Represents net interest income (annualized) divided by total average earning assets. |
(4) | 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. |
(5) | Average balances are average daily balances. |
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(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) | Represents the average rate earned on interest-earning assets minus the average rate paid on interest-bearing liabilities. |
(3) | Represents net interest income (annualized) divided by total average earning assets. |
(4) | 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. |
(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 weighted average interest rates. The following tables set 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 tables below summarize the increases
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and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates (dollars in thousands):
(unaudited)
Three Months ended March 31, 2017 compared
|
||||||||||||
Increase (Decrease) Due to |
||||||||||||
Volume |
Rate |
Total |
||||||||||
Interest income |
||||||||||||
Cash and cash equivalents |
$ | 14 | $ | 18 | $ | 32 | ||||||
Loans and leases (1) |
9,451 | (54 | ) | 9,397 | ||||||||
Securities available for sale |
(552 | ) | 778 | 226 | ||||||||
Securities held to maturity |
(56 | ) | 58 | 2 | ||||||||
Tax-exempt securities |
(22 | ) | (24 | ) | (46 | ) | ||||||
|
|
|
|
|
|
|||||||
Total interest income |
$ | 8,835 | $ | 776 | $ | 9,611 | ||||||
|
|
|
|
|
|
|||||||
Interest expense |
||||||||||||
Deposits |
||||||||||||
Interest checking |
$ | (1 | ) | $ | (2 | ) | $ | (3 | ) | |||
Money market accounts |
(13 | ) | (3 | ) | (16 | ) | ||||||
Savings |
1 | 3 | 4 | |||||||||
Time deposits |
346 | (1 | ) | 345 | ||||||||
Federal Home Loan Bank advances |
449 | 133 | 582 | |||||||||
Other borrowed funds |
380 | (99 | ) | 281 | ||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
$ | 1,162 | $ | 31 | $ | 1,193 | ||||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | 7,673 | $ | 745 | $ | 8,418 | ||||||
|
|
|
|
|
|
Year ended December 31, 2016 compared
|
||||||||||||
Increase (Decrease) Due to |
||||||||||||
Volume |
Rate |
Total |
||||||||||
Interest income |
||||||||||||
Cash and cash equivalents |
$ | (118 | ) | $ | 81 | $ | (37 | ) | ||||
Loans and leases (1) |
20,743 | (7,214 | ) | 13,529 | ||||||||
Securities available for sale |
(2,275 | ) | 2,478 | 203 | ||||||||
Securities held to maturity |
919 | 486 | 1,405 | |||||||||
Tax-exempt securities |
8 | (6 | ) | 2 | ||||||||
|
|
|
|
|
|
|||||||
Total interest income |
$ | 19,277 | $ | (4,175 | ) | $ | 15,102 | |||||
|
|
|
|
|
|
|||||||
Interest expense |
||||||||||||
Deposits |
||||||||||||
Interest checking |
$ | | $ | 5 | $ | 5 | ||||||
Money market accounts |
41 | 44 | 85 | |||||||||
Savings |
1 | 3 | 4 | |||||||||
Time deposits |
102 | 72 | 174 | |||||||||
Federal Home Loan Bank advances |
636 | 47 | 683 | |||||||||
Other borrowed funds |
520 | (355 | ) | 165 | ||||||||
|
|
|
|
|
|
|||||||
Total interest expense |
$ | 1,300 | $ | (184 | ) | $ | 1,116 | |||||
|
|
|
|
|
|
|||||||
Net interest income |
$ | 17,977 | $ | (3,991 | ) | $ | 13,986 | |||||
|
|
|
|
|
|
(1) | Includes loans and leases on non-accrual status. |
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Net interest income for the three months ended March 31, 2017 was $29.5 million compared to $21.1 million during the same period in 2016, an increase of $8.4 million or 39.9%. The increase in interest income of $9.6 million was primarily a result of organic growth of the loan portfolio and due to the Ridgestone acquisition. The three months ended March 31, 2017 represented the first full quarter with the Small Business Capital operations acquired from Ridgestone was integrated in the financial statements. Interest and fees on loans and leases for the three months ended March 31, 2017 was $28.4 million compared to $19.0 million for the three months ended March 31, 2016, an increase of $9.4 million or 49.5%. Interest income on securities for the three months ended March 31, 2017 was $4.0 million compared to $3.9 million for the three months ended March 31, 2016, an increase of $182,000 or 4.7%.
Interest expense increased by $1.2 million for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 primarily due to additional FHLB borrowings and acquired time deposits as a result of the Ridgestone transaction.
Net interest income for the year ended December 31, 2016 was $90.6 million compared to $76.6 million for the year ended December 31, 2015, an increase of $14.0 million or 18.3%. The total increase of $14.0 million in net interest income resulted mainly from volume change as indicated in the table above net of rate decrease. Interest and fees on loans and leases for 2016 was $83.2 million compared to $69.6 million in 2015, an increase of $13.5 million or 19.4%. Interest income on securities for 2016 was $14.8 million compared to $13.5 million in 2015, an increase of $1.4 million or 10.2%. The increase was due to the organic growth of the loan and investment securities balances as well as the acquisition of Ridgestone. Total loans increased by $802.6 million, primarily as a result of the Ridgestone acquisition which represented $351.8 million. Interest and fees on acquired loans related to the Ridgestone acquisition is estimated at $6.8 million for 2016. The decrease in the average rate earned on interest-bearing assets was attributable to a decrease of $9.8 million in acquired loan income due to resolutions within the acquired impaired loan portfolio from the Recapitalization. Acquired loan income for the years ended December 31, 2016 and 2015 was $33.2 million and $43.0 million, respectively.
The increase in interest income was partially offset by the increase in interest expense. Interest expense increased by 16.8% from $6.6 million for the year ended December 31, 2015 to $7.7 million for the year ended December 31, 2016. The increase in interest expense was primarily due to the organic growth of the deposit base, the acquisition of Ridgestone, and increased borrowings. Interest expense on deposits for the year ended December 31, 2016 was $4.6 million compared to $4.3 million for the year ended December 31, 2015, an
increase of $267,000 or 6.2%, of which an increase of $174,000 or 4.0% was related to interest expense on time deposits.
The Company assumed deposits of $361.4 million from the acquisition of Ridgestone. Interest expense on borrowings for 2016 was $3.2 million compared to $2.3 million for the year ended December 31, 2015, an increase of $848,000 or 36.6%. This increase was primarily driven by the increase in outstanding FHLB advances in the year ended December 31, 2016. Growth in the loan portfolio resulted in an increase in average FHLB advances. Interest expense on FHLB advances for the year ended December 31, 2016 was $706,000 compared to $23,000 for the year ended December 31, 2015, an increase of $683,000. Interest expense on Junior Subordinated Debentures issued to unconsolidated trusts was $2.1 million compared to $2.3 million for the year ended December 31, 2015, a decrease of $163,000 or 7.1%. Interest expense on the line of credit was $328,000 for the year ended December 31, 2016. There was no interest expense on the line of credit for the year ended December 31, 2015. The increase of $1.1 million of interest expense resulted from rate changes as indicated in the table above. The increase in the average rate paid on deposits was attributable to higher prevailing rates offered in the market.
The net interest margin for the three months ended March 31, 2017 was 4.04%, an increase of 44 basis points compared to 3.60% for the three months ended March 31, 2016. The primary driver of the increase was due to the increased volume of loans during the quarter.
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The net interest margin for the year ended December 31, 2016 was 3.59%, an increase of 15 basis points compared to 3.44% for the year ended December 31, 2015. The average yield on interest-earning assets increased by 16 basis points for the year ended December 31, 2016 as compared to the year ended December 31, 2015, while the average rate paid on interest-bearing liabilities increased by 2 basis points, for an increase in the interest rate spread of 13 basis points. The increase in the average yield on interest earning assets was due primarily to an increase in loan interest income resulting from increased loan originations along with loans associated with the Ridgestone acquisition. The higher yielding loans obtained from the Ridgestone acquisition resulted in an increase in the average rate for the combined loan portfolio. The average rate on the acquired impaired loan portfolio from the Recapitalization was 6.22% for the year ended December 31, 2016, up from 6.08% for the year ended December 31, 2015.
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 losses that, in managements evaluation, is appropriate to provide coverage for probable losses incurred in the loan portfolio. The allowance for loan losses is increased by the provision for loan losses and is decreased by charge-offs, net of recoveries on prior loan charge-offs.
Provisions for loan losses totaled $1.9 million and $2.5 million for the three months ended March 31, 2017 and March 31, 2016, respectively. We continue to see a reduction in provision expense related to the loan portfolio acquired in the Recapitalization due to better than expected performance and declining workout assets. The ALLL as a percentage of loans increased from 0.51% to 0.55% from December 31, 2016 to March 31, 2017. The increase was primarily due to the change in loan mix, with the originated portfolio increasing by $33.9 million to $1.3 billion at March 31, 2017 and the acquired portfolio decreasing by $38.4 million for the same period.
The provision for loan and lease losses for the year ended December 31, 2016 was $10.4 million compared to $7.0 million for the year ended December 31, 2015, an increase of $3.4 million or 48.6%, primarily due to an increase in loans through organic growth. However, the ALLL as a percentage of loans decreased from 0.57% to 0.51% from December 31, 2015 to December 31, 2016. The primary reason for the percentage decrease is that the loans acquired from Ridgestone were acquired loans at fair value and the allowance for loan losses was not carried over in the acquisition.
Non-interest income
The Company reported non-interest income of $12.3 million and $4.3 million for the three months ended March 31, 2017 and March 31, 2016, respectively. The increase of $8.0 million was primarily due to gains on sales of government guaranteed loans through the Small Business Capital operations of $8.1 million. There were no gains on sales of government guaranteed loans during the three months ended March 31, 2016. Non-interest income for the year ended December 31, 2016 was $25.9 million compared to $20.8 million for the year ended December 31, 2015, an increase of $5.1 million or 24.3%. The increase in non-interest income for 2016 compared to 2015 was primarily driven by increase in gains on sales of loans and servicing fees.
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The following table presents the major components of our non-interest income for the periods indicated (dollars in thousands):
(unaudited) |
|
|||||||||||||||
Three Months
|
Year
Ended
|
|||||||||||||||
2017 |
2016 |
2016 |
2015 |
|||||||||||||
Fees and service charges on deposits |
$ | 1,219 | $ | 1,389 | $ | 5,665 | $ | 5,803 | ||||||||
Servicing fees |
919 | | 1,906 | | ||||||||||||
ATM and interchange fees |
1,348 | 1,408 | 5,856 | 6,101 | ||||||||||||
Net gains on sales of securities available-for-sale |
8 | 923 | 3,227 | 3,064 | ||||||||||||
Net gains on sales of loans |
8,082 | | 4,323 | 3,151 | ||||||||||||
Fees on mortgage loan sales, net |
2 | 20 | 144 | 107 | ||||||||||||
Other non-interest income |
730 | 548 | 4,783 | 2,613 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest income |
$ | 12,308 | $ | 4,288 | $ | 25,904 | $ | 20,839 | ||||||||
|
|
|
|
|
|
|
|
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Fees and service charges on deposits represent fees charged to customers for banking services, such as fees charged on customer deposit accounts, and includes, but it is not limited to, maintenance fees, insufficient fund fees, overdraft protection fees, wire transfer fees and other. Fees on service charges on deposits decreased from $1.4 million for the three months ended March 31, 2016 to $1.2 million for the three months ended March 31, 2017. The decrease was mainly due to a decline in interchange income due to lower transaction volume during the quarter.
Fees and service charges on deposits decreased from $5.8 million for the year ended December 31, 2015 to $5.7 million for the year ended December 31, 2016. The decrease of $138,000 from the year ended December 31, 2015 to December 31, 2016 was mainly driven by lower insufficient fund fees.
ATM and interchange fees income decreased by $60,000 for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. For the year ended December 31, 2016 ATM and interchange fees were $5.9 million compared to $6.1 million for the year ended December 31, 2015, a decrease of $245,000 or 4.0% primarily driven by lower interchange income.
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 Byline Bank. In exchange for continuing to service loans that are sold, Byline Bank receives a servicing fee paid from a portion of the interest cash flow of the loan. As a result of the Ridgestone acquisition, we recorded $919,000 in net servicing revenue on the sold portion of the government guaranteed portfolio for the three months ended March 31, 2017. We did not receive servicing fees during for the three months ended March, 31, 2016 because the government guaranteed portfolio was acquired in October 2016 in the Ridgestone acquisition. For the year ended December 31, 2016, loan servicing fee income was $1.9 million. At March 31, 2017 and December 31, 2016, the outstanding balance of guaranteed loans sold in the secondary market and serviced, were $986.1 million and $1.0 billion, respectively.
Gains on sales of securities during the three months ended March 31, 2017 was $8,000 compared to $923,000 for the three months ended March 31, 2016 due to minimal securities sales during the first quarter of 2017.
Gains on sales of securities during 2016 was $3.2 million compared to $3.1 million for the year ended December 31, 2015, an increase of $163,000 or 5.3%. The increase was primarily driven by lower than expected interest rates during the first half of 2016 which created opportunities to realize additional gain on sale income.
For the three months ended March 31, 2017, net gains on sales of loans were $8.1 million. We did not have a government guaranteed lending unit during the three months ended March 31, 2016. For the year ended December 31, 2016, the Company recorded $4.3 million in gains on sales of loans, including $3.1 million in gains on sales of government guaranteed loans acquired as part of the Ridgestone acquisition. The gain on sale of loans in 2015 represented the sales of acquired impaired and non-impaired loans. The increase in gains on sales of loans of $1.2 million over 2015 was primarily driven by gain on sales of government guaranteed loans in the fourth quarter, offset by a reduction in the sale of loans from the acquired loan portfolio.
Other non-interest income increased to $730,000 for the three months ended March 31, 2017, an increase of 33.2% compared to the $548,000 for the three months ended March 31, 2016. The primary driver of this increase was the income related to fee income from a customer swap, which was not introduced until April 2016.
Other non-interest income increased $2.2 million primarily due to the gains on sales of assets for the year ended December 31, 2016 of $947,000 compared to a $197,000 loss for the year ended December 31, 2015, an increase of $1.1 million from the sales of real estate as part of the Companys branch consolidation strategy.
Another driver of other non-interest income in 2016 was income of $679,000 as a result of customer interest rate swaps, a new product offering to commercial banking loan customers during 2016. Additionally,
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other non-interest income increased due to gains on sales of leased equipment for the year ended December 31, 2016, which totaled $383,000 compared to $161,000 for the year ended December 31, 2015, an increase of $222,000.
Non-interest expense
Non-interest expense for the three months ended March 31, 2017 was $28.9 million compared to $24.5 million for the three months ended March 31, 2016, an increase of $4.4 million or 17.8% primarily due to the additional expenses from the acquisition of our Small Business Capital operation.
Non-interest expense for the year ended December 31, 2016 was $100.7 million compared to $105.2 million for the year ended December 31, 2015, a decrease of $4.5 million or 4.3%. The improvement in the various non-interest expense categories is indicative of the Companys improved asset quality and initial branch optimization savings. The improvements were partially offset by the increased expenses related to growth opportunities including the addition of commercial bankers and the Ridgestone acquisition.
The following table presents the major components of our non-interest expense for the periods indicated (dollars in thousands):
(unaudited) |
|
|||||||||||||||
Three Months
Ended
|
Year
Ended
|
|||||||||||||||
2017 |
2016 |
2016 |
2015 |
|||||||||||||
Salaries and employee benefits |
$ | 16,602 | $ | 11,940 | $ | 50,585 | $ | 45,960 | ||||||||
Occupancy expense, net |
3,739 | 3,802 | 15,066 | 16,682 | ||||||||||||
Equipment expense |
563 | 535 | 2,032 | 2,359 | ||||||||||||
Loan and lease related expenses |
569 | 461 | 1,992 | (21 | ) | |||||||||||
Legal, audit and other professional fees |
1,671 | 993 | 5,862 | 7,089 | ||||||||||||
Data processing |
2,409 | 1,820 | 8,157 | 7,033 | ||||||||||||
Net (gain) loss recognized on other real estate owned and other related expenses |
(570 | ) | 899 | 1,719 | 7,792 | |||||||||||
Regulatory assessments |
184 | 850 | 2,553 | 3,316 | ||||||||||||
Other intangible assets amortization expense |
769 | 747 | 3,003 | 2,980 | ||||||||||||
Advertising and promotions |
289 | 235 | 623 | 1,570 | ||||||||||||
Telecommunications |
418 | 458 | 1,698 | 1,643 | ||||||||||||
Other non-interest expense |
2,208 | 1,747 | 7,396 | 8,769 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-interest expense |
$ | 28,851 | $ | 24,487 | $ | 100,686 | $ | 105,172 | ||||||||
|
|
|
|
|
|
|
|
Salaries and employee benefits, the single largest component of our non-interest expense, totaled $16.6 million for the three months ended March 31, 2017, an increase of $4.7 million compared to the three months ended March 31, 2016 due to an increase in the number of employees as a result of the Ridgestone acquisition. The Companys staffing increased from 729 full-time equivalent employees as of March 31, 2016 to 791 as of March 31, 2017.
Salaries and employee benefits for the year ended December 31, 2016 was $50.6 million compared to $46.0 million, an increase of $4.6 million, or 10.1%, primarily due to the acquisition of Ridgestone and offset by the headcount reductions from the strategic branch optimization. The Companys staffing increased from 772 full-time equivalent employees as of December 31, 2015 to 795 as of December 31, 2016. Salaries and employee benefits related to Ridgestone were $4.5 million in 2016, offset by the reduction in retail employees related to the strategic branch consolidations.
Occupancy and equipment expense decreased $35,000 for the three months ended March 31, 2017 from the same period in 2016. The decrease in occupancy and equipment expense for the three months ended
-82-
March 31, 2017 resulted from the Companys branch optimization strategy resulting in the consolidation of 28 branches during 2016, partially offset by expenses incurred of $361,000 due to Small Business Capital operations.
Occupancy and equipment expense decreased $1.9 million, or 10.2%, from $19.0 million in 2015 to $17.1 million in 2016. This decrease was primarily driven by the Companys branch optimization strategy resulting in the consolidation of 28 branches during 2016.
Loan and lease related expenses for the three months ended March 31, 2017 were $569,000 compared to expenses of $461,000 for the three months ended March 31, 2016, an increase of $108,000, due to the increased lending and workout activity resulting from the operations of the Small Business Capital operations partially offset by lower problem loan real estate tax accrual for problem loans.
Loan and lease related expenses for the year ended December 31, 2016 were $2.0 million compared to income of $21,000 for the year ended December 31, 2015, an increase of $2.0 million, due to a decrease in real estate tax accruals of $2.8 million during 2015 as a result of the sale of loans from the acquired loan portfolio.
Legal, audit and other professional fees for the three months ended March 31, 2017 were $1.7 million compared to $993,000 for the three months ended March 31, 2016, an increase of $678,000 or 68.3%. The change is primarily driven by increased legal and professional fees related to our initial public offering and the integration costs associated with the Ridgestone acquisition.
Legal, audit and other professional fees for the year ended December 31, 2016 were $5.9 million compared to $7.1 million for the year ended December 31, 2015, a decrease of $1.2 million or 17.3%. The change is primarily driven by decreased legal and professional fees related to acquired loans and foreclosed real estate and partially offset by acquisition advisory expenses of $1.6 million related to the Ridgestone acquisition during 2016.
Data processing expense for the three months ended March 31, 2017 was $2.4 million compared to $1.8 million for the three months ended March 31, 2016, an increase of $589,000, or 32.4%. The increase is primarily due to an increase in data processing expenses as a result of the Ridgestone acquisition.
Data processing expense for the year ended December 31, 2016 was $8.2 million compared to $7.0 million for the year ended December 31, 2015, an increase $1.1 million, or 16.0%. The increase is primarily due to one-time data processing expenses related to the Ridgestone acquisition, totaling $412,000, which primarily consisted of termination expense related to the decommissioning of Ridgestones core operating system post acquisition.
OREO income was $570,000 for the three months ended March 31, 2017, a decrease of $1.5 million compared to OREO expense of $899,000 for the same period in 2016. The decrease is due to the decrease in OREO balances from $24.5 million to $13.2 million from March 31, 2016 to March 31, 2017, respectively and due to increased gains on the sale of other real estate.
OREO expense was $1.7 million in 2016, a decrease of $6.1 million, or 77.9%, compared to $7.8 million in 2015 due to the decrease in OREO balances from $26.7 million to $16.6 million from December 31, 2015 to December 31, 2016, respectively. The other real estate loan reduction was due to the sales of the assets during 2016. For the year ended December 31, 2015, the Company had losses on sale of other real estate of $3.4 million that was driven by an accelerated program to dispose of assets. For the year ended December 31, 2016, the Company had $411,000 of gains on the sale of other real estate.
-83-
Regulatory assessments for the three months ended March 31, 2017 were $184,000 compared to $850,000 for the same period in 2016, a decrease of $666,000 or 78.4%. Regulatory assessments for the year ended December 31, 2016 were $2.6 million compared to $3.3 million for the year ended December 31, 2015, a decrease of $763,000 or 23.0%. These decreases were primarily due our improved risk profile as a result of improved capital ratios, performance and asset quality.
Advertising and promotions for the three months ended March 31, 2017 were $289,000 compared to $235,000 for same period in 2016, an increase of $54,000 or 23.0% due to increased advertising and promotions in our Small Business Capital operations.
Advertising and promotions for the year ended December 31, 2016 were $623,000 compared to $1.6 million for the year ended December 31, 2015, a decrease of $947,000 or 60.3% due to the one-time rebranding initiative costs incurred during 2015.
Other non-interest expense for the three months ended March 31, 2017 was $2.2 million compared to $1.7 million for the three months ended March 31, 2016, an increase of $461,000, or 26.4%, due to the additional collection expenses from Small Business Capital.
Other non-interest expense for the year ended December 31, 2016 was $7.4 million compared to $8.8 million for the year ended December 31, 2015, a decrease of $1.4 million or 15.7%. This includes a decrease of $1.1 million in legal settlements, $494,000 in postage expense and $466,000 in stationery and supplies, offset by an increase in ATM card issuance costs due to the issuance of EMV chip cards.
Following the completion of this offering, we expect to incur additional one-time and recurring expenses to support our operations as a standalone public company, including expenses related to compliance with applicable legal and financial reporting requirements, incremental expenses to support information technology, corporate governance and compliance infrastructure, expansion of our employee compensation and benefits, investor relations and corporate communications functions. These expenses will adversely affect our efficiency ratio, and we will need to seek opportunities to offset these increased costs.
Income Taxes
Income tax expense for the three months ended March 31, 2017 totaled $4.5 million compared to a tax benefit of $240,000 for the three months ended March 31, 2016. The increase in income tax expense was primarily due to the reversal of our deferred tax asset valuation allowance at the end of 2016 and the increase in taxable income for the three months ended March 31, 2017 compared to a loss for the three months ended March 31, 2016. The Companys effective tax rate was 40.9% for the three months ended March 31, 2017.
The income tax benefit for the year ended December 31, 2016 was $61.2 million compared to a provision expense of $307,000 for the year ended December 31, 2015. The income tax benefit for the year ended December 31, 2016 was primarily due to the reversal of the $61.9 million valuation allowance established against the net deferred tax assets. The determination to reverse the allowance was based on Ridgestones actual pre-tax income, actual combined earnings for the Company and Ridgestone over the prior three years, as well as managements expectations for sustainable profitability in the future. Business forecasts are used in the evaluation of the recoverability and indicate improved profitability driven by improved asset quality in the Companys loan portfolio, consecutive quarterly profitability during 2016 and improved future profitability as a result of expense reductions from the strategic branch optimization. Managements expectations of future profitability are also driven by our improved loan to deposit ratio, cost reduction through branch optimization in 2016, and decreased special asset workout expenses due to loan sales during 2016. As a result of the valuation allowance reversal, the Companys effective tax rate was negative 1117% for the year ended December 31, 2016. The Companys effective tax rate was zero for the year ended December 31, 2015.
-84-
Financial Condition
Balance sheet analysis
The Companys total assets remained flat at $3.3 billion from December 31, 2016 to March 31, 2017. Loans remained flat for the same period as a result of the change in loan mix, with the originated portfolio increasing by $33.9 million and the acquired portfolio decreasing by $38.4 million, driven by seasonality and payoffs of acquired loans.
Total liabilities decreased by $18.1 million, or 0.6%, from $2.9 billion at December 31, 2016 to $2.9 billion at March 31, 2017. The decrease is a result of a decrease in Federal Home Loan Bank advances of $104.1 million, or 33.2% which was partially offset by an increase in total deposits of $85.4 million, or 3.4%.
The Companys total assets increased by $816.0 million, or 32.9%, from $2.5 billion at December 31, 2015 to $3.3 billion at December 31, 2016. In addition to organic growth in the loan portfolio, the increase in total assets is attributable to the acquired assets of $456.2 million from Ridgestone. The increase in total assets includes $799.3 million in net loans, or 59.7% and an increase in loans held for sale of $23.7 million. The Company acquired $351.8 million in net loans and $15.4 million of loans held for sale from the Ridgestone acquisition as of the date of acquisition.
Investment portfolio
The investment securities portfolio consists of securities classified as available-for-sale and held-to-maturity. There were no trading securities in our investment portfolio as of March 31, 2017, December 31, 2016 and 2015. 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 decreased $18.1 million, from $608.6 million at December 31, 2016 to $590.5 million at March 31, 2017. Securities available-for-sale decreased $159.2 million, or 20.7%, from $767.7 million at December 31, 2015 to $608.6 million at December 31, 2016. The decrease was primarily due to the redeployment of liquidity into higher yielding loans and leases.
The held-to-maturity securities portfolio consists of mortgage-backed securities and obligations of states, municipalities and political subdivisions. We carry these securities at amortized cost. As of March 31, 2017 this portfolio totaled $132.9 million. This portfolio totaled $138.8 million at December 31, 2016, compared to $111.5 million at December 31, 2015, an increase of $27.4 million, or 24.6%.
The Company had no securities that were classified as having OTTI as of March 31, 2017, December 31, 2016 and 2015.
-85-
The following tables summarize the fair value of the available-for-sale and held-to-maturity securities portfolio as of the dates presented (dollars in thousands):
(Unaudited) |
|
|
||||||||||||||||||||||
March 31, 2017 |
December 31, 2016 |
December 31, 2015 |
||||||||||||||||||||||
Amortized
|
Fair
|
Amortized
|
Fair
|
Amortized
|
Fair
|
|||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||
U.S. Treasury Notes |
$ | 14,996 | $ | 14,926 | $ | 14,995 | $ | 14,920 | $ | 30,580 | $ | 30,345 | ||||||||||||
U.S. Government agencies |
60,197 | 58,915 | 60,180 | 58,857 | 84,368 | 83,613 | ||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
16,336 | 16,190 | 16,271 | 16,059 | 20,687 | 20,752 | ||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||
Agency |
360,727 | 352,559 | 376,800 | 368,160 | 593,391 | 588,334 | ||||||||||||||||||
Non-agency |
19,470 | 19,263 | 20,107 | 19,933 | | | ||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||
Agency |
77,128 | 75,578 | 78,954 | 77,403 | 31,514 | 31,191 | ||||||||||||||||||
Non-agency |
31,987 | 31,061 | 32,061 | 31,052 | | | ||||||||||||||||||
Corporate securities |
17,065 | 17,459 | 17,065 | 17,329 | 7,801 | 7,696 | ||||||||||||||||||
Other securities |
3,623 | 4,556 | 4,161 | 4,847 | 5,098 | 5,801 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 601,529 | $ | 590,507 | $ | 620,594 | $ | 608,560 | $ | 773,439 | $ | 767,732 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Held-to-maturity |
||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | 24,828 | $ | 24,854 | $ | 24,878 | $ | 24,754 | $ | 25,081 | $ | 25,249 | ||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||
Agency |
63,530 | 63,506 | 67,692 | 67,444 | 86,379 | 85,686 | ||||||||||||||||||
Non-agency |
44,539 | 44,347 | 46,276 | 45,884 | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 132,897 | $ | 132,707 | $ | 138,846 | $ | 138,082 | $ | 111,460 | $ | 110,935 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not classify any securities as trading securities during the first quarter of 2017 or during the years ended December 31, 2016 or 2015.
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At March 31, 2017, the Company evaluated the securities which had an unrealized loss for OTTI and determined all declines in value to be temporary. There were 115 investment securities with unrealized losses at March 31, 2017 of which only two had a continuous unrealized loss position for 12 consecutive months or longer that is greater than 5% of amortized cost. 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 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.
-86-
Maturity as of March 31, 2017 |
||||||||||||||||||||||||||||||||
Due in One Year or Less |
Due from One to Five Years |
Due from Five to Ten Years |
Due after Ten Years |
|||||||||||||||||||||||||||||
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||
U.S. Treasury Notes |
$ | 4,998 | 1.04 | % | $ | 9,998 | 1.21 | % | $ | | 0.00 | % | $ | | 0.00 | % | ||||||||||||||||
U.S. government agencies |
| 0.00 | % | 29,201 | 1.31 | % | 30,996 | 1.62 | % | | 0.00 | % | ||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
410 | 3.73 | % | 3,085 | 3.45 | % | 6,850 | 3.08 | % | 5,991 | 2.95 | % | ||||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | 4,434 | 1.41 | % | 356,293 | 2.06 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 19,470 | 3.28 | % | ||||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | 11,937 | 1.38 | % | 65,191 | 2.16 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 31,987 | 2.61 | % | ||||||||||||||||||||
Corporate securities |
| 0.00 | % | 13,255 | 4.58 | % | 3,810 | 2.54 | % | | 0.00 | % | ||||||||||||||||||||
Other securities |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 3,623 | 3.37 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 5,408 | 1.25 | % | $ | 55,539 | 2.19 | % | $ | 58,027 | 1.79 | % | $ | 482,555 | 2.18 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | | 0.00 | % | $ | 528 | 1.50 | % | $ | 13,358 | 2.44 | % | $ | 10,942 | 2.81 | % | ||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 63,530 | 2.32 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 44,539 | 3.32 | % | ||||||||||||||||||||
|
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | | 0.00 | % | $ | 528 | 1.50 | % | $ | 13,358 | 2.44 | % | $ | 119,011 | 2.69 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity as of December 31, 2016 |
||||||||||||||||||||||||||||||||
Due in One Year or Less |
Due from One to Five Years |
Due from Five to Ten Years |
Due after Ten Years |
|||||||||||||||||||||||||||||
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||
U.S. Treasury Notes |
$ | | 0.00 | % | $ | 14,995 | 1.16 | % | $ | | 0.00 | % | $ | | 0.00 | % | ||||||||||||||||
U.S. government agencies |
| 0.00 | % | 29,185 | 1.31 | % | 30,995 | 1.62 | % | | 0.00 | % | ||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
200 | 2.48 | % | 3,236 | 3.51 | % | 6,709 | 3.24 | % | 6,126 | 2.96 | % | ||||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | 4,766 | 1.42 | % | 372,034 | 2.08 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 20,107 | 3.28 | % | ||||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | 11,969 | 1.22 | % | 66,985 | 2.15 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 32,061 | 2.61 | % | ||||||||||||||||||||
Corporate securities |
| 0.00 | % | 13,254 | 4.55 | % | 3,811 | 2.46 | % | | 0.00 | % | ||||||||||||||||||||
Other securities |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 4,161 | 3.13 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 200 | 2.48 | % | $ | 60,670 | 2.10 | % | $ | 58,250 | 1.76 | % | $ | 501,474 | 2.19 | % | ||||||||||||||||
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
-87-
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | | 0.00 | % | $ | 530 | 1.50 | % | $ | 11,938 | 2.44 | % | $ | 12,410 | 2.77 | % | ||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 67,692 | 2.23 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 46,276 | 3.32 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | | 0.00 | % | $ | 530 | 1.50 | % | $ | 11,938 | 2.44 | % | $ | 126,378 | 2.68 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The weighted average yields are based on amortized cost. |
Maturity as of December 31, 2015 |
||||||||||||||||||||||||||||||||
Due in One Year or Less |
Due from One to Five Years |
Due from Five to Ten Years |
Due after Ten Years |
|||||||||||||||||||||||||||||
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||||||
U.S. Treasury Notes |
$ | | 0.00 | % | $ | 30,580 | 0.98 | % | $ | | 0.00 | % | $ | | 0.00 | % | ||||||||||||||||
U.S. government agencies |
1,528 | 0.99 | % | 82,840 | 1.39 | % | | 0.00 | % | | 0.00 | % | ||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
1,268 | 3.51 | % | 2,169 | 4.72 | % | 7,121 | 4.07 | % | 10,129 | 3.87 | % | ||||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | 111,647 | 1.49 | % | 481,744 | 1.95 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | ||||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 31,514 | 2.09 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | ||||||||||||||||||||
Corporate securities |
| 0.00 | % | 5,240 | 1.82 | % | 2,561 | 1.68 | % | | 0.00 | % | ||||||||||||||||||||
Other securities |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 5,098 | 1.65 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 2,796 | 2.13 | % | $ | 120,829 | 1.37 | % | $ | 121,329 | 1.64 | % | $ | 528,485 | 2.00 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
Amortized
|
Weighted
|
|||||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | | 0.00 | % | $ | | 0.00 | % | $ | 11,953 | 2.37 | % | $ | 13,128 | 2.77 | % | ||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||||||
Agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | 86,379 | 2.16 | % | ||||||||||||||||||||
Non-agency |
| 0.00 | % | | 0.00 | % | | 0.00 | % | | 0.00 | % | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | | 0.00 | % | $ | | 0.00 | % | $ | 11,953 | 2.37 | % | $ | 99,507 | 2.24 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The weighted average yields are based on amortized cost. |
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions was $19.1 million at March 31, 2017, a decrease of $0.1 million from December 31, 2016.
Total non-taxable securities classified as obligations of states, municipalities and political subdivisions was $19.0 million at December 31, 2016, a decrease of $2.7 million from December 31, 2015.
There were no holdings of securities of any one issuer, other than U.S. government-sponsored entities and agencies, with total outstanding balances greater than 10% of our stockholders equity as of March 31, 2017, December 31, 2016 and 2015.
-88-
Restricted stock
As a member of the Federal Home Loan Bank system, the Company 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, the Company owns stock of Bankers Bank that was acquired as part of the Ridgestone acquisition. The stock is redeemable at par and carried at cost. As of March 31, 2017, December 31, 2016 and 2015, the Company held $9.5 million, $15.0 million and $7.6 million, respectively, in FHLB and Bankers Bank stocks. We evaluate impairment of our investment in FHLB and Bankers Bank based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We did not identify any indicators of impairment of FHLB and Bankers Bank stock as of March 31, 2017, December 31, 2016 and 2015.
-89-
Loan and lease concentrations
Lending-related income is the most important component of the Companys net interest income and is the main driver of the results of our operations. Total loans and leases at March 31, 2017 were $2.1 billion compared to $2.1 billion as of December 31, 2016. Total loans and leases at December 31, 2016 and December 31, 2015 were $2.1 billion and $1.3 billion, respectively, an increase of $802.6 million or 59.7%. This growth in the loan portfolio is due to the Ridgestone acquisition and increased market penetration through organic growth, as well as the addition of experienced lending officers, including the recent addition of a team of experienced sponsor finance lenders with over 50 years of combined experience. We plan to maintain a relatively diversified loan portfolio to help reduce the risk inherent in concentration in certain types of collateral. The following table shows the Companys allocation of originated, acquired impaired and acquired non-impaired loans as of the dates presented (dollars in thousands):
(unaudited) March 31, 2017 |
December 31, 2016 |
December 31, 2015 |
||||||||||||||||||||||
Amount |
% of Total |
Amount |
% of Total |
Amount |
% of Total |
|||||||||||||||||||
Originated loans |
||||||||||||||||||||||||
Commercial real estate |
$ | 380,292 | 18 | % | $ | 338,752 | 16 | % | $ | 201,586 | 15 | % | ||||||||||||
Residential real estate |
391,940 | 18 | % | 394,168 | 18 | % | 215,388 | 16 | % | |||||||||||||||
Construction, land development, and other land |
89,466 | 4 | % | 119,357 | 6 | % | 29,225 | 2 | % | |||||||||||||||
Commercial and industrial |
323,422 | 15 | % | 309,097 | 14 | % | 146,858 | 11 | % | |||||||||||||||
Installment and other |
2,016 | 0 | % | 2,021 | 0 | % | 544 | 0 | % | |||||||||||||||
Leasing financing receivables |
128,666 | 6 | % | 118,493 | 6 | % | 69,416 | 5 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total originated loans |
$ | 1,315,802 | 61 | % | $ | 1,281,888 | 60 | % | $ | 663,017 | 49 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Acquired impaired loans |
||||||||||||||||||||||||
Commercial real estate |
$ | 201,689 | 9 | % | $ | 207,303 | 10 | % | $ | 243,964 | 18 | % | ||||||||||||
Residential real estate |
169,676 | 8 | % | 175,717 | 8 | % | 223,738 | 16 | % | |||||||||||||||
Construction, land development, and other land |
6,116 | 0 | % | 6,979 | 0 | % | 8,634 | 1 | % | |||||||||||||||
Commercial and industrial |
13,114 | 1 | % | 13,464 | 1 | % | 9,570 | 1 | % | |||||||||||||||
Installment and other |
439 | 0 | % | 574 | 0 | % | 1,005 | 0 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total acquired impaired loans |
$ | 391,034 | 18 | % | $ | 404,037 | 19 | % | $ | 486,911 | 36 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Acquired non-impaired loans |
||||||||||||||||||||||||
Commercial real estate |
$ | 240,869 | 11 | % | $ | 250,289 | 11 | % | $ | 88,146 | 7 | % | ||||||||||||
Residential real estate |
39,791 | 2 | % | 40,853 | 2 | % | 45,208 | 3 | % | |||||||||||||||
Construction, land development, and other land |
9,733 | 1 | % | 14,430 | 1 | % | 2,373 | 0 | % | |||||||||||||||
Commercial and industrial |
111,931 | 5 | % | 115,677 | 5 | % | 9,268 | 1 | % | |||||||||||||||
Installment and other |
365 | 0 | % | 364 | 0 | % | 377 | 0 | % | |||||||||||||||
Leasing financing receivables |
34,009 | 2 | % | 40,473 | 2 | % | 50,137 | 4 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total acquired non-impaired loans |
$ | 436,698 | 21 | % | $ | 462,086 | 21 | % | $ | 195,509 | 15 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans |
$ | 2,143,534 | $ | 2,148,011 | $ | 1,345,437 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan and lease losses |
(11,817 | ) | (10,923 | ) | (7,632 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans, net allowance for loan losses |
$ | 2,131,717 | 100 | % | $ | 2,137,088 | 100 | % | $ | 1,337,805 | 100 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of acquisition accounting adjustments, acquired from Ridgestone totaled $351.8 million.
Total loan and lease portfolio was $2.1 billion as of March 31, 2017, relatively unchanged when compared to December 31, 2016 due to seasonality and payoffs of acquired loans. During 2016, the Company
-90-
experienced growth in real estate loans of 46.3%, with 249.9%, 49.2%, and 26.1% growth occurring in the construction and land development, commercial real estate and residential real estate loan portfolios, respectively. The commercial and industrial loan portfolios also experienced strong growth of 164.5% during 2016. The loan growth for 2016 was driven by the additional banking professionals and the Ridgestone acquisition.
Real estate loans comprised 71.4% and 72.1% of the loan and lease portfolio at March 31, 2017 and December 31, 2016, respectively. The largest portion of the real estate loan portfolio as of March 31, 2017 and December 31, 2016 was commercial real estate loans. At March 31, 2017, commercial real estate loans totaled $822.9 million and comprised 53.8% of real estate loans and 38.4% of the total loan and lease portfolio. At December 31, 2016, commercial real estate loans totaled $796.3 million and comprised 51.4% of real estate loans and 37.1% of the total loan and lease portfolio. During 2016, the commercial real estate loan portfolio increased by 49.2% from $533.7 million at December 31, 2015.
Residential real estate loans totaled $601.4 million at March 31, 2017 compared to $610.7 million at December 31, 2016, a decrease of $9.3 million or 1.5%. During 2016, the portfolio increased from $484.3 million at December 31, 2015, which is an increase of 26.1% or $126.4 million. The residential real estate loan portfolio comprised 39.3% and 39.5% of real estate loans as of March 31, 2017 and December 31, 2016, respectively, and 28.1% and 28.4% of total loans and leases at March 31, 2017 and December 31, 2016, respectively. Acquired residential impaired real estate loans continue to decrease from $223.7 million as of December 31, 2015 to $175.7 million as of December 31, 2016, a decrease of 21.5%, and further decreased to $169.7 million as of March 31, 2017, a decrease of 3.4% from December 31, 2016.
Construction, land development and other land loans totaled $105.3 million at March 31, 2017 compared to $140.8 million at December 31, 2016, a decrease of $35.5 million or 25.2%. During 2016, the portfolio increased by $100.5 million or 249.9% compared to $40.2 million at December 31, 2015. The construction, land development and other land loan portfolio comprised 6.9% and 9.1% of real estate loans as of March 31, 2017 and December 31, 2016, respectively, and 4.9% and 6.6% of the total loan and lease portfolio as of March 31, 2017 and December 31, 2016, respectively. The growth during 2016 was primarily due to the acquisition of Ridgestone and an increase in real estate construction projects.
Commercial and industrial loans totaled $448.5 million and $438.2 million at March 31, 2017 and December 31, 2016, respectively, compared to $165.7 million at December 31, 2015. During 2016, the portfolio increased by $272.5 million or 164.5% due to the Ridgestone acquisition and organic commercial growth. The commercial and industrial loan portfolio comprised 20.9% and 20.4% of the total loan and lease portfolio as of March 31, 2017 and December 31, 2016, respectively.
Lease financing receivables comprised 7.6% and 7.4% of the loan and lease portfolio as of March 31, 2017 and December 31, 2016, respectively. Total lease financing receivables were $162.7 million and $159.0 million at March 31, 2017 and December 31, 2016, respectively, compared to $119.6 million at December 31, 2015. During 2016, the portfolio increased by $39.4 million or 33.0% due to continued growth in our small-ticket vendor sales channels, and our increased syndication activities.
-91-
Loan portfolio maturities and interest rate sensitivity
The following table shows our loan and lease portfolio by scheduled maturity at March 31, 2017 (dollars in thousands) (unaudited):
Due in One Year or Less |
Due after One Year
|
Due after Five Years |
||||||||||||||||||||||||||
Fixed Rate |
Floating
|
Fixed
|
Floating
|
Fixed Rate |
Floating
|
Total |
||||||||||||||||||||||
Originated loans |
||||||||||||||||||||||||||||
Commercial real estate |
$ | 1,806 | $ | 35,248 | $ | 109,891 | $ | 157,636 | $ | 18,360 | $ | 57,351 | $ | 380,292 | ||||||||||||||
Residential real estate |
7,612 | 3,814 | 74,869 | 42,980 | 244,827 | 17,838 | 391,940 | |||||||||||||||||||||
Construction, land development, and other land |
1,850 | 25,829 | | 51,541 | 2,135 | 8,111 | 89,466 | |||||||||||||||||||||
Commercial and industrial |
10,526 | 64,769 | 16,957 | 162,758 | 2,307 | 66,105 | 323,422 | |||||||||||||||||||||
Installment and other |
11 | 950 | 570 | | 485 | | 2,016 | |||||||||||||||||||||
Leasing financing receivables |
2,290 | | 114,257 | | 12,119 | | 128,666 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total originated loans |
$ | 24,095 | $ | 130,610 | $ | 316,544 | $ | 414,915 | $ | 280,233 | $ | 149,405 | $ | 1,315,802 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Acquired impaired loans |
||||||||||||||||||||||||||||
Commercial real estate |
$ | 57,380 | $ | 455 | $ | 123,684 | $ | 438 | $ | 5,318 | $ | 14,414 | $ | 201,689 | ||||||||||||||
Residential real estate |
40,436 | 539 | 101,282 | 2,566 | 24,661 | 192 | 169,676 | |||||||||||||||||||||
Construction, land development, and other land |
2,405 | 243 | 3,020 | | | 448 | 6,116 | |||||||||||||||||||||
Commercial and industrial |
3,165 | 363 | 1,404 | 307 | 2,480 | 5,395 | 13,114 | |||||||||||||||||||||
Installment and other |
59 | 33 | 189 | | 158 | | 439 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total acquired impaired loans |
$ | 103,445 | $ | 1,633 | $ | 229,579 | $ | 3,311 | $ | 32,617 | $ | 20,449 | $ | 391,034 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Acquired non-impaired loans |
||||||||||||||||||||||||||||
Commercial real estate |
$ | 19,349 | $ | 2,385 | $ | 52,513 | $ | 3,359 | $ | 1,042 | $ | 162,221 | $ | 240,869 | ||||||||||||||
Residential real estate |
8,368 | 2,818 | 13,789 | 13,099 | 1,175 | 542 | 39,791 | |||||||||||||||||||||
Construction, land development, and other land |
699 | | 1,698 | | | 7,336 | 9,733 | |||||||||||||||||||||
Commercial and industrial |
3,308 | 6,626 | 1,896 | 8,563 | 298 | 91,240 | 111,931 | |||||||||||||||||||||
Installment and other |
38 | 327 | | | | | 365 | |||||||||||||||||||||
Leasing financing receivables |
3,521 | | 29,085 | | 1,403 | | 34,009 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total acquired non-impaired loans |
$ | 35,283 | $ | 12,156 | $ | 98,981 | $ | 25,021 | $ | 3,918 | $ | 261,339 | $ | 436,698 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans |
$ | 162,823 | $ | 144,399 | $ | 645,104 | $ | 443,247 | $ | 316,768 | $ | 431,193 | $ | 2,143,534 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2017, 52% of the loan and lease portfolio bears interest at fixed rates and 48% at floating rates. The expected life of our loan portfolio will differ from contractual maturities because borrowers may have the right to curtail or prepay their loans with or without penalties. Because a portion of the portfolio is accounted for under ASC 310-30, the carrying value is significantly affected by estimates and it is impracticable to allocate scheduled payments for those loans based on those estimates. Consequently, the tables above include information limited to contractual maturities of the underlying loans.
Allowance for loan and lease losses
The ALLL is determined by the Company on a quarterly basis, although we are engaged in monitoring the appropriate level of the allowance on a more frequent basis. The ALLL reflects managements estimate of probable incurred credit losses inherent in the loan portfolio. The computation includes element of judgement and high levels of subjectivity.
-92-
Factors considered by the Company 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 borrowers ability to repay and evaluation of the prevailing economic conditions. Changes in conditions may necessitate revision of the estimate in future periods.
The Company assesses the ALLL based on three categories: (i) originated loans and leases, (ii) acquired non-impaired loans and leases and (iii) acquired impaired loans with further credit deterioration after the acquisition or the Recapitalization.
Total ALLL was $11.8 million at March 31, 2017 compared to $10.9 million at December 31, 2016, an increase of $0.9 million, or 8.2%. The increase was primarily due to the change in loan mix, with the originated portfolio increasing by $33.9 million to $1.3 billion at March 31, 2017 and the acquired (impaired and non-impaired) portfolio decreasing by $38.4 million for the same period.
Total ALLL was $10.9 million at December 31, 2016 compared to $7.6 million at December 31, 2015, an increase of $3.3 million, or 43.1%. The increase was primarily due to the overall portfolio growth, increased weighting of the qualitative factors, and adjustments of new origination assumptions to better align the ALLL with the loan portfolios risk profile.
Total ALLL accounts for 0.55%, 0.51%, and 0.57% of total loans and leases at March 31, 2017, December 31, 2016 and 2015, respectively. This ratio is generally below the median of our peer banks, as the Company valued significant amounts of acquired loans at fair value as a result of either the Recapitalization or the Ridgestone acquisition, which, management believes, limits the amount of reserves needed to cover these loans as of March 31, 2017, December 31, 2016 and 2015. Acquisition accounting adjustments remaining balances resulting from the Recapitalization and the Ridgestone acquisition were $41.0 million, $43.2 million and $19.2 million as of March 31, 2017, December 31, 2016 and December 31, 2015, respectively.
-93-
The following table presents an analysis of the allowance of the loan and lease losses for the periods presented (dollars in thousands, data at and for the periods ended March 31, 2016 and 2017 is unaudited):
Commercial
|
Residential
|
Construction
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Balance at December 31, 2016 |
$ | 1,945 | $ | 2,483 | $ | 742 | $ | 4,196 | $ | 334 | $ | 1,223 | $ | 10,923 | ||||||||||||||
Provision for acquired impaired loans |
174 | 275 | | 46 | | | 495 | |||||||||||||||||||||
Provision for acquired non-impaired loans and leases |
(13 | ) | (2 | ) | 23 | 728 | (2 | ) | 170 | 904 | ||||||||||||||||||
Provision for originated loans and leases |
179 | (272 | ) | (348 | ) | 81 | (1 | ) | 853 | 492 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total provision |
$ | 340 | $ | 1 | $ | (325 | ) | $ | 855 | $ | (3 | ) | $ | 1,023 | $ | 1,891 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Charge-offs for acquired impaired loans |
(238 | ) | (57 | ) | | (60 | ) | | | (355 | ) | |||||||||||||||||
Charge-offs for acquired non-impaired loans and leases |
| (10 | ) | | (155 | ) | | (284 | ) | (449 | ) | |||||||||||||||||
Charge-offs for originated loans and leases |
| | | | | (486 | ) | (486 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total charge-offs |
$ | (238 | ) | $ | (67 | ) | $ | | $ | (215 | ) | $ | | $ | (770 | ) | $ | (1,290 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Recoveries for acquired impaired loans |
| | | | | | | |||||||||||||||||||||
Recoveries for acquired non-impaired loans and leases |
| | | | | 167 | 167 | |||||||||||||||||||||
Recoveries for originated loans and leases |
| | | | | 126 | 126 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total recoveries |
$ | | $ | | $ | | $ | | $ | | $ | 293 | $ | 293 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net charge-offs (recoveries) |
238 | 67 | | 215 | | 477 | 997 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Acquired impaired loans |
425 | 665 | | 660 | 1 | | 1,751 | |||||||||||||||||||||
Acquired non-impaired loans and leases |
102 | 332 | 33 | 647 | 326 | 331 | 1,771 | |||||||||||||||||||||
Originated loans and leases |
1,520 | 1,420 | 384 | 3,529 | 4 | 1,438 | 8,295 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at March 31, 2017 |
$ | 2,047 | $ | 2,417 | $ | 417 | $ | 4,836 | $ | 331 | $ | 1,769 | $ | 11,817 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending ALLL balance |
||||||||||||||||||||||||||||
Acquired impaired loans |
$ | 425 | $ | 665 | $ | | $ | 660 | $ | 1 | $ | | $ | 1,751 | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
| 282 | 26 | 966 | 325 | | 1,599 | |||||||||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
1,622 | 1,470 | 391 | 3,210 | 5 | 1,769 | 8,467 | |||||||||||||||||||||
Loans and leases ending balance |
||||||||||||||||||||||||||||
Acquired impaired loans |
$ | 201,689 | $ | 169,676 | $ | 6,116 | $ | 13,114 | $ | 439 | $ | | $ | 391,034 | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
9,764 | 1,262 | 85 | 3,317 | 327 | | 14,755 | |||||||||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
611,397 | 430,469 | 99,114 | 432,036 | 2,054 | 162,675 | 1,737,745 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases at March 31, 2017, gross |
$ | 822,850 | $ | 601,407 | $ | 105,315 | $ | 448,467 | $ | 2,820 | $ | 162,675 | $ | 2,143,534 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ratio of net charge-offs to average loans and leases outstanding during the year |
||||||||||||||||||||||||||||
Acquired impaired loans |
0.05 | % | 0.01 | % | 0.00 | % | 0.01 | % | 0.00 | % | 0.00 | % | 0.07 | % | ||||||||||||||
Acquired non-impaired loans and leases |
0.00 | % | 0.00 | % | 0.00 | % | 0.03 | % | 0.00 | % | 0.02 | % | 0.05 | % | ||||||||||||||
Originated loans and leases |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.07 | % | 0.07 | % | ||||||||||||||
Loans ending balance as a percentage of total loans, gross |
||||||||||||||||||||||||||||
Acquired impaired loans |
9.41 | % | 7.91 | % | 0.29 | % | 0.61 | % | 0.02 | % | 0.00 | % | 18.24 | % | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
0.46 | % | 0.06 | % | 0.00 | % | 0.15 | % | 0.02 | % | 0.00 | % | 0.69 | % | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
28.52 | % | 20.08 | % | 4.62 | % | 20.16 | % | 0.10 | % | 7.59 | % | 81.07 | % |
-94-
Commercial
|
Residential
|
Construction
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Balance at December 31, 2015 |
$ | 2,280 | $ | 2,981 | $ | 232 | $ | 1,403 | $ | 357 | $ | 379 | $ | 7,632 | ||||||||||||||
Provision for acquired impaired loans |
1,039 | 616 | 7 | 85 | 5 | | 1,752 | |||||||||||||||||||||
Provision for acquired non-impaired loans and leases |
214 | (42 | ) | | 3 | | 397 | 572 | ||||||||||||||||||||
Provision for originated loans and leases |
11 | (72 | ) | 83 | (139 | ) | | 306 | 189 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total provision |
$ | 1,264 | $ | 502 | $ | 90 | $ | (51 | ) | $ | 5 | $ | 703 | $ | 2,513 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Charge-offs for acquired impaired loans |
(1,156 | ) | (370 | ) | | | | | (1,526 | ) | ||||||||||||||||||
Charge-offs for acquired non-impaired loans and leases |
3 | (163 | ) | | (3 | ) | | (516 | ) | (679 | ) | |||||||||||||||||
Charge-offs for originated loans and leases |
| | | | | (166 | ) | (166 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total charge-offs |
$ | (1,153 | ) | $ | (533 | ) | $ | | $ | (3 | ) | $ | | $ | (682 | ) | $ | (2,371 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Recoveries for acquired impaired loans |
| | | | | | | |||||||||||||||||||||
Recoveries for acquired non-impaired loans and leases |
| | | | | 110 | 110 | |||||||||||||||||||||
Recoveries for originated loans and leases |
| | | | | 19 | 19 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total recoveries |
$ | | $ | | $ | | $ | | $ | | $ | 129 | $ | 129 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net charge-offs (recoveries) |
1,153 | 533 | | 3 | | 553 | 2,242 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Acquired impaired loans |
617 | 2,136 | 7 | 721 | 35 | | 3,516 | |||||||||||||||||||||
Acquired non-impaired loans and leases |
1,408 | 378 | | 49 | 327 | 150 | 2,312 | |||||||||||||||||||||
Originated loans and leases |
366 | 436 | 315 | 579 | | 379 | 2,075 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at March 31, 2016 |
$ | 2,391 | $ | 2,950 | $ | 322 | $ | 1,349 | $ | 362 | $ | 529 | $ | 7,903 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending ALLL balance |
||||||||||||||||||||||||||||
Acquired impaired loans |
$ | 617 | $ | 2,136 | $ | 7 | $ | 721 | $ | 35 | $ | | $ | 3,516 | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
1,309 | 380 | 137 | 163 | 327 | | 2,316 | |||||||||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
465 | 434 | 178 | 465 | | 529 | 2,071 | |||||||||||||||||||||
Loans and leases ending balance |
||||||||||||||||||||||||||||
Acquired impaired loans |
$ | 205,385 | $ | 207,536 | $ | 7,545 | $ | 7,462 | $ | 947 | $ | | $ | 428,875 | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
6,943 | 3,335 | 208 | 213 | 327 | | 11,026 | |||||||||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
295,297 | 441,539 | 46,041 | 156,496 | 649 | 123,572 | 1,063,594 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases at March 31, 2016, gross |
$ | 507,625 | $ | 652,410 | $ | 53,794 | $ | 164,171 | $ | 1,923 | $ | 123,572 | $ | 1,503,495 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ratio of net charge-offs to average loans and leases outstanding during the year |
||||||||||||||||||||||||||||
Acquired impaired loans |
0.32 | % | 0.10 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.42 | % | ||||||||||||||
Acquired non-impaired loans and leases |
0.00 | % | 0.05 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.11 | % | 0.16 | % | ||||||||||||||
Originated loans and leases |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.04 | % | 0.04 | % | ||||||||||||||
Loans ending balance as a percentage of total loans, gross |
||||||||||||||||||||||||||||
Acquired impaired loans |
13.66 | % | 13.80 | % | 0.50 | % | 0.50 | % | 0.07 | % | 0.00 | % | 28.53 | % | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
0.46 | % | 0.22 | % | 0.01 | % | 0.02 | % | 0.02 | % | 0.00 | % | 0.73 | % | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
19.64 | % | 29.37 | % | 3.06 | % | 10.41 | % | 0.04 | % | 8.22 | % | 70.74 | % |
-95-
Commercial
|
Residential
|
Construction
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Balance at December 31, 2015 |
$ | 2,280 | $ | 2,981 | $ | 232 | $ | 1,403 | $ | 357 | $ | 379 | $ | 7,632 | ||||||||||||||
Provision for acquired impaired loans |
3,011 | (981 | ) | | 111 | (37 | ) | | 2,104 | |||||||||||||||||||
Provision for acquired non-impaired loans and leases |
35 | (68 | ) | 105 | 28 | 2 | 844 | 946 | ||||||||||||||||||||
Provision for originated loans and leases |
986 | 1,184 | 500 | 2,730 | 24 | 1,878 | 7,302 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total provision |
$ | 4,032 | $ | 135 | $ | 605 | $ | 2,869 | $ | (11 | ) | $ | 2,722 | $ | 10,352 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Charge-offs for acquired impaired loans |
(3,256 | ) | (462 | ) | | (73 | ) | 8 | | (3,783 | ) | |||||||||||||||||
Charge-offs for acquired non-impaired loans and leases |
(1,111 | ) | (171 | ) | (95 | ) | (3 | ) | (1 | ) | (1,275 | ) | (2,656 | ) | ||||||||||||||
Charge-offs for originated loans and leases |
| | | | (19 | ) | (1,359 | ) | (1,378 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total charge-offs |
$ | (4,367 | ) | $ | (633 | ) | $ | (95 | ) | $ | (76 | ) | $ | (12 | ) | $ | (2,634 | ) | $ | (7,817 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Recoveries for acquired impaired loans |
| | | | | | | |||||||||||||||||||||
Recoveries for acquired non-impaired loans and leases |
| | | | | 550 | 550 | |||||||||||||||||||||
Recoveries for originated loans and leases |
| | | | | 206 | 206 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total recoveries |
$ | | $ | | $ | | $ | | $ | | $ | 756 | $ | 756 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Net charge-offs (recoveries) |
4,367 | 633 | 95 | 76 | 12 | 1,878 | 7,061 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Acquired impaired loans |
489 | 447 | | 674 | 1 | | 1,611 | |||||||||||||||||||||
Acquired non-impaired loans and leases |
115 | 344 | 10 | 74 | 328 | 278 | 1,149 | |||||||||||||||||||||
Originated loans and leases |
1,341 | 1,692 | 732 | 3,448 | 5 | 945 | 8,163 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Balance at December 31, 2016 |
$ | 1,945 | $ | 2,483 | $ | 742 | $ | 4,196 | $ | 334 | $ | 1,223 | $ | 10,923 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending ALLL balance |
||||||||||||||||||||||||||||
Acquired impaired loans |
$ | 489 | $ | 447 | $ | | $ | 674 | $ | 1 | $ | | $ | 1,611 | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
| 293 | | 396 | 328 | | 1,017 | |||||||||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
1,456 | 1,743 | 742 | 3,126 | 5 | 1,223 | 8,295 | |||||||||||||||||||||
Loans and leases ending balance |
||||||||||||||||||||||||||||
Acquired impaired loans |
$ | 207,303 | $ | 175,717 | $ | 6,979 | $ | 13,464 | $ | 574 | $ | | $ | 404,037 | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
8,916 | 1,300 | | 1,382 | 328 | | 11,926 | |||||||||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
580,125 | 433,721 | 133,787 | 423,392 | 2,057 | 158,966 | 1,732,048 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases at December 31, 2016, gross |
$ | 796,344 | $ | 610,738 | $ | 140,766 | $ | 438,238 | $ | 2,959 | $ | 158,966 | $ | 2,148,011 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ratio of net charge-offs to average loans and leases outstanding during the year |
||||||||||||||||||||||||||||
Acquired impaired loans |
0.19 | % | 0.03 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.23 | % | ||||||||||||||
Acquired non-impaired loans and leases |
0.07 | % | 0.01 | % | 0.01 | % | 0.00 | % | 0.00 | % | 0.04 | % | 0.13 | % | ||||||||||||||
Originated loans and leases |
0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.07 | % | 0.07 | % | ||||||||||||||
Loans ending balance as a percentage of total loans, gross |
||||||||||||||||||||||||||||
Acquired impaired loans |
9.65 | % | 8.18 | % | 0.32 | % | 0.63 | % | 0.03 | % | 0.00 | % | 18.81 | % | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases individually evaluated for impairment |
0.42 | % | 0.06 | % | 0.00 | % | 0.06 | % | 0.02 | % | 0.00 | % | 0.56 | % | ||||||||||||||
Acquired non-impaired loans and leases and originated loans and leases collectively evaluated for impairment |
27.01 | % | 20.19 | % | 6.23 | % | 19.71 | % | 0.10 | % | 7.40 | % | 80.63 | % |
-96-
Non-performing assets
Non-performing loans and leases include loans and leases 90 days past due and still accruing, loans and leases accounted for on a non-accrual basis and accruing restructured loans. Non-performing assets consist of non-performing loans and leases plus OREO (i.e. real estate acquired through foreclosure or deed in lieu of foreclosure).
Non-accrual loans and leases as of March 31, 2017, December 31, 2016 and 2015 totaled $7.8 million, $6.8 million and $7.4 million, respectively.
Total OREO held by the Company was $13.2 million as of March 31, 2017, a decrease of $3.4 million from December 31, 2016. The decrease in OREO resulted from dispositions of $3.9 million and valuation adjustments of $276,000, offset by net additions to OREO through loan foreclosures totaling $799,000.
Total OREO held by the Company decreased from $26.7 million as of December 31, 2015 to $16.6 million as of December 31, 2016. The $10.1 million decrease in OREO for the year ended December 31, 2016 resulted from the disposition of OREO of $17.4 million and valuation adjustments of $953,000 offset by additional OREO resulting from the acquisition of Ridgestone of $1.5 million and net additions through loan foreclosures of $6.7 million.
The following table sets forth the amounts of non-performing loans and leases, non-performing assets, and OREO at the dates indicated (dollars in thousands):
(unaudited) | ||||||||||||
March 31,
|
December 31,
|
December 31,
|
||||||||||
Non-accrual loans and leases (1)(2)(3) |
$ | 7,843 | $ | 6,784 | $ | 7,402 | ||||||
Past due loans and leases 90 days or more and still accruing interest |
| | | |||||||||
Accruing troubled debt restructured loans |
1,004 | 602 | 1,909 | |||||||||
|
|
|
|
|
|
|||||||
Total non-performing loans and leases |
8,847 | 7,386 | 9,311 | |||||||||
Other real estate owned |
13,173 | 16,570 | 26,715 | |||||||||
|
|
|
|
|
|
|||||||
Total non-performing assets |
$ | 22,020 | $ | 23,956 | $ | 36,026 | ||||||
|
|
|
|
|
|
|||||||
Total non-performing loans as a percentage of total loans and leases |
0.41 | % | 0.34 | % | 0.69 | % | ||||||
Total non-performing assets as a percentage of total assets |
0.67 | % | 0.73 | % | 1.45 | % | ||||||
Allowance for loan and lease losses as a percentage of non-performing loans and leases |
133.57 | % | 147.88 | % | 81.98 | % |
(1) | Includes $479,000, $552,000 and $833,000 of non-accrual restructured loans at March 31, 2017, December 31, 2016 and 2015. |
(2) | For the three months ended March 31, 2017, $203,000 in interest income would have been recorded had non-accrual loans been current and the amount of interest we recorded on these loans was $78,000. |
(3) | For the three months ended March 31, 2017, $9,000 in interest income would have been recorded had troubled debt restructurings included within accrual loans been current. |
Acquired impaired loans (accounted for under ASC 310-30) that are delinquent and/or on non-accrual status continue to accrue income provided the respective pool in which those assets reside maintains a discount and recognizes accretion income. The aforementioned loans are characterized as performing loans based on contractual delinquency. If the pool no longer has a discount and accretion income can no longer be recognized, any loan within that pool on non-accrual status will be classified as non-accrual for presentation purposes.
Total non-accrual loans increased by $1.1 million between December 31, 2016 and March 31, 2017 due to the additional non-accrual loans primarily in the government guaranteed loan portfolio. Total non-accrual
-97-
loans decreased by $618,000 or 8.3% between December 31, 2015 and 2016. The decrease was primarily due to the reduction in acquired loans from the recapitalization and offset by the addition of loans from the Ridgestone acquisition. At December 31, 2016, there were $746,000 of non-accrual loans acquired from Ridgestone.
Total accruing loans past due decreased from $14.1 million at December 31, 2016 to $12.7 million at March 31, 2017. Total accruing loans past due increased from $2.2 million at December 31, 2015 to $14.1 million at December 31, 2016. This represents an increase of $11.9 million or 546.7%, and can be attributed to the addition of loans from the Ridgestone acquisition. Of the $11.9 million increase, $11.0 million are from loans that were 3059 days past due; $7.7 million, or 54.3% of past due loans were acquired from Ridgestone in 2016.
The following tables summarize the recorded investment, unpaid principal balance, related allowance, average recorded investment, and interest income recognized for loans and leases considered impaired as of the periods indicated (dollars in thousands):
(unaudited) March 31, 2017 |
||||||||||||||||||||||||||||
Unpaid
|
Impaired
|
Impaired
|
Impaired
|
Specific
|
Average
|
Interest
|
||||||||||||||||||||||
Commercial real estate |
$ | 10,353 | $ | 5,190 | $ | | $ | 9,764 | $ | | $ | 9,798 | $ | 130 | ||||||||||||||
Residential real estate |
2,383 | 57,715 | 484 | 778 | 282 | 1,275 | 8 | |||||||||||||||||||||
Construction, land development, and other land |
87 | | 85 | | 26 | 86 | 6 | |||||||||||||||||||||
Commercial and industrial |
3,485 | 7,439 | 1,743 | 1,574 | 966 | 3,283 | 63 | |||||||||||||||||||||
Installment and other |
315 | | 327 | | 325 | 328 | 4 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans held in portfolio, net |
$ | 16,623 | $ | 70,344 | $ | 2,639 | $ | 12,116 | $ | 1,599 | $ | 14,770 | $ | 211 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
||||||||||||||||||||||||||||
Unpaid
|
Impaired
|
Impaired
|
Impaired
|
Specific
|
Average
|
Interest
|
||||||||||||||||||||||
Commercial real estate |
$ | 9,502 | $ | 5,226 | $ | | $ | 8,916 | $ | | $ | 8,975 | $ | 305 | ||||||||||||||
Residential real estate |
2,527 | 2,252 | 496 | 804 | 293 | 1,346 | 46 | |||||||||||||||||||||
Commercial and industrial |
1,393 | 8,189 | 861 | 521 | 396 | 1,430 | (2 | ) | ||||||||||||||||||||
Installment and other |
361 | 7 | 328 | | 328 | 328 | 16 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans held in portfolio, net |
$ | 13,783 | $ | 15,674 | $ | 1,685 | $ | 10,241 | $ | 1,017 | $ | 12,079 | $ | 365 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-98-
December 31, 2015 |
||||||||||||||||||||||||||||
Unpaid
|
Impaired
|
Impaired
|
Impaired
|
Specific
|
Average
|
Interest
|
||||||||||||||||||||||
Commercial real estate |
$ | 4,719 | $ | 87,514 | $ | 2,798 | $ | 1,362 | $ | 1,076 | $ | 4,220 | $ | 110 | ||||||||||||||
Residential real estate |
5,438 | 9,064 | 1,221 | 2,821 | 615 | 4,115 | 78 | |||||||||||||||||||||
Construction, land development, and other land |
1,201 | | 208 | | 137 | 208 | | |||||||||||||||||||||
Commercial and industrial |
171 | 10,768 | 171 | | 171 | 185 | 1 | |||||||||||||||||||||
Installment and other |
335 | 79 | 327 | | 327 | 327 | 23 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total impaired loans held in portfolio, net |
$ | 11,864 | $ | 107,425 | $ | 4,725 | $ | 4,183 | $ | 2,326 | $ | 9,055 | $ | 212 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
Total deposits at March 31, 2017 were $2.6 billion, representing an increase of $85.4 million, or 3.4%, compared to $2.5 billion at December 31, 2016. As of March 31, 2017, deposits accounted for 89.0% of total liabilities, and core deposits, which we define as all deposits excluding certificates of deposit exceeding $100,000, constituted 84.3% of our deposit base.
Total deposits at December 31, 2016 were $2.5 billion, representing an increase of $309.8 million, or 14.2%, compared to $2.2 billion at December 31, 2015. The majority of the growth in deposits is due to the acquisition of Ridgestone, which added $361.4 million to deposits at the time of the acquisition. This was offset by $34.3 million in net time deposit run off in 2016. We expect deposits to remain our primary funding source in the future as we continue to grow our high quality deposit base by investing in our product capabilities and lowering our cost of deposits. As of December 31, 2016, deposits accounted for 85% of total liabilities, and core deposits, which we define as all deposits excluding certificates of deposit exceeding $100,000, constituted 84.6% of our deposit base.
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.
-99-
The following tables show the average balance amounts and the average contractual rates paid on our deposits for the periods indicated (dollars in thousands):
(unaudited) |
||||||||||||||||
For the Three Months
|
For the Three Months
|
|||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||
Non-interest-bearing deposits |
$ | 716,162 | 0.00 | % | $ | 647,537 | 0.00 | % | ||||||||
Interest-bearing checking accounts |
181,903 | 0.06 | % | 186,642 | 0.06 | % | ||||||||||
Money market demand accounts |
367,273 | 0.23 | % | 389,110 | 0.24 | % | ||||||||||
Other savings |
446,891 | 0.07 | % | 439,861 | 0.07 | % | ||||||||||
Time deposits (below $100,000) |
400,175 | 0.49 | % | 319,954 | 0.47 | % | ||||||||||
Time deposits ($100,000 and above) |
390,391 | 0.71 | % | 235,899 | 0.76 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,502,795 | 0.24 | % | $ | 2,219,003 | 0.21 | % | ||||||||
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2016 |
For the Year Ended December 31, 2015 |
|||||||||||||||
Average
|
Average
|
Average
|
Average
|
|||||||||||||
Non-interest-bearing deposits |
$ | 666,221 | 0.00 | % | $ | 620,464 | 0.00 | % | ||||||||
Interest-bearing checking accounts |
187,042 | 0.07 | % | 187,287 | 0.07 | % | ||||||||||
Money market demand accounts |
401,628 | 0.25 | % | 385,175 | 0.24 | % | ||||||||||
Other savings |
442,458 | 0.07 | % | 440,736 | 0.07 | % | ||||||||||
Time deposits (below $100,000) |
318,544 | 0.39 | % | 322,598 | 0.44 | % | ||||||||||
Time deposits ($100,000 and above) |
264,478 | 0.73 | % | 241,617 | 0.67 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 2,280,371 | 0.20 | % | $ | 2,197,877 | 0.20 | % | ||||||||
|
|
|
|
|
|
|
|
The following table shows time deposits and other time deposits of $100,000 or more by time remaining until maturity:
(unaudited) At March 31, 2017 |
||||
Time Deposits |
||||
Three months or less |
$ | 116,511 | ||
Over three months through six months |
84,874 | |||
Over six months through 12 months |
112,262 | |||
Over 12 months |
89,918 | |||
|
|
|||
Total |
$ | 403,565 | ||
|
|
Borrowed funds
Other than deposits, we also utilize FHLB advances as a supplementary funding source to finance our operations. The Companys advances from the FHLB are collateralized by residential, multi-family real estate loans and securities. At March 31, 2017, December 31, 2016 and December 31, 2015, the Company had maximum borrowing capacity from the FHLB of $1.2 billion, $961.8 million and $888.3 million, respectively, subject to the availability of collateral. During the three months ended March 31, 2017, outstanding FHLB advances before acquisition accounting adjustment decreased to $209.5 million due to an increase in seasonal deposits. During 2016, FHLB advances increased by $275.7 million due to increased loan demand and timing of seasonal deposits outflows. Of the $275.7 million increase, $9.8 million was acquired with the Ridgestone merger net of acquisition accounting adjustments.
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The following table sets forth certain information regarding our short-term borrowings at the dates and for the periods indicated (dollars in thousands):
(unaudited)
March 31, |
As of and for the Years Ended December 31, |
|||||||||||
2017 |
2016 |
2015 |
||||||||||
Federal Home Loan Bank advances: |
||||||||||||
Average balance outstanding |
$ | 301,375 | $ | 151,508 | $ | 15,009 | ||||||
Maximum outstanding at any month-end period during the year |
374,697 | 313,715 | 100,000 | |||||||||
Balance outstanding at end of period |
209,663 | 313,715 | 38,000 | |||||||||
Weighted average interest rate during period |
0.89 | % | 0.47 | % | 0.15 | % | ||||||
Weighted average interest rate at end of period |
1.08 | 0.73 | 0.16 | |||||||||
Line of credit: |
||||||||||||
Average balance outstanding |
$ | 19,400 | $ | 6,424 | $ | | ||||||
Maximum outstanding at any month-end period during the year |
20,650 | 30,000 | | |||||||||
Balance outstanding at end of period |
18,150 | 20,650 | | |||||||||
Weighted average interest rate during period |
3.79 | % | 3.55 | % | | % | ||||||
Weighted average interest rate at end of period |
4.00 | 3.75 | |
The following table shows the scheduled maturities of these advances and weighted average interest rates at March 31, 2017 (dollars in thousands) (unaudited):
Scheduled Maturities |
Amount |
Weighted
|
||||||
2017 |
$ | 200,000 | 0.97 | % | ||||
2018 |
9,663 | 3.20 | % | |||||
|
|
|
|
|||||
Total |
$ | 209,663 | 1.08 | % | ||||
|
|
|
|
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. The Company pledges securities as collateral for the repurchase agreements. As of March 31, 2017, securities sold under agreements to repurchase increased $14.7 million to $31.9 million from December 31, 2016. Securities sold under agreements to repurchase increased by $4.5 million from $12.7 million at December 31, 2015 to $17.2 million at December 31, 2016.
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 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 Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015.
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As of March 31, 2017, we held $83.3 million in cash and cash equivalents. We maintain an investment portfolio of various holdings, types and maturities. We had securities available for sale of $590.5 million and securities held-to-maturity of $132.9 million as of March 31, 2017 and total unpledged securities was $504.3 million.
As of March 31, 2017, Byline Bank had maximum borrowing capacity from the FHLB of $1.2 billion and from the FRB of $169.5 million. As of March 31, 2017, Byline Bank had open advances, before acquisition accounting adjustment, of $209.5 million and open letters of credit of $300,000, leaving us with available FHLB and FRB borrowing capacity of $1.1 billion. In addition, Byline Bank had an uncommitted federal funds line of $20.0 million available to use.
As of December 31, 2016, Byline Bank had maximum borrowing capacity from the FHLB of $961.8 million and from the FRB of $110.6 million. As of December 31, 2016, Byline Bank had open advances of $313.5 million and open letters of credit of $400,000, leaving us with available FHLB and FRB borrowing capacity of $758.5 million. In addition, Byline Bank had an uncommitted federal funds line of $20.0 million available to use. On October 13, 2016, we entered into a $30.0 million revolving credit agreement with The Private Bank and Trust Company. As of December 31, 2016, this revolving line of credit had an outstanding balance of $20.7 million. On April 13, 2017, the revolving line of credit was converted to a non-revolving line of credit as long as the outstanding balance exceeds $5.0 million. When the outstanding balance decreases to $5.0 million, or below, the line of credit will be converted to a revolving line of credit with credit availability up to $5.0 million until maturity at October 12, 2017.
There are regulatory limitations that affect the ability of Byline Bank to pay dividends to the Company. See Note 21 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 for additional information. Management believes that such limitations will not impact our ability to meet our ongoing short-term cash obligations.
We expect to use a portion of the net proceeds of this offering to repay all amounts outstanding under our revolving agreement, although we will maintain the committed amount under such agreement. We expect that our cash and liquidity resources will be generated by the operations of Byline Bank, which we expect to be sufficient to satisfy our liquidity and capital requirements for at least the next twelve months.
Capital resources
Stockholders equity at March 31, 2017 was $389.7 million compared to $382.7 million at December 31, 2016, an increase of $7.0 million, or 1.8%. The increase was primarily driven by our earnings during the first quarter of 2017.
Stockholders equity at December 31, 2016 was $382.7 million compared to $188.3 million at December 31, 2015, an increase of $194.4 million, or 103.2%. The increase was primarily driven by the Ridgestone acquisition, a common equity private placement of $50.0 million in 2016, a non-cumulative perpetual preferred stock private placement of $10.4 million and an increase of $66.7 million to retained earnings.
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 the Companys and Byline Banks financial statements.
Under Capital Rules, 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
-102-
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 the Capital Rules. For further information, see Supervision and RegulationRegulatory Capital Requirements and Supervision and Regulation- Prompt Corrective Action Framework.
As of March 31, 2017, the FDIC categorized Byline Bank as well-capitalized under the prompt corrective action framework, as defined in Supervision and Regulation. There have been no conditions or events since March 31, 2017 that management believes have changed Byline Banks 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 are set forth in the following tables. The Companys and Byline Banks actual capital amounts and ratios as of the periods indicated (dollars in thousands).
Actual |
Minimum Capital Required |
Required to be Considered Well Capitalized |
||||||||||||||||||||||
March 31, 2017 (unaudited) |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 320,034 | 13.49 | % | $ | 189,753 | 8.00 | % | $ | 237,191 | N/A | |||||||||||||
Bank |
330,588 | 13.88 | % | 190,534 | 8.00 | % | 238,168 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 306,987 | 12.94 | % | $ | 142,314 | 6.00 | % | $ | 189,753 | N/A | |||||||||||||
Bank |
317,541 | 13.33 | % | 142,901 | 6.00 | % | 190,534 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 (CET1) to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 257,431 | 10.85 | % | $ | 106,736 | 4.50 | % | $ | 154,174 | N/A | |||||||||||||
Bank |
317,541 | 13.33 | % | 107,176 | 4.50 | % | 154,809 | 6.50 | % | |||||||||||||||
Tier 1 capital to average assets: |
||||||||||||||||||||||||
Company |
$ | 306,987 | 9.59 | % | $ | 128,020 | 4.00 | % | $ | 160,025 | N/A | |||||||||||||
Bank |
317,541 | 9.89 | % | 128,453 | 4.00 | % | 160,567 | 5.00 | % |
Actual |
Minimum Capital Required |
Required to be Considered Well Capitalized |
||||||||||||||||||||||
December 31, 2016 |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 316,314 | 13.28 | % | $ | 190,257 | 8.00 | % | $ | 238,159 | N/A | |||||||||||||
Bank |
325,465 | 13.61 | % | 191,267 | 8.00 | % | 239,084 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 304,324 | 12.78 | % | $ | 142,895 | 6.00 | % | $ | 190,527 | N/A | |||||||||||||
Bank |
313,474 | 13.11 | % | 143,450 | 6.00 | % | 191,267 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 (CET1) to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 266,760 | 11.20 | % | $ | 107,171 | 4.50 | % | $ | 154,803 | N/A | |||||||||||||
Bank |
313,474 | 13.11 | % | 107,588 | 4.50 | % | 155,404 | 6.50 | % | |||||||||||||||
Tier 1 capital to average assets: |
||||||||||||||||||||||||
Company |
$ | 304,324 | 10.07 | % | $ | 120,850 | 4.00 | % | $ | 151,062 | N/A | |||||||||||||
Bank |
313,474 | 10.35 | % | 121,169 | 4.00 | % | 151,461 | 5.00 | % |
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Actual |
Minimum Capital Required |
Required to be Considered Well Capitalized |
||||||||||||||||||||||
December 31, 2015 |
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
||||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 202,578 | 12.51 | % | $ | 129,534 | 8.00 | % | $ | 161,917 | N/A | |||||||||||||
Bank |
192,253 | 11.87 | % | 129,537 | 8.00 | % | 161,921 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 194,364 | 12.00 | % | $ | 97,150 | 6.00 | % | $ | 129,534 | N/A | |||||||||||||
Bank |
184,039 | 11.37 | % | 97,153 | 6.00 | % | 129,537 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 (CET1) to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 144,361 | 8.92 | % | $ | 72,863 | 4.50 | % | $ | 105,246 | N/A | |||||||||||||
Bank |
184,039 | 11.37 | % | 72,864 | 4.50 | % | 105,249 | 6.50 | % | |||||||||||||||
Tier 1 capital to average assets: |
||||||||||||||||||||||||
Company |
$ | 194,364 | 7.85 | % | $ | 99,076 | 4.00 | % | $ | 123,845 | N/A | |||||||||||||
Bank |
184,039 | 7.43 | % | 99,077 | 4.00 | % | 123,846 | 5.00 | % |
The Company and Byline Bank must maintain a capital conservation buffer consisting of CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The capital conservation buffer requirement began to be phased in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required, which amount increases each year until the buffer requirement is fully implemented on January 1, 2019. The conservation buffers for the Company and Byline Bank exceed the fully phased in minimum capital requirement as of March 31, 2017.
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 Banks 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. During the three months ended March 31, 2017, the Company received an $800,000 cash dividend from Byline Bank to make interest payments on the line of credit and the trust preferred securities and to pay dividends on the Companys Series B preferred stock. There were no cash dividends received by the Company from Byline Bank for the year ended December 31, 2016. Cash dividends of $700,000 to pay the interest payments on the trust preferred securities were received by the Company from Byline Bank for the year ended December 31, 2015.
Contractual obligations
The following table summarizes aggregated information about our outstanding contractual obligations and other long-term liabilities as of March 31, 2017. The payment amounts represent those amounts contractually due to the recipients (dollars in thousands (unaudited)).
Payments Due by Period |
||||||||||||||||||||
Total |
Less than
|
One
to
|
Three
to
|
More
|
||||||||||||||||
Contractual Obligations |
||||||||||||||||||||
Deposits without stated maturity |
$ | 1,764,803 | $ | 1,764,803 | $ | | $ | | $ | | ||||||||||
Time deposits |
811,036 | 638,977 | 158,653 | 13,392 | 14 | |||||||||||||||
Short term borrowings |
259,753 | 259,753 | | | | |||||||||||||||
Long term borrowings |
27,130 | | | | 27,130 | |||||||||||||||
Operating lease obligations |
13,412 | 2,937 | 4,795 | 3,120 | 2,560 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,876,134 | $ | 2,666,470 | $ | 163,448 | $ | 16,512 | $ | 29,704 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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FHLB advances are fully described in Note 12 of Bylines Consolidated Financial Statements as of December 31, 2016 and 2015. Operating lease obligations are in place for facilities and land on which banking facilities are located. See Note 17 of Bylines Consolidated Financial Statements as of December 31, 2016 and 2015 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 customers 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 managements credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).
Standby letters of credit are conditional commitments issued by Byline Bank to guarantee to a third-party the performance of a customer. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 2.1% to 19.5% and maturities up to 2025. Variable rate loan commitments have interest rates ranging from 2.5% to 9.8% and maturities up to 2046.
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.
The following table summarizes commitments as of the dates presented (dollars in thousands).
(Unaudited) March 31, 2017 |
December 31, |
|||||||||||||||||||||||
2016 |
2015 |
|||||||||||||||||||||||
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||||||||
Commitments to extend credit |
$ | 35,720 | $ | 367,278 | $ | 37,731 | $ | 332,928 | $ | 31,579 | $ | 169,298 | ||||||||||||
Standby letters of credit |
954 | 3,239 | 1,060 | 4,135 | 1,147 | 1,497 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 36,674 | $ | 370,517 | $ | 38,791 | $ | 337,063 | $ | 32,726 | $ | 170,795 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
During the first quarter ended March 31, 2017 and for the year ended December 31, 2016, we entered into interest rate swaps that are used to manage differences in the amount, timing, and duration of our known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. We also entered into interest rate swaps with certain qualified borrowers to facilitate the borrowers risk management strategies and concurrently entered into mirror-image derivatives with a third party counterparty. There were no interest rate swap agreements entered into during 2015.
-105-
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 March 31, 2017 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):
(Unaudited) March 31, 2017 |
||||||||||||||||
Derivative Assets |
Derivative Liabilities |
|||||||||||||||
Notional |
Fair Value |
Notional |
Fair Value |
|||||||||||||
Interest rate contractspay fixed, receive floating |
$ | 150,000 | $ | 3,925 | $ | 50,000 | $ | 254 | ||||||||
Other interest rate swapspay fixed, receive floating |
37,136 | 727 | 37,136 | 701 |
-106-
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 (NOW) accounts, savings accounts and money market deposits accounts (MMDAs) and the rate of prepayment associated with fixed-rate lending and mortgage-backed securities. Interest rates may also affect loan demand, credit losses, mortgage origination volume and other items affecting earnings.
We are also exposed to interest rate risk through the retained portion of the SBA loans we make and the related servicing rights. Our SBA loan portfolio is comprised primarily of SBA 7(a) loans, 91% 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 banks asset liability committee and is chaired by Byline Banks Treasurer based on a risk management infrastructure approved by our board of directors that outlines reporting and measurement requirements. In particular, this infrastructure sets limits and management targets, calculated monthly, for various metrics, including our economic value sensitivity, our economic value of equity and net interest income simulations involving parallel shifts in interest rate curves, steepening and flattening yield curves, and various prepayment and deposit duration assumptions. Our risk management infrastructure also requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, non-interest-bearing and interest-bearing demand deposit durations based on historical analysis and the targeted investment term of capital.
We manage the interest rate risk associated with our interest-bearing liabilities by managing the interest rates and tenors associated with our borrowings from the FHLB and deposits from our customers that we rely on for funding. In particular, from time to time we use special offers on deposits to alter the interest rates and tenors associated with our interest-bearing liabilities. We manage the interest rate risk associated with our interest-earning assets by managing the interest rates and tenors associated with our investment and loan portfolios, from time to time purchasing and selling investment securities and selling residential mortgage loans in the secondary market.
We utilize interest rate swaps to hedge our interest rate exposure on commercial loans when it meets our clients and Byline Banks needs. Typically, customer interest rate swaps are for terms of more than five years. As of March 31, 2017, we had a notional amount of $74.3 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
-107-
control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent credit review process that assesses compliance with commercial, real estate and other credit policies, risk ratings 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. See BusinessRisk ManagementCredit and Interest Rate Risk Management for further information about our credit risk management function.
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) varying loan prepayment speeds for different interest rate scenarios, (6) the effect of interest rate limitations in our assets, such as floors and caps, (7) the effect of our interest rate swaps and (8) 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 March 31, 2017 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100 basis points and immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points and (2) gradual shifts downward of 100 basis points over 12 months and gradual shifts upward of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide 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 immediate-shift scenarios, we assume short-term rates follow a forward yield curve throughout the forecast period that is dictated by the instantaneously shocked yield curve from the as of date. In the gradual-shift scenarios, we take each rate across the yield curve from the as of date and shock it by 1/12th of the total change in rates each month for twelve months.
Estimated Increase (Decrease) in Net Interest Income |
||||||||
Change in Market Interest Rates as of March 31, 2017 |
Twelve Months Ending
|
Twelve
Months Ending
|
||||||
Immediate Shifts |
||||||||
+400 basis points |
11.4 | % | 8.1 | % | ||||
+300 basis points |
9.0 | % | 6.5 | % | ||||
+200 basis points |
6.3 | % | 4.8 | % | ||||
+100 basis points |
3.3 | % | 2.7 | % | ||||
-100 basis points |
(6.7 | )% | (7.7 | )% | ||||
Dynamic Balance Sheet and Rate Shifts |
||||||||
+200 basis points |
6.2 | % | ||||||
+100 basis points |
3.2 | % | ||||||
-100 basis points |
(5.2 | )% |
-108-
The results of this simulation analysis are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads, would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposit liabilities or if our mix of assets and liabilities otherwise changes. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Finally, these simulation results do not contemplate all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.
-109-
Our Company
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. We have been a part of the Chicago banking community for over 100 years and operate the fifth largest branch network in the City of Chicago with 56 branches in the Chicago metropolitan area. 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 and were the sixth most active Small Business Administration (SBA) lender in the United States as reported by the SBA for the year ended September 30, 2016. As of March 31, 2017, we had consolidated total assets of $3.3 billion, total gross loans and leases outstanding of $2.1 billion, total deposits of $2.6 billion and total stockholders equity of $389.7 million.
Our mission is to provide customers with a high degree of service, convenience and the products they need to achieve their financial objectives. We aim to do so one customer, one relationship and one neighborhood at a time. We believe that customers value convenience, prompt decision making and knowledge of the local market when choosing a banking partner. We distinguish ourselves from smaller competitors with the breadth and sophistication of our product capabilities, ranging from basic deposit accounts to cash-flow based loan facilities and cash management products; and we differentiate ourselves from larger competitors with our level of responsiveness, local decision making and the accessibility of our service. Given the large presence of out-of-state banks and the scarcity of local community banks that can competitively serve small and medium sized businesses, we see an attractive opportunity for Byline to be the bank that Chicago deserves.
Our culture is rooted in a set of core values that we refer to as the Things That Matter . These values underlie everything we do, including the way we engage with customers, collaborate with colleagues, do business and manage our resources. We believe our culture and the quality of our people have been catalysts of our success and will continue to propel our future.
In 2013, our predecessor, Metropolitan Bank Group, Inc. (Metropolitan), experienced significant credit and financial losses resulting primarily from the collapse of real estate prices during the Great Recession. Despite deterioration in asset quality and financial performance, Metropolitan maintained a high quality deposit base, an attractive branch network and strong customer loyalty, which made it an ideal candidate for a turnaround. Our Chief Executive Officer, Chief Financial Officer and Chairman led an investment group in the $207 million Recapitalization of Metropolitan, the largest recapitalization of a Chicago bank in over 25 years. Under a new leadership team headed by our Chief Executive Officer, Alberto J. Paracchini, we have built upon Metropolitans strengths and have restructured, refocused and rationalized Byline Bank to deliver growth and profitability. We also launched a new brand called Byline, which represented an important milestone in presenting our franchise under a unified name to our customers and employees.
Over the past four years, we have significantly improved our asset quality while adding $1.3 billion in net originated loans and leases to create a more diversified and balanced loan and lease portfolio. We aggressively reduced the level of troubled loans and other real estate owned in our portfolio, and our nonperforming assets, as a percentage of loans and real estate owned, declined to 1.0% as of March 31, 2017 from 28.2% as of March 31, 2013. In addition, we sought to optimize our deposit base by expanding the percentage of non-interest bearing deposits to total deposits, enhance online and mobile capabilities and broaden our cash management products to better meet our customers needs. During this period, we consolidated from 88 to 57 branches, reducing our costs with minimal deposit attrition, and improved our efficiency, including through the consolidation of multiple banking platforms into one. In addition to improving efficiency, consolidating our banking platforms allowed us to better monitor operations while strengthening our governance and controls.
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The table below details our transformation:
What We Were |
What We Are | |||||||
At and for the three months ended 3/31/2013 |
At and for the three
3/31/2017 |
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Deposit Franchise |
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# of Bank Brand Names |
12 | 1 | ||||||
# of Branches |
88 | 57 | ||||||
Non-interest bearing Deposits / Total Deposits |
26 | % | 28 | % | ||||
Cost of Deposits (1) |
0.27 | % | 0.24 | % | ||||
Deposits / Branch ($mm) |
$ | 26 | $ | 45 | ||||
Loan and Lease Portfolio |
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Total Loans and Leases (2) ($mm) |
$ | 1,542 | $ | 2,167 | ||||
Loans and Leases / Deposits (3) |
68 | % | 84 | % | ||||
Commercial & Industrial Loans / Total Loans & Leases |
3 | % | 21 | % | ||||
Non-performing Assets / Loans & Leases + Other Real Estate Owned (4) |
28.2 | % | 1.0 | % | ||||
Non-accrual & 90 Days or More Past Due Loans & Leases ($mm) |
$ | 258 | $ | 8 | ||||
Other Real Estate Owned ($mm) |
$ | 116 | $ | 13 | ||||
Capital |
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Common Equity ($mm) |
($ | 31 | ) | $ | 364 | |||
Common Equity/Assets |
(1.3 | %) | 11.1 | % | ||||
Tangible Common Equity ($mm) (5) |
($ | 43 | ) | $ | 293 | |||
Tangible Common Equity / Tangible Assets (5) |
(1.8 | %) | 9.1 | % | ||||
Profitability |
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Return on Average Assets |
(2.57 | %) | 0.80 | % | ||||
Non-interest Expense / Average Assets |
4.96 | % | 3.53 | % | ||||
Non-interest Income / Total Revenue |
(4.27 | %) | 29.41 | % |
Source: SNL Financial and company management. Financial information as of and for the three months ended March 31, 2013 is derived from Metropolitans historical Consolidated Financial Statements for Holding Companies filed with the Federal Reserve Bank on Form FR Y-9C. The FR Y-9C reports were prepared by Metropolitans management team prior to the Recapitalization and may not reflect similar assumptions or accounting standards used in our financial statements. The financial information as of and for the three months ended March 31, 2013 included in this table has not been reviewed or audited by our independent registered public accounting firm and may not be directly comparable to Bylines financial results for the quarter ended March 31, 2017.
(1) | Represents annualized (meaning, recalculated as an annual rate) interest expense for the quarter divided by average total deposits for the quarter. |
(2) | Represents total loans and leases held for sale and held for investment. |
(3) | Represents total loans and leases held for sale and held for investment divided by total deposits. |
(4) | Represents total non-performing assets, which includes nonaccrual loans and leases, troubled debt restructured loans and other real estate owned divided by total loans and leases held for investment and other real estate owned. |
(5) | Represents a non-GAAP financial measure. See GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. |
We plan 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 allow 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.
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We Are Not Like the Other Guys
We believe the following strengths differentiate us from our competitors and will drive future growth:
Core deposit franchise and focus. The quality of our deposit franchise and access to stable funding are key components of our success. We have a strong deposit franchise characterized by a high level of core deposits, high proportion of non-interest bearing accounts and relatively low funding costs. As of March 31, 2017, deposits accounted for 89% of total liabilities, and core deposits, which we define as all deposits excluding time deposits exceeding $100,000, constituted 84% of our deposit base. We also increased our percentage of non-interest bearing deposits from 27% at December 31, 2013 to 28% at March 31, 2017 and our cost of deposits was 0.24% for the quarter ended March 31, 2017.
Our local presence and our scale are essential to the continued growth of our deposit base. Small businesses are a significant source of low cost deposits and represent opportunities for future growth. Small business owners value our ability to provide convenience and access to local, responsive decision makers. Commercial accounts also generally have higher deposit balances and transaction volumes than individual deposit accounts. As of March 31, 2017, commercial deposits represented 19% of total deposits.
Since the Recapitalization, we have consolidated from 88 to 57 branches, reducing our costs with minimal loss of deposits. Following the introduction of our Byline brand, customers now recognize us by a single name and we strive to deliver a consistent customer experience across our entire branch network. We have also enhanced our online and mobile capabilities and expanded our cash management products to meet our customers needs.
We believe that our Chicago branch network, service driven culture, diversified product offering and focus on small and medium sized businesses will allow us to accelerate deposit growth. We plan to continue investing in our brand, employees and product capabilities to further improve customer loyalty with a view toward growing our high quality deposit portfolio.
Seasoned management team and board of directors with a strong track record. Our seasoned executive management team has extensive local knowledge of the banking industry. Drawing on their experience and deep ties to the Chicago community, our management team successfully executed our turnaround strategy and guided our transformation while growing our franchise. Under their leadership, we have significantly improved asset quality, built a new, diversified loan and lease portfolio, strengthened our deposit base and improved our operating environment and controls, while also integrating two acquisitions. Our board of directors includes highly accomplished individuals with broad experience operating and working in the financial services industry and provides valuable insight to our business. We believe managements track record of performance, guided by our board and a culture dedicated to maintaining the highest business and ethical standards and practices, will drive the continued growth of our franchise.
Our executive management team is led by veteran banking executives:
| Alberto J. Paracchini, our President and Chief Executive Officer, has over 24 years of experience in the Chicago financial services industry, having spent over 16 years at Popular, Inc., where he held numerous leadership positions in both its banking and mortgage subsidiaries, and serving as Principal at BXM Holdings, Inc. (BXM), an investment fund specializing in community banks, where he was a member of the team that led the Recapitalization. |
| Lindsay Corby, our Executive Vice President and Chief Financial Officer, has over 16 years of experience in the financial services industry, including as a Principal and member of the team at BXM that led the Recapitalization, and as a Vice President in the investment banking group of Keefe, Bruyette & Woods, Inc. |
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| Timothy C. Hadro, our Chief Credit Officer and Head of the Special Assets Group for Byline Bank, has more than 42 years of lending experience, more than 34 years of experience in the Chicago banking industry and 31 years of experience at JPMorgan Chase and its predecessor organizations. |
Our board of directors includes highly accomplished individuals with strong track records:
| Roberto R. Herencia, our Chairman, is also Chairman of First BanCorp, and a director of Banner Corporation. Mr. Herencia is the current President and Chief Executive Officer of BXM, former President and Chief Executive Officer of Midwest Banc Holdings, Inc., and former Executive Vice President of Popular Inc.; |
| L. Gene Beube, former Executive Vice President and Chief Credit Officer of Banco Popular North America; |
| Phillip R. Cabrera, former Vice President and International Treasurer of McDonalds Corporation; |
| Antonio del Valle Perochena, Chairman of Grupo Kaluz and Grupo Financiero BX+ and director of Elementia S.A.B. de C.V. and Mexichem, S.A.B. de C.V., holding companies for financial, industrial and construction enterprises, and former Executive Vice President of Insurance and Pensions of ING Group, Mexico; |
| Jaime Ruiz Sacristán, Founder and Chairman of the board of directors of BX+, director of Elementia S.A.B. de C.V., Mexichem, S.A.B. de C.V. and Banco Popular Español, S.A., Chairman of the Mexican Stock Exchange and former Chief Executive Officer of Grupo Financiero Bital; and |
| Steven M. Rull, Managing Director of Detalus Advisors, LLC and Detalus Securities, LLC and co-Founder of Manchester Partners. |
Attractive market opportunity. Chicago is the third largest metropolitan area in the U.S. and ranks in the top 10% of the U.S. by median household income. The city boasts a highly educated labor force with more than 508,000 residents with bachelors degrees and an influx of approximately 158,000 college graduates annually. Due to its diversified economy, strong labor force and low cost of doing business compared to other large metropolitan areas, more than 400 major corporations are headquartered in Chicago, including 31 Fortune 500 companies. There are over 27,000 small and medium sized businesses in Chicago that generate between $5 million and $75 million in annual revenue, which we view as our target commercial customers. More recently, Chicago was named by KPMG as one of the top 10 technology innovation hubs worldwide, with Chicago based startups and tech companies having raised a combined $3.4 billion in capital in 2015 and 2016.
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The graphs below show Chicagos diverse labor force and its lower cost of doing business as compared to other major U.S. cities.
Chicagos Diverse Labor Force | Cost of Doing Business Index | |
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Source: Bureau of Labor Statistics State and Metro Area Employment and KPMG Competitive Alternatives 2016. Labor force data as of March 31, 2017. Business cost data as of December 31, 2016.
Note: Business costs are expressed as an index. An index below 100 indicates lower costs than the U.S. baseline. An index over 100 indicates higher costs than the U.S. baseline (e.g., an index of 95.0 represents costs 5.0% below the U.S. baseline). U.S. baseline is the average of the four largest U.S. metro areas.
We believe the lack of similarly sized banks in the Chicago area creates a unique opportunity for us as we strive to provide broader and more sophisticated product capabilities than our smaller competitors while offering more responsive decision making and accessible service to local businesses and consumers than our larger competitors. The table below segments the Chicago bank landscape, which we believe illustrates the opportunity for smaller, local banks between $2 billion and $10 billion in assets:
Source: SNL Financial. Deposit and market share data as of June 30, 2016 (giving pro forma effect to pending bank acquisitions) and includes deposits at branches that were subsequently closed. Asset data as of March 31, 2017.
Note: Excludes Northern Trust from $10+bn in IL group.
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The table below illustrates the fragmented banking environment in Chicago, demonstrated through a number of significantly smaller banks in our market and a lack of medium sized banks compared to other large metropolitan areas in the U.S.:
Chicago |
Top 10 U.S. MSA Avg |
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Percentage of Banks in Market <$1bn Assets |
81.6 | % | 69.1 | % | ||||
Percentage of Banks in Market $1$10bn Assets |
12.8 | % | 23.8 | % | ||||
Market Share of Top 3 Banks |
45.7 | % | 54.3 | % | ||||
Market Share of Top 3 Local Banks |
11.1 | % | 18.1 | % |
Source: SNL Financial. Data as of March 31, 2017.
Given the large number of businesses, the attractive demographics and the lack of medium sized local banks capable of serving small and medium sized businesses in our target market, we believe we are well positioned to capitalize on growth opportunities in this market.
Diversified loan growth approach. Our ability to originate loans and leases across a range of industries and product types helps us maintain a diversified loan and lease portfolio. Prior to June 2013, Metropolitans loan portfolio was primarily concentrated in commercial real estate. Since the Recapitalization, we have substantially diversified our loan and lease portfolio across various sectors, including commercial and industrial lending, leasing, U.S. government guaranteed loans and real estate loans, allowing us to efficiently manage our credit exposures and capitalize on more lending opportunities. We have also enhanced our product and lending capabilities with the addition of experienced lending teams hired from larger banks. Throughout this growth period we have maintained strong credit quality, and we intend to continue diversifying both our origination sources and types of loans and leases in the future.
The graphs below show the increased diversification of our loan and lease portfolio from June 30, 2013 to March 31, 2017.
Breakdown of Loan and Lease Portfolio |
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June 30, 2013 |
March 31, 2017 |
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The graph below shows the increasing credit quality of our loan portfolio from the fourth quarter of 2013 to the first quarter of 2017.
Loan Portfolio Over Time
($ in millions)
Data as of December 31, 2013, December 31, 2014, December 31, 2015, December 31, 2016 and March 31, 2017.
(1) | Workout loans are managed by our Special Assets Group. |
Disciplined credit risk management framework. Risk management is a core competency of our business, demonstrated by the strong credit performance of loans originated since the Recapitalization. We have implemented comprehensive policies and procedures for credit underwriting and monitoring of our loan portfolio. The sound credit practices followed by our relationship bankers allow credit decisions to be made efficiently on a local basis consistent with our underwriting standards. We attribute our success to a strong credit culture, the continuous evaluation of risk and return and the strict separation between business development and credit decision making. We are committed to reviewing and monitoring limits set at the loan, relationship, product and portfolio levels. We believe our robust approach to risk management has enabled us to grow our loan and lease portfolio without compromising credit quality.
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The graph below shows the decrease in nonperforming assets in our loan portfolio from the fourth quarter of 2013 to the first quarter of 2017.
Evolution of NPAs
($ in millions)
Data as of December 31, 2013, December 31, 2014, December 31, 2015, December 31, 2016 and March 31, 2017.
Premier SBA lending platform enhances fee income. Our acquisition of Ridgestone, completed in October 2016, provides us with a scalable lending platform focused on the origination and servicing of government guaranteed loans. Ridgestone was the most active originator of SBA loans in Illinois and Wisconsin, the second most active originator of SBA loans in Indiana and the sixth most active originator of SBA loans in the United States as reported by the SBA for the year ended September 30, 2016. Ridgestone originated $472 million in 7(a) loans for the SBA fiscal year ended September 30, 2016 and generated significant servicing fee income as well as income from sales of the government guaranteed portions of loans. We believe the combination of the talent, infrastructure and product knowledge we obtained through the acquisition provides us with significant opportunities for additional growth in the government guaranteed loan business throughout the country as Byline Small Business Capital.
The graphs below show the diversification, by industry and geography, of our Small Business Capital lending portfolio.
Industry Concentration | Geographic Concentration | |
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Data for Small Business Capital as of March 31, 2017.
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Our Growth Strategy
We believe we can continue to grow our business and create stockholder value by executing the following strategies:
Capitalize on the attractive Chicago banking opportunity. Chicago has been our home for over 100 years, and we believe Chicago residents and businesses exhibit the same loyalty as we do toward our hometown. We have a deep understanding of our customers and the communities that we serve. Given the market opportunity for a commercial bank of our size and the scarcity of banks within the $2 billion to $10 billion asset range, we see a significant opportunity for Byline to gain market share in the Chicago area.
Focus on organic growth. We intend to grow our business organically in a focused and strategic manner. We also intend to maintain an asset sensitive balance sheet, which positions us to benefit in a rising interest rate environment. Our staff, systems and organizational structure have been built to support a larger organization. Over the past four years, we have hired new lending and leasing teams and expanded the breadth of our lending and leasing products. We believe that our overall capabilities, culture and opportunities for career growth will allow us to continue to attract talented new commercial and retail bankers to our business and enable our existing banking teams to drive loan growth. We also believe our bankers have further capacity to penetrate the markets and communities they serve as the brand awareness of Byline Bank continues to grow.
Consider opportunistic acquisitions. We are currently focused on organic growth, but we may consider smaller bank acquisitions that fit within the deposit strength and commercial orientation of our franchise, as well as other non-bank acquisitions. In the future, we may evaluate and act upon acquisition opportunities that we believe could produce attractive returns for our stockholders. In particular, we believe that there will be further bank consolidation in the Chicago metropolitan area and that we are well positioned to be a preferred partner for smaller institutions looking to exit. We have successfully completed two acquisitions in the past three years, both accretive to our franchise value. Our management team has over 82 years of combined experience, including structuring and integrating transactions, which we believe provides an advantage in identifying and executing on strategically and financially compelling opportunities that will supplement our organic growth strategy.
Leverage our culture and talent. We have focused intensely on developing a distinct culture guided by a core set of values that we refer to as the Things That Matter . These values underlie everything we do and are designed to foster open communication and full transparency among our colleagues. Consistent with our belief that it is important to invest in our people, over the past four years, we have enhanced our compensation programs, employee benefits and training programs as well as upgraded our workspaces. We believe these investments will enable us to retain and attract talent that fits our team concept and culture. In connection with the Recapitalization, we replaced all senior management of Metropolitan and a significant majority of its lending staff. Many of our employees hired since then have come from larger banks and have sophisticated product knowledge. We view our team as action-oriented and energized by the opportunities in our markets. We believe that our culture and the quality of our people have been catalysts of our success and will continue to propel our future.
Improve our operating leverage. We plan to focus on the following strategies to further drive our operating efficiency:
| Lower operating expenses related to legacy loan and owned real estate workout activities |
| Pursue opportunities to drive higher fee income from our account base through the increased use of our treasury management services and the sales of other products and services to loan and lease customers |
| Continue to increase our average deposits per branch while adapting to changing consumer behavior |
| Invest in technology to automate processes in order to gain scale and reduce unit costs |
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Our Products and Services
We are a full-service, commercial bank offering a broad range of deposit products and lending services to small and medium sized businesses, commercial real estate and financial sponsors, and consumers around our 56 branch locations in the Chicago metropolitan area and one branch in Brookfield, Wisconsin. The products and services we offer are described below.
Retail deposits
We offer customers traditional retail deposit products through our branch network and the ability to access their accounts through online and mobile banking platforms. The wide variety of deposit products we offer include non-interest bearing accounts, MMDAs, savings accounts, NOW accounts and time deposits with maturities ranging from 7 days to 5 years. We consider our core deposits, defined as all deposits except for time deposits exceeding $100,000, to be our primary and most valuable funding source, and as of March 31, 2017, core deposits represented 84% of our total deposits. We strive to retain an attractive deposit mix from both large and small customers as well as a broad market reach, which has resulted in our top 50 customers accounting for only 10% of all deposits, as of March 31, 2017. Our bankers are incentivized to acquire and maintain quality, core deposits as we depend on them to fund the majority of our loans and leases. Our incentive compensation plans are designed so that those arrangements appropriately balance risk and financial rewards, are compatible with effective risk management practices and are supported by effective governance. We believe that our long-standing and high quality relationships with our depositors who provide us with long-term funding are due to the convenience and dedicated service we offer. We leverage our expansive branch locations and deep network of customer relationships in the Chicago metropolitan area to provide both low-cost funding sources for our lending business and deposit-related fee income. We had $2.6 billion of deposits, and our cost of deposits was 0.24% for the quarter ended March 31, 2017.
2017 Q1 Deposit Mix | 2017 Q1 Cost of Deposits | |
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Source: Company data and SNL Financial. Data as of March 31, 2017.
Commercial banking
Commercial banking is a fundamental component of our business. We define commercial banking as lending to small and medium sized businesses, real estate and financial sponsors. As of March 31, 2017, loans originated or managed by commercial lending represented $1.6 billion, or 73%, of our total gross loans outstanding. The business is supported by a seasoned lending team of 20 commercial bankers with deep local experience averaging 17 years. As of March 31, 2017, our top 10 commercial lending relationships accounted for approximately 10% of our total gross loans outstanding. We offer a comprehensive range of commercial loan,
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deposit and cash management products. Our conservative underwriting approach and ongoing risk management has resulted in average net charge-offs of less than 0.01% for loans originated since the Recapitalization. Our primary commercial lending groups are described below:
Commercial real estate: Our commercial real estate (CRE) business focuses on experienced real estate professionals with long track records of performance and access to ample equity capital sources. We believe our specialized expertise and efficient decision making process differentiate us from our competitors. We offer fixed and floating rate term loans, construction financing and revolving lines of credit in a wide range of term options. Since the Recapitalization, our CRE group has originated over $570 million of commitments, across more than 180 loans. Our CRE portfolio is broadly diversified by property type including loans secured by multi-family, retail, industrial and office properties. As of March 31, 2017 the CRE group had $417 million in loans outstanding comprised of 53% fixed rate loans and 47% floating rate loans with a weighted average interest rate of 3.83% and 56% overall line of credit usage (including construction lines of credit).
Commercial & industrial: Our commercial and industrial (C&I) group focuses on small and lower middle market businesses with up to $50 million of annual revenue and seek to establish long term relationships. We believe this customer segment is underserved by larger institutions that do not focus on this space, as well as by smaller institutions that lack product sophistication and capabilities. We provide solutions to over 1,200 customers across a diverse range of industries. We offer a broad range of lending products including term loans, revolving lines of credit, and cash management products and services. As of March 31, 2017, the C&I group managed a portfolio of $220 million in loans outstanding. The portfolio has grown at a 53% compounded annual growth rate since June 2013.
Sponsor finance: Our sponsor finance group provides senior secured financing solutions to private equity-backed lower middle market companies throughout the U.S. with earnings before interest, tax, depreciation and amortization generally between $2 million and $10 million. Our five lending professionals in this group have over 50 years of combined experience, and have collectively closed over $500 million in sponsor finance commitments over the course of their careers. We support the acquisition, recapitalization and growth investment efforts of private equity firms operating in the lower middle market, and believe our expertise in this niche is unique for a bank our size. As of March 31, 2017 we had $123 million in sponsor finance loans outstanding.
Syndications: From time-to-time, our syndications group seeks to deploy excess liquidity by opportunistically participating in syndicated loans, acquiring whole loans, or purchasing participations from lead banks that have existing relationships with well-capitalized and experienced sponsors. We employed this strategy extensively following the Recapitalization by leveraging our relationships with local, regional and national lenders as we developed our own lending capabilities and had excess liquidity. Now, with developed lending capabilities, our participation in syndications has decreased and represents a smaller piece of our portfolio. The syndications group targets transactions in the home mortgage, commercial real estate and C&I categories that provide attractive risk/reward characteristics, and we continue to maintain the ability to sell loan positions to manage credit and specific customer and industry concentrations. As of March 31, 2017, the group had $348 million in loan syndications outstanding.
Commercial deposits and cash management: We also support our business clients with a variety of deposit and cash management products, along with business transaction accounts. Our comprehensive suite of products includes treasury services, information reporting, fraud management, cash collection and interest rate derivative products. We believe these tailored products allow us to provide a robust service offering to our clients and support their day-to-day funding and risk management needs. These services are provided through multiple points of contact including branch, online and mobile interfaces.
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Commercial Banking By Business Line | Commercial Banking By State | |
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Data as of March 31, 2017.
Small Business Capital
We launched our SBA business with the acquisition of Ridgestone in October 2016. Ridgestone was the sixth most active SBA lender in the country and the most active originator of SBA loans in Illinois and Wisconsin, as reported by the SBA, for the period from October 1, 2015 to September 30, 2016. The Small Business Capital operation originated $472 million in 7(a) loans for the period from October 1, 2015 to September 30, 2016. Small Business Capital originated $97 million for the three months ended March 31, 2017. This business serves small businesses in need of, and qualifying for, U.S. government guaranteed loans. We also provide SBA lending services throughout the Midwest, Tennessee and California. We generally sell the government guaranteed portion of SBA and USDA loans into the secondary market while retaining the non-guaranteed portion of the loan and the servicing rights. This allows us to realize one-time gain on sale income along with a recurring servicing and interest revenue stream. In addition to the business development officers that we rely on to generate new business, we also have a dedicated servicing, portfolio management and workout staff with specialized expertise in U.S. government guaranteed loans. As of March 31, 2017 we held $394 million in outstanding government guaranteed loans.
Geographic Concentration | Industry Concentration | |
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Data for Small Business Capital as of March 31, 2017.
Small ticket equipment leasing
In 2014, we purchased small ticket leasing assets from Baytree National Bank & Trust Company and Wells Fargo Corporation, and today through our bank subsidiary Byline Financial Group, we provide financing
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solutions for equipment vendors and their end-users. The vertical markets served by our equipment vendors are primarily specialized in healthcare, manufacturing, technology, specialty vehicles and energy efficiency. The end-users, (i.e., our lessees and borrowers) are primarily physician group practices, other healthcare related entities, manufacturers, retailers, veterinarians, wholesalers and automotive related industries. The average leasing size at origination for Byline Financial Group for the three months ended March 31, 2017 was approximately $52,000. As of March 31, 2017 the weighted average yield of the Byline Financial Group portfolio was 5.5% and the gross portfolio yield was 6.4%. Our 16 person sales force originates leases throughout the country, and we have lessees in nearly every state. For the three months ended March 31, 2017, we originated $20 million in leases of mostly new equipment. As of March 31, 2017 the Byline Financial Group had $161 million in leases outstanding with a weighted average life of approximately 2.5 years.
Geographic Concentration | Industry Concentration | |
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Data as of March 31, 2017.
Distribution Channels
The primary market in which we operate is the Chicago metropolitan area, and our 56 branch network in this area is our core distribution channel. We operate the fifth largest branch network in the city of Chicago as of March 31, 2017, and we take advantage of our focused footprint and deep-rooted relationships to target local customers with a diversified product offering.
Our expansive local branch network enables us to gather low cost deposits, promote the Byline brand and customer loyalty, originate loans, leases and other products and maintain relationships with our customers through regular community involvement. Our branch network is fundamental to our ability to achieve successful customer outreach in line with our culture, which promotes high-touch engagement with our customers and proactive solutions.
While our branch network will continue to be our primary delivery channel, we understand the evolving banking environment requires digital interaction to keep pace with our customers needs. We have both rationalized our branch network to increase efficiency while investing in our product development, particularly our online and mobile banking platforms that allow customers to transact via the digital channel including bill payments, mobile deposits and peer-to-peer payment options. Approximately 76% of our checking account customers are enrolled in our online banking platform, and approximately 63% of our checking account customers are enrolled in mobile banking, as of March 31, 2017.
When we deem it advisable, we launch marketing campaigns through our branches and online platform to advertise new products or promotional services. We view these two channels as key touchpoints with our customers and frequently strategize how we can best utilize these distribution networks.
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Risk Management
We believe that effective risk management is of primary importance to our organization. Risk management refers holistically to the activities by which we identify, measure, monitor, evaluate and manage the risks we face in the course of our banking activities. These include liquidity, interest rate, credit, operational, cyber/technological, legal, compliance, regulatory, strategic, financial and reputational risk exposures. Our board of directors and management team has created a risk-conscious culture that is focused on quality growth, which starts with highly capable and experienced risk management teams and infrastructure capable of addressing the evolving risks we face, as well as the changing regulatory and compliance landscape. Our risk management approach employs comprehensive policies and processes to establish robust governance and emphasizes personal ownership and accountability for risk with all our employees. We believe a disciplined and conservative underwriting approach has been the key to our strong asset quality following the Recapitalization.
Our board of directors sets the tone at the top of our organization, adopting and overseeing the implementation of our company-wide risk management framework, which establishes our overall risk appetite and risk management strategy. The risk committee of our board of directors provides oversight of our enterprise risk management function. The risk committee approves the Risk Appetite Framework, which includes risk policies, procedures, limits, targets and reporting structured to guide decisions regarding the appropriate balance between risk and return considerations in our business, receives periodic reporting on the risks and control environment effectiveness and monitors risk levels in relation to the approved risk appetite. Additionally, the audit committee of the board of directors oversees governance of the regulatory, compliance, financial and internal control risks of the company. The Executive Credit Committee of the board is responsible for establishing and managing the overall credit risk framework and the related policies governing that risk. Our management and board of directors place significant focus on maintaining a healthy risk profile and ensuring sustainable growth. Our risk appetite seeks to balance the risks necessary to achieve our strategic goals while ensuring that our risks are appropriately managed and remain within our defined limits.
Enterprise risk management
Our Enterprise Risk Management Committee, which is comprised primarily of members of senior management, provides oversight of our risk management across our business. The committee is chaired by our Chief Risk Officer and includes the senior managers of major functional business units and supporting risk management personnel. The responsibilities of the Enterprise Risk Management Committee include monitoring our overall risk profile and ensuring that it remains within the board-approved Risk Appetite Framework, implementing remediation actions for risk exposures that are outside of our approved risk limits or deemed imprudent, assessing new and emerging risks, monitoring our risk management culture, assessing acceptability of the risk impacts of any material change to our business and overseeing compliance with regulatory expectations and requirements.
Our Chief Risk Officer leads our enterprise risk management function and oversees the principal risks facing our business. Our Chief Risk Officer reports to our Chief Executive Officer and has direct access to the risk committee of our board of directors. Our enterprise risk management function implements a company-wide approach to risk taking and coordinates risk management efforts. This group develops an enterprise risk framework, works with business units in risk identification, materiality assessment and quantification processes and ensures the adopted risk quantification approach is integrated within Byline Banks risk framework.
Credit and interest rate risk management
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 and the risk that credit assets will suffer significant deterioration in market value. We manage and control credit risk in our loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management.
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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 and product levels is actively managed to mitigate concentration risk. In addition, credit risk management includes an independent credit review process that assesses compliance with commercial, real estate and consumer credit policies, risk rating standards 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.
The Executive Credit Committee of our board of directors provides oversight of our credit risk management function. The Executive Credit Committee oversees the risk appetite, the development of policies, practices and systems for measuring credit risk and monitors the performance and quality of our credit portfolio. At the management level, our Chief Credit Officer leads this process and has primary oversight, ultimately delegating credit approval authority to our credit officers with the approval of the board of directors and Executive Credit Committee. We believe this robust governance system provides for a fulsome credit approval process.
Our credit officers are assigned specific lines of business and work closely with our Chief Credit Officer and Executive Credit Committee to monitor lending trends, concentrations, regulations and strategies to ensure underwriting guidance is aligned with our credit philosophy. We review our credit policies regularly and any changes must be approved by our board of directors. Our credit team also produces various credit statistics on our loan and lease portfolio reported to our board on a regular basis.
Our Chief Credit Officer has the authority to approve loans with principal amounts up to $5 million. Loans with principal amounts between $5 million and $10 million require the approval of our Bank Credit Committee, which is comprised of members of senior management including our Chief Executive Officer, Chief Risk Officer, Head of Commercial Banking, and Chairman of the Board. The Executive Credit Committee, which includes members of our board of directors, must approve all loans with principal amounts greater than $10 million.
Our bankers are our first line of defense for assuring credit quality and the integrity of our risk rating process. Our bankers must have an understanding of the nature of the borrowers business, operations, competitive position, financial requirements and the nature and value of the underlying collateral. Our credit department serves as a second line of defense and ensures a uniform approach to the assessment and management of credit by formulating processes and guidelines and defining credit standards. Internal loan review serves as a third line of defense and reports to the audit committee through the Chief Risk Officer. We currently outsource the internal loan review to a major independent firm. The firm conducts a minimum of three onsite reviews each year covering in excess of 40% of our loan portfolio. The firm independently selects the sample of loans for review, which is augmented by special emphasis items from our Chief Risk Officer and chair of the Executive Credit Committee. Additionally, the Credit Administrative Group conducts a portfolio review semiannually with each Commercial Lending unit. These credit management practices build and strengthen our banking relationships with our customers while identifying potential issues in a proactive manner to avoid unnecessary risk.
Our management of interest rate risk is overseen by our Asset and Liability Committee, which is chaired by our 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 interest rate-related 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 interest rate management policies also require a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates and deposit durations based on historical analysis, and the targeted investment term of capital.
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Operational risk management
Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (such as natural disasters), or compliance, reputational or legal matters, including the risk of loss resulting from fraud, litigation and breaches in data security. Operational risk is inherent in all of our business ventures and the management of that risk is important to the achievement of our objectives. We have an operational risk framework that consists of policies and procedures, a Risk & Control Self-Assessment Program, operational loss/near miss tracking, a Branch Review Program and an Operational Risk Management Committee. This framework allows for the ongoing assessment of risks within our business and evaluates the strength and effectiveness of our mitigating strategies. We have established key risk indicators and corresponding tolerance thresholds to determine adherence to our risk appetite. Additionally, operational risk reporting supports transparency and the proactive management of risk exposures.
Our Head of Operations & Technology Services directs the operational risk activities within Byline Bank. The operations coordinators in each operational department serve as a first line of defense against operational risk. These individuals oversee the quality of transaction processing on a daily basis by following documented procedures, workflows and policies. Our operational risk department serves as the second line of defense through managing the Risk & Control Self-Assessment Program, Branch Review Program, operational reviews of product usage, operational loss/near miss reporting and regular risk assessments. Internal audit reviews our programs and our operational functions on an annual basis and serves as the third line of defense. These operational risk practices are designed to allow us to proactively identify new risks, properly assess our controls for known risks and respond to events appropriately and consistently when they occur.
Technology risk
Technology Risk represents the risk of financial loss, disruption, or reputational damage from a failure of information technology (IT) systems, including both hardware and software failures and defects, as well as malicious attempts by third parties to inflict intentional harm, such as insider sabotage, malware or cyber-attack. Technology risk may arise from staff errors, technology system failures, third party disruption, unauthorized system access, natural disasters or cyber threats. We manage technology risks through the planning and monitoring of IT activities. We also maintain compliance with legal requirements and regulatory guidance (including the Gramm-Leach-Bliley Act and guidance from the Federal Financial Institutions Examination Council). We have established an Information Technology Steering Committee as a subcommittee of the Enterprise Risk Management Committee to assist our board of directors and senior management in overseeing the IT-related activities and the risk inherent therein. Important areas of focus for the Information Technology Steering Committee include overseeing IT strategic plans and investment priorities, monitoring major IT projects, implementing IT policies and monitoring the general level of risk. We have developed and monitor key metrics to measure the effectiveness of our technology risk management and these results are reported and reviewed regularly. For a discussion of our information technology systems, see Information Technology Systems below.
The IT group is managed by the Director of Information Technology, who reports to the Head of Operations and Technology Services, and serves as our first line of defense. The Director of Information Technology is responsible for managing effective and strong IT controls. These controls are outlined in several areas, including the key financial control framework, the Federal Financial Institutions Examination Council General IT Examination guidelines and the Gramm-Leach-Bliley Act. The Information Security (IS) Department serves as our second line of defense for technology risk. Our IS Department oversees network and perimeter security monitoring, a Risk & Control Self-Assessment Program, a logging and monitoring program, regular monitoring of IT controls with reporting and metrics, an incident response program, a security awareness program and disaster recovery and business continuity programs. The IS Department plays an important role in
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the evaluation of IT risk with our vendor management program. As an added level of oversight and our third line of defense, our technology management practices and policies are independently reviewed on an annual basis by
various audit and examination groups, including internal teams, third party vendors and local and national regulators. The results of the audits and examinations are tracked and reported to management and the appropriate board committees.
Policies and Procedures
We promote a culture of compliance that starts at the top of our organization and emphasizes standards of honesty and integrity. Our Policy Committee reviews and approves management-level policies and recommends to the board of directors approval of the board-level policies. Our risk management culture is further supported by a Procedure Committee that monitors our procedures and forms for compliance with the policies approved by the board and the Policy Committee. We also have a whistleblower process to allow for independent reporting of any related issues.
Our Enhanced Due Diligence policy is fundamental to our Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) compliance program. The goal of our Enhanced Due Diligence policy and program is to develop and maintain an awareness of the unique financial details of our customers and the ability to predict the type and frequency of transactions in which our customers are likely to engage. In doing so, we can better identify, research and report suspicious activity as required by BSA regulations. The BSA/Compliance/Community Reinvestment Act Senior Management Subcommittee of the Enterprise Risk Management Committee assists the board of directors in discharging its responsibility to ensure we maintain an effective BSA/AML control structure. Our BSA policy and program includes annual BSA/AML and Office of Foreign Assets Control risk assessments.
Investment Portfolio
As of March 31, 2017 the fair value of our investment portfolio totaled $723.2 million, with an average effective yield of 2.16% and an estimated duration of approximately 4.5 years. The primary objectives of the investment portfolio are to generate economic value, provide liquidity in accordance with the liquidity regulations and to be responsive to cash needs and assist in managing interest rate risk. The majority of our investment portfolio, or 66.5%, consists of residential mortgage-backed securities, along with 14.9% in commercial mortgage-backed securities and 5.6% in municipal securities. The remainder of our securities portfolio is invested in corporate bonds, asset backed securities, trust preferred securities and other securities. We regularly evaluate the composition of our investment portfolio as the interest rate yield curve changes and may sell investment securities from time to time to adjust our exposure to interest rates or to provide liquidity to meet loan demand.
Competition
The financial services industry is highly competitive as we compete for loans, leases, deposits and customer relationships in our market. Competition involves efforts to retain current clients, make new loans and obtain new deposits, increase the scope and sophistication of services offered and offer competitive interest rates paid on deposits and charged on loans. Within our branch footprint, we primarily face competition from national, regional and other local banks that have established branch networks throughout the Chicago metropolitan area, giving them visible retail presence to customers.
In commercial banking, we face competition to underwrite loans to sound, stable businesses and real estate projects at competitive price levels that make sense for our business and risk profile. Our major commercial bank competitors include larger national, regional and local banks that may have the ability to make loans on larger projects than we can or provide a larger mix of product offerings. We also compete with smaller local banks that may have aggressive pricing and unique terms on various types of loans.
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In retail banking, we primarily compete with local banks that have visible retail presence and personnel in our market areas. The primary factors driving competition in consumer banking are customer service, interest rates, fees charged, branch location and hours of operation and the range of products offered. We compete for deposits by advertising, offering competitive interest rates and seeking to provide a higher level of personal service. We also face competition from non-traditional alternatives to banks.
We believe our ability to provide a flexible, sophisticated product offering and an efficient process to our customers allows us to stay competitive in the financial services environment. Our local presence and hands-on approach enables us to provide a high level of service that our customers value.
Intellectual Property
In the highly competitive banking industry in which we operate, intellectual property is important to the success of our business. We registered the Byline Bank and Byline Bancorp trademarks with the United States Patent and Trademark Office, along with various other trademarks and logos, and we intend to protect the use of our trademarks and other intellectual property nationwide.
Information Technology Systems
We devote significant resources to maintain stable, reliable, efficient and scalable information technology systems. We utilize a single, highly integrated core processing system from a third party vendor across our entire business that improves cost efficiency and acquisition integration. We work with our third party vendors to monitor and maximize the efficiency of our use of their applications. We use integrated systems to originate and process loans and deposit accounts, which reduces processing time, improves customer experience and reduces costs.
We require a resilient, agile, secure and sustainable information technology infrastructure to support corporate strategic goals, deliver standardized services, optimize technology investments and understand and align processes and procedures into daily activities providing enterprise solutions that support business practices. Following the Recapitalization, we enhanced our technology platform to operate more efficiently and with the ability to increase in scale. Our goal is to ensure that technology and human resources are adequately developed, properly utilized, and managed to support business unit and enterprise wide strategic goals.
We have implemented a virtualization strategy for our servers and storage, reducing the dependency on physical hardware. Currently, 96% of all production data center servers are virtualized. In line with industry best practices, we also employed new security devices and internal controls to protect our internal network from external networks and unauthorized personnel, as we view information security as a critical competency. We leverage multiple tools to collect, correlate and log information from various technology resources, as well as provide intrusion detection and intrusion prevention. We utilize an outsourced managed security service for internal and external vulnerability assessments and pro-active perimeter cyber security protection. Our IS Department proactively identifies and monitors systems to analyze risk to the organization and implement mitigating controls where appropriate. Formal annual business continuity and disaster recovery exercises are conducted regularly, along with continuous training. We have successfully integrated businesses and platforms gained through acquisitions, which we believe is fundamental to our strategic goals. We have benefited from the investments made in our organization and technology platforms to efficiently convert acquired business models to seamlessly fit within our infrastructure.
Employees
As of March 31, 2017 we had 791 full-time equivalent employees. None of our employees are parties to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.
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Properties
Our corporate headquarters is located at 180 North LaSalle Street, Suite 300, Chicago, IL 60601. In addition to our corporate headquarters, we operated 56 branch offices located in the Chicago metropolitan area and one branch office in Brookfield, Wisconsin as of March 31, 2017. We lease 19 of our retail branch offices and our headquarters and own the remainder of our retail branch offices. We are continually evaluating opportunities to improve our existing branches, and we have closed and may close branches in certain circumstances to improve our efficiency.
Legal and Regulatory 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.
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We and our subsidiaries are subject to extensive regulation under federal and state banking laws that establish a comprehensive framework for our operations. This framework may materially affect our growth potential and financial performance and is intended primarily for the protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our stockholders and creditors. Significant elements of the statutes, regulations and policies applicable to us and our subsidiaries are described below.
Regulatory Agencies
Byline is a bank holding company under the BHC Act. Consequently, Byline and its subsidiaries are subject to supervision, regulation and examination by the Federal Reserve. The BHC Act provides generally for umbrella regulation of bank holding companies and functional regulation of holding company subsidiaries by applicable regulatory agencies. Byline Bank, our bank subsidiary, is an FDIC-insured commercial bank chartered under the laws of Illinois. Our bank is not a member of the Federal Reserve System. Consequently, the FDIC and the IDFPR are the primary regulators of our bank and also regulate our banks subsidiaries. As the owner of an Illinois-chartered bank, Byline is also subject to supervision and examination by the IDFPR. Following completion of this offering, Byline will be subject to the disclosure and regulatory requirements of the Securities Act and the Exchange Act as administered by the SEC, and, following the listing of our common stock, the rules adopted by the NYSE applicable to listed companies.
Permissible Activities for Bank Holding Companies
In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto, which include certain activities relating to extending credit or acting as an investment or financial advisor. Byline currently does not conduct any non-banking activities through its parent company or through any non-bank subsidiaries.
Bank holding companies that qualify and elect to be treated as financial holding companies may engage in a broader range of additional activities than bank holding companies that are not financial holding companies. In particular, financial holding companies may engage in activities that are (i) financial in nature or incidental to such financial activities or (ii) complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments. We have not elected to be treated as a financial holding company and currently have no plans to make a financial holding company election.
The Federal Reserve has the power to order any bank holding company or any of its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
Permissible Activities for Banks
As an Illinois-chartered commercial bank, our banks business is subject to extensive supervision and regulation by state and federal bank regulatory agencies. Our business is generally limited to activities permitted by Illinois law and any applicable federal laws. Under the Illinois Banking Act, our bank may generally engage in all usual banking activities, including, among other things, accepting deposits; lending money on personal and real estate security; issuing letters of credit; buying, discounting, and negotiating promissory notes and other forms of indebtedness; buying and selling foreign currency and, subject to certain limitations, certain investment securities; engaging in certain insurance activities and maintaining safe deposit boxes on premises.
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Illinois law also imposes restrictions on Byline Banks activities intended to ensure the safety and soundness of our bank. For example, Byline Bank is restricted under the Illinois Banking Act from investing in certain types of investment securities and is generally limited in the amount of money it can lend to a single borrower or invest in securities issued by a single issuer.
Acquisitions by Bank Holding Companies
The BHC Act, Section 18(c) of the Federal Deposit Insurance Act, popularly known as the Bank Merger Act, the Illinois Banking Act, the Illinois Bank Holding Company Act and other federal and state statutes regulate acquisitions of commercial banks and other FDIC-insured depository institutions. We must obtain the prior approval of the Federal Reserve under the BHC Act before (i) acquiring more than 5% of the voting stock of any FDIC-insured depository institution or other bank holding company (other than directly through our bank), (ii) acquiring all or substantially all of the assets of any bank or bank holding company or (iii) merging or consolidating with any other bank holding company. Under the Bank Merger Act, the prior approval of the FDIC is required for our bank to merge with another bank or purchase all or substantially all of the assets or assume any of the deposits of another FDIC-insured depository institution or to assume certain liabilities of non-banks. In reviewing applications seeking approval of merger and acquisition transactions, banking regulators consider, among other things, the competitive effect and public benefits of the transactions, the capital position and managerial resources of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicants performance record under the CRA, the applicants compliance with fair housing and other consumer protection laws and the effectiveness of all organizations involved in combating money laundering activities. In addition, failure to implement or maintain adequate compliance programs could cause banking regulators not to approve an acquisition where regulatory approval is required or to prohibit an acquisition even if approval is not required.
Dividends; Stress Testing
Byline is a legal entity separate and distinct from Byline Bank and other subsidiaries. As a bank holding company, Byline is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations.
Federal banking regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In particular, federal banking regulators have stated that paying dividends that deplete a banking organizations capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. Under the Capital Rules, institutions that seek to pay dividends must maintain 2.5% in Common Equity Tier 1 capital attributable to the capital conservation buffer, which is to be phased in over a three-year period that began on January 1, 2016. See Regulatory Capital Requirements.
A significant portion of our income comes from dividends from our bank, which is also the primary source of our liquidity. In addition to the restrictions discussed above, our bank is subject to limitations under Illinois law regarding the level of dividends that it may pay to us. Under the Illinois Banking Act, Byline Bank generally may not pay dividends in excess of its net profits. Under these restrictions, Byline Bank could pay aggregate dividends of approximately $66.4 million to us without obtaining affirmative government approvals as of March 31, 2017.
In October 2012, as required by the Dodd-Frank Act, the Federal Reserve and the FDIC published final rules regarding company-run stress testing. These rules require bank holding companies and banks with average
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total consolidated assets greater than $10 billion to conduct an annual company-run stress test of capital, consolidated earnings and losses under one base and at least two stress scenarios provided by the federal banking regulators. Neither we nor our bank is currently subject to the stress testing requirements, but we expect that if we become subject to those requirements, the Federal Reserve, the FDIC and the IDFPR will consider our results and those of our bank as an important factor in evaluating our and our banks capital adequacy, any proposed acquisitions by us or by our bank and whether any proposed dividends or stock repurchases by us or by our bank may be an unsafe or unsound practice.
Transactions with Affiliates and Insiders
Transactions between our bank and its subsidiaries, on the one hand, and Byline or any other subsidiary, on the other hand, are regulated under Sections 23A and 23B of the Federal Reserve Act. The Federal Reserve Act imposes quantitative and qualitative requirements and collateral requirements on covered transactions by Byline Bank with, or for the benefit of, its affiliates. Generally, the Federal Reserve Act limits the extent to which our bank or its subsidiaries may engage in covered transactions with any one affiliate to an amount equal to 10% of our banks capital stock and surplus, limits the aggregate amount of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and requires those transactions to be on terms at least as favorable to our bank as if the transaction were conducted with an unaffiliated third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, certain derivative transactions with an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, any credit transactions with any affiliate, must be secured by designated amounts of specified collateral.
Federal law also limits our banks authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons individually and in the aggregate. In addition, certain of our stockholders are foreign nationals, and we and certain of these foreign national stockholders have entered into commitments with the Federal Reserve that restrict our ability to engage in certain business transactions without the consent of the Federal Reserve. Certain of our stockholders have also entered into passivity commitments with the Federal Reserve that generally restrict these stockholders from entering into banking or nonbanking transactions with us. For further information, see Certain Relationships and Related TransactionsForeign National Commitments and Passivity Commitments.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, we are expected to commit resources to support Byline Bank, including at times when we may not be in a financial position to provide such resources, and it may not be in our, or our stockholders or creditors, best interests to do so. In addition, any capital loans we make to our bank are subordinate in right of payment to depositors and to certain other indebtedness of our bank. In the event of our bankruptcy, any commitment by us to a federal banking regulatory agency to maintain the capital of our bank will be assumed by the bankruptcy trustee and entitled to priority of payment.
Regulatory Capital Requirements
The Federal Reserve monitors the capital adequacy of our holding company on a consolidated basis, and the FDIC and the IDFPR monitor the capital adequacy of our bank. The banking regulators use a combination of
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risk-based guidelines and a leverage ratio to evaluate capital adequacy. The risk-based capital guidelines applicable to us and our bank are based on the Basel Committees December 2010 final capital framework, known as Basel III, as implemented by the federal banking regulators. The risk-based guidelines are intended to make regulatory capital requirements sensitive to differences in credit and market risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets.
Basel III and the Capital Rules. In July 2013, the federal banking regulators approved final rules, or the Capital Rules, implementing the Basel Committees December 2010 final capital framework for strengthening international capital standards, known as Basel III, and various provisions of the Dodd-Frank Act. The Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and banks, including us and our bank, compared to the previous risk-based capital rules. The Capital Rules revise the components of capital and address other issues affecting the numerator in regulatory capital ratio calculations. The Capital Rules, among other things, (i) include a new capital measure called Common Equity Tier 1 (CET1), (ii) specify that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to prior regulations. The Capital Rules also address risk weights and other issues affecting the denominator in regulatory capital ratio calculations, including replacing the existing risk-weighting approach derived from Basel I with a more risk-sensitive approach based, in part, on the standardized approach adopted by the Basel Committee in its 2004 capital accords, known as Basel II. The Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking regulators rules. Subject to a phase-in period for various provisions, the Capital Rules became effective for us and for our bank beginning on January 1, 2015.
Under the Basel III Capital Rules, the minimum capital ratios are (i) 4.5% CET1 to risk-weighted assets, (ii) 6% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets, (iii) 8% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets and (iv) 4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the leverage ratio).
The current Capital Rules also include a capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios. The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a three-year period (increasing by 0.625% on each subsequent January 1) until it reaches 2.5% on January 1, 2019. In addition, the Capital Rules provide for a countercyclical capital buffer applicable only to certain covered institutions. We do not expect the countercyclical capital buffer to be applicable to us or our bank. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.
When fully phased-in, the Capital Rules will require us, and our bank, to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, (iii) 10.5% total capital to risk-weighted assets and (iv) a minimum leverage ratio of 4%.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter). The Capital Rules also generally preclude
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certain hybrid securities, such as trust preferred securities, from being counted as Tier 1 capital for most bank holding companies. Bank holding companies such as us who had less than $15 billion in assets as of December 31, 2009 (and who continue to have less than $15 billion in assets) are permitted to include qualifying trust preferred securities issued prior to May 19, 2010 as Additional Tier 1 capital under the Capital Rules, however.
In addition, under the general risk-based Capital Rules, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded; however, non-advanced approaches banking organizations, including Byline and Byline Bank, were able to make a one-time permanent election to continue to exclude these items. Both Byline and Byline Bank made this election.
The Capital Rules also prescribed a new standardized approach for risk weightings that expanded the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0%, for U.S. government and agency securities, to 600%, for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.
With respect to our bank, the Capital Rules also revised the prompt corrective action regulations pursuant to Section 38 of the Federal Deposit Insurance Act (the FDIA). See Prompt Corrective Action Framework.
Liquidity Regulations
Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entitys expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.
In September 2014, the federal banking regulators approved final rules implementing the LCR for advanced approaches banking organizations (i.e., banking organizations with $250 billion or more in total consolidated assets or $10 billion or more in total on-balance sheet foreign exposure) and a modified version of the LCR for bank holding companies with at least $50 billion in total consolidated assets that are not advanced approach banking organizations. Neither of these final versions of the LCR would apply to us or our bank. In the second quarter of 2016, the federal banking regulators issued a proposed rule that would implement the NSFR for certain U.S. banking organizations. The proposed rule would require certain U.S. banking organizations to ensure they have access to stable funding over a one-year time horizon and has an effective date of January 1, 2018. The proposed rule would not apply to U.S. banking organizations with less than $50 billion in total consolidated assets such as Byline and Byline Bank.
Prompt Corrective Action Framework
The FDIA also requires the federal banking regulators to take prompt corrective action in respect of depository institutions that fail to meet specified capital requirements. The FDIA establishes five capital
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categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized), and the federal banking regulators are required to take certain mandatory supervisory actions, and are authorized to take other discretionary actions, with respect to institutions that are undercapitalized, significantly undercapitalized or critically undercapitalized. The severity of these mandatory and discretionary supervisory actions depends upon the capital category in which the institution is placed. The relevant capital measures, which reflect changes under the Capital Rules that became effective on January 1, 2015, are the total capital ratio, the CET1 capital ratio, the Tier 1 capital ratio and the leverage ratio.
A bank will be (i) well capitalized if the institution has a total risk-based capital ratio of 10% or greater, a CET1 capital ratio of 6.5% or greater, a Tier 1 risk-based capital ratio of 8% or greater and a leverage ratio of 5% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) adequately capitalized if the institution has a total risk-based capital ratio of 8% or greater, a CET1 capital ratio of 4.5% or greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio of 4% or greater and is not well capitalized; (iii) undercapitalized if the institution has a total risk-based capital ratio that is less than 8%, a CET1 capital ratio less than 4.5%, a Tier 1 risk-based capital ratio of less than 6% or a leverage ratio of less than 4%; (iv) significantly undercapitalized if the institution has a total risk-based capital ratio of less than 6%, a CET1 capital ratio less than 3%, a Tier 1 risk-based capital ratio of less than 4% or a leverage ratio of less than 3%; and (v) critically undercapitalized if the institutions tangible equity is equal to or less than 2% of average quarterly tangible assets. A banks capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of Byline Banks overall financial condition or prospects for other purposes.
The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized. An institution that is categorized as undercapitalized, significantly undercapitalized or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking regulator. Under the FDIA, in order for the capital restoration plan to be accepted by the appropriate federal banking agency, a bank holding company must guarantee that a subsidiary depository institution will comply with its capital restoration plan, subject to certain limitations. The bank holding company must also provide appropriate assurances of performance. The obligation of a controlling bank holding company under the FDIA to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiarys assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions and capital distributions, establishing any branches or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. Institutions that are undercapitalized or significantly undercapitalized and either fail to submit an acceptable capital restoration plan or fail to implement an approved capital restoration plan may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.
The appropriate federal banking agency may, under certain circumstances, reclassify a well capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower
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category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
As of March 31, 2017, we and our bank were well capitalized with Tier 1 capital ratios of 12.94% and 13.33%, respectively, total capital ratios of 13.49% and 13.88%, respectively, Tier 1 leverage ratios of 9.59% and 9.89%, respectively, and a CET1 ratio of 10.85% and 13.33%, respectively, as calculated under Basel III which went into effect on January 1, 2015.
As of December 31, 2016, we and our bank were well capitalized with Tier 1 capital ratios of 12.78% and 13.11%, respectively, total capital ratios of 13.28% and 13.61%, respectively, Tier 1 leverage ratios of 10.07% and 10.35%, respectively, and a CET1 ratio of 11.20% and 13.11%, respectively, as calculated under Basel III which went into effect on January 1, 2015. For more information on these financial measures at the Company and Byline Bank, see Note 21 of Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015.
Safety and Soundness Standards
The FDIA requires the federal banking agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. The federal banking agencies have adopted the Interagency Guidelines for Establishing Standards for Safety and Soundness. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. These guidelines also prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the banking regulator must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution may be subject under the FDIA. See Prompt Corrective Action Framework. If an institution fails to comply with such an order, the banking regulator may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Deposit Insurance
FDIC insurance assessments
As an FDIC-insured bank, our bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government.
As an institution with less than $10 billion in assets, our banks assessment rates are based on the level of risk it poses to the FDICs deposit insurance fund (DIF). Pursuant to changes adopted by the FDIC that were effective July 1, 2016, the initial base rate for deposit insurance is between three and 30 basis points. Total base assessment after possible adjustments now ranges between 1.5 and 40 basis points. For established smaller
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institutions, like Byline Bank, supervisory ratings are used along with (i) an initial base assessment rate, (ii) an unsecured debt adjustment (which can be positive or negative), and (iii) a brokered deposit adjustment, to calculate a total base assessment rate.
Under the Dodd-Frank Act, the limit on FDIC deposit insurance was increased to $250,000. The coverage limit is per depositor, per insured depository institution for each account ownership category. The Dodd-Frank Act also set a new minimum DIF reserve ratio at 1.35% of estimated insured deposits. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. In August 2016, the FDIC announced that the DIF reserve ratio had surpassed 1.15% as of June 30, 2016.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
Other assessments
In addition, the Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (FICO) to impose assessments on certain deposits in order to service the interest on the FICOs bond obligations from deposit insurance fund assessments. The amount assessed on individual institutions is in addition to the amount, if any, paid for deposit insurance according to the FDICs risk-related assessment rate schedules. Assessment rates may be adjusted quarterly to reflect changes in the assessment base.
All Illinois state-chartered banks are required to pay supervisory assessments to the IDFPR to fund the operations of that agency. The amount of the assessment is calculated on the basis of Byline Banks total assets.
The Volcker Rule
The Dodd-Frank Act, pursuant to a statutory provision commonly called the Volcker Rule, prohibits banks and their affiliates from engaging in proprietary trading and investing in and sponsoring hedge funds and private equity funds. The Volcker Rule, which became effective in July 2015, does not significantly affect the operations of Byline and its subsidiaries, as we do not have any significant engagement in the businesses prohibited by the Volcker Rule.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of deposits of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.
Interstate Branching
Illinois state-chartered banks, such as Byline Bank, have the authority under Illinois law to establish branches anywhere in the State of Illinois, subject to receipt of all required regulatory approvals.
Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) any state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in
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another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of which expressly authorize such expansion. However, the Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across state lines without these impediments.
Consumer Financial Protection
We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the Equal Credit Opportunity Act (ECOA), the Fair Credit Reporting Act, the Truth in Lending Act (TILA), the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, Fair Credit Reporting Act, the Service Members Civil Relief Act, the Right to Financial Privacy Act, Telephone Consumer Protection Act, CAN-SPAM Act, and these laws respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, restrict our ability to raise interest rates on extensions of credit and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys fees. Federal banking regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.
The Dodd-Frank Act created a new, independent federal agency, the Consumer Financial Protection Bureau (CFPB), which was granted broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws with respect to certain consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations. The CFPB has the authority to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institutions primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary responsibility for examination of our bank and enforcement with respect to various federal consumer protection laws so long as our bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance with all state consumer laws. The CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as our bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.
The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the TILA, the ECOA and new requirements for financial services products provided for in the Dodd-Frank Act.
The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks including, among other things, the authority to prohibit unfair, deceptive, or abusive acts and practices. Abusive acts or practices are defined in the Dodd-Frank Act as those that (1) materially interfere with a
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consumers ability to understand a term or condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumers (a) lack of financial savvy, (b) inability to protect herself or himself in the selection or use of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumers interests. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but it could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.
Federal Home Loan Bank Membership
Byline Bank is a member of the FHLB, which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.
Ability-To-Pay Rules and Qualified Mortgages
As required by the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 amending Regulation Z, implementing TILA, which requires mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a residential mortgage loan has a reasonable ability to repay the loan according to its terms. These final rules prohibit creditors, such as Byline Bank, from extending residential mortgage loans without regard for the consumers ability to repay and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and restrict compensation practices relating to residential mortgage loan origination. Mortgage lenders are required to determine consumers ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit decision. Alternatively, the mortgage lender can originate qualified mortgages, which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a qualified mortgage is a residential mortgage loan that does not have certain high risk features, such as negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount and the borrowers total debt-to-income ratio must be no higher than 43% (subject to certain limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored enterprise or a federal agency).
Commercial Real Estate Guidance
In December 2015, the federal banking regulators released a statement entitled Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending (the CRE Guidance). In the CRE Guidance, the federal banking regulators (i) expressed concerns with institutions that ease commercial real estate underwriting standards, (ii) directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and (iii) indicated that they will continue to pay special attention to commercial real estate lending activities and concentrations going forward. The federal banking regulators previously issued guidance in December 2006, entitled Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices, which stated that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where (1) total commercial real estate loans represent 300% or more of its total capital and (2) the outstanding balance of such institutions commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.
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Leveraged Lending Guidance
In March 2013, the federal banking regulators jointly issued guidance on leveraged lending that updates and replaces the guidance for leveraged finance activities issued by the federal banking regulators in April 2001. The revised leveraged lending guidance describes regulatory expectations for the sound risk management of leveraged lending activities, including the importance for institutions to maintain, among other things, (i) a credit limit and concentration framework consistent with the institutions risk appetite, (ii) underwriting standards that define acceptable leverage levels, (iii) strong pipeline management policies and procedures and (iv) guidelines for conducting periodic portfolio and pipeline stress tests.
Community Reinvestment Act of 1977
Under the CRA, our bank has an obligation, consistent with safe and sound operations, to help meet the credit needs of the market areas where it operates, which includes providing credit to low- and moderate-income individuals and communities. In connection with its examination of our bank, the FDIC is required to assess our banks compliance with the CRA. Our banks failure to comply with the CRA could, among other things, result in the denial or delay in certain corporate applications filed by us or our bank, including applications for branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company. Our bank received a rating of Satisfactory in its most recently completed CRA examination in 2016 that was as of February 17, 2016.
Financial Privacy
The federal banking regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to an unaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.
Anti-Money Laundering and the USA PATRIOT ACT
A major focus of governmental policy on financial institutions in recent years has been combating money laundering and terrorist financing. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act, substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States in these areas: customer identification programs, money laundering, terrorist financing, identifying and reporting suspicious activities and currency transactions, currency crimes, and cooperation between financial institutions and law enforcement authorities. The U.S. Treasury Departments Financial Crimes Enforcement Network, among other federal agencies, also promulgates rules and regulations regarding the USA Patriot Act with which financial institutions are required to comply. Financial institutions are prohibited from entering into specified financial transactions and account relationships and must use enhanced due diligence procedures in their dealings with certain types of high-risk customers and implement a written customer identification program. Financial institutions must take certain steps to assist government agencies in detecting and preventing money laundering and report certain types of suspicious transactions. Regulatory authorities routinely examine financial institutions for compliance with these obligations, and failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. Regulatory authorities have imposed cease and desist orders and significant civil money penalties against institutions found to be violating these obligations and have in some cases brought criminal actions against some institutions for these types of violations.
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Office of Foreign Assets Control Regulation
The U.S. Treasury Departments Office of Foreign Assets Control, or OFAC, administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. We and our bank are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences and could result in civil money penalties imposed on the institution by OFAC. Failure to comply with these sanctions could also cause applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Incentive Compensation
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not large, complex banking organizations. These reviews will be tailored to each organization based on the scope and complexity of the organizations activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organizations supervisory ratings, which can affect the organizations ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organizations safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In June 2010, the federal banking regulators issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organizations incentive compensation arrangements should (1) provide incentives that appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risk, (2) be compatible with effective internal controls and risk management and (3) be supported by strong corporate governance, including active and effective oversight by the organizations board of directors.
During the second quarter of 2016, certain U.S. regulators, including the Federal Reserve, the FDIC and the SEC, proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (including Byline and Byline Bank). The proposed revised rules would establish general qualitative requirements applicable to all covered entities, which would include: (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping.
Pursuant to rules adopted by the stock exchanges and approved by the SEC in January 2013 under the Dodd-Frank Act, public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.
Public companies will be required, once stock exchanges impose additional listing requirements under the Dodd-Frank Act, to implement clawback procedures for incentive compensation payments and to disclose
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the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards.
Cybersecurity
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institutions management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institutions operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.
Future Legislation and Regulation
Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the regulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital or modify our business strategy, or limit our ability to pursue business opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely affected, perhaps materially, as a result.
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Executive Officers and Directors
The following table sets forth information regarding our directors and executive officers.
Name |
Age |
Position |
||||
Executive Officers: |
||||||
Alberto J. Paracchini |
46 |
President, Chief Executive Officer and Director |
||||
Lindsay Corby |
39 |
Executive Vice President and Chief Financial Officer |
||||
Timothy C. Hadro |
66 |
Executive Vice President and Chief Credit Officer |
||||
Rick Schobert |
64 |
Chief Risk Officer |
||||
Bruce Lammers |
61 |
President of Small Business Capital |
||||
Donald J. Meyer |
66 |
Executive Vice President of Commercial Banking |
||||
Thomas J. Bell III |
50 |
Senior Vice President and Corporate Treasurer |
||||
Megan Biggam |
38 |
Senior Vice President of Retail Banking |
||||
Non-Employee Directors: |
||||||
Roberto R. Herencia |
57 |
Chairman of the Board of Directors |
||||
L. Gene Beube |
77 |
Director |
||||
Phillip R. Cabrera |
65 |
Director |
||||
Antonio del Valle Perochena |
48 |
Director |
||||
Jaime Ruiz Sacristán |
67 |
Director |
||||
Steven M. Rull |
67 |
Director |
Executive Officers
Alberto J. Paracchini has served as President, Chief Executive Officer and Director of Byline since June 2013. Mr. Paracchini also serves as President, Chief Executive Officer and Director of Byline Bank. Prior to joining Byline, Mr. Paracchini served as Principal for BXM Holdings, Inc., an investment fund specializing in community bank investments, from October 2010 to June 2013 and spent 16 years at Popular, Inc., where he held numerous leadership positions in both its banking and mortgage subsidiaries. From January 2010 through May 2010, Mr. Paracchini was Executive Vice President at Midwest Bank & Trust. From 2006 through 2008, Mr. Paracchini served as President and Chief Financial Officer of Popular Financial Holdings and Chief Financial Officer of E-Loan, an internet banking and mortgage company. Prior to 2006, Mr. Paracchini spent 13 years at Banco Popular North America, where he held several senior leadership roles including Chief Financial Officer, Treasurer and the head of all operations and technology functions. Mr. Paracchini is a member of the Cook County Council of Economic Advisors and Economic Club of Chicago. Mr. Paracchini holds a bachelors degree from Marquette University and an M.B.A. from the University of Chicago Booth School of Business. Mr. Paracchinis qualifications to serve as a member of our board of directors include his extensive experience in the financial services industry and his demonstrated leadership skills.
Lindsay Corby has been Executive Vice President and Chief Financial Officer of Byline since July 2015. Ms. Corby is also the Executive Vice President and Chief Financial Officer of Byline Bank. Ms. Corby joined Byline in June 2013, serving as Chief Administrative Officer until July 2015. Prior to joining Byline, Ms. Corby was a Principal at BXM Holdings, Inc. from February 2011 to June 2013. In addition, Ms. Corby served on the board of directors of QCR Holdings, Inc., a public bank holding company, from 2012 to 2016. Prior to joining BXM Holdings, Inc., Ms. Corby was a Vice President in the investment banking group of Keefe, Bruyette & Woods, Inc., focused on mergers and acquisitions, capital markets transactions, complex recapitalizations and valuation activities for U.S. financial institutions. Ms. Corby received a bachelors degree in Spanish, a bachelor of business administration in accounting and a masters degree in accounting from Southern Methodist University. Ms. Corby is also a graduate of the Kellogg Executive Education, Womens Senior Leadership Program, and is a registered Certified Public Accountant .
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Timothy C. Hadro has served as Chief Credit Officer of Byline Bank since January 2015 and as Head of the Special Assets Group for Byline Bank since August 2013. Prior to joining Byline, Mr. Hadro was co-founding principal of Loan Management Solutions, a distressed loan consulting firm. Prior to that experience, Mr. Hadro spent 31 years with JP Morgan Chase and its predecessor organizations. Mr. Hadro serves as a director on the advisory board of Banner Group, a private apartment and self-storage development company and as a director of Community Investment Corporation, Chicagos largest non-profit mortgage lender. Mr. Hadro holds a bachelors degree in mathematics and economics from Macalester College in St. Paul, Minnesota and an M.B.A. from the University of Chicago Booth School of Business.
Rick Schobert has been the Chief Risk Officer of Byline Bank since October 2013. Prior to joining Byline, Mr. Schobert was a Senior Credit Risk examiner at the Federal Reserve Bank of Atlanta from April to October 2013. Prior to that experience, he was a financial institution consultant at Schobert & Carper, LLC from July 2011 to March 2013. Mr. Schobert also served as a member of the supervisory committee and board of directors of First Federal Credit Union, an Arizona credit union, from May 2012 to March 2013. He also was an Executive Vice President and Chief Operating Officer at West Valley National Bank in Avondale, Arizona from July 2010 to July 2011. Prior to that experience, Mr. Schobert held management and bank examination positions at the Office of the Comptroller of the Currency from July 1979 to June 2010. Mr. Schobert received a bachelors degree and a masters degree in business administration from the University of Wisconsin.
Bruce Lammers has been the President of Small Business Capital for Byline Bank since October 2016. Prior to joining Byline, Mr. Lammers served as President and Chief Executive Officer of Ridgestone Bank from September 2006 until the Ridgestone acquisition in October 2016. Prior to that experience, Mr. Lammers served as the Chief Operating Officer and Executive Vice President of Amcore Bank, Senior Vice President and Senior Commercial Loan Officer of the Sheboygan, Wisconsin office of U.S. Bank and President of the Northeastern Wisconsin Region of U.S. Bank. Mr. Lammers received a bachelor of business administration in accounting from Lakeland University.
Donald J. Meyer has served as Executive Vice President of Commercial Banking for Byline since August 2013. Prior to joining to Byline, Mr. Meyer was a co-founding Principal of Loan Management Solutions, a distressed loan consulting firm, from August 2009 to July 2013. Prior to that experience, Mr. Meyer was the Chief Investment Officer for Centerline Capital Group, a subsidiary of Centerline Holding Company, a NYSE listed real estate finance company, from 2006 to 2009. During 2008 and 2009, Mr. Meyer also served as the Chief Executive Officer of American Mortgage Acceptance Company, a commercial mortgage real estate investment trust managed by Centerline that filed for Chapter 11 bankruptcy in 2010. Mr. Meyer serves as a director of Neighborhood Housing Services of Chicago, a non-profit organization providing home mortgage and financial education to potential home owners in low and moderate income neighborhoods. Mr. Meyer holds a bachelors degree in finance from the University of Illinois.
Thomas J. Bell III has been Senior Vice President and Corporate Treasurer for Byline Bank since August 2013. Prior to joining Byline, Mr. Bell previously served as a consultant for and then the Senior Vice President, Treasurer and Head of Planning of Anchor Bancorp from July 2010 to August 2013 where he was responsible for treasury, finance and capital management. Prior to joining Anchor Bancorp, Mr. Bell was an Executive Vice President, Treasurer and Chief Investment Officer for Midwest Banc Holdings, Inc. from December 2008 to June 2010. Prior to that experience, Mr. Bell served as a Senior Vice President with for ABN AMRO North America Inc., a Chicago-based holding company for the LaSalle Bank Corporation. Prior to his experience at ABM AMRO North America, Inc., Mr. Bell spent several years with the Federal Reserve Bank of Chicago. Mr. Bell received a bachelors degree in finance from Lewis University.
Megan Biggam has served as Senior Vice President of Retail Banking of Byline Bank since June 2013. Prior to joining Byline, Ms. Biggam was the Director of Marketing of Metrobank Group, Bylines predecessor bank parent, from August 2008 to June 2013. Prior joining Metrobank Group, Ms. Biggam was a Division Marketing Manager at Washington Mutual, overseeing the retail marketing development for the Chicago, Atlanta and New Jersey markets. Prior to joining Washington Mutual, Ms. Biggam was the Regional Marketing Director for TCF Bank for the Chicago and Milwaukee markets. Ms. Biggam received a bachelors degree in journalism from Indiana University.
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Non-Employee Directors
Our board of directors consists of seven members, including our Chief Executive Officer. We expect all of our directors to continue to serve on our board of directors following the completion of this offering.
Roberto R. Herencia has served as Chairman of our board of directors since June 2013 and serves as chair of the audit, compensation and governance and nominating committees, as well as a member of the risk committee. Mr. Herencia also serves as Chairman of the board of directors of Byline Bank. Mr. Herencia led the Recapitalization of our predecessor, Metropolitan, as President and Chief Executive Officer of BXM Holdings, Inc., a position he has held since November 2010. Prior to BXM Holdings, Inc., Mr. Herencia served as President and Chief Executive Officer of Midwest Banc Holdings, Inc. and spent 17 years with Popular Inc. as its Executive Vice President and as President of Popular Inc.s subsidiary, Banco Popular North America. Mr. Herencia has also served as an independent director of Banner Corporation and its subsidiary, Banner Bank, since March 2016, and as Chairman of the board of directors of First BanCorp, and its subsidiary, FirstBank Puerto Rico, since October 2011. Mr. Herencia previously served as an independent director of privately held SKBHC Holdings LLC, and its two subsidiary banks, American West Bank and First National Bank of Starbuck, from December 2010 to September 2015. Appointed by President Obama in 2011, Mr. Herencia serves on the Overseas Private Investment Corporations board of directors. Mr. Herencia holds a bachelors degree in finance from Georgetown University and an M.B.A. from the Kellogg School of Management at Northwestern University. Mr. Herencias qualifications include over 32 years of experience in the banking industry, having held senior roles in corporate, commercial, small business, problem asset restructuring and retail banking, as well as extensive experience with complex and distressed turnaround efforts, having executed over 15 mergers and acquisitions in his career.
L. Gene Beube has served on our board of directors since June 2013 and serves on the risk, audit, compensation and governance and nominating committees. Mr. Beube also serves on the board of directors of Byline Bank. Prior to joining Byline, Mr. Beube ran LGB Consulting, a credit risk management consultancy, from February 2005 to December 2011 after retiring as Executive Vice President and Chief Credit Officer for Banco Popular North America, a position he held from 1997 through January 2005. Prior to joining Banco Popular North America, Mr. Beube held various positions at First National Bank of Chicago from 1962 to 1997 and retired as Senior Vice President and Senior Credit Officer. Mr. Beube holds a bachelors degree in finance and a masters degree from the College of Business Administration at the University of Illinois. Mr. Beubes qualifications include over 50 years of both domestic and international experience in the banking industry.
Phillip R. Cabrera has served on our board of directors since June 2013 and serves as chair of the risk committee as well as a member of our audit, compensation and governance and nominating committees. Mr. Cabrera also serves on the board of directors of Byline Bank. Since retiring from the McDonalds Corporation in 2015, Mr. Cabrera has served as an advisor and consultant to Air Products and INDURA, Santiago, Chile, assisting management in identifying and remedying gaps in audit, treasury, governance and controls. Mr. Cabrera retired as Vice President and International Treasurer of McDonalds Corporation in October 2015, where for 21 years he held varied executive roles. Prior to his tenure at McDonalds, Mr. Cabrera was a Managing Director and Senior Partner in the Latin America Group of Continental Bank and served as President of Continental International Finance Corporation, a holding company for Continental Banks international equity investments, from 1993 to 1994. Mr. Cabrera also serves on the board of directors of Institutional Cash Distributors, an Internet broker of money funds. Mr. Cabrera previously served on the advisory board of Unibanco, Banco do Investimento do Brazil from 1982 to 1986. Mr. Cabrera holds a bachelors degree in business administration from Bradley University and a masters degree in international management with a
finance concentration from the Thunderbird School of Global Management and served in the U.S. Army. Mr. Cabreras qualifications include over 30 years of experience in corporate finance, corporate treasury and banking.
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Antonio del Valle Perochena has served on our board of directors since June 2013 and serves on our compensation committee. Mr. del Valle Perochena also serves on the board of directors of Byline Bank. Mr. del Valle Perochena has been the Chairman of the board of directors of Kaluz, S.A., which is the holding company for Mexichem, S.A.B. and Elementia, S.A., since September 2013 and has been the Chairman of the board of directors of Grupo Financiero Ve por Más, S.A. (BX+) since 2006. Prior to incorporating Kaluz and BX+, which are financial, industrial and construction enterprises, in 2003, Mr. del Valle Perochena worked at ING Group as Executive Vice President of Insurance and Pensions in Mexico from 1996 to 1999, and later as Director of New Projects of the direct banking business of the group, ING Direct, in Madrid, Spain from 1999 to 2001. Mr. del Valle Perochena has served as a director of Pochteca Group and Grupo Empresarial Kaluz since 2003 and as a director of Afianzadora Sofimex since 2004. Mr. del Valle Perochena holds a business administration degree and Masters in Management from Universidad Anáhuac. He also holds a Senior Management graduate degree at IPADE and a specialization in literature at the Iberoamericana University. Mr. del Valle Perochenas qualifications include over 20 years of experience in the financial and business sectors.
Jaime Ruiz Sacristán has served on our board of directors since June 2013 and serves on the risk and governance and nominating committees. Mr. Ruiz Sacristán also serves on the board of directors of Byline Bank. Mr. Ruiz Sacristán is the Founder and Chairman of the board of directors of Banco Ve por Más, a position he has held since 2003, has been a director of Banco Popular Español since September 2016 and has served as Chairman of the board of directors of the Mexican Stock Exchange since January 2015. Prior to founding and working for Banco Ve por Más from July 1992 to March 2003, Mr. Ruiz Sacristán held various positions as Grupo Financiero Bital, including serving as its Chief Executive Officer from 2001 to 2003, and was a director at each of its portfolio companies. Prior to Grupo Financiero Bital, Mr. Ruiz Sacristán held several senior management positions in Banco Mexicano Somex and Citibank Mexico. Mr. Ruiz Sacristán was unanimously elected and served as President of the Mexican Banks Association from April 2011 to April 2013. Mr. Ruiz Sacristán holds a bachelors degree in business administration from Universidad Anáhuac and an M.B.A. from the Kellogg School of Management at Northwestern University. Mr. Ruiz Sacristáns qualifications include over 35 years of experience in the banking and financial sectors.
Steven M. Rull has served on our board of directors since October 2016 and serves on the risk committee. Mr. Rull also serves on the board of directors of Byline Bank. From 2007 to 2016, Mr. Rull served as lead director of the board of Ridgestone Financial Services, Inc. and its subsidiary, Ridgestone Bank, which we acquired in 2016. Mr. Rull co-founded Manchester Holdings and its wholly-owned subsidiaries, Detalus Advisors, a retail and institutional asset manager, and Detalus Consulting, a financial technology and financial advisory firm, in 2001. Mr. Rull co-founded Manchester Partners, an investment and consulting firm where he serves as Managing Director, in 1997. Mr. Rull served as Chairman and Chief Executive Officer of Bunker Hill Bancorp and its subsidiary, Boulevard Bank, from 2003 until its sale in 2013. He also held positions as Chairman of Atlanta Bancorporation and director of its subsidiary, Bank of Atlanta, from 2005 until its sale in 2014. Mr. Rull was the co-head of the capital markets division of Mark Twain Bank from 1994 to 1997. Prior to this role, he held positions as Chief Investment Officer and Chief Financial Officer of United Postal Bancorp from 1987 to 1994 and as President of the Mortgage Division of Mercantile Bank, which acquired United Postal Bancorp in 1994. Mr. Rull holds a bachelors degree in accounting from Southern Illinois University Edwardsville and was a Certified Public Accountant in the state of Missouri from 1973 to 1996. Mr. Rulls qualifications include over 40 years of management and advisory experience in the financial services industry.
Composition of Our Board of Directors
Our board of directors has seven members. Under our amended and restated certificate of incorporation, the number of directors constituting our board of directors will be fixed from time to time by resolution of our board of directors. Each of our directors is currently elected for a one-year term.
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Board Leadership Structure and Qualifications
We believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and standards. They should have broad experience at the policy-making level in business, government or banking. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Each director must represent the interests of all stockholders. When considering potential director candidates, our board of directors considers the candidates character, judgment, diversity, skills, including financial literacy, and experience in the context of our needs and those of the board of directors. Our board also considers the candidates service on boards of other companies and whether such service would impair the candidates ability to perform responsibly all director duties for Byline.
Our board of directors does not have a formal policy requiring the separation of the roles of Chief Executive Officer and Chairman of the Board. It is the board of directors view that rather than having a rigid policy, the board of directors, with the advice and assistance of the governance and nominating committee, and upon consideration of all relevant factors and circumstances, will determine, as and when appropriate, whether the two offices should be separate. Currently, our leadership structure separates the offices of Chief Executive Officer and Chairman of the Board, with Mr. Paracchini serving as our Chief Executive Officer and Mr. Herencia as Chairman of the Board, reinforcing the leadership role of our board of directors in its oversight of our business and affairs.
Director Independence
Under the rules of the NYSE, independent directors must comprise a majority of our board of directors not later than the first anniversary date of this offering. The rules of the NYSE, as well as those of the SEC, impose several requirements with respect to the independence of our directors. Our board of directors has undertaken a review of the independence of each director in accordance with these rules. Based on information provided by each director concerning his background, employment and affiliations, our board of directors has determined that Roberto R. Herencia, L. Gene Beube, Phillip R. Cabrera, Antonio del Valle Perochena, Jaime Ruiz Sacristán and Steven M. Rull do not have relationships that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is independent as that term is defined under the applicable rules. Our board of directors has determined that Mr. del Valle Perochena is independent for purposes of his service on the board of directors but does not satisfy the heightened independence requirements for compensation committee members, and we will avail ourselves of the transition period in Section 303A of the NYSE Listed Company Manual, under which Mr. del Valle Perochena can continue to serve on the compensation committee until the one year anniversary of the listing date. In making these determinations, our board of directors considered the current and prior relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our shares by each non-employee director.
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Committees of Our Board of Directors
The standing committees of our board of directors consist of an audit committee, a compensation committee, a governance and nominating committee and a risk committee. The responsibilities of these committees are described below. Our board of directors may also establish such other committees as it deems appropriate, in accordance with applicable law and regulations and our corporate governance documents. The following table summarizes the expected membership of each of the committees of the board of directors upon completion of the offering:
Director Name |
Audit Committee |
Compensation
|
Governance and
Committee |
Risk Committee |
||||
Roberto R. Herencia |
Chair | Chair | Chair | Member | ||||
L. Gene Beube |
Member | Member | Member | Member | ||||
Phillip R. Cabrera |
Member | Member | Member | Chair | ||||
Antonio del Valle Perochena |
Member | |||||||
Jaime Ruiz Sacristán |
Member | Member | ||||||
Steven M. Rull |
Member |
Audit committee. The audit committee assists the board of directors in fulfilling its responsibilities for general oversight of the integrity of our financial statements, our compliance with legal and regulatory requirements, the independent auditors qualifications and independence, the performance of our internal audit function and independent auditors and risk assessment and risk management. Among other things, upon completion of this offering, the audit committee will:
| annually review the audit committee charter and the committees performance; |
| appoint, evaluate and determine the compensation of our independent auditors; |
| review and approve the scope of the annual audit, the audit fee, the financial statements, significant accounting policy changes, material weaknesses identified by outside auditors or the internal audit function and risk management issues; |
| prepare the audit committee report for inclusion in our proxy statement for our annual meeting; |
| review disclosure controls and procedures, internal controls, internal audit function and corporate policies with respect to financial information; |
| assist the board of directors in monitoring our compliance with applicable legal and regulatory requirements; |
| oversee investigations into complaints concerning financial matters, if any; and |
| review other risks that may have a significant impact on our financial statements. |
The audit committee works closely with management as well as our independent auditors. The audit committee has the authority to obtain advice and assistance from, and receive appropriate funding to engage outside legal, accounting or other advisors as the audit committee deems necessary to carry out its duties. The audit committee has adopted a written charter that among other things, specifies the scope of its rights and responsibilities. Before completion of the offering, the charter will be available on our website at www.bylinebank.com.
Upon completion of the offering, the audit committee will be composed solely of members who satisfy the applicable independence, financial literacy and other requirements of the NYSE for audit committees, and at
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least one of its members will be an audit committee financial expert. Roberto R. Herencia, L. Gene Beube and Phillip R. Cabrera will also qualify as independent directors under the independence requirements of Rule 10A-3 of the Exchange Act.
Compensation committee . The compensation committee is responsible for discharging the boards responsibilities relating to compensation of our executive officers and directors. Among other things, upon completion of this offering, the compensation committee will:
| evaluate human resources and compensation strategies; |
| review and approve objectives relevant to executive officer compensation; |
| evaluate performance and determine the compensation of the Chief Executive Officer in accordance with those objectives; |
| approve any changes to non-equity-based benefit plans involving a material financial commitment; |
| recommend to the board of directors compensation for directors; |
| prepare the compensation committee report required by SEC rules to be included in our annual report; and |
| evaluate performance in relation to the compensation committee charter. |
The compensation committee has adopted a written charter that among other things, specifies the scope of its rights and responsibilities. Before completion of the offering, the charter will be available on our website at www.bylinebank.com. On or before the one year anniversary of the listing date, the compensation committee will be composed solely of members who satisfy the applicable independence requirements of the NYSE for compensation committees.
Governance and nominating committee . The governance and nominating committee is responsible for making recommendations to our board of directors regarding candidates for directorships and the size and composition of our board of directors. In addition, the governance and nominating committee will be responsible for overseeing our corporate governance guidelines and reporting and making recommendations to our board of directors concerning governance matters. Among other things, the governance and nominating committee will:
| identify individuals qualified to be directors consistent with the criteria approved by the board of directors, subject to any waivers granted by the board, and recommend director nominees to the full board of directors; |
| ensure that the audit and compensation committees have the benefit of qualified independent directors; |
| oversee management continuity planning; |
| lead the board of directors in its annual performance review; and |
| take a leadership role in shaping the corporate governance of our organization. |
The governance and nominating committee has adopted a written charter that among other things, specifies the scope of its rights and responsibilities. Before completion of the offering, the charter will be available on our website at www.bylinebank.com. Upon completion of the offering, the governance and nominating committee will be composed solely of members who satisfy the applicable independence requirements of the NYSE for governance and nominating committees.
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Risk committee . The risk committee is responsible for overseeing our enterprise-risk management policies, commensurate with our capital structure, risk profile, complexity, size and other risk-related factors:
| monitor our overall risk profile and review risk management policies; |
| monitor our process to identify, assess and manage risks that could prevent us from achieving our business objectives; |
| oversee actions relating to interest rate risk and liquidity risks; |
| oversee actions relating to the activities of our enterprise risk management oversight groups; and |
| facilitate communication among management, the board of directors and our enterprise risk management oversight groups. |
The risk committee has adopted a written charter that specifies among other things, the scope of its rights and responsibilities.
Board Oversight of Risk Management
Our board of directors believes that effective risk management and control processes are critical to our safety and soundness, our ability to predict and manage the challenges that we face and, ultimately, our long-term corporate success. Our board of directors, both directly and through its committees, is responsible for overseeing our risk management processes, with each of the committees of our board of directors assuming a different and important role in overseeing the management of the risks we face.
The risk committee of our board of directors oversees our enterprise-wide risk management framework, which establishes our overall risk appetite and risk management strategy and enables our management to understand, manage and report on the risks we face. Our risk committee also reviews and oversees policies and practices established by management to identify, assess, measure and manage key risks we face, including the risk appetite metrics developed by management and approved by our board of directors. The audit committee of our board of directors is responsible for overseeing risks associated with financial matters (particularly financial reporting, accounting practices and policies, disclosure controls and procedures and internal control over financial reporting) and engaging as appropriate with our risk committee to assess our enterprise-wide risk framework. The compensation committee of our board of directors has primary responsibility for risks and exposures associated with our compensation policies, plans and practices, regarding both executive compensation and the compensation structure generally. In particular, our compensation committee, in conjunction with our President and Chief Executive Officer and Director of Human Resources and other members of our management as appropriate, reviews our incentive compensation arrangements to ensure these programs are consistent with applicable laws and regulations, including safety and soundness requirements, and do not encourage imprudent or excessive risk-taking by our employees. The governance and nominating committee of our board of directors oversees risks associated with the independence of our board of directors and potential conflicts of interest.
Our senior management is responsible for implementing and reporting to our board of directors regarding our risk management processes, including by assessing and managing the risks we face, including strategic, operational, regulatory, investment and execution risks, on a day-to-day basis. Our senior management is also responsible for creating and recommending to our board of directors for approval appropriate risk appetite metrics reflecting the aggregate levels and types of risk we are willing to accept in connection with the operation of our business and pursuit of our business objectives.
The role of our board of directors in our risk oversight is consistent with our leadership structure, with our President and Chief Executive Officer and the other members of senior management having responsibility for
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assessing and managing our risk exposure, and our board of directors and its committees providing oversight in connection with those efforts. We believe this division of risk management responsibilities presents a consistent, systemic and effective approach for identifying, managing and mitigating risks throughout our operations.
Compensation Committee Interlocks and Insider Participation
Upon completion of this offering, none of the members of our compensation committee will be or will have been an officer or employee of Byline or its subsidiary, Byline Bank. In addition, none of our executive officers serve or have served as a member of the board of directors, compensation committee or other board committee performing equivalent functions of any entity that has one or more executive officers serving as one of our directors or on our compensation committee.
Code of Business Conduct and Ethics
Our board of directors will adopt a code of business conduct and ethics (the Code of Ethics) that applies to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer and persons performing similar functions. The Code of Ethics will be available upon written request to Corporate Secretary, Byline Bancorp, Inc., 180 North LaSalle Street, Suite 300, Chicago, Illinois 60601 and on our website at www.bylinebank.com. If we amend or grant any waiver from a provision of our Code of Ethics that applies to our executive officers, we will publicly disclose such amendment or waiver on our website and as required by applicable law, including by filing a Current Report on Form 8-K.
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EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
The named executive officers of Byline Bancorp, Inc. are Alberto J. Paracchini, our principal executive officer, and Lindsay Corby and Timothy C. Hadro, our other two executive officers as of December 31, 2016. In June 2017, our Board of Directors identified additional employees who serve as executive officers effective as of June 2017, see Management - Executive Officers above. The following table presents compensation awarded in the fiscal years ended December 31, 2015 and 2016 to our named executive officers or paid to or accrued for those executive officers for services rendered during fiscal years 2015 and 2016. All share and option information in Executive and Director Compensation reflects our Reincorporation in Delaware in connection with this offering, and the resulting exchange of one share of Byline Delaware common stock for every five shares of Byline Illinois common stock.
Year | Salary | Bonus (1) |
Option
Awards (2) |
All Other
Compensation (3) |
Total | |||||||||||||||||||
Name and Principal Position | ||||||||||||||||||||||||
Alberto J. Paracchini |
2016 | $ | 375,000 | $ | 281,250 | $ | | $ | 20,806 | $ | 677,056 | |||||||||||||
President and Chief Executive Officer |
2015 | 350,000 | 110,000 | 808,937 | 13,223 | 1,282,160 | ||||||||||||||||||
Lindsay Corby |
2016 | 265,000 | 136,475 | | 13,834 | 415,309 | ||||||||||||||||||
Executive Vice President and Chief Financial Officer |
2015 | 250,000 | 76,165 | 183,850 | 7,451 | 517,466 | ||||||||||||||||||
Timothy C. Hadro |
2016 | 260,000 | 114,400 | | 14,450 | 388,850 | ||||||||||||||||||
Executive Vice President and Chief Credit Officer |
2015 | 260,000 | 77,274 | 183,850 | 8,252 | 529,376 |
(1) | The amounts in this column represent earned annual cash incentive awards under the Byline Executive Incentive Plan. |
(2) | The amounts in this column represent the grant date fair value, as determined in accordance with FASB ASC Topic 718 using the valuation methodology for stock options set forth in Note 19 to the Bylines Consolidated Financial Statements as of and for the years ended December 31, 2016 and 2015 included in this prospectus, of awards of Byline stock options granted pursuant to the Byline Bancorp Equity Incentive Plan. At the time of grant, 50% of the options were subject to performance-based vesting conditions and 50% were subject to time-based vesting conditions, as described below under Stock Options Awarded under the Byline Bancorp Equity Incentive Plan. |
(3) | The items comprising All Other Compensation for 2016 are as follows: |
Contributions
to Defined Contribution Plans (a) |
Insurance
Premiums (b) |
Total | ||||||||||
Name | ||||||||||||
Alberto J. Paracchini |
$ | 6,641 | $ | 14,165 | $ | 20,806 | ||||||
Lindsay Corby |
5,118 | 8,716 | 13,834 | |||||||||
Timothy C. Hadro |
4,767 | 9,683 | 14,450 |
(a) | Reflects company contributions under the Byline Bancorp, Inc. 401(k) Plan consistent with company policy for all Byline employees. |
(b) | Reflects insurance premiums paid for the benefit of each of our named executive officers for medical, dental, life, short-term disability and long-term disability insurance policies consistent with company policy for all Byline employees. |
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Narrative Disclosure to Summary Compensation Table
Base salary
Each named executive officers base salary is a fixed component of compensation for each year for performing specific job duties and functions. The total base salaries earned by our named executive officers in fiscal years 2015 and 2016 are disclosed in the Summary Compensation Table above.
Base salaries for our named executive officers are reviewed annually by the compensation committee of the Byline board of directors (the Compensation Committee). Messrs. Paracchini and Hadros base salaries were initially established pursuant to their employment agreements with Byline Bank, as described under Employment agreements with Messrs. Paracchini and Hadro below, but are subject to review and approval of the Compensation Committee.
Annual incentive
Our named executive officers participate in Bylines Executive Incentive Plan, which was adopted by the Company in 2014 and is an annual incentive plan under which earned awards are determined following the end of each year based on corporate and individual achievement during the year. Performance is assessed against performance goals and targets that are established for the fiscal year; for each of our named executive officers for each of 2015 and 2016, corporate goals were weighted 70% and individual performance goals were weighted 30%. Named executive officers can earn up to a maximum of 150% of their target annual incentive awards and annual incentive awards may be as low as 0% if the Companys performance target is not met. The Compensation Committee has discretion to enhance the awards for our named executive officers above the amounts earned based on corporate and individual performance. Executives must be employed on the date of payment in order to receive payment of an earned award.
In 2016, target annual cash incentives under the Executive Incentive Plan for each of our named executive officers was 50% of the named executive officers base salary. The annual cash incentives awarded for 2016 performance were: $281,250 for Mr. Paracchini (representing achievement at 150%); $136,475 for Ms. Corby (representing achievement at 103%); and $114,400 for Mr. Hadro (representing achievement at 88%).
Stock options awarded under the Byline Bancorp Equity Incentive Plan
In March 2015, the board of directors of the Company approved the Byline Bancorp Equity Incentive Plan (the Byline Equity Plan) in order to promote the long-term financial interests and growth of the Company by attracting, motivating and retaining key management and other personnel, in a manner aligned with the long-term interests of the Companys stockholders. In June 2017, the board of directors terminated the Byline Equity Plan in connection with the IPO, such that no new awards may be made under the Byline Equity Plan. Awards previously granted under the Byline Equity Plan, however, remain outstanding. The Byline Equity Plan is administered by the Compensation Committee. Prior to the plans termination, the Compensation Committee had discretion to grant stock options under the Byline Equity Plan to eligible employees, non-employee members of the board of directors or other persons having a service relationship with the Company.
Our named executive officers were granted awards of stock options under the Byline Equity Plan on June 26, 2015 (each, a 2015 Option Award) in the following amounts: 428,988 options for Mr. Paracchini; 97,496 options for Ms. Corby; and 97,496 options for Mr. Hadro. Pursuant to each named executive officers stock option award agreement, the 2015 Option Award was divided into equal amounts of (1) options with time-based vesting conditions (Time Options) and (2) options with performance-based vesting conditions (Performance Options). The Time Options were designed to vest based on a participants continued employment, with 20% vesting annually beginning on the first anniversary of June 28, 2013, the date of the Recapitalization. The Performance Options vest based on the achievement of four performance criteria: (1) adversely classified assets as a percent of each of Tier 1 capital and allowance for loan and lease losses (the
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Adversely Classified Assets Goal); (2) return on average assets; (3) outstanding memorandums of understanding or consent orders (the MOU Goal); and (4) internal rate of return for stockholders holding the Companys common stock as of the Recapitalization. Upon the achievement of the applicable performance criteria, Performance Options are treated as Time Options and vest based on a participants continued employment, with 20% vesting annually beginning on the first anniversary of the Recapitalization (with credit for time vesting already completed as of the date the performance criteria are achieved). As of December 31, 2016, Byline achieved the Adversely Classified Assets Goal and the MOU Goal. Accordingly, as of December 31, 2016, 128,696 of the Time Options and 42,894 of the Performance Options granted to Mr. Paracchini were vested, 29,249 of the Time Options and 9,748 of the Performance Options granted to Ms. Corby were vested and 29,249 of the Time Options and 9,748 of the Performance Options granted to Mr. Hadro were vested, as shown under Outstanding Equity Awards at Fiscal Year End below.
Following a change in control, if an option holders employment is terminated without cause or the option holder terminates employment for good reason, in each case within 12 months after such change in
control, the unvested portion of the Time Options will become immediately vested and exercisable and the Performance Options will only remain subject to the applicable performance conditions, which will be measured at the normal time. Following a special change in control, the Time Options will become immediately vested and exercisable and the Performance Options will only remain subject to achievement of the applicable performance goals measured at the time of the special change in control.
Change in control generally means: (1) any person other than a fiduciary holding shares under an employee benefit plan or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company is or becomes the beneficial owner of more than 50% of both the total voting power of the then outstanding shares (Voting Stock) and the fair market value of the outstanding shares of capital stock of the Company (Economic Stock); (2) the consummation of a reorganization, merger or consolidation, or the sale or other disposition of all or substantially all of the assets of the Company unless all or substantially all of the individuals and entities who were the beneficial owners of both the Voting Stock and Economic Stock beneficially own, directly or indirectly, more than 50% of either (A) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the transaction or (B) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the transaction in substantially the same proportions as their ownership, immediately prior to the transaction, of the Voting Stock and Economic Stock (combined); or (3) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company.
Special change in control generally means a change in control, other than by plan of complete liquidation or dissolution, where in addition, either (1) the beneficial owners of at least 25% of the Voting Stock and the Economic Stock, in the aggregate, held by the beneficial owners holding all of the Voting Stock and the Economic Stock on June 28, 2013 receive in such transaction either cash or securities that are publicly traded on a securities exchange (and not restricted for more than 30 days other than pursuant to applicable law or regulation); or (2) such transaction satisfies the definition of a change in control above with 70% replacing 50% each time it appears.
Cause is defined in the employment agreement for each of Messrs. Paracchini and Hadro (described below under Employment Agreements with Messrs. Paracchini and Hadro). For Ms. Corby, cause generally means: (1) willful and continued failure to substantially perform duties; (2) willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of duties and responsibilities; (3) commission of a crime involving moral turpitude, dishonesty, fraud, theft or financial impropriety; (4) willful violation of a material requirement of any applicable code of ethics or standards of conduct of Byline or Byline Bank or fiduciary duty; or (5) a breach of the Agreement Protecting Company Interests (described below under Employment Agreements with Messrs. Paracchini and Hadro).
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Good reason is defined in the employment agreement for each of Messrs. Paracchini and Hadro. If an option holder is not a party to an employment agreement, the option award agreement does not provide a right to terminate employment for good reason following a change in control. Ms. Corby is not party to an employment agreement.
Employment agreements with Messrs. Paracchini and Hadro
Byline Bank previously entered into an employment agreement with Mr. Paracchini, which became effective on January 21, 2016, and an employment agreement with Mr. Hadro, which became effective on March 4, 2015. Each agreement is for an initial term of three years with automatic one-year extensions at the end of each year following the initial term unless notice of termination is provided. During the term of their respective agreements, Mr. Paracchini serves as President and Chief Executive Officer, reporting to the board of directors of Byline Bank, and Mr. Hadro serves as Executive Vice President, Head of Special Assets Group (and has since been named Bylines Chief Credit Officer). Material terms of the employment agreements include: for
Mr. Paracchini, an annual base salary of $350,000 (which has since been increased and is $375,000 as of December 31, 2016), participation in the Executive Incentive Plan, with a maximum annual bonus of 75% of his annual base salary, and participation in the Byline Equity Plan; and for Mr. Hadro, an annual base salary of $260,000, participation in the Executive Incentive Plan with a target annual bonus of 50% of his annual base salary, and participation in Bylines long-term incentive program (which was previously covered by Mr. Hadros participation in the Byline Equity Plan).
Messrs. Paracchini and Hadros employment agreements also include severance benefits that are, in each case, subject to signing a release. If Byline Bank terminates the executive without cause (and not due to disability) or the executive resigns for good reason, the executive will be entitled to: (1) one-and-a-half times (for Mr. Paracchini) or one times (for Mr. Hadro) the sum of (A) his then-current annual base salary; and (B) the excess of the applicable COBRA premiums for health, dental and vision benefits on the date of termination (provided that he elects COBRA continuation coverage) over the amount of health, dental and vision premiums charged to active employees of the Company for like coverage on the date of termination, payable in cash in installments over 18 months (for Mr. Paracchini) or 12 months (for Mr. Hadro) following termination of employment, and (2) a pro rata bonus for the year of termination based on actual performance and paid following the end of the fiscal year. In the event the executive is terminated without cause (and not due to disability) or the executive voluntarily resigns for good reason within two years (for Mr. Paracchini) or one year (for Mr. Hadro) following a change in control, he will be entitled to each of the severance payments described above plus one-and-a-half times (for Mr. Paracchini) or one times (for Mr. Hadro) the higher of the two immediately preceding completed fiscal years earned bonus, with all amounts other than the pro rata bonus payable in a lump sum following termination of employment. In the event of a special change in control, regardless of whether employment is terminated, each of Mr. Paracchini and Mr. Hadro is entitled to each of the severance payments described above for a qualifying termination following a change in control with such pro rata bonus being paid based on achievement of applicable performance goals through the date of the special change in control (as opposed to through the end of the fiscal year).
Cause generally means: (1) willful and continued failure to perform substantially your duties; (2) willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of your duties and responsibilities; (3) being charged with a crime (or in the case of Mr. Hadro, the commission of a crime) involving moral turpitude, dishonesty, fraud, theft or financial impropriety; (4) willful violation of a material requirement of any applicable code of ethics or standards of conduct of Byline or violation of fiduciary duty to Byline; or (5) a breach of the Agreement Protecting Company Interests.
Good reason generally means: (1) any material reduction in base salary; (2) any material adverse change in title, position, authority or reporting relationships (for Mr. Paracchini) or being required to report to any employee other than the Chief Executive Officer (for Mr. Hadro); (3) the requirement to relocate principal place of employment to a location in excess of thirty-five (35) miles (for Mr. Paracchini) or fifty (50) miles (for
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Mr. Hadro) from the principal work location on the date of the employment agreement; or (4) the failure to nominate to, or removal from, the board of directors of Byline Bank (for Mr. Paracchini only).
Change in control and special change in control are defined consistent with the definitions provided under Stock Options Awarded under the Byline Bancorp Equity Incentive Plan above.
As a condition to their respective employment agreements, Messrs. Paracchini and Hadro entered into Agreements Protecting Company Interests with Byline Bancorp, Inc. and Byline Bank. Ms. Corby also entered into an Agreement Protecting Company Interests with Byline Bancorp, Inc. and Byline Bank in connection with her receipt of a 2015 Option Award. The Agreement Protecting Company Interests contains (1) a confidentiality provision regarding the use and disclosure of confidential information during the term of employment and after, (2) a customer and employee non-solicit during employment and for eighteen (18) months following termination of employment (for Mr. Paracchini) and twelve (12) months (for Ms. Corby and Mr. Hadro), and (3) assignment of inventions and non-disparagement provisions.
Savings and Retirement Plans
Byline maintains the Byline Bancorp, Inc. 401(k) Plan (the 401(k) Plan), which is a tax-qualified defined contribution savings plan for all eligible employees of Byline, including each of our named executive officers. Under the 401(k) Plan, eligible employees may contribute up to 90% of their pay (subject to Internal Revenue Service limitations) to the 401(k) Plan. Contributions are withheld by payroll deductions on a pre-tax basis. Byline matches 100% of the first 3% of the pay that an employee contributes on a pre-tax basis to the 401(k) Plan and 50% of the next 2% of the pay that an employee contributes on a pre-tax basis to the 401(k) Plan. Messrs. Paracchini and Hadro and Ms. Corby are eligible for such matching contributions. Participants are 100% vested in their pre-tax contributions and, upon completion of three years of service, the employer matching contributions. Each of our named executive officers is fully vested in their employer matching contributions.
Outstanding Equity Awards at Fiscal Year End
As of December 31, 2016, our named executive officers held outstanding equity-based awards of the Company as listed in the table below.
Option Awards | ||||||||||||||||||||||||
Grant Date |
Number of
Securities Underlying Unexercised Options (#) exercisable |
Number of
Securities Underlying Unexercised Options (#) unexercisable (1) |
Equity Incentive
Plan awards: Number of securities underlying unexercised unearned options (#) (2) |
Option
Exercise Price |
Option
Expiration Date (3) |
|||||||||||||||||||
Name | ||||||||||||||||||||||||
Alberto J. Paracchini |
6/26/2015 | 171,590 | 85,798 | 171,600 | $ | 11.18 | 6/26/2025 | |||||||||||||||||
Lindsay Corby |
6/26/2015 | 38,997 | 19,499 | 39,000 | $ | 11.18 | 6/26/2025 | |||||||||||||||||
Timothy C. Hadro |
3/2/2015 | 38,997 | 19,499 | 39,000 | $ | 11.18 | 3/2/2025 |
(1) | These options were granted pursuant to the Byline Equity Plan and vest 50% on June 28, 2017 and 50% on June 28, 2018. |
(2) | These options were granted pursuant to the Byline Equity Plan and are earned based on the achievement of performance goals, as described under Stock Options Awarded under the Byline Bancorp Equity Incentive Plan above and, except with respect to certain qualifying terminations, the participants continued employment on the date of such achievement. |
(3) | The options may expire earlier than the expiration date listed in the case of termination of employment, a participants breach of their Agreement to Protect Company Interests, a change in control or the suspension or termination of the Byline Equity Plan by the Byline board of directors. |
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Anticipated Changes to Our Compensation Program Following This Offering
In connection with this offering, our board of directors has adopted, and Byline Bancorp, Inc., an Illinois corporation, as our sole stockholder prior to the Reincorporation, has approved, the incentive plans and benefits described below, under which we will be permitted to grant a variety of equity-based and cash-based incentive awards.
2017 Omnibus Incentive Compensation Plan
Our board of directors has adopted, and our sole stockholder has approved, the Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan (the Omnibus Plan) in connection with this offering.
The purposes of the Omnibus Plan are to help us attract, retain and motivate key employees (including prospective employees), consultants and non-employee directors, align the interests of those individuals with the interests of the Companys stockholders and promote ownership of the Companys equity. To accomplish these purposes, the Omnibus Plan provides for the grant of stock options (both stock options intended to meet the requirements of incentive stock options under Section 422 of the Code and non-qualified stock options that do not meet such requirements), stock appreciation rights (SARs), restricted stock, restricted stock units, dividend equivalent rights and other equity-based, equity-related or cash-based awards (including performance share awards and performance units settled in cash) (collectively, awards).
Shares Subject to the Omnibus Plan
A total of 1,550,000 shares of our common stock (as adjusted in connection with the Reincorporation) will be reserved and available for issuance under the Omnibus Plan. If an award granted under the Omnibus Plan expires, is forfeited or is settled in cash, the shares of our common stock not acquired pursuant to the award will again become available for subsequent issuance under the Omnibus Plan. Shares of our common stock subject to awards that are assumed, converted or substituted under the Omnibus Plan as a result of our acquisition of another company will not be counted against the number of shares that may be granted under the Omnibus Plan. With respect to awards of stock-settled SARs, the total number of shares that may be granted under the Omnibus Plan will be reduced by the full number of shares underlying the exercised portion of such award (rather than only the number of shares actually delivered upon exercise). The following types of shares under the Omnibus Plan will not become available for the grant of new awards under the Omnibus Plan: (i) shares withheld to satisfy any tax withholding obligation, (ii) shares tendered to, or withheld by, us to pay the exercise price of an option and (iii) shares covered by a SAR (to the extent that it is settled in shares).
The aggregate number of shares of our common stock that may be granted to any employee during a fiscal year in the form of awards (other than stock options and SARs) that are intended to be performance-based compensation for purposes of Section 162(m) of the Code, may not exceed shares (which will be calculated by dividing approximately $3,500,000 by the public offering price). The maximum number of shares of our common stock that may be granted to any single individual during a fiscal year in the form of stock options may not exceed 200,000 shares (as adjusted in connection with the Reincorporation). The maximum number of shares of our common stock that may be granted to any single individual during a fiscal year in the form of SARs may not exceed 200,000 shares (as adjusted in connection with the Reincorporation). Aggregate awards to any one non-employee director in respect of any fiscal year, solely with respect to his or her service as a director, may not exceed $2,000,000 based on the aggregate value of cash awards and fair market value of stock-based awards, in each case, determined as of the date of grant.
Administration of the Omnibus Plan
The Omnibus Plan will be administered by the compensation committee (and its delegates) unless the board of directors determines otherwise. For purposes of this summary, we refer to the committee that
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administers the Omnibus Plan, and to any person or group to whom this committee delegates authority, as the compensation committee. Subject to the terms of the Omnibus Plan, the compensation committee will determine which employees, consultants and non-employee directors will receive awards under the Omnibus Plan, the dates of grant, the number and types of awards to be granted, the exercise or purchase price of each award, and the terms and conditions of the awards, including the period of their exercisability and vesting and the fair market value applicable to a stock award.
In addition, the compensation committee has the authority to determine whether any award may be settled in cash, shares of our common stock, other securities or other awards or property. The compensation committee has the authority to interpret the Omnibus Plan and may adopt any administrative rules, regulations, procedures and guidelines governing the Omnibus Plan or any awards granted under the Omnibus Plan as it deems to be appropriate. The compensation committee may also delegate any of its powers, responsibilities or duties to any person who is not a member of the compensation committee or any administrative group within the Company. Our board of directors may also grant awards or administer the Omnibus Plan.
Conditions on Awards
All of the awards described below are subject to the conditions, limitations, restrictions, vesting and forfeiture provisions determined by the compensation committee, in its sole discretion, subject to certain limitations provided in the Omnibus Plan. The compensation committee may condition the vesting of or the lapsing of any applicable vesting restrictions or conditions on awards upon the attainment of performance goals, continuation of service, or any other term or conditions. The vesting conditions placed on any award need not be the same with respect to each grantee and the compensation committee will have the sole discretion to amend any outstanding award to accelerate or waive any or all restrictions, vesting provisions or conditions set forth in the award agreement.
Each award granted under the Omnibus Plan will be evidenced by an award agreement, which will govern that awards terms and conditions. In the case of any conflict or potential inconsistency between the Omnibus Plan and a provision of any award or award agreement with respect to an award, the Omnibus Plan will govern.
Types of Awards
The Omnibus Plan provides for the grant of stock options intended to meet the requirements of incentive stock options under Section 422 of the Code as well as non-qualified stock options that do not meet such requirements, SARs, restricted stock, restricted stock units, dividend equivalent rights and other equity-based, equity-related or cash-based awards (including performance-based awards).
Stock Options
An award of a stock option gives a grantee the right to purchase a certain number of shares of our common stock during a specified term in the future, after a vesting period (if any), at an exercise price equal to at least 100% of the fair market value of our common stock on the grant date. The term of a stock option may not exceed 10 years from the date of grant. Incentive stock options may only be granted from a plan that has been approved by our stockholders and will be exercisable in any fiscal year only to the extent that the aggregate fair market value of our common stock with respect to which the incentive stock options are exercisable for the first time does not exceed $100,000. No incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own stock possessing more than 10% of our total combined voting power or that of any of our affiliates unless (i) the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and (ii) the term of the incentive stock option does not exceed five years from the date of grant. The exercise price of any stock option may be paid using (i) cash, check or certified bank check, (ii) shares of our common stock, (iii) a net exercise of the stock option, (iv) other legal consideration approved by the Company and permitted by applicable law or (v) any combination of the foregoing.
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Stock Appreciation Rights (SARs)
A SAR entitles the grantee to receive an amount equal to the difference between the fair market value of our common stock on the exercise date and the exercise price of the SAR (which may not be less than 100% of the fair market value of a share of our common stock on the grant date), multiplied by the number of shares subject to the SAR. The term of a SAR may not exceed 10 years from the date of grant. Payment to a grantee upon the exercise of a SAR may be either in cash, shares of our common stock or other securities or property, or a combination of the foregoing, as determined by the compensation committee.
Restricted Stock
A restricted stock award is an award of outstanding shares of our common stock that does not vest until a specified period of time has elapsed or other conditions have been satisfied, as determined by the compensation committee, and which will be forfeited if the conditions to vesting are not met. The compensation committee will issue a certificate in respect to the shares of restricted stock, unless the compensation committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of such shares. In the event a certificate is issued it may be registered in the name of the grantee, and the Company will hold the certificate until the restrictions upon the award have lapsed. During the period that any restrictions apply, the transfer of stock awards is generally prohibited. Grantees have full voting rights with respect to their restricted shares. Unless the compensation committee determines otherwise, all ordinary cash dividend payments or other ordinary distributions paid upon a restricted stock award will be retained by us and will be paid to the relevant grantee (without interest) when the award of restricted shares vests and will revert back to us if for any reason the restricted share upon which such dividends or other distributions were paid reverts back to us.
Restricted Stock Units
A restricted stock unit is an unfunded and unsecured obligation to issue a share of common stock (or an equivalent cash amount) to the grantee in the future. Restricted stock units become payable on terms and conditions determined by the compensation committee and will be settled either in cash, shares of our common stock or other securities or property, or a combination of the foregoing, as determined by the compensation committee.
Dividend Equivalent Rights
Dividend equivalent rights entitle the grantee to receive amounts equal to all or any of the ordinary cash dividends that are paid on the shares underlying a grant while the grant is outstanding. Dividend equivalent rights may be paid in cash, in shares of our common stock or in another form. The compensation committee will determine whether dividend equivalent rights will be conditioned upon the exercise of the award to which they relate (subject to compliance with Section 409A of the Code) and other terms and conditions, as determined by the compensation committee. No dividends may be paid unless and until an award vests.
Other Stock-Based or Cash-Based Awards
Under the Omnibus Plan, the compensation committee may grant other types of equity-based, equity-related or cash-based awards subject to such terms and conditions that the compensation committee may determine. Such awards may include the grant or offer for sale of unrestricted shares of our common stock, performance share awards and performance units settled in cash.
Performance-Based Awards
At the discretion of the compensation committee, other stock-based or cash-based awards may be granted in a manner which is intended to be deductible by the Company under Section 162(m) of the Code
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(taking into account any transition relief available thereunder). In such event, the performance-based award will be determined based on the attainment of written objective performance goals based on one or more of the Performance Criteria (as defined below), and may be measured in absolute terms or relative to historic performance or the performance of other companies or an index. The performance goal(s) must be approved by the compensation committee for a performance period established by the compensation committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if the performance period is less than one year, the number of days which is equal to 25% of the relevant performance period. When setting performance goals, the compensation committee will also prescribe a formula to determine the amount of the performance-based award that may be payable upon the level of attainment of the performance goals during the performance period. Following the completion of each performance period, the compensation committee will have the sole discretion to determine whether the applicable performance goals have been met with respect to each individual, and if they have, will certify the amount of the applicable performance-based award. The amount of a performance-based award actually paid may be less (but not more) than the amount determined according to the formula, at the discretion of the compensation committee.
If performance goals are established by the compensation committee in connection with the grant of an award, they will be based upon performance criteria which may include one or more of the following (Performance Criteria): (1) return measures (including, but not limited to, total shareholder return; return on equity; return on tangible common equity; return on tier 1 common equity; return on assets or net assets; return on risk-weighted assets; and return on capital (including return on total capital or return on invested capital)); (2) revenues (including, but not limited to, total revenue; gross revenue; net revenue; revenue growth; and net sales); (3) income/earnings measures (including, but not limited to, earnings per share; earnings or loss (including earnings before or after interest, taxes, depreciation and amortization); gross income; net income after cost of capital; net interest income; non-interest income; fee income; net interest margin; operating income (before or after taxes); pre- or after-tax income or loss; pre- or after-tax operating income; net earnings; net income or loss; operating margin; gross margin; and adjusted net income); (4) expense measures (including, but not limited to, expenses; operating efficiencies; non-interest expense and operating/efficiency ratios; and improvement in or attainment of expense levels or working capital levels (including cash and accounts receivable)); (5) balance sheet/risk management measures (including, but not limited to, loans; deposits; assets; tangible equity; charge-offs; net charge-offs; non-performing assets or loans; risk-weighted assets; classified assets; criticized assets; allowance for loans and lease losses; loan loss reserves; asset quality levels; year-end cash; investments; interest-sensitivity gap levels; regulatory compliance; satisfactory internal or external audits; financial ratings; shareholders equity; tier 1 capital; and liquidity); (6) cash flow measures (including, but not limited to, cash flow or cash flow per share (before or after dividends); and cash flow return on investment); (7) share price measures (including, but not limited to, share price; appreciation in and/or maintenance of share price; and market capitalization); (8) strategic objectives (including, but not limited to, market share; debt reduction; operating efficiencies; customer satisfaction; customer or household growth; employee satisfaction; research and development achievements; branding; mergers and acquisitions; succession management; people development; management retention; expense reduction initiatives; reductions in costs; risk management; regulatory compliance and achievements; and recruiting and maintaining personnel); and (9) other measures (including, but not limited to, financial ratios (including those measuring liquidity, activity, profitability or leverage); cost of capital or assets under management; and financing and other capital raising transactions). Any of the above criteria may be used with or without adjustment for extraordinary items or nonrecurring items, and to the extent permitted under Section 162(m) of the Code (taking into account any transition relief available thereunder), the compensation committee may provide for objectively determinable adjustments, modifications or amendments, as determined in accordance with GAAP, to any of the Performance Criteria for one or more of the items of gain, loss, profit or expense.
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Adjustments
In connection with a recapitalization, stock split, reverse stock split, stock dividend, spinoff, split up, combination, reclassification or exchange of shares, merger, consolidation, rights offering, separation, reorganization or liquidation, or any other change in the corporate structure or shares, including any extraordinary dividend or extraordinary distribution, the compensation committee will make adjustments as it deems appropriate in (i) the maximum number of shares of our common stock reserved for issuance as grants, (ii) the maximum number of stock options, SARs or awards intended to qualify as performance-based compensation that any individual participating in the Omnibus Plan may be granted in any fiscal year, (iii) the number and kind of shares covered by outstanding grants, (iv) the kind of shares that may be issued under the Omnibus Plan and (v) the terms of any outstanding stock awards, including exercise or strike price, if applicable.
Amendment; Termination
Our board of directors may amend or terminate the Omnibus Plan at any time, provided that no such amendment may materially adversely impair the rights of a grantee of an award without the grantees consent. Our stockholders must approve any amendment to the extent required to comply with the Code, applicable laws or applicable stock exchange requirements. Unless terminated sooner by our board of directors or extended with stockholder approval, the Omnibus Plan will terminate on the day immediately preceding the tenth anniversary of the date on which our stockholder approved the Omnibus Plan, but any outstanding award will remain in effect until the underlying shares are delivered or the award lapses.
Change in Control
Unless the compensation committee determines otherwise, or as otherwise provided in the applicable award agreement, (i) in the case of a grantee other than a non-employee director, if such grantees employment is terminated by us without cause (as defined in the Omnibus Plan) or the participant resigns his or her employment for good reason (as defined in the Omnibus Plan), in either case, on or within two years after a change in control (as defined in the Omnibus Plan), (A) all outstanding awards will become fully vested (including lapsing of all restrictions and conditions), and, as applicable, exercisable and (B) any shares deliverable pursuant to restricted stock units will be delivered promptly (but no later than 15 days) following such grantees termination of employment and (ii) in the case of a non-employee director grantee, each award will become fully vested (including the lapsing of all restrictions and conditions) and, as applicable, exercisable upon a change in control (as defined in the Omnibus Plan), and any shares deliverable pursuant to restricted stock units will be delivered promptly (but no later than 15 days) following such change in control. As of the change in control date, any outstanding performance-based awards will be deemed earned at the greater of the target level and the actual performance level at the date of the change in control with respect to all open performance periods and will cease to be subject to any further performance conditions.
In the event of a change in control, the compensation committee may also (i) provide for the assumption of or the issuance of substitute awards, (ii) provide that for a period of at least 20 days prior to the change in control, stock options or SARs that would not otherwise become exercisable prior to a change in control will be exercisable as to all shares of common stock, as the case may be, subject thereto and that any stock options or SARs not exercised prior to the consummation of the change in control will terminate and be of no further force or effect as of the consummation of the change in control, (iii) modify the terms of such awards to add events or conditions (including the termination of employment within a specified period after a change in control) upon which the vesting of such awards will accelerate, (iv) deem any performance conditions satisfied at target, maximum or actual performance through closing or provide for the performance conditions to continue (as is or as adjusted by the compensation committee) after closing or (v) settle awards for an amount of cash or securities equal to their value (in the case of stock options and SARs that are settled in cash, the value of such awards will be equal to their in-the-money spread value, if any, of such awards, as determine in the sole discretion of the compensation committee). In the event that the consideration paid in the change in control includes contingent
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value rights, earnout or indemnity payments or similar payments, then the compensation committee will determine if awards settled pursuant to item (v) above are (a) valued at closing taking into account such contingent consideration (with the value determined by the compensation committee in its sole discretion) or (b) entitled to a share of such contingent consideration.
In general terms, except in connection with any initial public offering and except as expressly defined in an award agreement, a change in control under the Omnibus Plan occurs if following the completion of this offering:
| during any period of not more than 36 months, individuals who constitute the board of directors as of the beginning of the period whose appointment or election is endorsed by two-thirds of the incumbent directors no longer constitute a majority of the board; |
| a person, other than MBG Investors I, L.P. or any of its direct or indirect subsidiaries, becomes a beneficial owner, directly or indirectly, of our capital stock representing 50% of the voting power of our outstanding capital stock; |
| we merge into another entity, unless (i) the business combination is with MBG Investors I, L.P. or any of its direct or indirect subsidiaries or (ii) (a) more than 50% of the combined voting power of the merged entity or its parent is represented by our voting securities that were outstanding immediately prior to the merger, (b) the board of directors prior to the merger constitutes at least 50% of the board of the merged entity or its parent following the merger and (c) no person is or becomes the beneficial owner of 50% or more of the combined voting power of the outstanding capital stock eligible to elect directors of the merged entity or its parent; |
| we sell or dispose of all or substantially all of our assets (other than to MBG Investors I, L.P. or any of its direct or indirect subsidiaries); or |
| we are liquidated or dissolved. |
Clawback
All awards under the Omnibus Plan will be subject to any clawback or recapture policy that we may adopt from time to time.
Byline Bancorp, Inc. Employee Stock Purchase Plan
Our board of directors has adopted, and our sole stockholder has approved, the Byline Bancorp, Inc. Employee Stock Purchase Plan (the ESPP) in connection with this offering. The ESPP will allow our employees to purchase shares of our common stock at a discount from the market price through automatic payroll deductions. A total of 200,000 (as adjusted in connection with the Reincorporation) shares of our common stock will be reserved and available for sale under the ESPP, subject to adjustment in accordance with the terms of the ESPP. We intend for the ESPP to be qualified under Section 423 of the Code.
Administration
The ESPP will be administered by the compensation committee of our board of directors, who may delegate its administrative authority to a person or committee who shall serve as the Plan Administrator. The compensation committee has delegated such authority to our senior human resources officer. The Plan Administrator will have the authority to make and adopt rules and regulations not inconsistent with the provisions of the ESPP or the Code. In addition, the Plan Administrator will correct any defect or supply any omission or reconcile any inconsistency in the ESPP. The interpretations and decisions of the Plan Administrator in respect to the ESPP will be final and binding.
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Eligible Employees
All of our employees or employees of participating subsidiaries, as defined in the ESPP, whose customary term of employment is for more than 20 hours per week, are eligible to participate in the ESPP. In addition, no employee may purchase shares of our common stock under the ESPP that would result in the employee owning 5% or more of the total combined voting power or value of our stock or the stock of any of our subsidiaries.
Offerings
From time-to-time, the Company will offer employees the opportunity to buy stock in the Company through the ESPP. Unless determined otherwise by the compensation committee, offerings will begin on January 1 and July 1 of each year and last for a period of six months. The compensation committee will establish an enrollment period, a period of time prior to the beginning of an offering during which eligible participants may subscribe to an offering in such manner as the compensation committee may prescribe (which may include enrollment by submitting forms, by voice response, internet access or other electronic means). Eligible employees elect whether to participate in the ESPP ( i.e., have deductions made from their after-tax compensation for the purpose of buying shares) during the enrollment period.
Each eligible employee who is a participant as of the date an offering commences is deemed to be granted an option to participate in the ESPP for that offering. The compensation committee may also establish a waiting period of up to two years after an employee is first employed before the employee may participate, or permit employees who are hired during an offering period to participate in the offering. On the last day of each offering period, the accumulated balance in each participants account will be used to purchase shares at the purchase price described below. The compensation committee may also provide for periodic purchase dates during an offering period.
A participant can change his or her level of withholding, or withdraw his or her subscription at any time (but not retroactively), during an offering, subject to rules and limitations established by the Plan Administrator. A participant whose employment is terminated during an offering period will be deemed to have withdrawn his or her subscription. Upon the withdrawal (or deemed withdrawal) of a participant, the balance in his or her account will either be refunded or used to purchase shares on the next purchased date, as determined by the compensation committee.
Purchase Price
The purchase price paid by participants for the shares purchased under the ESPP will be set by the compensation committee and will, in any case, be no less than 85% of the lower of the fair market value of a share of our common stock on the first day of the applicable offering period or on the purchase date. Unless provided otherwise, the default purchase price per share provided for in the ESPP will be 85% of the fair market value of a share of our common stock on the last day of the applicable offering period or earlier purchase date.
Limitations on Purchase
As required by the Code, no eligible employee may purchase stock under the ESPP at a rate which, when aggregated with his or her other rights to purchase our common stock, exceeds $25,000 in fair market value per year. Unless the Plan Administrator determines otherwise, employees are also limited in making elections under the ESPP to contributing no more than 15% of their after-tax compensation to the ESPP.
Mandatory Retention or Sale of Stock
To facilitate compliance with applicable law, the compensation committee may require participants to (a) retain any shares purchased under the ESPP for a designated period of time or may establish other procedures
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to restrict transfer of such shares or (b) sell shares immediately upon purchase or within a specified period following a termination of employment.
Adjustments
In the event of a stock split, stock dividend, reverse stock split, extraordinary cash dividend, recapitalization, reorganization, reclassification or combination of shares, merger, consolidation, distribution, split-up, spin-off, exchange of shares, sale of assets or similar corporate transaction or event, the compensation committee, in the manner it deems equitable, will adjust (a) the number and class of shares or other securities reserved for issuance under the ESPP, (b) the number and class of shares or other securities that are subject to outstanding options, and (c) the appropriate market value and other price determinations applicable to options (including the purchase price).
Termination and Amendment of the ESPP
Our compensation committee generally may, at any time, terminate or amend the ESPP in any respect, except that, without approval of our shareholders, no amendment may increase the maximum number of our shares reserved under the ESPP or modify the requirements as to eligibility for participation in the ESPP. No termination or amendment of the ESPP may terminate or materially and adversely affect a participants rights under the ESPP without such participants consent. Unless earlier terminated by the compensation committee, the ESPP shall terminate when no more shares are available for issuance under the ESPP.
IPO Awards
In connection with this offering, the Board has approved the award of a special one-time grant of approximately 58,900 restricted shares under the Omnibus Plan (the IPO award) to certain key employees, including Messrs. Paracchini and Hadro and Ms. Corby, to be granted upon the completion of this offering. Mr. Paracchini will receive an award of 10,000 restricted shares (valued at $ based on the price per share of our common stock in the initial public offering), Ms. Corby will receive an award of 7,500 restricted shares (valued at $ based on the price per share of our common stock in the initial public offering) and Mr. Hadro will receive an award of 5,000 restricted shares (valued at $ based on the price per share of our common stock in the initial public offering).
The award agreements for the IPO awards provide that 100% of the restricted shares will cliff vest on the third anniversary of the grant date, subject to continued employment. On a termination of employment by reason of death or disability or a change in control, the restricted shares will vest in full and all transfer restrictions will immediately lapse.
Director Compensation
2016 Director Compensation Table
The following table lists the individuals who served on Bylines board of directors in 2016 and received compensation in 2016 for their service as directors. All compensation paid to directors is for their service on both the Byline board of directors and the Byline Bank board of directors. Messrs. del Valle Perochena and Ruiz Sacristán did not receive compensation in 2016 for their service on the Byline board of directors.
Fees earned or
paid in cash (1) |
Option Awards (2) |
All Other
Compensation (3) |
Total | |||||||||||||
Name | ||||||||||||||||
Roberto R. Herencia |
$ | 800,000 | $ | | $ | 32,831 | $ | 832,831 | ||||||||
L. Gene Beube |
120,000 | | | 120,000 | ||||||||||||
Phillip R. Cabrera |
115,000 | | | 115,000 | ||||||||||||
Steven M. Rull |
10,417 | | | 10,417 |
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(1) | Mr. Herencia received $400,000 in annual director fees for his service on the Byline board of directors and its committees. In addition, Mr. Herencia received a special incentive payment of $400,000 to compensate him for the extensive duties and responsibilities he has assumed as Chairman of the board following the Recapitalization transactions. His responsibilities include meeting with Bylines executive officers and other members of management on a regular basis to ensure appropriate oversight of Bylines business and meeting on a regular basis with regulators. The incentive payment was paid in two equal installments in each of September 2016 and March 2017 to serve as an incentive for Mr. Herencia to maintain his roles at Byline. Messrs. Beube and Cabrera each received $100,000 in annual director fees for their service on the Byline board of directors in 2016. Mr. Rull, who joined the Byline board of directors on October 14, 2016, received $10,417 in annual director fees for his service in 2016. In addition, Mr. Beube received $15,000 for his service as Chair of the Executive Credit Committee and $5,000 for his service as a member of the Audit Committee; and Mr. Cabrera received $5,000 for his service as Chair of the Regulatory Compliance Committee, $5,000 for his service as a member of the Audit Committee and $5,000 for his service as a member of the Executive Credit Committee. |
(2) | Mr. Herencia has 428,988 options outstanding as of March 31, 2017, with 171,590 of those options vested and exercisable, 85,798 options subject to time-based vesting conditions and 171,600 subject to performance conditions. No such options were granted in 2016. |
(3) | Reflects reimbursement for health insurance premiums. |
Byline Bancorp, Inc. Director Compensation Program
As in effect in June 2017, our director compensation program provides the following compensation for non-employee members of our board of directors:
| An annual cash retainer of $100,000 for directors who were serving on June 1, 2016 and $75,000 for all other directors; |
| An additional annual cash retainer of $15,000 for the chair of the executive credit committee; |
| An additional annual cash retainer of $5,000 for the chair of the risk committee; |
| An additional annual membership fee of $5,000 for each member of the audit committee and/or executive credit committee; and |
| An aggregate annual cash retainer of $400,000 for the Chairman of our board of directors, which includes the annual board retainer and all committee membership and committee chair retainers that the Chairman would otherwise be entitled to. The Chairman currently serves as the chair of each of the audit committee, the compensation committee and the governance and nominating committee. |
The Chairman of the board of directors will also receive an additional annual special incentive payment of $400,000, payable in two equal installments in September 2017 and March 2018, subject to continued service through such dates, to compensate the Chairman for the extensive duties and responsibilities assumed following the Recapitalization transaction. The Chairmans responsibilities include meeting with Bylines executive officers and other members of management on a regular basis to ensure appropriate oversight of Bylines business and meeting on a regular basis with regulators. The annual special incentive payment also serves as an incentive for the Chairman to maintain his or her role at Byline.
We also reimburse all directors for reasonable and substantiated out-of-pocket expenses incurred in connection with the performance of their duties as directors. Additionally, the Chairman of the Board will be reimbursed for cell phone services and two business-related club memberships and will receive an annual stipend of $43,800 that may be used toward medical and health insurance expenses.
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Directors agree, in connection with their service as directors, that they will not, without the prior consent of Byline, directly or indirectly, provide any material services to any other banking entity which competes in any material respect with Byline and its subsidiaries as long as they serve as a director of Byline (other than services disclosed in writing prior to the adoption of the director compensation program).
Notwithstanding the above, any director who is an officer of the Company will not receive any director compensation.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information, as of the date of this prospectus, regarding the beneficial ownership of our common stock, immediately prior to and immediately after the consummation of this offering, by:
| all persons known by us to own beneficially more than 5% of our outstanding common stock; |
| the selling stockholders; |
| each of our named executive officers; |
| each of our directors; and |
| all of our directors and executive officers as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to such securities. A security holder is also deemed to be, as of any date, the beneficial owner of all securities that such security holder has the right to acquire within 60 days after such date through (i) the exercise of any option or warrant, (ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement or (iv) the automatic termination of a trust, discretionary account or similar arrangement. Except as otherwise indicated, all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. Except as otherwise indicated, the address for each stockholder listed below is c/o Byline Bancorp, Inc., 180 North LaSalle Street, Suite 300, Chicago, Illinois 60601. Information presented assumes no participation by the 5% or greater stockholders, directors or officers in the Reserved Share Program.
Name of Beneficial Owners Greater than 5% Shareholders |
Beneficial Ownership
|
Number of
|
Beneficial Ownership
After the Completion
|
|||||||||||||||||
Number |
Percentage |
Number |
Percentage |
|||||||||||||||||
MBG Investors I, L.P. (1) |
11,467,123 | 46.58 | % | 0 | 11,467,123 | 39.21 | % | |||||||||||||
ECR Holdings, S.A. de C.V. (2) |
2,038,691 | 8.28 | % | 0 | 2,038,691 | 6.97 | % | |||||||||||||
Fambeck Servicios Financieros del Exterior, S.A. de C.V. (3) |
1,706,540 | 6.93 | % | 1,706,540 | 0 | 0.00 | % | |||||||||||||
Directors and Executive Officers |
||||||||||||||||||||
Roberto R. Herencia (4) |
306,072 | 1.20 | % | 0 | 306,072 | 1.02 | % | |||||||||||||
L. Gene Beube |
2,781 | * | 0 | 2,781 | * | |||||||||||||||
Phillip R. Cabrera (5) |
2,201 | * | 0 | 2,201 | * | |||||||||||||||
Antonio del Valle Perochena (1) |
11,467,123 | 46.58 | % | 0 | 11,467,123 | 39.21 | % | |||||||||||||
Jaime Ruiz Sacristán (6) |
107,582 | * | 0 | 107,582 | * | |||||||||||||||
Steven M. Rull (7) |
190,400 | * | 0 | 190,400 | * | |||||||||||||||
Alberto Paracchini (8) |
230,304 | * | 0 | 240,304 | * | |||||||||||||||
Lindsay Corby (9) |
54,018 | * | 0 | 61,518 | * | |||||||||||||||
Timothy C. Hadro (10) |
48,747 | * | 0 | 53,747 | * | |||||||||||||||
Rick Schobert (11) |
19,498 | * | 0 | 19,498 | * | |||||||||||||||
Bruce Lammers (12) |
49,163 | * | 0 | 49,163 | * | |||||||||||||||
Donald J. Meyer (13) |
48,747 | * | 0 | 53,747 | * | |||||||||||||||
Thomas J. Bell III (14) |
32,153 | * | 0 | 33,153 | * | |||||||||||||||
Megan Biggam (15) |
25,297 | * | 0 | 27,297 | * | |||||||||||||||
All directors and executive officers as a group (14 persons) |
12,584,086 | 51.02 | % | 12,614,586 | 43.05 | % | ||||||||||||||
Additional Selling Stockholders |
||||||||||||||||||||
Trinity Universal Insurance Company (16) |
436,532 | 1.77 | % | 218,266 | 218,266 | * |
* | Represents beneficial ownership of less than 1%. |
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(1) | Mr. Antonio del Valle Perochena as general partner of MBG Investors I, L.P. possesses the voting and investment power with respect to the securities beneficially owned by MBG Investors I, L.P. and may be deemed the beneficial owner of such securities. The address for MBG Investors I, L.P. is 365 Bay Street, Suite 800, M5H2V1 Toronto, Ontario, Canada. Mr. del Valle Perochena owns 16.625% of the partnership interests of MBG Investors I, L.P. and serves on our board of directors. Mr. del Valle Perochena disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. |
(2) | Mr. Eugenio Santiago Clariond Reyes as sole administrator of ECR Holdings, S.A. de C.V. possesses the voting and investment power with respect to the securities beneficially owned by ECR Holdings, S.A. de C.V. and may be deemed the beneficial owner of such securities. The address for ECR Holdings, S.A. de C.V. is Vasconcelos 220, San Pedro Garza Garcia, Nuevo Leon, Mexico. |
(3) | Mr. Juan Francisco Beckmann Vidal as sole administrator of Fambeck Servicios Financieros del Exterior, S.A. de C.V. possesses the voting and investment power with respect to the securities beneficially owned by Fambeck Servicios Financieros del Exterior, S.A. de C.V. and may be deemed the beneficial owner of such securities. The address for Fambeck Servicios Financieros del Exterior, S.A. de C.V. is Guillermo Gonzalez Camarena 800, 4 th Floor, Mexico D.F., 01210. |
(4) | Includes 10,147 shares of common stock held through the Roberto Herencia Inc. Defined Benefit Plan as Mr. Herencia has investment and voting power over the securities held by the Plan. Includes 214,490 shares of our common stock underlying options that have vested. Excludes 214,498 shares of our common stock underlying options that are subject to vesting. |
(5) | Includes 1,600 shares of common stock held through Phillip R. Cabrera Revocable Trust as Mr. Cabrera has investment and voting power over the securities held by the Trust. |
(6) | Represents the power to vote or direct the voting of shares of common stock owned by Tenedora Jacaru, S.A. de C.V. as the result of Mr. Ruiz Sacristáns majority ownership interest in Tenedora Jacaru, S.A. de C.V. |
(7) | Includes the 190,400 shares of common stock owned by Mr. Rull held indirectly through the Rull Family Partnership, L.P. as Mr. Rull possesses the voting and investment power with respect to the securities beneficially owned by the Rull Family Partnership, L.P. |
(8) | Includes 214,490 shares of our common stock underlying options that have vested. Excludes 214,498 shares of our common stock underlying options that are subject to vesting. Shares beneficially owned after the completion of this offering include restricted shares of common stock to be granted to Mr. Paracchini in connection with the IPO awards. The IPO awards will cliff vest on the third anniversary of the grant date, subject to continued employment. For a discussion of these awards, see Executive and Director Compensation IPO Awards. |
(9) | Includes 48,747 shares of our common stock underlying options that have vested. Excludes 48,749 shares of our common stock underlying options that are subject to vesting. Shares beneficially owned after the completion of this offering include restricted shares of common stock to be granted to Ms. Corby in connection with the IPO awards. The IPO awards will cliff vest on the third anniversary of the grant date, subject to continued employment. For a discussion of these awards, see Executive and Director Compensation IPO Awards. |
(10) | Includes 48,747 shares of our common stock underlying options that have vested. Excludes 48,749 shares of our common stock underlying options that are subject to vesting. Shares beneficially owned after the completion of this offering include restricted shares of common stock to be granted to Mr. Hadro in connection with the IPO awards. The IPO awards will cliff vest on the third anniversary of the grant date, subject to continued employment. For a discussion of these awards, see Executive and Director Compensation IPO Awards. |
(11) | Includes 19,498 shares of our common stock underlying options that have vested. Excludes 19,499 shares of our common stock underlying options that are subject to vesting. |
(12) | Excludes 182,400 shares of our common stock underlying options that are subject to vesting. |
(13) |
Includes 48,747 shares of our common stock underlying options that have vested. Excludes 48,749 shares of our common stock underlying options that are subject to vesting. Shares beneficially owned after the completion of this offering include restricted shares of common stock to be granted to Mr. Meyer in |
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connection with the IPO awards. The IPO awards will cliff vest on the third anniversary of the grant date, subject to continued employment. For a discussion of these awards, see Executive and Director Compensation IPO Awards. |
(14) | Includes 29,248 shares of our common stock underlying options that have vested. Excludes 29,249 shares of our common stock underlying options that are subject to vesting. Shares beneficially owned after the completion of this offering include restricted shares of common stock to be granted to Mr. Bell in connection with the IPO awards. The IPO awards will cliff vest on the third anniversary of the grant date, subject to continued employment. For a discussion of these awards, see Executive and Director Compensation IPO Awards. |
(15) | Includes 24,374 shares of our common stock underlying options that have vested. Excludes 24,374 shares of our common stock underlying options that are subject to vesting. Shares beneficially owned after the completion of this offering include restricted shares of common stock to be granted to Ms. Biggam in connection with the IPO awards. The IPO awards will cliff vest on the third anniversary of the grant date, subject to continued employment. For a discussion of these awards, see Executive and Director Compensation IPO Awards. |
(16) | Trinity Universal Insurance Company is a wholly-owned subsidiary of Kemper Corporation and, accordingly, Kemper Corporation may be deemed to be the beneficial owner of the securities beneficially owned by Trinity Universal Insurance Company. The address for Trinity Universal Insurance Company is One East Wacker Drive 9th Floor, Chicago, Illinois 60601. |
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We or one of our subsidiaries may occasionally enter into transactions with certain related persons. Related persons include our executive officers, directors, 5% or more beneficial owners of our common stock, immediate family members of these persons and entities in which one of these persons has a direct or indirect material interest. We generally refer to transactions with these related persons as related party transactions.
Related Party Transaction Policy
Our board of directors will adopt a written policy governing the review and approval of transactions with related parties that will or may be expected to exceed $120,000 in any fiscal year. The policy will call for the related party transactions to be reviewed and, if deemed appropriate, approved or ratified by our audit committee. Upon determination by our audit committee that a transaction requires review under the policy, the material facts are required to be presented to the audit committee. In determining whether or not to approve a related party transaction, our audit committee will take into account, among other relevant factors, whether the related party transaction is in our best interests, whether it involves a conflict of interest and the commercial reasonableness of the transaction. In the event that we become aware of a related party transaction that was not approved under the policy before it was entered into, our audit committee will review such transaction as promptly as reasonably practical and will take such course of action as may be deemed appropriate under the circumstances. In the event a member of our audit committee is not disinterested with respect to the related party transaction under review, that member may not participate in the review, approval or ratification of that related party transaction.
Certain decisions and transactions are not subject to the related party transaction approval policy, including: (i) decisions on compensation or benefits relating to directors or executive officers and (ii) indebtedness to us in the ordinary course of business, on substantially the same terms, including interest rate and collateral, as those prevailing at the time for comparable loans with persons not related to us and not presenting more than the normal risk of collectability or other unfavorable features.
Certain Related Party Transactions
On March 24, 2016, we issued and sold 1,541,585 shares of common stock to MBG Investors I, L.P., a 5% stockholder, and received $25,050,764 for the sale of such securities. Mr. del Valle Perochena, one of our directors, had a pecuniary interest of $4,164,689 in this transaction based on his 16.625% ownership interest in MBG Investors I, L.P. On September 30, 2016, we issued and sold 658,740 shares of common stock to MBG Investors I, L.P. and we received $10,704,532 for the sale of such securities. Mr. del Valle Perochena had a pecuniary interest of $1,779,628 in this transaction based on his 16.625% ownership interest in MBG Investors I, L.P.
On March 24, 2016, we issued and sold 217,137 shares of common stock to ECR Holdings, S.A. de C.V., a 5% stockholder, and we received $3,528,489 for the sale of such securities. On September 30, 2016, we issued and sold 92,199 shares of common stock to ECR Holdings, S.A. de C.V. and we received $1,498,235 for the sale of such securities.
On March 24, 2016, we issued and sold 8,617 shares of common stock to Roberto Herencia, one of our directors, and we received $140,000 for the sale of such securities. On September 30, 2016, we issued and sold 3,585 shares of common stock to Mr. Herencia and we received $58,260 for the sale of such securities.
On December 31, 2016, the Joann R. Rull Irrevocable Trust purchased 250 shares of Series F preferred stock (which were exchanged for series B preferred stock of Byline Delaware in the Reincorporation), and we received $250,000 for the sale of such securities. Steven M. Rull, one of our directors, is the trustee of the trust and his immediate family members are the beneficiaries.
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Other Related Party Transactions
In the ordinary course of our business, we have engaged and expect to continue engaging through our bank in ordinary banking transactions with our directors, executive officers, their immediate family members and companies in which they may have a 5% or more beneficial ownership interest, including loans to such persons. Any such loan was made on substantially the same terms, including interest rates and collateral, as those prevailing at the time such loan was made as loans made to persons who were not related to us. These loans do not involve more than the normal credit collection risk and do not present any other unfavorable features to us.
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to the directors, senior management, existing stockholders, certain employees of Byline Bancorp, Inc. and Byline Bank and persons having relationships with us through a reserved share program. See UnderwritingReserved Shares for additional information regarding the reserved share program.
Foreign National Commitments and Passivity Commitments
Certain of our stockholders are foreign nationals, and we and certain of these foreign national stockholders have entered into commitments with the Federal Reserve that restrict our ability to engage in certain business transactions without the consent of the Federal Reserve. In particular, subject to certain limited exceptions, we are not permitted to engage in or be a party to any business transaction or relationship with a company that is controlled by these foreign national stockholders or by their immediate families. In addition, our bank is not permitted to engage in or be a party to any extension of credit, as defined in the Federal Reserves Regulation O, to these foreign national stockholders, their immediate families or any company controlled by these foreign national stockholders. Our bank is also not permitted to engage in or be a party to any covered transaction, as defined in the Federal Reserve Act and the Federal Reserves Regulation W, with any company that is controlled by these foreign national stockholders.
Certain of our stockholders have entered into passivity commitments with the Federal Reserve that generally restrict these stockholders from entering into banking or nonbanking transactions with us. These stockholders may establish and maintain deposit accounts with us provided that the aggregate balance of these deposit accounts does not exceed $500,000 and the accounts are maintained on substantially the same terms as those prevailing for comparable accounts of persons who are unaffiliated with us.
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The following description of our capital stock is a summary of the material terms of our amended and restated certificate of incorporation and amended and restated bylaws. Reference is made to the more detailed provisions of, and the descriptions are qualified in their entirety by reference to, these documents, which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part, and applicable law.
General
Our authorized capital stock consists of 150,000,000 shares of common stock, $0.01 par value per share, and 25,000,000 shares of preferred stock, par value $0.01 per share, of which 15,003 shares have been designated as Series A preferred stock and 50,000 shares have been designated as Series B preferred stock. As of March 31, 2017, there were issued and outstanding 24,616,706 shares of our common stock, 15,003 shares of our Series A preferred stock and 10,438 shares of our Series B preferred stock. The authorized but unissued shares of our capital stock will be available for future issuance without stockholder approval, unless otherwise required by applicable law or the rules of any applicable securities exchange. All of our issued and outstanding shares of capital stock are validly issued, fully paid and non-assessable.
Common Stock
Subject to the rights and preferences granted to holders of our preferred stock then outstanding, and except with respect to voting rights, conversion rights and certain distributions of our capital stock, holders of our common stock rank equally with respect to distributions and have identical rights, preferences, privileges and restrictions, including the right to attend meetings and receive any information distributed by us with respect to such meetings.
Dividends. Holders of our common stock are equally entitled to receive ratably such dividends as may be declared from time to time by our board of directors out of legally available funds. In no event will any stock dividends or stock splits or combinations of stock be declared or made on common stock unless the shares of common stock at the time outstanding are treated equally and identically, provided that, in the event of a dividend of common stock, shares of common stock shall only be entitled to receive shares of common stock. The ability of our board of directors to declare and pay dividends on our common stock is subject to the laws of the state of Delaware, applicable federal and state banking laws and regulations, and the terms of any senior securities (including preferred stock) we may then have outstanding. Our principal source of income is dividends that are declared and paid by our bank on its capital stock. Therefore, our ability to pay dividends is dependent upon the receipt of dividends from our bank. See Dividend Policy and Dividends.
Voting rights. Each holder of our common stock is entitled to one vote for each share of record held on all matters submitted to a vote of stockholders, except as otherwise required by law and subject to the rights and preferences of the holders of any outstanding shares of our preferred stock. Holders of our common stock are not entitled to cumulative voting in the election of directors. Directors are elected by a plurality of the votes cast.
Liquidation rights. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of our assets remaining after payment of liabilities, including, but not limited to, the liquidation preference of any then outstanding preferred stock. Because we are a bank holding company, our rights and the rights of our creditors and stockholders to receive the assets of any subsidiary upon liquidation or recapitalization may be subject to prior claims of our subsidiarys creditors, except to the extent that we may be a creditor with recognized claims against our subsidiary.
Preemptive and other rights. Holders of our common stock are not entitled to any preemptive, subscription or redemption rights, and no sinking fund will be applicable to our common stock.
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Preferred Stock
Our amended and restated certificate of incorporation authorizes our board of directors to establish one or more series of preferred stock. Unless required by law or any stock exchange, the authorized but unissued shares of preferred stock will be available for issuance without further action by our stockholders. Our board of directors is authorized to divide the preferred stock into series and, with respect to each series, to fix and determine the designation, terms, preferences, limitations and relative rights thereof, including dividend rights, dividend rates, conversion rights, voting rights, redemption rights and terms, liquidation preferences, sinking fund provisions and the number of shares constituting the series. Subject to the rights of the holders of any series of preferred stock, the number of authorized shares of any series of preferred stock may be increased (but not above the total number of shares of preferred stock authorized under our amended and restated certificate of incorporation) or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority in voting power of the outstanding shares. Without stockholder approval, we could issue preferred stock that could impede or discourage an acquisition attempt or other transaction that some, or a majority, of our stockholders may believe is in their best interests or in which they may receive a premium for their common stock over the market price of the common stock.
We have two series of preferred stock outstanding as of the date of this prospectus, the terms of which are summarized below. In the Reincorporation merger, Series E Preferred Stock of Byline Illinois were exchanged for Series A Preferred Stock of Byline Delaware and Series F Preferred Stock of Byline Illinois were exchanged for Series B Preferred Stock of Byline Delaware. The Series A Preferred Stock and Series B Preferred Stock have substantially the same rights and privileges as the Series E Preferred Stock and Series F Preferred Stock, respectively.
Series A preferred stock
Preferential rights. Our Series A preferred stock ranks on parity with our common stock as to dividends and senior to our common stock as to distribution upon the liquidation, dissolution, or winding up of Byline. Our Series A preferred stock ranks junior to our Series B preferred stock as to dividends and equal to our Series B preferred stock as to distributions upon the liquidation, dissolution or winding up of Byline. Our Series A preferred stock is not convertible into or exchangeable for any shares of common stock or any other class of Byline capital stock. Holders of our Series A preferred stock do not have any preemptive rights. Byline may issue stock with preferences equal with or junior to the Series A preferred stock without the consent of the holders of the Series A preferred stock.
Dividends. As long as shares of Series A preferred stock remain outstanding, Byline cannot declare or pay any dividend or make any other distribution on any common stock, unless at the time of such dividend or other distribution Byline simultaneously declares and pays a dividend or makes a distribution, in cash or the same securities, assets or property as is paid to the holders of common stock, on each outstanding share of Series A preferred stock in an amount equal to the product of (i) the per share dividend or distribution paid on one share of common stock multiplied by (ii) the Common Stock Multiplier (as defined in the Series A preferred stock certificate of designations). Dividends on the Series A preferred stock are noncumulative.
If the board of directors does not declare a dividend with respect to the common stock in respect of any dividend period, the holders of Series A preferred stock will have no right to receive any dividend for such dividend period, and Byline will have no obligation to pay a dividend for such dividend period, whether or not dividends are declared and paid for any future dividend period with respect to the Series A preferred stock, the common stock or any other class or series of preferred stock.
Voting rights. Holders of Series A preferred stock do not have voting rights other than those described below and as specifically required by Delaware law.
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Without the vote or consent of a majority of the Series A preferred stock then outstanding, voting as a single class with all other classes and series of parity securities having similar voting rights then outstanding,
Byline may not (i) alter or change the provisions of Bylines certificate of incorporation (including any certificate of amendment or certificate of designations relating to the Series A preferred stock) or bylaws so as to adversely affect the powers, preferences or rights of the holders of shares of Series A preferred stock or (ii) merge or consolidate with another entity where Byline is not the surviving corporation and the Series A preferred stock is changed into anything other than a class or series of preferred stock of the surviving corporation having voting rights that, if such change had been effected by amendment of the certificate of incorporation, would not have required a vote of the holders of the Series A preferred stock under the certificate of designations for the Series A preferred stock.
Liquidation rights. In the event of the voluntary or involuntary liquidation, dissolution or winding up of Byline, holders of Series A preferred stock are entitled to receive out of assets available for distribution to stockholders, before any distribution of assets may be made to or set aside to holders of our common stock and any capital stock ranking junior to the Series A preferred stock as to distributions, a liquidating distribution in an amount equal to the greater of (i) $10 per share, plus any declared but unpaid dividends thereon, and (ii) the amount that a holder of one share of Series A preferred stock would be entitled to receive if such share were instead equal to a number of shares of common stock equal to the Common Stock Multiplier immediately prior to such liquidation, dissolution or winding up, plus any declared but unpaid dividends thereon.
Redemption. With the prior approval of the Federal Reserve, Byline may redeem the Series A preferred stock (i) in whole or in part, at its option, at any time or from time to time on or after July 1, 2018 or (ii) in whole, but not in part, upon the occurrence of a Regulatory Capital Treatment Event (as defined in the Series A preferred stock certificate of designations), in each case at the redemption price equal to the product of the current market price of the common stock and the Common Stock Multiplier, plus any declared and unpaid dividends, without accumulation of any undeclared dividends, to, but excluding, the date fixed for redemption.
Series B preferred stock
Preferential rights. Our Series B preferred stock ranks senior to our common stock as to dividends and distributions upon the liquidation, dissolution or winding up of Byline, ranks senior to our Series A preferred stock as to dividends and ranks equal to our Series A preferred stock as to distributions upon the liquidation, dissolution or winding up of Byline. The Series B preferred stock is not convertible into or exchangeable for any shares of common stock or any other class of Byline capital stock. Holders of our Series B preferred stock do not have any preemptive rights. We may issue stock with preferences equal with or junior to the Series B preferred stock without the consent of the holders of the Series B preferred stock.
Dividends. Holders of our Series B preferred stock are entitled to receive cash dividends when and as declared by the board of directors of Byline or a duly authorized committee of the board out of assets legally available for payment, (i) from the date of issuance to, but excluding December 31, 2021, at an annual rate of 7.50% on the liquidation preference amount of $1,000 per share of Series B preferred stock and (ii) from, and including, December 31, 2021, at an annual rate equal to three-month LIBOR plus 5.41% on the liquidation preference amount of $1,000 per share of Series B preferred stock, quarterly in arrears, on March 31, June 30, September 30, and December 31 of each year, beginning on March 31, 2017. Dividends on the Series B preferred stock are noncumulative.
Voting rights. Holders of Series B Preferred Stock do not have voting rights other than those described below and as specifically required by Delaware law.
Without the vote or consent of the holders of shares entitled to cast at least two-thirds of the votes entitled to be cast by the holders of the total number of shares of Series B preferred stock then outstanding, Byline may not create any class of stock having preference as to dividends or upon the liquidation, dissolution or
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winding up of Byline over the Series B preferred stock, or alter or change the provisions of Bylines amended and restated certificate of incorporation (including any certificate of amendment or certificate of designations relating to the Series B preferred stock) or bylaws so as to adversely affect the powers, preferences or rights of the holders of shares of Series B preferred stock.
Liquidation rights. In the event of the voluntary or involuntary liquidation, dissolution or winding up of Byline, holders of Series B preferred stock are entitled to receive out of assets available for distribution to stockholders, before any distribution of assets may be made to or set aside to holders of capital stock ranking junior to the Series B preferred stock as to distributions, a liquidating distribution in an amount equal to $1,000 per share, plus any declared but unpaid dividends thereon to the date of final distribution.
Redemption. With the prior approval of the Federal Reserve, Byline may redeem the Series B preferred stock (i) in whole or in part, at its option, at any time or from time to time on any dividend payment date on or after March 31, 2022, or (ii) in whole, but not in part, at any time within 90 days following a Regulatory Capital Event (as defined in the Series B preferred stock certificate of designations), in each case at the redemption price equal to $1,000 per share, plus any declared and unpaid dividends, without accumulation of any undeclared dividends, to, but excluding, the date fixed for redemption.
Authorized but Unissued Capital Stock
The DGCL does not generally require stockholder approval for the issuance of authorized shares. These additional shares may be used for a variety of corporate purposes, including future public offerings, to raise additional capital or to facilitate acquisitions. However, the listing requirements of the NYSE, which would apply so long as the common stock remains listed on the NYSE, require stockholder approval of certain issuances equal to or exceeding 20% of the then outstanding voting power or then outstanding number of shares of common stock.
One of the effects of the existence of unissued and unreserved common stock or preferred stock may be to enable our board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive our stockholders of opportunities they may believe are in their best interests or in which they may receive a premium for their common stock over the market price of the common stock.
Anti-Takeover Effects of Provisions of Applicable Law and Our Amended and Restated Certificate of Incorporation and Bylaws
Business combination statute. We have elected to opt out of Section 203 of the DGCL, which prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years after the date that such stockholder became an interested stockholder, subject to certain exceptions.
Federal banking law. The ability of a third party to acquire our stock is also limited under applicable U.S. banking laws, including regulatory approval requirements. The BHC Act requires any bank holding company to obtain the approval of the Federal Reserve before acquiring, directly or indirectly, more than 5% of our outstanding common stock. Any company (as defined in the BHC Act) other than a bank holding company is required to obtain the approval of the Federal Reserve before acquiring control of us. Control generally means (i) the ownership or control of 25% or more of a class of voting securities, (ii) the ability to elect a majority of the directors or (iii) the ability otherwise to exercise a controlling influence over management and policies. A person, other than an individual, that controls us for purposes of the BHC Act is subject to regulation and supervision as a bank holding company under the BHC Act. In addition, under the Change in Bank Control
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Act of 1978, as amended, and the Federal Reserves regulations thereunder, any person, either individually or acting through or in concert with one or more persons, is required to provide notice to the Federal Reserve prior to acquiring, directly or indirectly, 10% or more of our outstanding common stock (or any other class of our voting securities).
Requirements for advance notification of stockholder nominations and proposals. Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and nomination of candidates for election as directors. These procedures provide that notice of such stockholder proposal must be timely given in writing to our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 90 days nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year. For purposes of the provision, our 2017 annual meeting is deemed to have occurred on June 14, 2017. The notice must contain certain information required to be provided by our amended and restated bylaws.
Limits on written consents. Our amended and restated certificate of incorporation provides that any action to be taken by the stockholders that the stockholders are required or permitted to take must be effected at a duly called annual or special meeting of stockholders. Our stockholders are not permitted to take action by written consent.
Annual meetings; limits on special meetings. Following this offering, we expect to hold our first annual meeting of stockholders in 2018. Subject to the rights of the holders of any series of preferred stock, special meetings of the stockholders may be called only by (i) our board of directors, (ii) the Chairperson of the board, (iii) the Vice Chairperson, if any, of the board and (iv) our President.
Amending our amended and restated certificate of incorporation and amended and restated bylaws
Our amended and restated certificate of incorporation may be amended or altered in any manner provided by the DGCL. Our amended and restated bylaws may be adopted, amended, altered or repealed by stockholders only upon approval of at least two-thirds of outstanding shares of our common stock. Additionally, our amended and restated certificate of incorporation will provide that our amended and restated bylaws may be amended, altered or repealed by our board of directors by a majority vote.
Sole and Exclusive Forum
Our amended and restated bylaws provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our certificate of incorporation or our bylaws or (iv) any action asserting a claim that is governed by the internal affairs doctrine. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock shall be deemed to have notice of and to have consented to this provision of our amended and restated certificate of incorporation. This choice of forum provision may have the effect of discouraging lawsuits against us and our directors, officers, employees and agents. The enforceability of similar choice of forum provisions in other companies certificates of incorporation or bylaws has been challenged in legal proceedings, and it is possible that, in connection with one or more actions or proceedings described above, a court could find the provision of our amended and restated certificate of incorporation to be inapplicable or unenforceable.
Indemnification and Limitation of Liability
Our amended and restated bylaws provide generally that we will indemnify and hold harmless, to the full extent permitted by law, our directors, officers, employees and agents, as well as other persons who have
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served as our directors, officers, employees or agents and other persons who serve or have served at our request at another corporation, limited liability company, public limited company, partnership, joint venture, trust, employee benefit plan, fund or other enterprise in connection with any actual or threatened action, suit or proceeding, subject to limited exceptions. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons, we have been informed that, in the
opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. Finally, our ability to provide indemnification to our directors and officers is limited by federal banking laws and regulations.
Our amended and restated certificate of incorporation limits, to the full extent permitted by law, the personal liability of our directors in actions brought on our behalf or on behalf of our stockholders for monetary damages as a result of a directors breach of fiduciary duty while acting in a capacity as a director. Our amended and restated certificate of incorporation does not eliminate or limit our right or the right of our stockholders to seek injunctive or other equitable relief not involving monetary damages.
Listing
Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol BY.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future sales of substantial amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect market prices prevailing from time to time. Furthermore, because only a limited number of shares will be available for sale shortly after this offering due to existing contractual and legal restrictions on resale as described below, there may be sales of substantial amounts of our common stock in the public market after the restrictions lapse. This may adversely affect the prevailing market price and our ability to raise equity capital in the future.
Upon completion of this offering, we will have 28,391,900 shares of common stock outstanding (29,246,900 shares if the underwriters exercise in full their option to purchase additional shares from us). In addition, 1,857,123 shares of our common stock will be issuable upon the vesting and settlement of outstanding equity awards. Of these shares, 5,700,000 shares of our common stock (or 6,555,000 shares if the underwriters exercise their option to purchase additional shares of common stock in full) sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act. The remaining 22,691,900 shares of our common stock outstanding are restricted shares as defined in Rule 144. Restricted shares may be sold in the public market only if registered under the Securities Act or if they qualify for an exemption from registration under Rule 144. As a result of the contractual 180-day lock-up period described below applicable to certain of our stockholders and the provisions of Rule 144, the shares subject to the lockup will be available for sale in the public market only after 180 days from the date of this prospectus (subject to registration or an exemption from registration).
Rule 144
In general, a person who has beneficially owned restricted shares of our common stock for at least six months would be entitled to sell such securities, provided that (i) such person is not deemed to have been one of our affiliates at the time of, or at any time during the 90 days preceding, the sale and (ii) we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Persons who have beneficially owned restricted shares of our common stock for at least six months but who are our affiliates at the time of, or any time during the 90 days preceding, the sale, would be subject to additional restrictions, by which such person would be entitled to sell within any three-month period only a number of securities that does not exceed the greater of the following:
| 1% of the number of shares of our common stock then outstanding, which will equal approximately 284,000 shares immediately after this offering; or |
| the average weekly trading volume of our common stock on during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale; |
provided, in each case, that we are subject to the Exchange Act periodic reporting requirements for at least 90 days before the sale. Such sales both by affiliates and by non-affiliates must also comply with the manner of sale and notice provisions of Rule 144 to the extent applicable.
Lock-up Agreements
We, our executive officers and directors, the selling stockholders, holders of a significant majority of our common stock and purchasers of shares in the Reserved Share Program, subject to de minimis exceptions, have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keefe, Bruyette & Woods, Inc, as representatives of the underwriters. See Underwriting. At any time and without public notice, the representatives may, in their sole discretion, release all or some of the securities from these lock-up agreements. The underwriters do not have any present intention or arrangement to release any shares of our common stock subject to lock-up agreements prior to the expiration of the 180-day lock-up period.
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Equity Incentive Plans
We intend to file with the SEC a registration statement on Form S-8 covering the shares of common stock reserved for issuance under our equity incentive plans. That registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Upon effectiveness, the shares of common stock covered by that registration statement will be eligible for sale in the public market, subject to the lock-up agreements and Rule 144 restrictions described above.
Rule 701
In general, under Rule 701 under the Securities Act, an employee, consultant or advisor who purchases shares of our common stock from us in connection with a compensatory stock or option plan or other written agreement is eligible to resell those shares 90 days after the effective date of the registration statement of which this prospectus forms a part in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period restriction, contained in Rule 144.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF OUR COMMON STOCK
This section summarizes certain United States federal income and estate tax consequences of the ownership and disposition of shares of our common stock by a non-U.S. holder (as defined below). It applies to you only if you acquire your shares of our common stock in this offering and you hold the shares of our common stock as a capital asset for United States federal income tax purposes. You are a non-U.S. holder if you are, for United States federal income tax purposes:
| a nonresident alien individual; |
| a foreign corporation; or |
| an estate or trust that in either case is not subject to United States federal income tax on a net income basis on income or gain from our common stock. |
This section does not consider the specific facts and circumstances that may be relevant to a particular non-U.S. holder and does not address United States federal alternative minimum tax consequences or the treatment of a non-U.S. holder under the laws of any state, local or foreign taxing jurisdiction. In addition, it does not represent a detailed description of the United States federal income tax consequences applicable to you if you are subject to special treatment under the United States federal income tax laws (including if you are a United States expatriate, controlled foreign corporation, passive foreign investment company or a partnership or other pass-through entity for United States federal income tax purposes). This section is based on the tax laws of the United States, including the Code, existing and proposed Treasury regulations, and administrative and judicial interpretations, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.
If an entity classified as a partnership for United States federal income tax purposes holds the shares of our common stock, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding shares of our common stock should consult its tax advisor with regard to the United States federal income tax treatment of an investment in our common stock.
You should consult your tax advisor regarding the United States federal tax consequences of acquiring, holding and disposing of shares of our common stock in your particular circumstances, as well as any tax consequences that may arise under the laws of any state, local or foreign taxing jurisdiction.
Dividends
If we make a distribution of cash or other property (other than certain distributions of our stock) in respect of our common stock, the distribution generally will be treated as a dividend to the extent of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Any portion of a distribution that exceeds our current and accumulated earnings and profits will generally be treated first as a tax-free return of capital, on a share-by-share basis, to the extent of your tax basis in our common stock (and will reduce your basis in such common stock), and, to the extent such portion exceeds your tax basis in our common stock, the excess will be treated as gain from the taxable disposition of the common stock, the tax treatment of which is discussed below under Gain on Taxable Disposition of Common Stock.
Except as described below, if you are a non-U.S. holder, distributions paid to you that are characterized as dividends for United States federal income tax purposes are subject to withholding of United States federal income tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. If you are eligible for a lower treaty rate, we and other payors will generally be required to
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withhold at a 30% rate (rather than the lower treaty rate) on dividend payments to you, unless you have furnished to us or another payor:
| a valid Internal Revenue Service (IRS) Form W-8 or an acceptable substitute form upon which you certify, under penalties of perjury, your status as a non-United States person and your entitlement to the lower treaty rate with respect to such payments; or |
| in the case of payments made outside the United States to an offshore account (generally, an account maintained by you at an office or branch of a bank or other financial institution at any location outside the United States), other documentary evidence establishing your entitlement to the lower treaty rate in accordance with Treasury regulations. |
If you are eligible for a reduced rate of United States withholding tax under a tax treaty, you may obtain a refund of any amounts withheld in excess of that rate by filing a refund claim with the IRS.
If dividends paid to you are effectively connected with your conduct of a trade or business within the United States, and, if required by a tax treaty, the dividends are attributable to a permanent establishment that you maintain in the United States, we and other payors generally are not required to withhold tax from the dividends, provided that you have furnished to us or another payor a valid IRS Form W-8ECI or an acceptable substitute form upon which you represent, under penalties of perjury, that:
| you are a non-United States person; and |
| the dividends are effectively connected with your conduct of a trade or business within the United States and are includible in your gross income. |
Effectively connected dividends are taxed at rates applicable to United States citizens, resident aliens and domestic United States corporations.
If you are a corporate non-U.S. holder, effectively connected dividends that you receive may, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate.
Gain on Taxable Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to United States federal income tax on gain that you recognize on a taxable disposition of shares of our common stock unless:
| the gain is effectively connected with your conduct of a trade or business in the United States, and if required by a tax treaty, the gain is attributable to a permanent establishment that you maintain in the United States; |
| you are an individual, you are present in the United States for 183 or more days in the taxable year of the sale and certain other conditions exist; or |
| we are or have been a United States real property holding corporation for United States federal income tax purposes and you held, directly or indirectly, at any time during the five-year period ending on the date of disposition, more than 5% of our common stock and you are not eligible for any treaty exemption. |
If you are a non-U.S. holder and the gain from the taxable disposition of shares of our common stock is effectively connected with your conduct of a trade or business in the United States (and, if required by a tax
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treaty, the gain is attributable to a permanent establishment that you maintain in the United States), you will be subject to tax on the net gain derived from the sale at rates applicable to United States citizens, resident aliens and domestic United States corporations. If you are a corporate non-U.S. holder, effectively connected gains that you recognize may also, under certain circumstances, be subject to an additional branch profits tax at a 30% rate or at a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate. If you are an individual non-U.S. holder described in the second bullet point immediately above, you will be subject to a flat 30% tax or a lower rate if you are eligible for the benefits of an income tax treaty that provides for a lower rate, on the gain derived from the sale, which may be offset by United States source capital losses, even though you are not considered a resident of the United States.
We have not been, are not and do not anticipate becoming a United States real property holding corporation for United States federal income tax purposes.
FATCA Withholding
Pursuant to sections 1471 through 1474 of the Code, commonly known as the Foreign Account Tax Compliance Act (FATCA), a 30% withholding tax (FATCA withholding) may be imposed on certain payments to you or to certain foreign financial institutions, investment funds and other non-U.S. persons receiving payments on your behalf if you or such persons fail to comply with certain information reporting requirements. Such payments will include dividends and the gross proceeds from the sale or other taxable disposition of shares of our common stock. Payments of dividends that you receive in respect of shares of our common stock could be subject to this withholding if you are subject to the FATCA information reporting requirements and fail to comply with them or if you hold shares of our common stock through a non-U.S. person (e.g., a foreign bank or broker) that fails to comply with these requirements (even if payments to you would not otherwise have been subject to FATCA withholding). Payments of gross proceeds from a sale or other taxable disposition of shares of our common stock could also be subject to FATCA withholding unless such disposition occurs before January 1, 2019. You should consult your tax advisor regarding the relevant U.S. law and other official guidance on FATCA withholding.
Backup Withholding and Information Reporting
If you are a non-U.S. holder, we and other payors are required to report payments of dividends on IRS Form 1042-S even if the payments are exempt from United States withholding tax. You are otherwise generally exempt from backup withholding and information reporting requirements with respect to dividend payments and the payment of the proceeds from the sale of shares of our common stock effected at a United States office of a broker provided that either (i) the payor or broker does not have actual knowledge or reason to know that you are a United States person and you have furnished a valid IRS Form W-8 or other documentation upon which the payor or broker may rely to treat the payments as made to a non-United States person or (ii) you otherwise establish an exemption.
Payment of the proceeds from the sale of shares of our common stock effected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale effected at a foreign office of a broker could be subject to information reporting in the same manner as a sale within the United States (and in certain cases may be subject to backup withholding as well) if (i) the broker has certain connections to the United States, (ii) the proceeds or confirmation are sent to the United States or (iii) the sale has certain other specified connections with the United States. In addition, certain foreign brokers may be required to report the amount of gross proceeds from the sale or other taxable disposition of shares of our common stock under FATCA if you are presumed to be a United States person.
Federal Estate Taxes
Shares of our common stock held by a non-U.S. holder at the time of death will be included in the holders gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
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The following is a summary of certain considerations associated with the purchase of the shares of our common stock by employee benefit plans that are subject to Title I of ERISA, plans, individual retirement accounts and other arrangements that are subject to Section 4975 of the Code and entities whose underlying assets are considered to include plan assets of any such plan, account or arrangement (each a Plan), as well as arrangements that are subject to provisions under any federal, state, local, non-U.S. or other laws or regulations that are similar to Title I of ERISA or Section 4975 of the Code (such arrangements Non-ERISA Arrangements, and such provisions Similar Laws).
THE FOLLOWING IS MERELY A SUMMARY, HOWEVER, AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE OR AS COMPLETE IN ALL RELEVANT RESPECTS. ALL INVESTORS ARE URGED TO CONSULT THEIR LEGAL ADVISORS BEFORE INVESTING IN US AND TO MAKE THEIR OWN INDEPENDENT DECISION.
General Fiduciary Matters
ERISA and the Code impose certain duties on persons who are fiduciaries of a Plan and prohibit certain transactions involving the assets of a Plan and its fiduciaries or other interested parties. Under ERISA and the Code, any person who exercises any discretionary authority or control over the administration of such Plan or the management or disposition of the assets of such a Plan, or who renders investment advice for a fee or other compensation to such a Plan, is generally considered to be a fiduciary of the Plan.
In considering an investment in shares of our common stock with a portion of the assets of any Plan or Non-ERISA Arrangement, a fiduciary should determine whether the investment is in accordance with the documents and instruments governing the Plan or Non-ERISA Arrangement and the applicable provisions of ERISA, the Code or any Similar Law relating to a fiduciarys duties to the Plan or Non-ERISA Arrangement including, without limitation, the prudence, diversification, delegation of control and prohibited transaction provisions of ERISA, the Code and any other applicable Similar Laws.
Prohibited Transaction Issues
Section 406 of ERISA and Section 4975 of the Code prohibit Plans from engaging in specified transactions involving plan assets with persons or entities who are parties in interest, within the meaning of ERISA, or disqualified persons, within the meaning of Section 4975 of the Code, unless an exemption is available. A party in interest or disqualified person who engages in a non-exempt prohibited transaction may be subject to excise taxes and other penalties and liabilities under ERISA and the Code, and a prohibited transaction may result in the disqualification of an IRA. In addition, the fiduciary of the Plan that engages in such a non-exempt prohibited transaction may be subject to penalties and liabilities under ERISA and the Code.
The acquisition of shares of our common stock by a Plan with respect to which we or an underwriter is considered a party in interest or a disqualified person may constitute or result in a direct or indirect prohibited transaction under Section 406 of ERISA and/or Section 4975 of the Code, unless the investment is acquired in accordance with an applicable statutory, class or individual prohibited transaction exemption. In this regard, the United States Department of Labor has issued prohibited transaction class exemptions (PTCEs) that may apply to the acquisition of our common stock. These class exemptions include, without limitation, PTCE 84-14 respecting transactions determined by independent qualified professional asset managers, PTCE 90-1 respecting insurance company pooled separate accounts, PTCE 91-38 respecting bank collective investment funds, PTCE 95-60 respecting life insurance company general accounts and PTCE 96-23 respecting transactions determined by in-house asset managers. In addition, Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code provide an exemption from the prohibited transaction provisions of ERISA and Section 4975 of the Code for the acquisition and the disposition of the common stock, provided that neither the issuer of the securities nor any of
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its affiliates (directly or indirectly) have or exercise any discretionary authority or control or render any investment advice with respect to the assets of any Plan involved in the transaction and provided further that the Plan pays no more and receives no less than adequate consideration in connection with the transaction. There can be no assurance that all of the conditions of any such exemptions will be satisfied.
Representation
Accordingly, by acceptance of the shares of our common stock, each purchaser or subsequent transferee of our common stock will be deemed to have represented and warranted either that (i) no portion of such purchasers or transferees assets used to acquire such shares constitutes assets of any Plan or (ii) the purchase of our common stock by such purchaser or transferee will not constitute a non-exempt prohibited transaction under Section 406 of ERISA or Section 4975 of the Code or similar violation under any applicable Similar Laws.
Responsibility for Purchase
Purchasers of our common stock have exclusive responsibility for ensuring that their acquisition and holding of our common stock does not violate the fiduciary or prohibited transaction rules of ERISA or the Code, or any similar provision of applicable Similar Laws. In addition, the foregoing discussion is general in nature, is not intended to be all-inclusive, and is based on laws in effect on the date of this prospectus. Such discussion should not be construed as legal advice. Due to the complexity of these rules and the penalties that may be imposed upon persons involved in non-exempt prohibited transactions, it is particularly important that fiduciaries, or other persons considering purchasing shares of our common stock on behalf of, or with the assets of, any Plan or Non-ERISA Arrangement consult with counsel regarding the potential applicability of ERISA, Section 4975 of the Code and Similar Laws to such investment and whether an exemption would be applicable to the purchase of shares of our common stock.
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Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keefe, Bruyette & Woods, Inc. are acting as representatives of each of the underwriters named below. Subject to the terms and conditions set forth in an underwriting agreement among us, the selling stockholders and the underwriters, we and the selling stockholders have agreed to sell to the underwriters, and each of the underwriters has agreed, severally and not jointly, to purchase from us and the selling stockholders, the number of shares of common stock set forth opposite its name below.
Underwriter |
Number of Shares |
|||
Merrill Lynch, Pierce, Fenner & Smith Incorporated |
||||
Keefe, Bruyette & Woods, Inc. |
||||
Piper Jaffray & Co. |
||||
Sandler ONeill & Partners, L.P. |
||||
Stephens Inc. |
||||
|
|
|||
Total |
5,700,000 | |||
|
|
Subject to the terms and conditions set forth in the underwriting agreement, the underwriters have agreed, severally and not jointly, to purchase all of the shares sold under the underwriting agreement if any of these shares are purchased. If an underwriter defaults, the underwriting agreement provides that the purchase commitments of the non-defaulting underwriters may be increased or the underwriting agreement may be terminated.
We and the selling stockholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the underwriting agreement, such as the receipt by the underwriters of officers certificates and legal opinions. The underwriters reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The representatives have advised us and the selling stockholders that the underwriters propose initially to offer the shares to the public at the public offering price set forth on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. After the initial offering, the public offering price, concession or any other term of the offering may be changed.
The following table shows the public offering price, underwriting discounts and commissions and proceeds before expenses to us and the selling stockholders. The information assumes either no exercise or full exercise by the underwriters of their option to purchase additional shares.
Per Share | Without Option | With Option | ||||||||||
Public offering price |
$ | $ | $ | |||||||||
Underwriting discounts and commissions |
$ | $ | $ | |||||||||
Proceeds, before expenses, to us |
$ | $ | $ | |||||||||
Proceeds, before expenses, to the selling stockholders |
$ | $ | $ |
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The expenses of the offering, not including the underwriting discounts and commissions, are estimated at $4.5 million and are payable by us and the selling stockholders. We have agreed to reimburse the underwriters for expenses in connection with the Financial Industry Regulatory Authority review of this offering in an amount not to exceed $50,000. In addition, the underwriters have agreed to reimburse us for certain expenses incurred by us in connection with this offering upon closing of this offering.
Option to Purchase Additional Shares
We have granted an option to the underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to 855,000 additional shares at the public offering price, less the underwriting discounts and commissions. If the underwriters exercise this option, each will be obligated, subject to conditions contained in the underwriting agreement, to purchase a number of additional shares proportionate to that underwriters initial amount reflected in the above table.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 10% of the shares offered by this prospectus for sale to the directors, senior management, existing stockholders, certain employees of Byline Bancorp, Inc. and Byline Bank and persons having relationships with us through a reserved share program. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus.
No Sales of Similar Securities
We and the selling stockholders, our executive officers and directors, holders of a significant majority of our common stock and purchasers of shares in the Reserved Share Program, subject to de minimis exceptions, have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Keefe, Bruyette & Woods, Inc. Specifically, we and these other persons have agreed, with certain limited exceptions, not to directly or indirectly
| offer, pledge, sell or contract to sell any common stock, |
| sell any option or contract to purchase any common stock, |
| purchase any option or contract to sell any common stock, |
| grant any option, right or warrant for the sale of any common stock, |
| lend or otherwise dispose of or transfer any common stock, |
| request or demand that we file a registration statement related to the common stock, or |
| enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise. |
This lock-up provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition.
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Listing
Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE, under the symbol BY. In order to meet the requirements for listing on that exchange, the underwriters have undertaken to sell a minimum number of shares to a minimum number of beneficial owners as required by that exchange.
Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the representatives. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are
| the valuation multiples of publicly traded companies that the representatives believe to be comparable to us, |
| our financial information, |
| the history of, and the prospects for, our company and the industry in which we compete, |
| an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues, |
| the present state of our development, and |
| the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours. |
An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares is completed, SEC rules may limit underwriters and selling group members from bidding for and purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases to peg, fix or maintain that price.
In connection with the offering, the underwriters may purchase and sell our common stock in the open market. These transactions may include short sales, purchases on the open market to cover positions created by short sales and stabilizing transactions. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are sales made in an amount not greater than the underwriters option to purchase additional shares described above. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the option granted to them. Naked short sales are sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of our common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of shares of common stock made by the underwriters in the open market prior to the completion of the offering.
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The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a
decline in the market price of our common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. The underwriters may conduct these transactions on the NYSE in the over-the-counter market or otherwise.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Electronic Distribution
In connection with the offering, certain of the underwriters or securities dealers may distribute prospectuses by electronic means, such as e-mail.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
A person associated with one of the underwriters acquired approximately 72,608 shares of our common stock in certain private transactions with other stockholders prior to the filing of the registration statement of which this prospectus forms a part with the Securities and Exchange Commission (the Acquired Shares). The Acquired Shares will be deemed to be underwriting compensation in connection with this offering and will be subject to lock-up restrictions, as required by FINRA Rule 5110(g)(1), and may not be sold during the offering, or sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of such securities by any person for a period of 180 days immediately following the date of effectiveness of the registration statement of which this prospectus forms a part or commencement of sales of the offering, except as provided in FINRA Rule 5110(g)(2).
European Economic Area
In relation to each member state of the European Economic Area, no offer of ordinary shares which are the subject of the offering has been, or will be made to the public in that Member State, other than under the following exemptions under the Prospectus Directive:
(a) | to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
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(b) | to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the Representatives for any such offer; or |
(c) | in any other circumstances falling within Article 3(2) of the Prospectus Directive, |
provided that no such offer of ordinary shares referred to in (a) to (c) above shall result in a requirement for the Company or any Representative to publish a prospectus pursuant to Article 3 of the Prospectus Directive, or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
Each person located in a Member State to whom any offer of ordinary shares is made or who receives any communication in respect of an offer of ordinary shares, or who initially acquires any ordinary shares will be deemed to have represented, warranted, acknowledged and agreed to and with each Representative and the Company that (1) it is a qualified investor within the meaning of the law in that Member State implementing Article 2(1)(e) of the Prospectus Directive; and (2) in the case of any ordinary shares acquired by it as a financial intermediary as that term is used in Article 3(2) of the Prospectus Directive, the ordinary shares acquired by it in
the offer have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Member State other than qualified investors, as that term is defined in the Prospectus Directive, or in circumstances in which the prior consent of the Representatives has been given to the offer or resale; or where ordinary shares have been acquired by it on behalf of persons in any Member State other than qualified investors, the offer of those ordinary shares to it is not treated under the Prospectus Directive as having been made to such persons.
The Company, the Representatives and their respective affiliates will rely upon the truth and accuracy of the foregoing representations, acknowledgments and agreements.
This prospectus has been prepared on the basis that any offer of shares in any Member State will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of shares. Accordingly, any person making or intending to make an offer in that Member State of shares which are the subject of the offering contemplated in this prospectus may only do so in circumstances in which no obligation arises for the Company or any of the Representatives to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. Neither the Company nor the Representatives have authorized, nor do they authorize, the making of any offer of shares in circumstances in which an obligation arises for the Company or the Representatives to publish a prospectus for such offer.
For the purposes of this provision, the expression an offer of ordinary shares to the public in relation to any ordinary shares in any Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the ordinary shares to be offered so as to enable an investor to decide to purchase or subscribe the ordinary shares, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (as amended) and includes any relevant implementing measure in each Member State.
The above selling restriction is in addition to any other selling restrictions set out below.
Notice to Prospective Investors in the United Kingdom
In addition, in the United Kingdom, this document is being distributed only to, and is directed only at, and any offer subsequently made may only be directed at persons who are qualified investors (as defined in the Prospectus Directive) (i) who have professional experience in matters relating to investments falling within
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Article 19 (5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the Order) and/or (ii) who are high net worth companies (or persons to whom it may otherwise be lawfully communicated) falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons). This document must not be acted on or relied on in the United Kingdom by persons who are not relevant persons. In the United Kingdom, any investment or investment activity to which this document relates is only available to, and will be engaged in with, relevant persons.
Notice to Prospective Investors in Switzerland
The shares may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the shares or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, the Company or the shares have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of shares will not be supervised by, the Swiss Financial Market Supervisory Authority, and the offer of shares has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of shares.
Notice to Prospective Investors in the Dubai International Financial Centre
This prospectus relates to an Exempt Offer in accordance with the Offered Securities Rules of the Dubai Financial Services Authority (DFSA). This prospectus is intended for distribution only to persons of a type specified in the Offered Securities Rules of the DFSA. It must not be delivered to, or relied on by, any other person. The DFSA has no responsibility for reviewing or verifying any documents in connection with Exempt Offers. The DFSA has not approved this prospectus nor taken steps to verify the information set forth herein and has no responsibility for the prospectus. The shares to which this prospectus relates may be illiquid and/or subject to restrictions on their resale. Prospective purchasers of the shares offered should conduct their own due diligence on the shares. If you do not understand the contents of this prospectus you should consult an authorized financial advisor.
Notice to Prospective Investors in Australia
No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission, in relation to the offering. This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the Corporations Act), and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia of the shares may only be made to persons (the Exempt Investors) who are sophisticated investors (within the meaning of section 708(8) of the Corporations Act), professional investors (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the shares without disclosure to investors under Chapter 6D of the Corporations Act.
The shares applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to
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investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring shares must observe such Australian on-sale restrictions.
This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
Notice to Prospective Investors in Hong Kong
The shares have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than (a) to professional investors as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (b) in other circumstances which do not result in the document being a prospectus as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No advertisement, invitation or document relating to the shares has been or may be issued or has been or may be in the possession of any person
for the purposes of issue, whether in Hong Kong or elsewhere, which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors as defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Notice to Prospective Investors in Japan
The shares have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (Law No. 25 of 1948, as amended) and, accordingly, will not be offered or sold, directly or indirectly, in Japan, or for the benefit of any Japanese Person or to others for re-offering or resale, directly or indirectly, in Japan or to any Japanese Person, except in compliance with all applicable laws, regulations and ministerial guidelines promulgated by relevant Japanese governmental or regulatory authorities in effect at the relevant time. For the purposes of this paragraph, Japanese Person shall mean any person resident in Japan, including any corporation or other entity organized under the laws of Japan.
Notice to Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the SFA), (ii) to a relevant person pursuant to Section 275(1), or any person pursuant to Section 275(1A), and in accordance with the conditions specified in Section 275, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is:
(a) | a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or |
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(b) | a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an accredited investor, |
securities (as defined in Section 239(1) of the SFA) of that corporation or the beneficiaries rights and interest (howsoever described) in that trust shall not be transferred within six months after that corporation or that trust has acquired the shares pursuant to an offer made under Section 275 of the SFA except:
(c) | to an institutional investor or to a relevant person defined in Section 275(2) of the SFA, or to any person arising from an offer referred to in Section 275(1A) or Section 276(4)(i)(B) of the SFA; |
(d) | where no consideration is or will be given for the transfer; |
(e) | where the transfer is by operation of law; |
(f) | as specified in Section 276(7) of the SFA; or |
(g) | as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore. |
Notice to Prospective Investors in Canada
The shares may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations . Any resale of the shares must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non-Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
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The validity of the shares of our common stock offered hereby will be passed upon for us by Sullivan & Cromwell LLP, New York, New York. The validity of the shares of common stock offered hereby will be passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY.
The consolidated financial statements of Byline Bancorp, Inc. and subsidiaries as of and for the years ended December 31, 2016 and 2015 included in this prospectus have been audited by Moss Adams LLP, an independent registered public accounting firm, as stated in their report included herein. Such consolidated financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of Ridgestone Financial Services, Inc. as of October 14, 2016 and December 31, 2015 and for the period from January 1, 2016 to October 14, 2016 and for the year ended December 31, 2015 included in this prospectus have been so included in reliance on the report of Crowe Horwath LLP, independent auditor, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus, which constitutes a part of a registration statement on Form S-1 filed with the SEC, does not contain all of the information set forth in the registration statement and the related exhibits and schedules. Some items are omitted in accordance with the rules and regulations of the SEC. Accordingly, we refer you to the complete registration statement, including its exhibits and schedules, for further information about us and the shares of common stock to be sold in this offering. Statements or summaries in this prospectus as to the contents of any contract or other document referred to in this prospectus are not necessarily complete and, where that contract or document is filed as an exhibit to the registration statement, each statement or summary is qualified in all respects by reference to the exhibit to which the reference relates. You may read and copy the registration statement, including the exhibits and schedules to the registration statement, at the SECs Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our filings with the SEC, including the registration statement, are also available to you for free on the SECs Internet website at www.sec.gov.
Upon completion of the offering, we will become subject to the informational and reporting requirements of the Exchange Act and, in accordance with those requirements, will file reports and proxy and information statements with the SEC. You will be able to inspect and copy these reports and proxy and information statements and other information at the addresses set forth above. Those filings will also be available to the public on, or accessible through, our website under the heading Investor Relations at www.bylinebank.com. The information we file with the SEC or contained on or accessible through our corporate website or any other website we may maintain is not part of this prospectus or the registration statement of which this prospectus forms a part. We intend to furnish to our stockholders our annual reports containing our audited consolidated financial statements certified by an independent public accounting firm.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Byline Bancorp, Inc. and Subsidiaries |
||||
F-2 | ||||
Consolidated Financial Statements |
||||
Consolidated Statements of Financial Condition as of December 31, 2016 and December 31, 2015 |
F-3 | |||
Consolidated Statements of Operations for the years ended December 31, 2016 and December 31, 2015 |
F-4 | |||
F-5 | ||||
F-6 | ||||
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and December 31, 2015 |
F-7 | |||
F-9 | ||||
Unaudited Interim Condensed Consolidated Financial Statements |
||||
F-69 | ||||
Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (unaudited) |
F-70 | |||
F-71 | ||||
F-72 | ||||
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (unaudited) |
F-73 | |||
Notes to Unaudited Condensed Consolidated Financial Statements |
F-75 | |||
Ridgestone Financial Services, Inc. |
||||
F-116 | ||||
Consolidated Financial Statements |
||||
Consolidated Balance Sheets as of October 14, 2016 and December 31, 2015 |
F-117 | |||
F-118 | ||||
F-119 | ||||
F-120 | ||||
F-121 | ||||
F-122 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Byline Bancorp, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of financial condition of Byline Bancorp, Inc. and Subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Byline Bancorp, Inc. and Subsidiaries as of December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
Portland, Oregon
April 7, 2017, except for Note 26,
as to which the date is June 19, 2017
F-2
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2016 AND 2015
See accompanying Notes to Consolidated Financial Statements.
F-3
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(dollars in thousands, except share and per share data) |
2016 |
2015 |
||||||
INTEREST AND DIVIDEND INCOME |
||||||||
Interest and fees on loans and leases |
$ | 83,150 | $ | 69,621 | ||||
Interest on taxable securities |
14,169 | 12,799 | ||||||
Interest on tax-exempt securities |
653 | 651 | ||||||
Other interest and dividend income |
393 | 192 | ||||||
|
|
|
|
|||||
Total interest and dividend income |
98,365 | 83,263 | ||||||
INTEREST EXPENSE |
||||||||
Deposits |
4,580 | 4,313 | ||||||
Federal Home Loan Bank advances |
706 | 23 | ||||||
Subordinated debentures and other borrowings |
2,461 | 2,295 | ||||||
|
|
|
|
|||||
Total interest expense |
7,747 | 6,631 | ||||||
|
|
|
|
|||||
Net interest income |
90,618 | 76,632 | ||||||
PROVISION FOR LOAN AND LEASE LOSSES |
10,352 | 6,966 | ||||||
|
|
|
|
|||||
Net interest income after provision for loan and lease losses |
80,266 | 69,666 | ||||||
|
|
|
|
|||||
NON-INTEREST INCOME |
||||||||
Fees and service charges on deposits |
5,665 | 5,803 | ||||||
Servicing fees |
1,906 | | ||||||
ATM and interchange fees |
5,856 | 6,101 | ||||||
Net gains on sales of securities available-for-sale |
3,227 | 3,064 | ||||||
Net gains on sales of loans |
4,323 | 3,151 | ||||||
Fees on mortgage loan sales, net |
144 | 107 | ||||||
Other non-interest income |
4,783 | 2,613 | ||||||
|
|
|
|
|||||
Total non-interest income |
25,904 | 20,839 | ||||||
|
|
|
|
|||||
NON-INTEREST EXPENSE |
||||||||
Salaries and employee benefits |
50,585 | 45,960 | ||||||
Occupancy expense, net |
15,066 | 16,682 | ||||||
Equipment expense |
2,032 | 2,359 | ||||||
Loan and lease related expenses |
1,992 | (21 | ) | |||||
Legal, audit and other professional fees |
5,862 | 7,089 | ||||||
Data processing |
8,157 | 7,033 | ||||||
Net (gain) loss recognized on other real estate owned and other related expenses |
1,719 | 7,792 | ||||||
Regulatory assessments |
2,553 | 3,316 | ||||||
Other intangible assets amortization expense |
3,003 | 2,980 | ||||||
Advertising and promotions |
623 | 1,570 | ||||||
Telecommunications |
1,698 | 1,643 | ||||||
Other non-interest expense |
7,396 | 8,769 | ||||||
|
|
|
|
|||||
Total non-interest expense |
100,686 | 105,172 | ||||||
|
|
|
|
|||||
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |
5,484 | (14,667 | ) | |||||
PROVISION (BENEFIT) FOR INCOME TAXES |
(61,245 | ) | 307 | |||||
|
|
|
|
|||||
NET INCOME (LOSS) |
$ | 66,729 | $ | (14,974 | ) | |||
|
|
|
|
|||||
EARNINGS (LOSS) PER SHARE |
||||||||
Basic |
$ | 3.31 | $ | (0.86 | ) | |||
Diluted |
$ | 3.27 | $ | (0.86 | ) |
See accompanying Notes to Consolidated Financial Statements.
F-4
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(dollars in thousands) |
2016 |
2015 |
||||||
Net income (loss) |
$ | 66,729 | $ | (14,974 | ) | |||
Securities available-for-sale |
||||||||
Unrealized holding losses arising during the period |
(3,100 | ) | (3,804 | ) | ||||
Reclassification adjustments for net gains included in net income (loss) |
(3,227 | ) | (3,064 | ) | ||||
Tax effect |
2,533 | | ||||||
|
|
|
|
|||||
Net of tax |
(3,794 | ) | (6,868 | ) | ||||
Cash flow hedges |
||||||||
Unrealized holding gains |
3,684 | | ||||||
Reclassification adjustments for losses included in net income (loss) |
40 | | ||||||
Tax effect |
(1,491 | ) | | |||||
|
|
|
|
|||||
Net of tax |
2,233 | | ||||||
|
|
|
|
|||||
Total other comprehensive loss |
(1,561 | ) | (6,868 | ) | ||||
|
|
|
|
|||||
Comprehensive income (loss) |
$ | 65,168 | $ | (21,842 | ) | |||
|
|
|
|
Gains
|
Unrealized Gains
|
Total
|
||||||||||
Balance, January 1, 2015 |
$ | | $ | 1,161 | $ | 1,161 | ||||||
Other comprehensive loss, net of tax |
| (6,868 | ) | (6,868 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance, December 31, 2015 |
| (5,707 | ) | (5,707 | ) | |||||||
Other comprehensive income (loss), net of tax |
2,233 | (3,794 | ) | (1,561 | ) | |||||||
|
|
|
|
|
|
|||||||
Balance, December 31, 2016 |
$ | 2,233 | $ | (9,501 | ) | $ | (7,268 | ) | ||||
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-5
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(dollars in thousands, except share data) |
Preferred Stock |
|
Additional
Paid-In Capital |
Retained
Earnings (Accumulated Deficit) |
Accumulated
Other Comprehensive Income (Loss) |
Total
Stockholders Equity |
||||||||||||||||||||||||||
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||
Balance, January 1, 2015 |
15,003 | $ | 15,003 | 17,332,775 | $ | 193,729 | $ | | $ | (822 | ) | $ | 1,161 | $ | 209,071 | |||||||||||||||||
Net loss |
| | | | | (14,974 | ) | | (14,974 | ) | ||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | | | | | (6,868 | ) | (6,868 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| | | | 1,045 | | | 1,045 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, December 31, 2015 |
15,003 | 15,003 | 17,332,775 | 193,729 | 1,045 | (15,796 | ) | (5,707 | ) | 188,274 | ||||||||||||||||||||||
Issuance of common stock, net of issuance cost |
| | 3,078,075 | 50,018 | (426 | ) | | | 49,592 | |||||||||||||||||||||||
Issuance of common stock due to business combination |
| | 4,199,791 | 68,247 | | | | 68,247 | ||||||||||||||||||||||||
Issuance of preferred stock |
9,388 | 9,388 | | | | | | 9,388 | ||||||||||||||||||||||||
Subscription of preferred stock |
1,050 | 1,050 | | | | | | 1,050 | ||||||||||||||||||||||||
Net income |
| | | | | 66,729 | | 66,729 | ||||||||||||||||||||||||
Other comprehensive loss, net of tax |
| | | | | | (1,561 | ) | (1,561 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| | | | 899 | | | 899 | ||||||||||||||||||||||||
Exercise of stock options, net of tax |
| | 6,065 | | 40 | | | 40 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, December 31, 2016 |
25,441 | $ | 25,441 | 24,616,706 | $ | 311,994 | $ | 1,558 | $ | 50,933 | $ | (7,268 | ) | $ | 382,658 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-6
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
(dollars in thousands) |
2016 |
2015 |
||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 66,729 | $ | (14,974 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
||||||||
Provision for loan and lease losses |
10,352 | 6,966 | ||||||
Impairment loss on premises and equipment |
327 | 687 | ||||||
Impairment loss on assets held for sale |
408 | | ||||||
Depreciation and amortization of premises and equipment |
5,060 | 5,800 | ||||||
Net amortization of securities |
7,090 | 7,969 | ||||||
Net gains on sales of securities available-for-sale |
(3,227 | ) | (3,064 | ) | ||||
Net losses on sales or disposals of premises and equipment |
20 | 197 | ||||||
Net gains on sales of assets held for sale |
(967 | ) | | |||||
Net gains on sales of loans |
(4,323 | ) | (3,151 | ) | ||||
Originations of mortgage loans held for sale |
(5,687 | ) | (3,805 | ) | ||||
Proceeds from mortgage loans sold |
6,003 | 3,888 | ||||||
Originations of government guaranteed loans |
(35,949 | ) | | |||||
Proceeds from government guaranteed loans sold |
30,624 | | ||||||
Accretion of premiums and discounts on acquired loans, net |
(33,179 | ) | (42,998 | ) | ||||
Net change in servicing assets |
(796 | ) | | |||||
Net valuation adjustments on other real estate owned |
953 | 9,265 | ||||||
Net gains on sales of other real estate owned |
(1,364 | ) | (5,828 | ) | ||||
Amortization of intangible assets |
3,003 | 2,980 | ||||||
Amortization of time deposit premium |
(590 | ) | (143 | ) | ||||
Amortization of Federal Home Loan Bank advances premium |
(44 | ) | | |||||
Accretion of junior subordinated debentures discount |
876 | 944 | ||||||
Share-based compensation expense |
899 | 1,045 | ||||||
Exercise of share-based awards |
40 | | ||||||
Deferred tax asset, net of valuation |
(61,503 | ) | | |||||
Increase in cash surrender value of bank owned life insurance |
(223 | ) | (209 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accrued interest receivable |
(503 | ) | (978 | ) | ||||
Other assets |
(3,950 | ) | (843 | ) | ||||
Accrued interest payable |
1,355 | (4,521 | ) | |||||
Accrued expenses and other liabilities |
(7,655 | ) | (2,700 | ) | ||||
|
|
|
|
|||||
Net cash used in operating activities |
(26,221 | ) | (43,473 | ) | ||||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of securities available-for-sale |
(557,527 | ) | (856,768 | ) | ||||
Proceeds from maturities and calls of securities available-for-sale |
95,412 | 103,274 | ||||||
Proceeds from paydowns of securities available-for-sale |
105,837 | 144,158 | ||||||
Proceeds from sales of securities available-for-sale |
534,418 | 511,028 | ||||||
Purchases of securities held-to-maturity |
(59,436 | ) | (120,498 | ) | ||||
Proceeds from paydowns of securities held-to-maturity |
30,469 | 15,155 | ||||||
Purchases of Federal Home Loan Bank stock |
(6,454 | ) | (124 | ) | ||||
Proceeds from other loans sold |
2,213 | 27,606 | ||||||
Net change in loans and leases |
(420,065 | ) | (48,662 | ) | ||||
Purchases of premises and equipment |
(5,948 | ) | (4,019 | ) | ||||
Proceeds from sales of premises and equipment |
1,156 | 1,354 | ||||||
Proceeds from sales of assets held for sale |
2,566 | | ||||||
Proceeds from sales of other real estate owned |
17,306 | 38,563 | ||||||
Net cash paid in acquisition of business |
(11,273 | ) | | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(271,326 | ) | (188,933 | ) | ||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-7
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015
See accompanying Notes to Consolidated Financial Statements.
F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies
Nature of business Byline Bancorp, Inc. (the Company, we, us, our) is a bank holding company whose principal activity is the ownership and management of its subsidiary bank, Byline Bank (the Bank). The Bank originates commercial, mortgage and consumer loans and leases, government guaranteed loans, and receives deposits from customers located primarily in the Chicago, Illinois metropolitan area. The Bank operates 56 Chicago metropolitan area and one Brookfield, Wisconsin, banking offices. The Bank operates under a state bank charter, provides a full range of banking services, and has full trust powers. As a state-chartered financial institution that is not a member of the Federal Reserve System, the Bank is subject to regulation by the Illinois Department of Financial and Professional Regulation and the Federal Deposit Insurance Corporation. The Company is regulated by the Board of Governors of the Federal Reserve System.
On June 28, 2013, the Company completed an external recapitalization involving a series of transactions that included the merging of the Companys multiple subsidiary banks into the Bank. In connection with the merger of the subsidiary banks at the time of recapitalization, the Company entered into certain Conditions and Commitments to the merger and integration of the banks, which contained on-going requirements related to payment of dividends, execution of an integration plan, director and senior officer appointments, changes in responsibilities, and reporting requirements. The Company accounted for the external recapitalization as a business combination in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 805, Business Combinations . The transaction qualified as a recapitalization under Section 368(a)(1)(E) of the Internal Revenue Code and resulted in carryover treatment of the existing tax bases and tax loss carryforwards.
The Company is a participant in the Small Business Administration (SBA) and the United States Department of Agriculture (USDA) (collectively referred to as government guaranteed loans) lending programs and originates government guaranteed loans as a result of its acquisition of Ridgestone Financial Services, Inc. (Ridgestone) on October 14, 2016. See Note 3Acquisition of a Business for additional information regarding the transaction.
The Company also engages in short-term direct financing lease contracts through BFG Corporation, doing business as Byline Financial Group (BFG), a wholly-owned subsidiary of the Bank. BFG is located in Bannockburn, Illinois with sales offices in Texas, North Carolina, Florida, New York, Michigan and Arizona.
On June 14, 2017, stockholders of record as of May 22, 2017 voted to approve an Agreement and Plan of Merger between Byline Bancorp, Inc., an Illinois corporation (Byline Illinois), and Byline Bancorp, Inc., a wholly owned Delaware subsidiary of the Company, including the amended and restated certificate of incorporation and by-laws of the Company. Each share of Byline Illinois common stock issued and outstanding immediately prior to the effective time of the Merger was converted automatically into the right to receive one fifth (0.20) of a share of common stock of the Company. Fractional shares are to be paid in cash based on the initial public offering price of Byline Bancorp, Inc.s common stock.
Basis of financial statement presentation and consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany items and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (GAAP) as contained within the FASBs ASC and rules and regulations of the Securities and Exchange Commission (SEC), including the instructions to Regulation S-X. In accordance with applicable accounting standards, the Company does not consolidate statutory
F-9
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
trusts established for the sole purposes of issuing trust preferred securities and related trust common securities. See Note 15, Junior Subordinated Debentures, for additional discussion. Dollars within footnote tables disclosed within the consolidated financial statements are presented in thousands, except share and per share data. Operating results include the years ended December 31, 2016 and 2015.
Use of estimates In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the Consolidated Statements of Financial Condition and certain revenues and expenses for the periods included in the Consolidated Statements of Operations and the accompanying notes. Actual results could differ from those estimates.
Estimates that are particularly susceptible to significant changes in the near term relate to the determination of expected cash flows of acquired impaired loans, the allowance for loan and lease losses, valuation of servicing assets, fair value measurements for assets and liabilities, goodwill, other intangible assets, and assessment of the requirement for a valuation allowance against deferred tax assets.
Basic and diluted earnings per share Basic earnings per common share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then be shared in the earnings of the Company. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the diluted effect of share-based compensation using the treasury stock method.
Business combinations The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations (ASC 805). The Company recognizes 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 immediately expensed. The results of operations of the acquired business are included in the Consolidated Statements of Operations from the effective date of the acquisition, which is the date control is obtained.
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 (a) one year from the acquisition date or (b) the date when the acquirer receives the information necessary to complete the business combination accounting.
Cash and cash equivalents Cash and cash equivalents have original maturities of three months or less. The Company holds cash and cash equivalents on deposit with other banks and financial institutions in amounts that periodically exceed the federal deposit insurance limit. The Company evaluates the credit quality of these banks and financial institutions to mitigate its credit risk and has not experienced any losses in such accounts.
Cash on hand or on deposit with the Federal Reserve Bank of Chicago was required to meet regulatory reserve and clearing requirements. The reserve requirement was $14.1 million and $8.9 million as of
F-10
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
December 31, 2016 and 2015, respectively, and the Bank met the requirement at each balance sheet date. The average amount of interest bearing deposits with other banks for the years ended December 31, 2016 and 2015 were $33.0 million and $69.0 million, respectively.
Securities Securities that are held principally for resale in the near term are classified as trading and recorded at fair value with changes in fair value included in earnings. The Company did not invest in securities classified as trading during 2016 and 2015. Securities are classified as available-for-sale if the instrument may be sold in response to such factors including changes in market interest rates and related changes in prepayment risk, needs for liquidity, changes in the availability of and the yield on alternative instruments, and changes in funding sources and terms. Gains or losses on the sales of available-for-sale securities are recorded on the trade date and determined using the specific-identification method. Unrealized holding gains or losses, net of tax, on available-for-sale securities are carried as accumulated other comprehensive income (loss) within stockholders equity until realized. Securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity.
Fair values of securities are generally based on quoted market prices for the same or similar instruments. Interest income includes the amortization of purchase premiums and discounts, which are recognized using the effective interest method over the period to maturity.
Management evaluates securities for other-than-temporary impairment (OTTI) on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. The evaluation is based upon factors such as the creditworthiness of the issuers or guarantors, the underlying collateral, if applicable, and the continuing performance of the securities. Management also evaluates other facts and circumstances that may be indicative of an OTTI condition. This includes, but is not limited to, an evaluation of the type of security, length of time and extent to which the fair value has been less than cost, and near-term prospects of the issuer.
The Companys assessment of OTTI considers whether it intends to sell a security or if it is likely that it would be required to sell the security before recovery of the amortized cost basis of the investment, which may be at maturity. For debt securities, if the Company intends to sell the security or it is more likely than not that it will be required to sell the security before recovering its cost basis, the entire impairment loss is recognized in earnings as an OTTI. If the Company does not intend to sell the security and it is more likely than not that it will be required to sell the security, and the Company does not expect to recover the entire amortized cost basis of the security, only the portion of the impairment loss representing credit losses would be recognized in earnings. The credit loss on a security is measured as the difference between the amortized cost basis and the present value of the cash flows expected to be collected. Projected cash flows are discounted by the original or current effective interest rate depending on the nature of the security being measured for potential OTTI. The remaining impairment related to all other factors, the difference between the present value of the cash flows expected to be collected and fair value, is recognized as a charge to other comprehensive income (loss).
Restricted stock The Company owns stock of the Federal Home Loan Bank of Chicago (FHLB). No ready market exists for this stock, and it has no quoted market value. As a member of the FHLB system, the Bank is required to maintain an investment in FHLB stock. The stock is redeemable at par by the FHLB and is, therefore, carried at cost. In addition, the Company owns stock of Bankers Bank that was acquired as part of the Ridgestone transaction. The stock is redeemable at par and carried at cost.
Restricted stock is generally viewed as a long-term investment. Accordingly, when evaluating for impairment, its value is determined based on the ultimate recoverability of the par value rather than by
F-11
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
recognizing temporary declines in value. The Bank did not recognize impairment of its restricted stock as a result of its impairment analyses for the years ended December 31, 2016 and 2015.
Loans held for sale Loans that management has the intent and ability to sell are designated as held for sale. Government guaranteed loans and mortgage loans originated are carried at either amortized cost or estimated fair value. The Company determines whether to account for loans at fair value or amortized cost at origination. The loans accounted for at fair value remain at fair value after the determination. The loans accounted for at amortized cost are carried at the lower of cost or fair value, valued on a loan by loan basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Gains or losses on sales of government guaranteed loans are recognized based on the difference between the net sales proceeds, carrying value of the sold loan, fair value of the servicing asset recognized, and fair value of the retained loan (if any), and are reflected as operating activities in the Consolidated Statements of Cash Flows. The difference between the initial carrying balance of the retained loan and the relative fair value is recorded as a discount to the retained loan, establishing a new carrying balance. The recorded discount is accreted to earnings on a level yield basis. Government guaranteed loans are generally sold with servicing retained.
Loans transferred to loans held for sale are carried at the lower of cost or fair value, less estimated costs to sell. At the time of transfer, write-downs are recorded as charge-offs, establishing a new cost basis. Any subsequent adjustments are determined on an individual loan basis and are recognized as a charge to non-interest income. Sales proceeds received that are in excess of the new cost basis within 90 days are recorded to the allowance for loan and lease losses, up to the amount previously charged off. Any remaining proceeds are recorded as a gain on sale and included in non-interest income. Sales proceeds that are less than the new cost basis upon transfer and are received within 90 days of classifying the loans as held for sale are recorded as a charge-off to the allowance for loan and lease losses. Any proceeds received after 90 days of classifying the loans as held for sale are recorded as a gain or loss on sale and included in other non-interest income.
Originated loans Originated loans are stated at the amount of unpaid principal outstanding, net of purchase premiums and discounts, and any deferred fees or costs. Net deferred fees, costs, discounts and premiums are recognized as yield adjustments over the contractual life of the loan. Interest on loans is calculated daily based on the principal amount outstanding.
Originated loans are classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, in accordance with the terms of the original loan agreement. The carrying value of impaired loans is based on the present value of expected future cash flows (discounted at each loans effective interest rate) or, for collateral dependent loans, at the fair value of the collateral less estimated selling costs. If the measurement of each impaired loans value is less than the recorded investment in the loan, impairment is recognized and the carrying value of the loan is adjusted in the allowance for loan and lease losses as a specific component provided or through a charge-off of the impaired portion of the loan.
Accrual of interest on impaired loans is discontinued when the loan is 90 days past due or when, in managements opinion, the borrower may be unable to make payments as they become due. When the accrual of interest is discontinued, all unpaid accrued interest is reversed through interest income. Payments received during the time a loan is on non-accrual status are applied to principal. Interest income is not recognized until the loan is returned to accrual status or after the principal balance is paid in full. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured as evidenced by agreed upon performance for a period of not less than six months.
F-12
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
Troubled debt restructuring A troubled debt restructuring (TDR) is a formal restructuring of a loan in which the Bank, for economic or legal reasons related to the borrowers financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including providing a below-market interest rate, reduction in the loan balance or accrued interest, extension of the maturity date, or a combination of these. Troubled debt restructurings are considered to be impaired loans and are subject to the Banks impaired loan accounting policy. Acquired impaired loans are not subject to TDR accounting.
The Bank does not accrue interest on a TDR unless it believes collection of all principal and interest under the modified terms is reasonably assured. For a TDR to begin accruing interest, the borrower must demonstrate some level of past performance and the future capacity to perform under the modified terms. Generally, six months of consecutive payment performance under the restructured terms is required before a TDR is returned to accrual status.
Direct finance leases The Bank engages in leasing for small-ticket equipment, software, machinery and ancillary supplies and services to customers under leases that qualify as direct financing leases for financial reporting. Certain leases qualify as operating leases for income tax purposes. Under the direct financing method of accounting, the minimum lease payments to be received under the lease contract, together with the estimated unguaranteed residual values of up to 15% of the cost of the related equipment, are recorded as lease receivables when the lease is signed and funded and the lease property is delivered to the customer. The excess of the minimum lease payments and residual values over the amount financed is recorded as unearned lease income. Unearned lease income is recognized over the term of the lease based on the effective yield interest method. Residual value is the estimated fair market value of the equipment on lease at lease termination. In estimating the equipments fair value at lease termination, the Bank relies on historical experience by equipment type and manufacturer and, where available, valuations by independent appraisers, adjusted for known trends. The Banks estimates are for reasonableness; however, the amounts the Bank will ultimately realize could differ from the estimated amounts. If the review results in other-than-temporary impairment, the impairment is recognized in current period earnings. An upward adjustment of the estimated residual value is not recorded.
The policies for delinquency and non-accrual for direct finance leases are materially consistent with those described for all classes of loan receivables.
The Bank defers and amortizes certain initial direct costs over the contractual term of the lease as an adjustment to the yield. The unamortized direct costs are recorded as a reduction of unearned lease income.
Acquired impaired loans Loans initially acquired with evidence of credit quality deterioration are accounted for under ASC Topic 310-30, Accounting for Purchased Loans with Deteriorated Credit Quality (ASC 310-30). These loans were recorded either on a pool or a loan-by-loan basis at their estimated fair value where applicable. The Bank aggregated loans into pools based on similar credit risks and predominant risk characteristics such as delinquency status and loan type.
Management estimated the fair values of acquired loans at both the recapitalization date and the Ridgestone acquisition date based on estimated future cash flows. The excess of cash flows expected to be collected over a loans carrying value is considered to be the accretable yield and is recognized as interest income over the estimated life of the loan or pool using the effective yield method. The acquisition date estimates of accretable yield may subsequently change due to changes in managements estimates of timing and amounts of expected cash flows. The excess of the contractual amounts due over the cash flows expected to be collected is
F-13
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
considered to be the non-accretable difference. The non-accretable difference represents the Banks estimate of the credit losses expected to occur and is considered in determining the fair value of the loans. Reclassifications between accretable yield and non-accretable difference represent changes in expected cash flows over the remaining estimated life of the loan or pool. Subsequent increases in expected cash flows over those expected at inception are adjusted through an increase to the accretable yield on a prospective basis. Any subsequent decreases in expected cash flows attributable to credit deterioration are recognized by recording an additional provision for loan losses.
Once a pool of loans is assembled, the integrity of the pool is maintained. A loan can only be removed from a pool if either of the following conditions is met: (1) the Bank sells, forecloses, or otherwise receives assets in satisfaction of the loan, or (2) the loan is written off. A refinancing or restructuring of a loan does not result in a removal of a loan from a pool. Loan sales are accounted for under ASC Topic 860, Transfers and Servicing (ASC 860), when control over the assets have been relinquished. See transfers of financial assets accounting policy.
Acquired non-impaired loans and leases Acquired non-impaired loans and leases are accounted for under ASC Subtopic 310-20, Receivables Nonrefundable Fees and Other Costs (ASC 310-20). These loans and leases were individually recorded at fair value at the time of acquisition. The component of fair value representing an adjustment to an assets outstanding principal balance is accreted or amortized over the life of the related asset as a yield adjustment. Any previously recognized allowance for loan and lease losses and unearned fees or discounts are not carried over and recognized at the date of acquisition. The balance of the asset is then evaluated periodically pursuant to the Banks allowance for loan and lease loss accounting policy and any adjustment required for credit risk is recorded within the allowance for loan and lease losses.
Allowance for loan and lease losses and reserve for unfunded commitments The allowance for loan and lease losses is maintained at a level management believes is appropriate to provide for probable loan and lease losses as of the date of the Consolidated Statements of Financial Condition. The allowance for loan and lease losses is increased by a provision for loans and lease losses and decreased by charge-offs, net of recoveries. Loan and lease losses are charged against the allowance for loan and lease losses when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan and lease losses. The allowance for loan and lease losses is based on managements evaluation of the loan and lease portfolio giving consideration to the nature and volume of the loan portfolio, the value of the underlying collateral, overall portfolio quality, review of specific problem loans, and prevailing economic conditions that may affect the borrowers ability to pay. While management uses the best information available to make its evaluation, future adjustments to the allowance for loan and lease losses may be necessary if there are significant changes in economic condition. The allowance for loan and lease losses consists of general and specific components. Allocations of the allowance for loan and lease losses not attributable to acquired impaired loans may be made for specific loans and leases, but the entire allowance is available for any loan and lease that, in managements judgement, should be charged off.
The general component covers loans and leases that are collectively evaluated for impairment. Larger groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, and leases are collectively evaluated for impairment, and accordingly, they are not included in the separately identified impairment disclosures. The general component is based on a trailing 12-quarter weighted average loss rate for each loan category based on the Companys peer group and adjusted for qualitative and other economic factors. These factors include (1) changes in lending policies and procedures, including changes in underwriting
F-14
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
standards and collections, charge-off and recovery practices; (2) changes in international, national, regional and local conditions; (3) changes in the nature and volume of the portfolio and terms of the loans and leases; (4) changes in experience, depth and ability of lending management and other relevant staff; (5) changes in the volume and severity of past due loans and leases; (6) changes in the quality of the Companys loan review system; (7) changes in the value of the underlying collateral for collateral dependent loans; (8) existence and effect of any concentrations of credit and changes in the levels of such concentrations; and (9) the effect of other external factors (i.e., competition, legal and regulatory requirements) on the level of estimated credit losses. Based upon managements judgement of other factors that fall outside of the predefined qualitative or historical loss rates, the allowance for loan and lease losses may include an unallocated component as a proportion of the loan and lease categories collectively evaluated for impairment.
The specific component relates to loans that are risk-rated substandard or worse, and based on current information and events, it is likely that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in determining the impairment include payment status, collateral value, strength of guarantor, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired and are reviewed on a case-by-case basis. TDRs are individually evaluated for impairment and are measured at the present value of estimated future cash flows using the loans effective rate at origination. If a TDR is considered to be a collateral dependent loan, the loan is reported at the fair value of the collateral, less estimated costs to sell.
The allowance for loan losses also includes amounts representing decreases in expected cash flows attributable to credit deterioration of acquired impaired loans. The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is sufficient to absorb probable losses associated with the Banks commitment to lend funds under existing agreements, such as letters or lines of credit. Management determines the appropriate reserve for unfunded commitments based upon reviews of individual credit facilities, current economic conditions, the risk characteristics of the various categories of commitments, and other relevant factors. The reserve for unfunded commitments is based on estimates, and ultimate losses may vary from the current estimates. These estimates are evaluated on a quarterly basis and, as adjustments become necessary, they are recognized in earnings in the periods in which they become known. Advances that are considered uncollectible are charged to the reserve for unfunded commitments.
Provisions and recoveries of advances previously charged-off are recognized within the reserve for unfunded commitments, which is included in other liabilities within the Consolidated Statements of Financial Condition. The factors supporting the allowance for loan and lease losses and the reserve for unfunded commitments do not diminish the fact that the entire allowance for loan and lease losses and reserve for unfunded commitments not attributable to acquired impaired loans are each available to absorb losses in the loan and lease portfolios and related commitment portfolio, respectively.
The allowance for loan and lease losses and reserve for unfunded commitments are both subject to review by regulatory agencies during examinations and may require us to recognize adjustments to the allowance for loan and lease losses or the reserve for unfunded commitments.
Servicing assets Servicing assets are recognized separately when they are acquired through sales of loans. When loans are sold, servicing assets are recorded at fair value in accordance with ASC 860. Fair value is
F-15
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
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.
Sales of government guaranteed loans are executed on a servicing retained basis. The standard SBA loan sale agreement is structured to provide the Company with a servicing spread paid from a portion of the interest cash flow of the loan. SBA regulations require the Bank to retain a portion of the cash flow from the interest payments received for a sold loan. The USDA loan sale agreements are not standardized with respect to servicing.
Servicing fee income, which is reported on the Consolidated Statements of Operations as servicing fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. Late fees and ancillary fees related to loan servicing are not material.
The Company has elected the fair value measurement method and measures servicing rights at fair value at each reporting date and reports changes in fair value of servicing assets in earnings in the period in which the changes occur, and are included with servicing fees on the Consolidated Statements of Operations. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds, default rates, and losses.
Concentrations of credit risk Most of the Banks business activity is concentrated with customers located within its principal market areas, with the exception of government guaranteed loans and leasing activities. The Bank originates commercial real estate, construction, land development and other land, commercial and industrial, residential real estate, installment and other loans, and leases. Generally, loans are secured by accounts receivable, inventory, deposit accounts, personal property or real estate.
Rights to collateral vary and are legally documented to the extent practicable. The Bank has a concentration in commercial real estate loans and the ability of borrowers to honor these and other contracts is dependent upon the real estate and general economic conditions within their geographic market.
Transfers of financial assets Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. The Company has assessed that partial sales of financial assets meet the definition of participating interest. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company and the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets. Gains or losses are recognized in the period of sale upon derecognition of the asset.
Premises and equipment Premises and equipment acquired through a business combination are stated at the acquisition date fair value. All other premises and equipment are stated at cost less accumulated depreciation. Depreciation on premises and equipment is recognized on a straight-line basis over their estimated useful lives ranging from three to 39 years. Land is also carried at its fair value following a business combination and is not subject to depreciation. Leasehold improvements are amortized over the shorter of the life of the related asset or expected term of the underlying lease. Gains and losses on the dispositions of premises and equipment are included in non-interest income. Expenditures for new premises, equipment and major betterments are capitalized. Normal costs of maintenance and repairs are expensed as incurred.
Long-lived depreciable assets are evaluated periodically for impairment when events or changes in circumstances indicate the carrying amounts may be not recoverable. Impairment exists when the undiscounted
F-16
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
expected future cash flows of a long-lived asset are less than its carrying value. In that event, the Company recognizes a loss for the difference between the carrying amount and the estimated fair value of the asset based on a quoted market price, if applicable, or a discounted cash flow analysis. Impairment losses are recorded in non-interest expense.
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 at the lower of its carrying value or its fair value, less estimated costs to sell.
Other real estate owned Other real estate owned (OREO) includes real estate assets that have been acquired through, or in lieu of, loan foreclosure or repossession and are to be sold. OREO assets are initially recorded at fair value, less estimated costs to sell, of the collateral of the loan, on the date of foreclosure or repossession, establishing a new cost basis. Adjustments that reduce loan balances to fair value at the time of foreclosure or repossession are recognized as charge-offs in the allowance for loan and lease losses. Positive adjustments, if any, at the time of foreclosure or repossession are recognized in non-interest expense. After foreclosure or repossession, management periodically obtains new valuations, and real estate or other assets may be adjusted to a lower carrying amount, determined by the fair value of the asset, less estimated costs to sell. Any subsequent write-downs are recorded as a decrease in the asset and charged against other real estate owned valuation adjustments. Operating expenses of such properties, net of related income, are included in non-interest expense, and gains and losses on their disposition are included in non-interest expense. Gains on internally financed other real estate owned sales are accounted for in accordance with the methods stated in ASC Topic 360-20, Real Estate Sales (ASC 360-20). Any losses on the sales of other real estate owned properties are recognized immediately.
Goodwill The excess of the cost of the recapitalization and acquisitions over the fair value of the net assets acquired, including core deposit intangible, consists of goodwill. Goodwill is not amortized but is periodically evaluated for impairment under the provisions of ASC Topic 350, IntangiblesGoodwill and Other (ASC 350).
Impairment testing is performed using either a qualitative or quantitative approach at the reporting unit level. All of the Companys goodwill is allocated to the Bank, which is the Companys only applicable reporting unit for the purposes of testing goodwill for impairment. The Company has selected November 30 as the date it performs the annual goodwill impairment test. Additionally, the Company performs a goodwill impairment evaluation on an interim basis when events or circumstances indicate impairment potentially exists. The Company performs impairment testing using a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others, a material change in the estimated value of the Company based on current market multiples common for community banks of similar size and operations; a significant adverse change in legal factors or in the business climate; adverse action or assessment by a regulator; and unanticipated competition. If the assessment of qualitative factors indicates that it is not more likely than not that impairment exists, no further testing is performed; otherwise, the Company would proceed with a quantitative two-step goodwill impairment test. In the first step, the Company compares its estimate of the fair value of the reporting unit, which is based on a discounted cash flow analysis, with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is not impaired and the second step is not required. If necessary, the second step compares the implied fair value of
F-17
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
the reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by assigning the value of the reporting unit to all of the assets and liabilities of that unit, including any other identifiable intangible assets. An impairment loss is recognized if the carrying amount of the reporting unit goodwill exceeds the implied fair value of the goodwill.
Based on an annual analysis completed as of November 30, 2016, the Company determined that it is more likely than not that goodwill was not impaired.
Other intangible assets Other intangible assets primarily consist of core deposit intangible assets. Other intangible assets with definite useful lives are amortized to their estimated residual values over their respective estimated useful lives, and are also reviewed periodically for impairment. Amortization of other intangible assets is included in other non-interest expense. Core deposit intangibles were recognized apart from goodwill at the time of the recapitalization and the acquisition of Ridgestone based on market valuations. Core deposit intangibles are amortized over a ten-year period. In valuing core deposit intangibles, the Company considered variables such as deposit servicing costs, attrition rates and market discount rates. If the estimated fair value is less than the carrying value, the core deposit intangible would be reduced to such value and the impairment recognized as non-interest expense. The Company did not recognize impairment on its core deposit intangibles for the years ended December 31, 2016 and 2015.
Bank-owned life insurance The Bank holds life insurance policies that provide protection against the adverse financial effects that could result from the death of current and former employees, and provide tax deferred income. Although the lives of individual current or former management-level employees are insured, the Bank is the owner and is split beneficiary on certain policies. The Bank is exposed to credit risk to the extent an insurance company is unable to fulfill its financial obligations under a policy. Split-dollar life insurance is recorded as an asset at cash surrender value. Increases in the cash value of these policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax. At December 31, 2016 and 2015, bank-owned life insurance totaled $6.6 million and $4.0 million, respectively. The liabilities associated with the bank-owned life insurance were $457,000 and $458,000 at December 31, 2016 and 2015, respectively.
Income taxes The Company uses 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 the Companys assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The Companys annual tax rate is based on its 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. The Company reviews its deferred tax positions periodically and adjusts the balances as new information becomes available. The Company evaluates 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. The Company uses short and long-range business forecasts to provide
F-18
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
additional information for its evaluation of the recoverability of deferred tax assets. It is the Companys 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. At December 31, 2016, the Company did not record a deferred tax valuation allowance. At December 31, 2015, the Companys recorded valuation allowance related to its net deferred tax assets was $61.4 million.
Derivative financial instruments and hedging activities The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the future cash flows of certain assets. ASC Topic 815, Derivatives and Hedging (ASC 815), establishes accounting and reporting standards requiring that every derivative instrument be recorded in the statement of condition as either an asset or liability measured at its fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. On the date the derivative contract is entered into, the Company designates the derivative as a fair value hedge, a cash flow hedge, or a non-designated derivative.
Fair value hedges are accounted for by recording the changes in the fair value of the derivative instrument and the changes in the fair value related to the risk being hedged of the hedged asset or liability on the Consolidated Statements of Financial Condition with corresponding offsets recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an asset or liability.
Cash flow hedges are accounted for by recording the changes in the fair value of the effective portion of the derivative instrument in other comprehensive income (loss) and are recognized in the Consolidated Statements of Operations when the hedged item affects earnings.
Derivative instruments that are not designated as hedges according to accounting guidance are reported in the Consolidated Statements of Financial Condition at fair value and the changes in fair value are recognized as non-interest income during the period of the change.
The Company formally documents the relationship between a derivative instrument and a hedged asset or liability, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also formally assesses, both at the hedges inception and on an ongoing basis, whether the derivatives that are used in the hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
Comprehensive income (loss) Recognized revenue, expenses, gains and losses are included in net income (loss). Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities and adjustments related to cash flow hedges, are reported on a cumulative basis, net of tax effects, as a separate component of equity on the Consolidated Statements of Financial Condition. Changes in such items, along with net income (loss), are components of comprehensive income (loss).
Advertising expense Advertising costs are expensed as incurred.
F-19
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 1Business and Summary of Significant Accounting Policies (Continued)
Off-balance sheet instruments In the ordinary course of business, the Company has entered into off-balance sheet arrangements consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded in the consolidated financial statements when they are funded or when the related fees are incurred or received.
Segment reporting The Company has one reportable segment. The Companys 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.
Loss contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the Consolidated Financial Statements for the years ended December 31, 2016 and 2015.
Share-based compensation The Company accounts for share-based compensation in accordance with ASC Topic 718, CompensationStock Compensation (ASC 718), which requires compensation cost relating to share-based compensation transactions be recognized in the Consolidated Statements of Operations, based generally upon the grant-date fair value of the share-based compensation granted by the Company. Share-based awards may have service, market or performance conditions. Refer to Note 19Stock Option Plan for additional information.
Fair value of assets and liabilities Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, including respective accrued interest balances, in an orderly transaction between market participants at the measurement date. The Company determines fair value based upon quoted prices when available or through the use of alternative approaches, such as matrix or model pricing, when market quotes are not readily accessible or available. The valuation techniques used are based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Companys market assumptions.
Reclassifications Some items in the prior year consolidated financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net loss or stockholders equity.
Note 2Recently Issued Accounting Pronouncements
The following reflect recent accounting pronouncements that have been adopted or are pending adoption by the Company. As the Company qualifies as an emerging growth company and has elected the extended transition period for complying with new or revised accounting pronouncements, it is not subject to new or revised accounting standards applicable to public companies during the extended transition period. The accounting pronouncements pending adoption below reflect effective dates for the Company as an emerging growth company with the extended transition period.
Revenue from Contracts with Customers In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, deferred by ASU No. 2015-14 and clarifying standards, Revenue from Contracts with Customers , which creates Topic 606 and supersedes Topic 605, Revenue Recognition . The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers
F-20
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 2Recently Issued Accounting Pronouncements (Continued)
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Under the terms of ASU No. 2015-14 the standard is effective for interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact the standard will have on the Companys Consolidated Financial Statements. As a financial institution, the Companys largest component of revenue, interest income, is excluded from the scope of this ASU. The Company is currently evaluating which, if any, of its sources of non-interest income will be impacted by this ASU. The Company expects to adopt this new guidance on January 1, 2019, with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant. In April 2016, FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing . The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: (1) identifying performance obligations and (2) licensing implementation guidance, while retaining the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606, Revenues from Contracts with Customers . The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Companys Consolidated Financial Statements.
In May 2016, FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients , amending ASC Topic 606, Revenue from Contracts with Customers . The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606. The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Companys Consolidated Financial Statements.
Customers Accounting for Fees Paid in a Cloud Computing Arrangement In April 2015, FASB issued ASU No. 2015-05, Customers Accounting for Fees Paid in a Cloud Computing Arrangement . The amendments in this ASU provide guidance to customers in cloud computing arrangements about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments were effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and were adopted by the Company as of January 1, 2016. This ASU did not have a material effect on the Companys Consolidated Financial Statements.
F-21
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 2Recently Issued Accounting Pronouncements (Continued)
Business CombinationsSimplifying the Accounting for Measurement-Period Adjustments In September 2015, FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments . The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period when the adjustment amounts are determined. The acquirer is required to record in the same periods financial statements the effect on earnings from changes in depreciation, amortization, or other income effects resulting from the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer must present separately on the income statement, or disclose in the notes, the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the provisional amount had been recognized at the acquisition date. The amendments in this ASU were effective for fiscal years beginning after December 15, 2015.
The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Companys Consolidated Financial Statements, but may in the future.
Recognition and Measurement of Financial Assets and Financial Liabilities In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. The amendments simplify the impairment assessment of equity investments without readily determinable fair values. The amendments also eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This amendment excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the provisions of ASU No. 2016-01 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019 and is not expected to have a significant impact on the Companys Consolidated Financial Statements.
Leases (Topic 842) In February 2016, FASB issued ASU No. 2016-02, Leases . The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessees 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 lessees right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years
F-22
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 2Recently Issued Accounting Pronouncements (Continued)
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 Companys Consolidated Statements of Operations and Consolidated Statements of Financial Condition. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company expects an increase in assets and liabilities as a result of recording additional lease contracts where the Company is lessee.
Derivatives and Hedging (Topic 815) In March 2016, FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships . The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 (Derivatives and Hedging) does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this ASU on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This ASU became effective for the Company on January 1, 2017 and is not expected to have a material impact on the Companys Consolidated Financial Statements.
In March 2016, FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments . The amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. To determine how to account for debt instruments with embedded features, including contingent put and call options, an entity is required to assess whether the embedded derivatives must be bifurcated from the host contract and accounted for separately. Part of this assessment consists of evaluating whether the embedded derivative features are clearly and closely related to the debt host. Under existing guidance, for contingently exercisable options to be considered clearly and closely related to a debt host, they must be indexed only to interest rates or credit risk. ASU 2016-06 addresses inconsistent interpretations of whether an event that triggers an entitys ability to exercise the embedded contingent option must be indexed to interest rates or credit risk for that option to qualify as clearly and closely related. Diversity in practice has developed because the existing four-step decision sequence in ASC 815 focuses only on whether the payoff was indexed to something other than an interest rate or credit risk. As a result, entities have been uncertain whether they should (1) determine whether the embedded features are clearly and closely related to the debt host solely on the basis of the four-step decision sequence or (2) first apply the four-step decision sequence and then also evaluate whether the event triggering the exercisability of the contingent put or call option is indexed only to an interest rate or credit risk. This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815 as amended by this ASU. The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. This ASU became effective for the Company on January 1, 2017 and is not expected to have a material impact on the Companys Consolidated Financial Statements.
F-23
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 2Recently Issued Accounting Pronouncements (Continued)
CompensationStock Compensation (Topic 718) In March 2016, FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting . FASB issued this ASU as part of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments in this ASU relate to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments in this ASU require recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively.
An entity may elect to apply the amendments in this ASU related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. This ASU became effective for the Company on January 1, 2017 and is not expected to have a material impact on the Companys Consolidated Financial Statements.
Financial InstrumentsCredit Losses (Topic 326) In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments . Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2021. The Company is still evaluating the effects this ASU will have on the Companys Consolidated Financial Statements. While the Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.
Statement of Cash Flows (Topic 230) In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments . There is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other Topics. This
F-24
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 2Recently Issued Accounting Pronouncements (Continued)
ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Those eight issues are (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues. These amendments provide guidance for each of the eight issues, thereby reducing current and potential future diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is currently evaluating the provisions of ASU No. 2016-15 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (230), Restricted Cash . The ASU will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendment is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of the update is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect this ASU to have a material impact on the Companys Consolidated Financial Statements.
Income Taxes (Topic 740) In October 2016, the FASB issued ASU No. 2016-16, Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory . The ASU was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party; this update clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. The amendment is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of the update is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect this ASU to have a material impact on the Companys Consolidated Financial Statements.
Consolidation (Topic 810) In October 2016, the FASB issued ASU No. 2016-17, Consolidation , Interests Held through Related Parties That Are under Common Control. The ASU was issued to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore,
F-25
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 2Recently Issued Accounting Pronouncements (Continued)
consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the update is permitted. The Company adopted this new authoritative guidance on January 1, 2017 and it did not have an impact on the Companys Consolidated Financial Statements.
Business Combinations (Topic 805) In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business . The guidance clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect a material impact of this ASU on the Companys Consolidated Financial Statements.
IntangiblesGoodwill and Other (Topic 350) In January 2017, FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment . The amendments in this ASU are intended to reduce the cost and complexity of the goodwill impairment test by eliminating step two from the impairment test. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this ASU, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU are effective for the Companys annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is early adopting these amendments in 2017 and does not expect a material impact on the Companys Consolidated Financial Statements.
Nonrefundable Fees and Other Costs (Subtopic 310-20) In March 2017, FASB issued ASU No. 2017-08, ReceivablesNonrefundable Fees and Other Costs. The amendments in the ASU shorten the amortization period for certain callable debt securities held at a premium at the earliest call date. Under current GAAP, the Company amortizes the premium as an adjustment of yield over the contractual life of the instrument. As a result, upon exercise of a call on a callable debt security held at a premium, the unamortized premium is charged to earnings. The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The Company is required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements.
F-26
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 3Acquisition of a Business
On October 14, 2016, the Company acquired stock of Ridgestone and its subsidiaries under the terms of a definitive merger agreement (Agreement) dated June 9, 2016. Ridgestone operated two wholly-owned subsidiaries, Ridgestone Bank and RidgeStone Capital Trust I, and specializes in government guaranteed lending as a participant in the SBA and USDA lending programs. Ridgestone provided financial services through its two full-service banking offices in Brookfield, Wisconsin and Schaumburg, Illinois. In addition, Ridgestone had loan production offices located in Wisconsin (Green Bay and Wausau), Indiana (Indianapolis) and California (Newport Beach).
Under the terms of the Agreement, each Ridgestone common share was converted into the right to receive, at the election of the shareholder (subject to proration as outlined in the Agreement), either cash or Company common stock, or the combination of both. Total consideration included aggregate cash in the amount of $36.8 million and the issuance of 4,199,791 shares of the Companys common stock valued at $16.25 per common share. The transaction resulted in goodwill of $26.3 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. Acquisition advisory expenses related to the Ridgestone acquisition of $1.6 million are reflected in non-interest expense on the Consolidated Statements of Operations. Stock issuance costs were not material. There were no contingent assets or liabilities arising from the acquisition.
The acquisition of Ridgestone was accounted for using the acquisition method of accounting in accordance with ASC 805. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities involves significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available. Fair values are preliminary estimates due to deferred tax assets and deferred tax liabilities.
F-27
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 3Acquisition of a Business (Continued)
The following table presents a summary of the estimates of fair values of assets acquired and liabilities assumed as of the acquisition date:
Assets |
||||
Cash and cash equivalents |
$ | 25,480 | ||
Securities available-for-sale |
27,662 | |||
Restricted stock |
931 | |||
Loans held for sale |
15,363 | |||
Loans |
351,820 | |||
Servicing assets |
20,295 | |||
Premises and equipment |
2,011 | |||
Other real estate owned |
1,525 | |||
Other intangible assets |
486 | |||
Bank-owned life insurance |
2,352 | |||
Other assets |
8,228 | |||
|
|
|||
Total assets acquired |
456,153 | |||
Liabilities |
||||
Deposits |
361,370 | |||
Federal Home Loan Bank advances |
9,773 | |||
Junior subordinated debentures |
1,339 | |||
Accrued expenses and other liabilities |
4,958 | |||
|
|
|||
Total liabilities assumed |
377,440 | |||
|
|
|||
Net assets acquired |
$ | 78,713 | ||
|
|
|||
Consideration paid |
||||
Common stock (4,199,791 shares issued at $16.25 per share) |
68,247 | |||
Cash paid |
36,753 | |||
|
|
|||
Total consideration paid |
105,000 | |||
|
|
|||
Goodwill |
$ | 26,287 | ||
|
|
The following table presents the acquired non-impaired loans as of the acquisition date:
Fair value |
$ | 312,166 | ||
Gross contractual amounts receivable |
450,292 | |||
Estimate of contractual cash flows not expected to be collected (1) |
19,661 | |||
Estimate of contractual cash flows expected to be collected |
430,631 |
(1) | Includes interest payments not expected to be collected due to loan prepayments as well as principal and interest payments not expected to be collected due to customer default. |
The discount on the acquired non-impaired loans is being accreted into income over the life of the loans on an effective yield basis.
The following table provides the unaudited pro forma information for the results of operations for the years ended December 31, 2016 and 2015, as if the acquisition had occurred on January 1, 2015. The pro forma
F-28
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 3Acquisition of a Business (Continued)
results combine the historical results of Ridgestone into the Companys Consolidated Statements of Operations, including the impact of certain acquisition accounting adjustments, which includes loan discount accretion, intangible assets amortization, deposit premium accretion and borrowing 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, 2015. 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.
Years ended December 31, |
||||||||
2016 |
2015 |
|||||||
Total revenues (net interest income and non-interest income) |
$ | 171,059 | $ | 151,054 | ||||
Net income (loss) |
$ | 82,252 | $ | (1,437 | ) | |||
Earnings per sharebasic |
$ | 3.54 | $ | (0.07 | ) | |||
Earnings per sharediluted |
$ | 3.50 | $ | (0.07 | ) |
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Ridgestone for period from October 15, 2016 through December 31, 2016. Revenues and earnings of the acquired company since the acquisition date have not been disclosed as it is not practicable as Ridgestone was merged into the Company and separate financial information is not readily available.
Note 4Securities
The following tables summarize the amortized cost and fair values of securities available-for-sale and securities held-to-maturity at December 31, 2016 and 2015 and the corresponding amounts of gross unrealized gains and losses:
2016 |
Amortized
|
Gross
|
Gross
|
Fair Value |
||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 14,995 | $ | 4 | $ | (79 | ) | $ | 14,920 | |||||||
U.S. Government agencies |
60,180 | | (1,323 | ) | 58,857 | |||||||||||
Obligations of states, municipalities, and political subdivisions |
16,271 | 60 | (272 | ) | 16,059 | |||||||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
376,800 | | (8,640 | ) | 368,160 | |||||||||||
Non-agency |
20,107 | | (174 | ) | 19,933 | |||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency |
78,954 | | (1,551 | ) | 77,403 | |||||||||||
Non-agency |
32,061 | | (1,009 | ) | 31,052 | |||||||||||
Corporate securities |
17,065 | 350 | (86 | ) | 17,329 | |||||||||||
Other securities |
4,161 | 742 | (56 | ) | 4,847 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 620,594 | $ | 1,156 | $ | (13,190 | ) | $ | 608,560 | |||||||
|
|
|
|
|
|
|
|
F-29
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 4Securities (Continued)
Amortized
|
Gross
|
Gross
|
Fair Value |
|||||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | 24,878 | $ | 105 | $ | (229 | ) | $ | 24,754 | |||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
67,692 | 35 | (283 | ) | 67,444 | |||||||||||
Non-agency |
46,276 | 50 | (442 | ) | 45,884 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 138,846 | $ | 190 | $ | (954 | ) | $ | 138,082 | |||||||
|
|
|
|
|
|
|
|
2015 |
Amortized
|
Gross
|
Gross
|
Fair Value |
||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 30,580 | $ | | $ | (235 | ) | $ | 30,345 | |||||||
U.S. Government agencies |
84,368 | 9 | (764 | ) | 83,613 | |||||||||||
Obligations of states, municipalities, and political subdivisions |
20,687 | 151 | (86 | ) | 20,752 | |||||||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
593,391 | 184 | (5,241 | ) | 588,334 | |||||||||||
Non-agency |
| | | | ||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency |
31,514 | | (323 | ) | 31,191 | |||||||||||
Non-agency |
| | | | ||||||||||||
Corporate securities |
7,801 | | (105 | ) | 7,696 | |||||||||||
Other securities |
5,098 | 733 | (30 | ) | 5,801 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 773,439 | $ | 1,077 | $ | (6,784 | ) | $ | 767,732 | |||||||
|
|
|
|
|
|
|
|
Amortized
|
Gross
|
Gross
|
Fair Value |
|||||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | 25,081 | $ | 310 | $ | (142 | ) | $ | 25,249 | |||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
86,379 | 8 | (701 | ) | 85,686 | |||||||||||
Non-agency |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 111,460 | $ | 318 | $ | (843 | ) | $ | 110,935 | |||||||
|
|
|
|
|
|
|
|
The Company did not classify securities as trading during 2016 and 2015.
F-30
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 4Securities (Continued)
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 December 31, 2016 and 2015 are summarized as follows:
2016 |
Less than 12 Months |
12 Months or Longer |
Total | |||||||||||||||||||||||||
# of
|
Fair Value |
Unrealized
|
Fair
|
Unrealized
|
Fair Value |
Unrealized
|
||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||
U.S. Treasury Notes |
3 | $ | 9,918 | $ | (79 | ) | $ | | $ | | $ | 9,918 | $ | (79 | ) | |||||||||||||
U.S. Government agencies |
10 | 58,857 | (1,323 | ) | | | 58,857 | (1,323 | ) | |||||||||||||||||||
Obligations of states, municipalities and political subdivisions |
14 | 7,799 | (259 | ) | 115 | (13 | ) | 7,914 | (272 | ) | ||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
41 | 364,713 | (8,483 | ) | 3,447 | (157 | ) | 368,160 | (8,640 | ) | ||||||||||||||||||
Non-agency |
2 | 19,933 | (174 | ) | | | 19,933 | (174 | ) | |||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
8 | 70,762 | (1,488 | ) | 6,641 | (63 | ) | 77,403 | (1,551 | ) | ||||||||||||||||||
Non-agency |
5 | 31,052 | (1,009 | ) | | | 31,052 | (1,009 | ) | |||||||||||||||||||
Corporate securities |
4 | 5,097 | (78 | ) | 2,522 | (8 | ) | 7,619 | (86 | ) | ||||||||||||||||||
Other securities |
1 | | | 1,994 | (56 | ) | 1,994 | (56 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
88 | $ | 568,131 | $ | (12,893 | ) | $ | 14,719 | $ | (297 | ) | $ | 582,850 | $ | (13,190 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
12 Months or Longer |
Total | ||||||||||||||||||||||||||
# of
|
Fair Value |
Unrealized
|
Fair
|
Unrealized
|
Fair Value |
Unrealized
|
||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
22 | $ | 16,235 | $ | (229 | ) | $ | | $ | | $ | 16,235 | $ | (229 | ) | |||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
15 | 52,156 | (283 | ) | | | 52,156 | (283 | ) | |||||||||||||||||||
Non-agency |
5 | 29,245 | (442 | ) | | | 29,245 | (442 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
42 | $ | 97,636 | $ | (954 | ) | $ | | $ | | $ | 97,636 | $ | (954 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-31
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 4Securities (Continued)
2015 |
Less than 12 Months |
12 Months or Longer |
Total | |||||||||||||||||||||||||
# of
|
Fair Value |
Unrealized
|
Fair
|
Unrealized
|
Fair Value |
Unrealized
|
||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||
U.S. Treasury Notes |
9 | $ | 30,345 | $ | (235 | ) | $ | | $ | | $ | 30,345 | $ | (235 | ) | |||||||||||||
U.S. Government agencies |
15 | 72,576 | (764 | ) | | | 72,576 | (764 | ) | |||||||||||||||||||
Obligations of states, municipalities and political subdivisions |
12 | 7,553 | (86 | ) | 25 | | 7,578 | (86 | ) | |||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
77 | 555,282 | (5,241 | ) | | | 555,282 | (5,241 | ) | |||||||||||||||||||
Non-agency |
0 | | | | | | | |||||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
3 | 23,038 | (236 | ) | 8,153 | (87 | ) | 31,191 | (323 | ) | ||||||||||||||||||
Non-agency |
0 | | | | | | | |||||||||||||||||||||
Corporate securities |
3 | 7,696 | (105 | ) | | | 7,696 | (105 | ) | |||||||||||||||||||
Other securities |
1 | 1,964 | (30 | ) | | | 1,964 | (30 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
120 | $ | 698,454 | $ | (6,697 | ) | $ | 8,178 | $ | (87 | ) | $ | 706,632 | $ | (6,784 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
12 Months or Longer |
Total | ||||||||||||||||||||||||||
# of
|
Fair Value |
Unrealized
|
Fair
|
Unrealized
|
Fair Value |
Unrealized
|
||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
16 | $ | 12,342 | $ | (142 | ) | $ | | $ | | $ | 12,342 | $ | (142 | ) | |||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
17 | 81,899 | (701 | ) | | | 81,899 | (701 | ) | |||||||||||||||||||
Non-agency |
0 | | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
33 | $ | 94,241 | $ | (843 | ) | $ | | $ | | $ | 94,241 | $ | (843 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At December 31, 2016, the Company evaluated the securities which had an unrealized loss for OTTI and determined all declines in value to be temporary. There were 130 investment securities with unrealized losses at December 31, 2016, of which only two had a continuous unrealized loss position for 12 consecutive months or longer that is greater than 5% of amortized cost. 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.
F-32
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 4Securities (Continued)
The proceeds from all sales of securities were available-for-sale and the associated gains and losses for the years ended December 31, 2016 and 2015 are listed below:
2016 |
2015 |
|||||||
Proceeds |
$ | 534,418 | $ | 511,028 | ||||
Gross gains |
3,358 | 3,124 | ||||||
Gross losses |
131 | 60 |
The amount of net gains reclassified from accumulated other comprehensive loss into earnings for the years ended December 31, 2016 and 2015 were $3.2 million and $3.1 million, respectively.
Securities pledged at December 31, 2016 and 2015 had carrying amounts of $178.6 million and $144.5 million, respectively. At December 31, 2016 and 2015, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $93.2 million and $128.4 million, respectively; for FHLB advances of $58.7 million and $0, respectively; and for customer repurchase agreements of $19.9 million and $16.0 million, respectively. Other securities were pledged for derivative positions, letters of credit and for purposes required or permitted by law. At December 31, 2016, and 2015, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders equity.
At December 31, 2016, 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
|
Fair Value |
|||||||
Available-for-sale |
||||||||
Due in one year or less |
$ | 200 | $ | 200 | ||||
Due from one to five years |
60,670 | 60,436 | ||||||
Due from five to ten years |
41,515 | 40,568 | ||||||
Due after ten years |
7,195 | 7,032 | ||||||
Mortgage-backed securities |
507,922 | 496,548 | ||||||
Other securities with no defined maturity |
3,092 | 3,776 | ||||||
|
|
|
|
|||||
Total |
$ | 620,594 | $ | 608,560 | ||||
|
|
|
|
|||||
Held-to-maturity |
||||||||
Due from one to five years |
$ | 530 | $ | 523 | ||||
Due from five to ten years |
11,938 | 11,801 | ||||||
Due after ten years |
12,410 | 12,430 | ||||||
Mortgage-backed securities |
113,968 | 113,328 | ||||||
|
|
|
|
|||||
Total |
$ | 138,846 | $ | 138,082 | ||||
|
|
|
|
F-33
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 5Loan and Lease Receivables
Outstanding loan and lease receivables as of December 31, 2016 and 2015 were categorized as follows:
2016 |
2015 |
|||||||
Commercial real estate |
$ | 796,950 | $ | 534,249 | ||||
Residential real estate |
610,699 | 484,085 | ||||||
Construction, land development, and other land |
141,122 | 40,360 | ||||||
Commercial and industrial |
439,476 | 165,709 | ||||||
Installment and other |
2,917 | 1,899 | ||||||
Lease financing receivables |
155,999 | 117,514 | ||||||
|
|
|
|
|||||
Total loans and leases |
2,147,163 | 1,343,816 | ||||||
Net unamortized deferred fees and costs |
(2,119 | ) | (418 | ) | ||||
Initial direct costs |
2,967 | 2,039 | ||||||
Allowance for loan and lease losses |
(10,923 | ) | (7,632 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
$ | 2,137,088 | $ | 1,337,805 | ||||
|
|
|
|
2016 |
2015 |
|||||||
Lease financing receivables |
||||||||
Net minimum lease payments |
$ | 168,345 | $ | 126,159 | ||||
Unguaranteed residual values |
1,787 | 2,099 | ||||||
Unearned income |
(14,133 | ) | (10,744 | ) | ||||
|
|
|
|
|||||
Total lease financing receivables |
155,999 | 117,514 | ||||||
Initial direct costs |
2,967 | 2,039 | ||||||
|
|
|
|
|||||
Lease financial receivables before allowance for lease losses |
$ | 158,966 | $ | 119,553 | ||||
|
|
|
|
At December 31, 2016 and 2015, total loans and leases included U.S. Government guaranteed loans of $332.9 million and $2.6 million, respectively. At December 31, 2016 and 2015, installment and other loans included overdraft deposits of $1.0 million and $1.1 million, respectively, which were reclassified as loans. At December 31, 2016 and 2015, loans and loans held for sale pledged as security for borrowings were $507.2 million and $545.3 million, respectively. Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases.
The minimum annual lease payments for lease financing receivables as of December 31, 2016 are summarized as follows:
Minimum lease
|
||||
2017 |
$ | 58,780 | ||
2018 |
46,929 | |||
2019 |
33,109 | |||
2020 |
20,583 | |||
2021 |
8,031 | |||
Thereafter |
913 | |||
|
|
|||
Total |
$ | 168,345 | ||
|
|
F-34
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 5Loan and Lease Receivables (Continued)
Originated loans and leases represent originations following a business combination. Acquired impaired loans are loans acquired from a business combination with evidence of credit quality deterioration and are accounted for under ASC 310-30. Acquired non-impaired loans and leases represent loans and leases acquired from a business combination without evidence of credit quality deterioration and are accounted for under ASC 310-20. Leases and revolving loans do not qualify to be accounted for as acquired impaired loans and are accounted for under ASC 310-20. The following tables summarize the balances for each respective loan and lease category as of December 31, 2016 and 2015:
2016 |
Originated |
Acquired
|
Acquired
|
Total |
||||||||||||
Commercial real estate |
$ | 338,752 | $ | 207,303 | $ | 250,289 | $ | 796,344 | ||||||||
Residential real estate |
394,168 | 175,717 | 40,853 | 610,738 | ||||||||||||
Construction, land development, and other land |
119,357 | 6,979 | 14,430 | 140,766 | ||||||||||||
Commercial and industrial |
309,097 | 13,464 | 115,677 | 438,238 | ||||||||||||
Installment and other |
2,021 | 574 | 364 | 2,959 | ||||||||||||
Lease financing receivables |
118,493 | | 40,473 | 158,966 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 1,281,888 | $ | 404,037 | $ | 462,086 | $ | 2,148,011 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
2015 |
Originated |
Acquired
|
Acquired
|
Total |
||||||||||||
Commercial real estate |
$ | 201,586 | $ | 243,964 | $ | 88,146 | $ | 533,696 | ||||||||
Residential real estate |
215,388 | 223,738 | 45,208 | 484,334 | ||||||||||||
Construction, land development, and other land |
29,225 | 8,634 | 2,373 | 40,232 | ||||||||||||
Commercial and industrial |
146,858 | 9,570 | 9,268 | 165,696 | ||||||||||||
Installment and other |
544 | 1,005 | 377 | 1,926 | ||||||||||||
Lease financing receivables |
69,416 | | 50,137 | 119,553 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 663,017 | $ | 486,911 | $ | 195,509 | $ | 1,345,437 | ||||||||
|
|
|
|
|
|
|
|
Acquired impaired loans As part of the Ridgestone acquisition, the Bank acquired impaired loans that are accounted for under ASC 310-30 in the amount of $39.7 million. Refer to Note 3Acquisition of a Business for additional information regarding the transaction. There were no other acquired impaired loans purchased during 2016 or 2015. 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 October 14, 2016:
Undiscounted contractual cash flows |
$ | 66,488 | ||
Undiscounted cash flows not expected to be collected (non-accretable difference) |
(19,918 | ) | ||
|
|
|||
Undiscounted cash flows expected to be collected |
46,570 | |||
Accretable yield at acquisition |
(6,916 | ) | ||
|
|
|||
Estimated fair value of impaired loans acquired at acquisition |
$ | 39,654 | ||
|
|
The outstanding balance and carrying amount of all acquired impaired loans are summarized below. The balances do not include an allowance for loan and lease losses of $1.6 million and $3.3 million, respectively, at December 31, 2016 and 2015.
F-35
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 5Loan and Lease Receivables (Continued)
2016 |
2015 |
|||||||||||||||
Outstanding
|
Carrying
|
Outstanding
|
Carrying
|
|||||||||||||
Commercial real estate |
$ | 278,893 | $ | 207,303 | $ | 305,979 | $ | 243,964 | ||||||||
Residential real estate |
236,384 | 175,717 | 287,760 | 223,738 | ||||||||||||
Construction, land development, and other land |
15,292 | 6,979 | 20,362 | 8,634 | ||||||||||||
Commercial and industrial |
23,164 | 13,464 | 10,803 | 9,570 | ||||||||||||
Installment and other |
1,976 | 574 | 2,467 | 1,005 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
$ | 555,709 | $ | 404,037 | $ | 627,371 | $ | 486,911 | ||||||||
|
|
|
|
|
|
|
|
The following table summarizes the changes in accretable yield for acquired impaired loans for the years ended December 31, 2016 and 2015:
2016 |
2015 |
|||||||
Beginning balance |
$ | 43,915 | $ | 68,238 | ||||
Additions |
6,916 | | ||||||
Accretion to interest income |
(26,208 | ) | (35,547 | ) | ||||
Reclassification from nonaccretable difference |
12,245 | 11,224 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 36,868 | $ | 43,915 | ||||
|
|
|
|
Acquired non-impaired loans and leases The Company acquired non-impaired loans as part of the Ridgestone acquisition in the amount of $312.2 million. Refer to Note 3Acquisition of a Business for additional information regarding the transaction.
The unpaid principal balance and carrying value for acquired non-impaired loans and leases at December 31, 2016 and 2015 were as follows:
2016 |
2015 |
|||||||||||||||
Unpaid
|
Carrying
|
Unpaid
|
Carrying
|
|||||||||||||
Commercial real estate |
$ | 259,055 | $ | 250,289 | $ | 87,708 | $ | 88,146 | ||||||||
Residential real estate |
41,282 | 40,853 | 45,471 | 45,208 | ||||||||||||
Construction, land development, and other land |
14,619 | 14,430 | 2,432 | 2,373 | ||||||||||||
Commercial and industrial |
125,806 | 115,677 | 9,369 | 9,268 | ||||||||||||
Installment and other |
402 | 364 | 390 | 377 | ||||||||||||
Lease financing receivables |
40,205 | 40,473 | 49,420 | 50,137 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total acquired non-impaired loans and leases |
$ | 481,369 | $ | 462,086 | $ | 194,790 | $ | 195,509 | ||||||||
|
|
|
|
|
|
|
|
Note 6Allowance 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 or recapitalization, and originated loans and leases. Although all acquired loans and leases are included in the following table, only those with credit deterioration subsequent to acquisition date are actually included in the allowance for loan and lease losses.
F-36
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
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 as of and for the years ended December 31, 2016 and 2015:
2016 |
Commercial Real Estate |
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Allowance for loan and lease losses |
||||||||||||||||||||||||||||
Beginning balance |
$ | 2,280 | $ | 2,981 | $ | 232 | $ | 1,403 | $ | 357 | $ | 379 | $ | 7,632 | ||||||||||||||
Provisions |
4,032 | 135 | 605 | 2,869 | (11 | ) | 2,722 | 10,352 | ||||||||||||||||||||
Charge-offs |
(4,367 | ) | (633 | ) | (95 | ) | (76 | ) | (12 | ) | (2,634 | ) | (7,817 | ) | ||||||||||||||
Recoveries |
| | | | | 756 | 756 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 1,945 | $ | 2,483 | $ | 742 | $ | 4,196 | $ | 334 | $ | 1,223 | $ | 10,923 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 293 | $ | | $ | 396 | $ | 328 | $ | | $ | 1,017 | ||||||||||||||
Collectively evaluated for impairment |
1,456 | 1,743 | 742 | 3,126 | 5 | 1,223 | 8,295 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
489 | 447 | | 674 | 1 | | 1,611 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total allowance for loan and lease losses |
$ | 1,945 | $ | 2,483 | $ | 742 | $ | 4,196 | $ | 334 | $ | 1,223 | $ | 10,923 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Loans and leases ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 8,916 | $ | 1,300 | $ | | $ | 1,382 | $ | 328 | $ | | $ | 11,926 | ||||||||||||||
Collectively evaluated for impairment |
580,125 | 433,721 | 133,787 | 423,392 | 2,057 | 158,966 | 1,732,048 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
207,303 | 175,717 | 6,979 | 13,464 | 574 | | 404,037 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases evaluated for allowance for loan and lease losses |
$ | 796,344 | $ | 610,738 | $ | 140,766 | $ | 438,238 | $ | 2,959 | $ | 158,966 | $ | 2,148,011 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
2015 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Allowance for loan and lease losses |
||||||||||||||||||||||||||||
Beginning balance |
$ | 1,112 | $ | 1,936 | $ | 834 | $ | 648 | $ | 121 | $ | 143 | $ | 4,794 | ||||||||||||||
Provisions |
2,464 | 1,873 | (585 | ) | 782 | 237 | 2,195 | 6,966 | ||||||||||||||||||||
Charge-offs |
(1,296 | ) | (828 | ) | (17 | ) | (30 | ) | (1 | ) | (2,187 | ) | (4,359 | ) | ||||||||||||||
Recoveries |
| | | 3 | | 228 | 231 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 2,280 | $ | 2,981 | $ | 232 | $ | 1,403 | $ | 357 | $ | 379 | $ | 7,632 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,076 | $ | 615 | $ | 137 | $ | 171 | $ | 327 | $ | | $ | 2,326 | ||||||||||||||
Collectively evaluated for impairment |
470 | 476 | 95 | 596 | | 379 | 2,016 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
734 | 1,890 | | 636 | 30 | | 3,290 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total allowance for loan and lease losses |
$ | 2,280 | $ | 2,981 | $ | 232 | $ | 1,403 | $ | 357 | $ | 379 | $ | 7,632 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Loans and leases ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 4,160 | $ | 4,042 | $ | 208 | $ | 171 | $ | 327 | $ | | $ | 8,908 | ||||||||||||||
Collectively evaluated for impairment |
285,571 | 256,555 | 31,390 | 155,955 | 594 | 119,553 | 849,618 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
243,964 | 223,738 | 8,634 | 9,570 | 1,005 | | 486,911 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases evaluated for allowance for loan and lease losses |
$ | 533,695 | $ | 484,335 | $ | 40,232 | $ | 165,696 | $ | 1,926 | $ | 119,553 | $ | 1,345,437 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For acquired impaired loans, there was a net reversal of $1.7 million of the allowance for loan and lease losses during the year ended December 31, 2016. The Company increased the allowance for loan and leases losses by $1.4 million for the year ended December 31, 2015.
F-38
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
The following tables summarize the recorded investment, unpaid principal balance, related allowance, average recorded investment, and interest income recognized for loans and leases considered impaired as of December 31, 2016 and 2015, which excludes acquired impaired loans:
2016 |
Recorded
|
Unpaid
|
Related
|
Average
|
Interest
|
|||||||||||||||
With no related allowance recorded |
||||||||||||||||||||
Commercial real estate |
$ | 8,916 | $ | 9,502 | $ | | $ | 8,975 | $ | 305 | ||||||||||
Residential real estate |
804 | 1,999 | | 827 | 45 | |||||||||||||||
Commercial and Industrial |
521 | 524 | | 516 | (2 | ) | ||||||||||||||
With an allowance recorded |
||||||||||||||||||||
Residential real estate |
496 | 528 | 293 | 519 | 1 | |||||||||||||||
Commercial and industrial |
861 | 869 | 396 | 914 | | |||||||||||||||
Installment and Other |
328 | 361 | 328 | 328 | 16 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$ | 11,926 | $ | 13,783 | $ | 1,017 | $ | 12,079 | $ | 365 | ||||||||||
|
|
|
|
|
|
|
|
|
|
2015 |
Recorded
|
Unpaid
|
Related
|
Average
|
Interest
|
|||||||||||||||
With no related allowance recorded |
||||||||||||||||||||
Commercial real estate |
$ | 1,362 | $ | 1,922 | $ | | $ | 1,394 | $ | 64 | ||||||||||
Residential real estate |
2,821 | 4,222 | | 2,865 | 63 | |||||||||||||||
With an allowance recorded |
||||||||||||||||||||
Commercial real estate |
2,798 | 2,797 | 1,076 | 2,826 | 46 | |||||||||||||||
Residential real estate |
1,221 | 1,216 | 615 | 1,250 | 15 | |||||||||||||||
Construction, land development, and other land |
208 | 1,201 | 137 | 208 | | |||||||||||||||
Commercial and industrial |
171 | 171 | 171 | 185 | 1 | |||||||||||||||
Installment and other |
327 | 335 | 327 | 327 | 23 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total impaired loans |
$ | 8,908 | $ | 11,864 | $ | 2,326 | $ | 9,055 | $ | 212 | ||||||||||
|
|
|
|
|
|
|
|
|
|
For purposes of these tables, the unpaid principal balance represents the outstanding contractual balance. Impaired loans include loans that are individually evaluated for impairment as well as troubled debt restructurings for all loan categories. The sum of non-accrual loans and loans past due 90 days still on accrual will differ from the total impaired loan amount.
The Banks credit risk rating methodology assigns risk ratings from 1 to 10, where a higher rating represents higher risk. The risk rating categories are described by the following groupings:
Pass Ratings 14 define the risk levels of borrowers and guarantors that offer a minimal to an acceptable level of risk.
Watch A watch asset (rating of 5) has credit exposure that presents higher than average risk and warrants greater than routine attention by Bank personnel due to conditions affecting the borrower, the borrowers industry or the economic environment.
F-39
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
Special Mention A special mention asset (rating of 6) has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Banks credit position at some future date.
Substandard Accrual A substandard accrual asset (rating of 7) has well-defined weakness or weaknesses in cash flow and collateral coverage resulting in a distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. This classification may be used in limited cases, where despite credit severity, the borrower is current on payments and there is an agreed plan for credit remediation.
Substandard Non-Accrual A substandard asset (rating of 8) has well-defined weakness or weaknesses in cash flow and collateral coverage resulting in the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful A doubtful asset (rating of 9) has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.
Loss A loss asset (rating of 10) is considered uncollectible and of such little value that its continuance as a realizable asset is not warranted.
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 December 31, 2016 and 2015:
2016 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Pass |
$ | 536,499 | $ | 419,880 | $ | 129,732 | $ | 369,136 | $ | 2,052 | $ | 157,296 | $ | 1,614,595 | ||||||||||||||
Watch |
38,707 | 10,885 | 2,897 | 52,872 | 4 | 324 | 105,689 | |||||||||||||||||||||
Special Mention |
5,377 | 3,116 | 1,158 | 1,258 | 1 | 512 | 11,422 | |||||||||||||||||||||
Substandard |
8,458 | 1,140 | | 1,508 | 328 | 739 | 12,173 | |||||||||||||||||||||
Doubtful |
| | | | | 95 | 95 | |||||||||||||||||||||
Loss |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 589,041 | $ | 435,021 | $ | 133,787 | $ | 424,774 | $ | 2,385 | $ | 158,966 | $ | 1,743,974 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Pass |
$ | 259,656 | $ | 236,255 | $ | 30,801 | $ | 148,577 | $ | 592 | $ | 118,486 | $ | 794,367 | ||||||||||||||
Watch |
16,073 | 18,923 | 589 | 2,181 | | 375 | 38,141 | |||||||||||||||||||||
Special Mention |
10,833 | 1,997 | | 5,075 | 2 | 254 | 18,161 | |||||||||||||||||||||
Substandard |
3,170 | 3,411 | 208 | 293 | 327 | 331 | 7,740 | |||||||||||||||||||||
Doubtful |
| 10 | | | | 107 | 117 | |||||||||||||||||||||
Loss |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 289,732 | $ | 260,596 | $ | 31,598 | $ | 156,126 | $ | 921 | $ | 119,553 | $ | 858,526 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
The following tables summarize contractual past due and current loan information for acquired non-impaired and originated loans by category as of December 31, 2016 and 2015:
2016 |
30-59 Days
|
60-89 Days
|
Greater than
|
Non-accrual |
Total
|
Current |
Total |
|||||||||||||||||||||
Commercial real estate |
$ | 2,944 | $ | 648 | $ | | $ | 3,935 | $ | 7,527 | $ | 581,514 | $ | 589,041 | ||||||||||||||
Residential real estate |
243 | | | 1,118 | 1,361 | 433,660 | 435,021 | |||||||||||||||||||||
Construction, land development, and other land |
1,363 | | | | 1,363 | 132,424 | 133,787 | |||||||||||||||||||||
Commercial and industrial |
6,066 | 374 | | 958 | 7,398 | 417,376 | 424,774 | |||||||||||||||||||||
Installment and other |
| | | 328 | 328 | 2,057 | 2,385 | |||||||||||||||||||||
Lease Financing Receivables |
2,070 | 390 | | 445 | 2,905 | 156,061 | 158,966 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 12,686 | $ | 1,412 | $ | | $ | 6,784 | $ | 20,882 | $ | 1,723,092 | $ | 1,743,974 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 |
30-59 Days
|
60-89 Days
|
Greater than
|
Non-accrual |
Total
|
Current |
Total |
|||||||||||||||||||||
Commercial real estate |
$ | | $ | | $ | | $ | 3,179 | $ | 3,179 | $ | 286,553 | $ | 289,732 | ||||||||||||||
Residential real estate |
74 | 95 | | 2,999 | 3,168 | 257,428 | 260,596 | |||||||||||||||||||||
Construction, land development, and other land |
| | | 208 | 208 | 31,390 | 31,598 | |||||||||||||||||||||
Commercial and industrial |
| | | 251 | 251 | 155,875 | 156,126 | |||||||||||||||||||||
Installment and other |
| 1 | | 327 | 328 | 593 | 921 | |||||||||||||||||||||
Lease Financing Receivables |
1,596 | 414 | | 438 | 2,448 | 117,105 | 119,553 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 1,670 | $ | 510 | $ | | $ | 7,402 | $ | 9,582 | $ | 848,944 | $ | 858,526 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016 and 2015, the Company had a recorded investment in troubled debt restructurings of $1.2 million and $2.7 million, respectively. The restructurings were granted due to borrower financial difficulty and provide for a modification of loan repayment terms. The Company has not allocated any specific allowance for these loans at December 31, 2016 and 2015. In addition, there were no commitments outstanding on troubled debt restructurings.
Loans modified as troubled debt restructurings that occurred during the years ended December 31, 2016 and 2015 did not result in any charge-offs or permanent reductions of the recorded investments in the loans. Troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the years ended December 31, 2016 and 2015 had a recorded investment of $477,000 and $750,000, respectively.
At December 31, 2016 and 2015, the reserve for unfunded commitments was $760,000 and $268,000, respectively. During the years ended December 31, 2016 and 2015, the provisions for unfunded commitments were $493,000 and $94,000, respectively. There were no charge-offs or recoveries related to the reserve for unfunded commitments during both periods.
F-41
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 7Servicing Assets
As part of the Ridgestone acquisition, the Company acquired loan servicing assets. Refer to Note 3Acquisition of a Business for additional information regarding the transaction. The Company did not hold any servicing assets as of December 31, 2015.
Loans serviced for others are not included in the Consolidated Statements of Financial Condition. The unpaid principal balances of these loans serviced for others were as follows of December 31, 2016:
2016 |
||||
Loan portfolios serviced for: |
||||
SBA |
$ | 911,803 | ||
USDA |
106,125 | |||
|
|
|||
Total |
$ | 1,017,928 | ||
|
|
Activity for servicing assets and the related changes in fair value are as follows:
2016 |
||||
Beginning balance |
$ | | ||
Acquired servicing assets at fair value |
20,295 | |||
Additions, net |
539 | |||
Changes in fair value |
257 | |||
|
|
|||
Ending balance |
$ | 21,091 | ||
|
|
Loan servicing income totaled $1.9 million for the year ended December 31, 2016.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights.
Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which may result in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the condition existing and the assumptions used as of a particular point in time, and those assumptions may change over time. Refer to Note 17Fair Value Measurement for further details.
Note 8Other Real Estate Owned
The following table presents the change in other real estate owned (OREO) for the years ended December 31, 2016 and 2015.
2016 |
2015 |
|||||||
Beginning balance |
$ | 26,715 | $ | 56,181 | ||||
Acquisition of OREO through business combination |
1,525 | | ||||||
Net additions to other real estate owned |
6,672 | 13,793 | ||||||
Dispositions of OREO |
(17,389 | ) | (33,994 | ) | ||||
Valuation adjustments |
(953 | ) | (9,265 | ) | ||||
|
|
|
|
|||||
Ending balance |
$ | 16,570 | $ | 26,715 | ||||
|
|
|
|
F-42
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 9Premises and Equipment
Classifications of premises and equipment as of December 31, 2016 and 2015 were as follows:
2016 |
2015 |
|||||||
Premises |
$ | 53,495 | $ | 62,560 | ||||
Furniture, fixtures and equipment |
7,214 | 4,231 | ||||||
Leasehold improvements |
1,093 | 1,585 | ||||||
|
|
|
|
|||||
Total cost |
61,802 | 68,376 | ||||||
Less accumulated depreciation and amortization |
(9,780 | ) | (8,786 | ) | ||||
|
|
|
|
|||||
Net book value of premises, furniture, fixtures, equipment, leasehold improvements |
52,022 | 59,590 | ||||||
Construction in progress |
3,869 | 2,272 | ||||||
Land |
46,183 | 53,312 | ||||||
|
|
|
|
|||||
Premises and equipment, net |
$ | 102,074 | $ | 115,174 | ||||
|
|
|
|
During 2015, the Company approved the closure of sixteen retail branches based on a detailed assessment of the branch network and analysis of branch and market data. During 2016, twelve additional retail branches were also approved to be closed. Branches owned by the Company and actively marketed for sale were transferred to assets held for sale based on their carrying value or fair value, less estimated costs to sell. Assets are considered held for sale when management has approved the sale of the assets following a branch closure or other events. During 2016 and 2015, land and premises of $16.0 million and $2.3 million were transferred to assets held for sale, respectively. An assessment of the recoverability of other long-lived assets associated with all branches resulted in impairment losses of $408,000 and $687,000 during the years ended December 31, 2016 and 2015, respectively, which are reflected in non-interest expense.
Depreciation and amortization expense for the years ended December 31, 2016 and 2015 was $5.1 million and $5.8 million, respectively. Refer to Note 17Commitments and Contingent Liabilities for additional discussion related to operating lease commitments.
Note 10Goodwill, Core Deposit Intangible and Other Intangible Assets
The Companys annual goodwill test was performed as of November 30, 2016. The Company determined that no impairment existed as of that date. Refer to Note 1Business and Summary of Significant Accounting Policies for discussion of goodwill.
The following table summarizes the changes in the Companys goodwill and core deposit intangible assets for the years ended December 31, 2016 and 2015:
2016 |
2015 |
|||||||||||||||
Goodwill |
Core Deposit
|
Goodwill |
Core Deposit
|
|||||||||||||
Beginning balance |
$ | 25,688 | $ | 22,275 | $ | 25,613 | $ | 25,245 | ||||||||
Additions |
26,287 | 486 | 75 | | ||||||||||||
Amortization or accretion |
| (2,985 | ) | | (2,970 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 51,975 | $ | 19,776 | $ | 25,688 | $ | 22,275 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated amortization or accretion |
N/A | $ | 10,410 | N/A | $ | 7,425 | ||||||||||
Weighted average remaining amortization or accretion period |
N/A | 6.6 Years | N/A | 7.5 Years |
F-43
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 10Goodwill, Core Deposit Intangible and Other Intangible Assets (Continued)
The Company has other intangible assets of $50,000 and $51,000 as of December 31, 2016 and 2015, respectively, related to trademark-related transactions. The increases in goodwill and core deposit intangible for the year ended December 31, 2016 resulted from the Ridgestone acquisition. The increase in goodwill during the year ended December 31, 2015 resulted in a measurement period adjustment related to finalizing the fair values of certain assets acquired and certain liabilities assumed in a business combination that occurred during 2014.
The following table presents the estimated amortization expense for core deposit intangible and other intangible assets recognized at December 31, 2016:
Estimated
|
||||
2017 |
$ | 3,072 | ||
2018 |
3,061 | |||
2019 |
3,050 | |||
2020 |
3,024 | |||
2021 |
3,017 | |||
Thereafter |
4,602 | |||
|
|
|||
Total |
$ | 19,826 | ||
|
|
Note 11Income Taxes
The following were the components of provision for income taxes for the years ended December 31, 2016 and 2015:
2016 |
2015 |
|||||||
Current tax expense |
||||||||
Federal |
$ | | $ | 250 | ||||
State and local |
| 57 | ||||||
|
|
|
|
|||||
Total current tax expense |
| 307 | ||||||
Deferred tax expense |
||||||||
Federal |
478 | 4,929 | ||||||
State and local |
136 | 656 | ||||||
|
|
|
|
|||||
Total deferred tax expense |
614 | 5,585 | ||||||
|
|
|
|
|||||
Total deferred tax benefit before reversal of valuation allowance |
614 | 5,585 | ||||||
|
|
|
|
|||||
Deferred tax valuation allowance |
(61,859 | ) | (5,585 | ) | ||||
|
|
|
|
|||||
Provision (benefit) for income taxes |
$ | (61,245 | ) | $ | 307 | |||
|
|
|
|
F-44
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 11Income Taxes (Continued)
The following is a reconciliation between the statutory U.S. federal income tax rate of 35% and the effective tax rate:
2016 |
2015 |
|||||||
Calculated tax benefit at statutory rate |
35.0 | % | 35.0 | % | ||||
Increase (decrease) in income taxes resulting from: |
||||||||
Reversal of valuation allowance, net of change in estimated Section 382 impact |
(1,167.6 | ) | 73.4 | |||||
State and local income taxes |
6.1 | 5.0 | ||||||
Tax exempt income |
(5.3 | ) | 24.2 | |||||
Non-deductible expenses |
14.8 | (137.6 | ) | |||||
|
|
|
|
|||||
Total benefit for income taxes |
-1117.0 | % | 0.0 | % | ||||
|
|
|
|
The income tax benefit for the year ended December 31, 2016 was primarily attributable to the reversal of the Companys previously established valuation allowance of $61.4 million. Management concluded that no valuation allowance was necessary on the Companys net deferred tax assets as a result of the Ridgestone acquisition. This determination was based on Ridgestones actual pre-tax income over the prior three years, and pro-forma combined earnings for the Company and Ridgestone over the prior three years, as well as managements expectations for sustainable profitability in the future. Management monitors deferred tax assets on a quarterly basis for changes affecting realizability. The valuation allowance could be adjusted in future periods.
F-45
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 11Income Taxes (Continued)
The following were the significant components of the deferred tax assets and liabilities as of December 31, 2016 and 2015:
2016 |
2015 |
|||||||
Deferred tax assets: |
||||||||
Net operating losses and tax credits |
$ | 61,906 | $ | 60,657 | ||||
Interest on non-accrual loans |
2,882 | 3,632 | ||||||
Allowance for loan losses and loan basis |
22,017 | 10,918 | ||||||
Deposits |
316 | 45 | ||||||
AMT credit carryforward |
1,073 | 1,073 | ||||||
Other real estate owned |
214 | 2,073 | ||||||
Net unrealized holding losses on securities available-for-sale |
4,818 | 2,750 | ||||||
Other |
3,241 | 1,230 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
96,467 | 82,378 | ||||||
|
|
|
|
|||||
Deferred tax liabilities: |
||||||||
Premises and equipment |
(6,907 | ) | (7,614 | ) | ||||
Core deposit intangibles |
(7,858 | ) | (8,660 | ) | ||||
Servicing assets |
(7,899 | ) | | |||||
Trust preferred securities |
(3,809 | ) | (4,119 | ) | ||||
Unrealized holding gain on cash flow hedges |
(1,491 | ) | | |||||
Other |
(743 | ) | (608 | ) | ||||
|
|
|
|
|||||
Total deferred tax liabilities |
(28,707 | ) | (21,001 | ) | ||||
|
|
|
|
|||||
Less valuation allowance on net deferred tax asset |
| (61,377 | ) | |||||
|
|
|
|
|||||
Net deferred tax assets after valuation allowance |
$ | 67,760 | $ | | ||||
|
|
|
|
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of net operating loss and credit carryforwards may be limited in the event a cumulative change in ownership of more than 50 percent occurs within a three-year period. The Company has determined that such an ownership change occurred as of June 28, 2013 as a result of the recapitalization. This ownership change resulted in estimated limitations on the utilization of tax attributes, including net operating loss carryforwards and tax credits. Pursuant to Sections 382 and 383, a portion of the limited net operating loss carryforwards and credits become available to use each year. The Company estimates that approximately $756,000 of the restricted Federal and Illinois net operating losses will become available each year.
After the impact of Section 382, $116.4 million of Federal and $420.8 million of Illinois net operating loss carryforwards are available to offset future taxable income. The Federal and Illinois net operating losses will begin to expire in 2026 and 2020, respectively, if not utilized in an earlier period. Federal alternative minimum tax credits of $1.1 million are available to offset future federal income tax. These credits have no expiration. The Company and the Bank file consolidated income tax returns.
The Company and the Bank are no longer subject to United States federal income tax examinations for years before 2013 and state income tax examinations for years before 2012.
F-46
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 12Federal Home Loan Bank Advances
The following table summarizes the FHLB advances, including acquisition accounting adjustments of $228,000 as of December 31, 2016 and no acquisition accounting adjustments as of December 31, 2015, along with weighted average costs and scheduled maturities:
2016 |
2015 |
|||||||
Federal Home Loan advances |
$ | 313,715 | $ | 38,000 | ||||
Weighted average cost |
0.73 | % | 0.16 | % | ||||
Scheduled
|
|
|||||||
2017 |
$ | 304,000 | ||||||
2018 |
9,715 | |||||||
|
|
|||||||
Total |
$ | 313,715 | ||||||
|
|
At December 31, 2016, fixed-rate advances totaled $133.7 million with interest rates ranging from 0.70% to 3.22% and maturities ranging from January 2017 to February 2018. Total floating rate advances totaled $180.0 million with interest rates of 0.57% and 0.72% and maturities of February 2017 and March 2017. The Companys advances from the FHLB are collateralized by residential real estate loans and securities. The Banks required investment in FHLB stock is $1 for every $20 in advances. Refer to Note 4Securities for additional discussion. At December 31, 2016 and 2015, the Bank had additional borrowing capacity from the FHLB of $647.9 million and $849.8 million, respectively, subject to the availability of proper collateral. The Banks maximum borrowing capacity is limited to 35% of total assets.
FHLB advances assumed from the Ridgestone acquisition of $1.5 million are putable quarterly and are required to be repaid upon the request of the FHLB.
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 22Derivative Instruments and Hedging Activities for additional information.
Note 13Other Borrowings
The following is a summary of the Companys other borrowings as of December 31, 2016 and 2015:
2016 |
2015 |
|||||||
Securities sold under agreements to repurchase |
$ | 17,249 | $ | 12,659 | ||||
Revolving line of credit |
20,650 | | ||||||
|
|
|
|
|||||
Total |
$ | 37,899 | $ | 12,659 | ||||
|
|
|
|
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 4Securities for additional discussion.
On October 13, 2016, in connection with the Ridgestone acquisition, the Company entered into a $30.0 million revolving credit agreement with The PrivateBank and Trust Company with a $300,000
F-47
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 13Other Borrowings (Continued)
commitment fee payable at such time. Refer to Note 3Acquisition of a Business for additional information. The revolving line of credit has a maturity date of October 12, 2017 and bears an interest rate equal to the Prime rate. At December 31, 2016, the interest rate was 3.75%. As of December 31, 2016, the Company was in compliance with all financial covenants set forth in the revolving line of credit agreement.
The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as of December 31, 2016 and 2015:
2016 |
2015 |
|||||||
Federal Reserve Bank of Chicago discount window line |
$ | 110,600 | $ | 170,900 | ||||
Available federal funds line |
20,000 | 20,000 |
Note 14Time Deposits
Time deposits in denominations of $100,000 or more at December 31, 2016 and 2015 were $383.7 million and $237.0 million, respectively. Time deposits in denominations of $250,000 or more at December 31, 2016 and 2015 were $117.4 million and $57.6 million, respectively.
At December 31, 2016, the scheduled maturities of time deposits were as follows:
Scheduled Maturities |
||||
2017 |
$ | 693,702 | ||
2018 |
56,084 | |||
2019 |
11,937 | |||
2020 |
8,515 | |||
2021 |
6,278 | |||
|
|
|||
Total |
$ | 776,516 | ||
|
|
Note 15Junior Subordinated Debentures
At December 31, 2016 and 2015, the Companys junior subordinated debentures by issuance were as follows:
Name of Trust |
Aggregate
|
Aggregate
|
Stated Maturity |
Contractual
|
Interest Rate Spread |
|||||||||||||||
Metropolitan Statutory Trust 1 |
$ | 35,000 | $ | 35,000 | March 17, 2034 | 3.78 | % | Three-month LIBOR + 2.79% | ||||||||||||
RidgeStone Capital Trust I |
1,500 | | June 30, 2033 | 5.09 | % | Five-year LIBOR + 3.50% | ||||||||||||||
|
|
|
|
|||||||||||||||||
Total liability, at par |
36,500 | 35,000 | ||||||||||||||||||
Discount |
(9,574 | ) | (10,289 | ) | ||||||||||||||||
|
|
|
|
|||||||||||||||||
Total liability, at fair value |
$ | 26,926 | $ | 24,711 | ||||||||||||||||
|
|
|
|
In 2004, the Companys 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
F-48
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 15Junior Subordinated Debentures (Continued)
preferred securities. The debentures bear interest at three-month London Interbank Offered Rate (LIBOR) plus 2.79% (3.78% and 3.32% at December 31, 2016 and 2015, 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. In August 2010, the Company notified the trustee of Metropolitan Statutory Trust 1 that it would be deferring its regularly scheduled quarterly interest payments. Pursuant to the terms of the indenture governing the subordinated debentures, the Company had the right to defer interest payments for up to 20 quarters, or through the June 17, 2015 payment date. On September 17, 2015, the Company made a payment of $6.4 million, which included $6.2 million of accrued deferred interest payments and continues to make quarterly payments pursuant to the terms. Accrued interest payable was $50,000 and $49,000 as of December 31, 2016 and 2015, 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. Refer to Note 3Acquisition of a Business for additional information. Beginning on June 30, 2008, the interest rate reset to the five-year LIBOR plus 3.50% (5.09% at December 31, 2016), which is in effect until September 30, 2018 and updated every five years. Interest is paid on a quarterly basis. Ridgestone deferred interest payments on the subordinated debentures from 2009 through 2014. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after June 30, 2008. There was no accrued interest payable as of December 31, 2016.
The Trusts are not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trusts as liabilities. The Company owns all of the common securities of each trust. The junior subordinated debentures qualify, and are treated as, Tier 1 regulatory capital of the Company subject to regulatory limitations. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
Note 16Employee Benefit Plans
The Banks defined contribution 401(k) savings plan (the Plan) covers substantially all employees that have completed certain service requirements. The Board of Directors determines the amount of any discretionary profit sharing contribution made to the plan. There were no profit sharing contributions to the Plan for the years ended December 31, 2016 and 2015. The net assets of the plan are not included in the Consolidated Statements of Financial Condition.
As of February 1, 2016, a 401(k) employer match contribution was adopted by the Bank, pursuant to which the Bank will make a contribution equal to 50% of the first 4% contributed by employees. Total expense for the employer contributions made to the Plan was $655,000 during the year ended December 31, 2016. Effective January 1, 2017, the employer match was increased to equal 100% of the first 3% and 50% for the next 2% contributed by employees.
Note 17Commitments 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 Consolidated
F-49
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 17Commitments and Contingent Liabilities (Continued)
Statements of Financial Condition or Consolidated Statements of Operations for years ended December 31, 2016 and 2015.
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 December 31, 2016, exclusive of taxes and other charges, are summarized as follows:
Minimum Rental
|
||||
2017 |
$ | 2,766 | ||
2018 |
2,105 | |||
2019 |
1,875 | |||
2020 |
1,480 | |||
2021 |
1,212 | |||
Thereafter |
2,791 | |||
|
|
|||
Total |
$ | 12,229 | ||
|
|
The Companys rental expenses for the years ended December 31, 2016 and 2015 were $3.8 million and $3.6 million, respectively. During the years ended December 31, 2016 and 2015, the Company received $737,000 and $744,000, respectively, in sublease income which is included in the consolidated statements of operations as a reduction of occupancy expense. The total amount of minimum rentals to be received in the future on these subleases is approximately $1.8 million, and the leases have contractual lives extending through 2025. In addition to the above required lease payments, the Company has contractual obligations related primarily to information technology contracts and other maintenance contracts. The amounts are not material.
Commitments to extend credit The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contractual or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Banks 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. The Bank uses the same credit policies in making commitments and conditional obligations as it does for funded instruments. The Bank does not anticipate any material losses as a result of the commitments and standby letters of credit.
F-50
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 17Commitments and Contingent Liabilities (Continued)
The following table summarizes the contract or notional amount of outstanding loan and lease commitments at December 31, 2016 and 2015:
2016 |
2015 |
|||||||||||||||
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||
Commitments to extend credit |
$ | 37,731 | $ | 332,928 | $ | 31,579 | $ | 169,298 | ||||||||
Standby letters of credit |
1,060 | 4,135 | 1,147 | 1,497 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 38,791 | $ | 337,063 | $ | 32,726 | $ | 170,795 | ||||||||
|
|
|
|
|
|
|
|
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).
Standby letters of credit are conditional commitments issued by the Bank to guarantee to a third-party the performance of a customer. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 2.0% to 19.5% and maturities up to 2025. Variable rate loan commitments have interest rates ranging from 2.4% to 14.9% and maturities up to 2046.
Note 18Fair 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 Companys own data used to develop unobservable inputs may be adjusted for market considerations when reasonably available.
F-51
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 18Fair Value Measurement (Continued)
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to assets and liabilities.
The Company used the following methods and significant assumptions to estimate fair value for certain assets measured and carried at fair value on a recurring basis:
Securities available-for-sale The Company obtains fair value measurements from an independent pricing service. Management reviews the procedures used by the third party, including significant inputs used in the fair value calculations. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds 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 Companys 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 Companys valuation). In 2016, all of the ratings derived by the Company were BBB or better with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined, the Company obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets.
Servicing assets Fair value is based on a loan-by-loan basis taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing market-based discount rate assumptions. Servicing assets were acquired through a business combination during 2016. Refer to Note 7Servicing Assets.
Derivative instruments Interest rate swaps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. Derivative financial instruments are included in other assets and other liabilities in the Consolidated Statements of Financial Condition.
F-52
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 18Fair Value Measurement (Continued)
The following tables summarize the Companys financial assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2016 and 2015:
Fair Value Measurements Using |
||||||||||||||||
2016 |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Financial assets |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 14,920 | $ | 14,920 | $ | | $ | | ||||||||
U.S. Government agencies |
58,857 | | 58,857 | | ||||||||||||
Obligations of states, municipalities, and political subdivisions |
16,059 | | 15,509 | 550 | ||||||||||||
Mortgage-backed securities; residential |
||||||||||||||||
Agency |
368,160 | | 368,160 | | ||||||||||||
Non-Agency |
19,933 | | 19,933 | | ||||||||||||
Mortgage-backed securities; commercial |
||||||||||||||||
Agency |
77,403 | | 77,403 | | ||||||||||||
Non-Agency |
31,052 | | 31,052 | | ||||||||||||
Corporate securities |
17,329 | | 17,329 | | ||||||||||||
Other securities |
4,847 | 1,938 | 2,379 | 530 | ||||||||||||
Servicing assets (1) |
21,091 | | | 21,091 | ||||||||||||
Derivative assets |
4,317 | | 4,317 | | ||||||||||||
Financial liabilities |
||||||||||||||||
Derivative liabilities |
559 | | 559 | |
(1) | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. |
Fair Value Measurements Using |
||||||||||||||||
2015 |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Financial assets |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 30,345 | $ | 30,345 | $ | | $ | | ||||||||
U.S. Government agencies |
83,613 | | 83,613 | | ||||||||||||
Obligations of states, municipalities, and political subdivisions |
20,752 | | 20,752 | | ||||||||||||
Mortgage-backed securities; residential |
||||||||||||||||
Agency |
588,334 | | 588,334 | | ||||||||||||
Non-Agency |
| | | | ||||||||||||
Mortgage-backed securities; commercial |
||||||||||||||||
Agency |
31,191 | | 31,191 | | ||||||||||||
Non-Agency |
| | | | ||||||||||||
Corporate securities |
7,696 | | 7,696 | | ||||||||||||
Other securities |
5,801 | 1,964 | 3,837 | | ||||||||||||
Servicing assets |
| | | | ||||||||||||
Derivative assets |
| | | | ||||||||||||
Financial liabilities |
||||||||||||||||
Derivative liabilities |
| | | |
F-53
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 18Fair Value Measurement (Continued)
During 2016, the Company acquired the servicing assets and single-issuer trust preferred securities included in other securities categorized as Level 3 of the fair value hierarchy through a business combination. Refer to Note 7Servicing Assets for the rollforward of recurring Level 3 fair values. During the year ended December 31, 2016, the Company recognized $1,000 of accretion income for the single-issuer trust preferred securities.
In addition, during 2016, the Company purchased privately-issued municipal securities that are categorized as Level 3. These municipal securities are bonds issued for one municipal government entity primarily located in the Chicago metropolitan and are privately placed, non-rated bonds without CUSIP numbers.
There were no financial instruments classified as Level 3 as of December 31, 2015. The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the years ended December 31, 2016 and 2015. The Companys policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
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 December 31, 2016:
Financial Instruments |
Valuation Technique |
Unobservable Inputs |
Range of Inputs |
Weighted
|
Impact to
|
|||||||||
Obligations of states, municipalities, and political obligations |
Discounted cash flow | Probability of default | 2.0%2.4% | 2.2% | Decrease | |||||||||
Single issuer trust preferred |
Discounted cash flow | Probability of default | 7.5%12.0% | 8.8% | Decrease | |||||||||
Servicing assets |
Discounted cash flow | Prepayment speeds | 5.6%9.2% | 7.2% | Decrease | |||||||||
Discount rate | 7.6%18.6% | 12.7% | Decrease | |||||||||||
Expected weighted
average loan life |
0.58.2 years | 6.1 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:
Loans held for sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value based on contract price. Loans transferred to loans held for sale are carried at the lower of cost or fair value, less estimated costs to sell.
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, which are obtained not less than once every twelve months in accordance with the Banks credit policy. Impaired loans that are not collateral dependent are not material.
Assets held for sale Assets held for sale consist of former branch locations, vacant land, and a house previously purchased for expansion. Assets are considered held for sale when management has approved to sell
F-54
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 18Fair Value Measurement (Continued)
the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based on the lower of carrying value or its fair value, less estimated costs to sell.
Other real estate owned Certain assets held within other real estate owned represent real estate or other collateral that has been adjusted to its estimated fair value, less cost to sell, as a result of transferring from the loan portfolio at the time of foreclosure or repossession and based on managements 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 Companys assets that were measured at fair value on a non-recurring basis, excluding acquired impaired loans, as of December 31, 2016 and 2015:
2016 |
Fair Value Measurements Using |
|||||||||||||||
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Non-recurring |
||||||||||||||||
Impaired loans |
||||||||||||||||
(excluding acquired impaired loans) |
||||||||||||||||
Commercial real estate |
$ | 8,916 | $ | | $ | | $ | 8,916 | ||||||||
Residential real estate |
1,007 | | | 1,007 | ||||||||||||
Construction, land development, and other land |
| | | | ||||||||||||
Commercial and industrial |
986 | | | 986 | ||||||||||||
Installment and Other |
| | | | ||||||||||||
Assets held for sale |
14,748 | | | 14,748 | ||||||||||||
Other real estate owned |
16,570 | | | 16,570 | ||||||||||||
2015 |
Fair Value Measurements Using |
|||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Non-recurring |
||||||||||||||||
Impaired loans |
||||||||||||||||
(excluding acquired impaired loans) |
||||||||||||||||
Commercial real estate |
$ | 3,084 | $ | | $ | | $ | 3,084 | ||||||||
Residential real estate |
3,427 | | | 3,427 | ||||||||||||
Construction, land development, and other land |
71 | | | 71 | ||||||||||||
Commercial and industrial |
| | | | ||||||||||||
Installment and Other |
| | | | ||||||||||||
Assets held for sale |
2,259 | | | 2,259 | ||||||||||||
Other real estate owned |
26,715 | | | 26,715 |
F-55
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 18Fair Value Measurement (Continued)
The following table provides a description of the valuation technique, unobservable inputs and qualitative information about the Companys assets and liabilities classified as Level 3 and measured at fair value on a non-recurring basis as of December 31, 2016 and 2015:
Financial Instruments |
Valuation Technique | Unobservable Inputs | Range of Inputs |
Impact to
Valuation from an Increased or Higher Input Value |
||||
Impaired loans (excluding acquired impaired loans) |
Appraisals |
Appraisal adjustments,
|
6%10% |
Decrease |
||||
Assets held for sale |
List price, contract
|
Sales costs and other
|
7% |
Decrease |
||||
Other real estate owned |
Appraisals |
Appraisal adjustments,
|
7%20% |
Decrease |
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. The fair value for time certificates with other banks is based on the market values for comparable investments.
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 bonds 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 Companys current origination rates for similar loans adjusted to reflect the inherent credit risk.
Loan and lease receivables, net For certain variable rate loans that reprice frequently and with no significant changes in credit risk, fair value is estimated at carrying value. The fair value of other types of loans is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
F-56
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 18Fair Value Measurement (Continued)
Deposit liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows, using rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances The fair value of FHLB advances is estimated by discounting the agreements based on maturities using rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date.
Securities sold under agreements to repurchase The carrying amount approximates fair value due to maturities of less than ninety days.
Junior subordinated debentures The fair value of junior subordinated debentures, in the form of trust preferred securities, is determined using rates currently available to the Company for debt with similar terms and remaining maturities.
Accrued interest receivable and payable The carrying amount approximates fair value.
Commitments to extend credit and commercial and standby letters of credit The fair values of these off-balance sheet commitments to extend credit and commercial and standby letters of credit are not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.
The estimated fair values of financial instruments and levels within the fair value hierarchy are as follows:
2016 |
2015 |
|||||||||||||||||||
Fair Value
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
1 | $ | 17,735 | $ | 17,735 | $ | 21,312 | $ | 21,312 | |||||||||||
Interest bearing deposits with other banks |
2 | 28,798 | 28,798 | 23,572 | 23,572 | |||||||||||||||
Securities held-to-maturity |
2 | 138,846 | 138,082 | 111,460 | 110,935 | |||||||||||||||
Other restricted stock |
2 | 14,993 | 14,993 | 7,608 | 7,608 | |||||||||||||||
Loans held for sale |
3 | 23,976 | 26,487 | 268 | 268 | |||||||||||||||
Loans and lease receivables, net |
3 | 2,137,088 | 2,068,157 | 1,337,805 | 1,333,675 | |||||||||||||||
Accrued interest receivable |
3 | 6,866 | 6,866 | 5,319 | 5,319 | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Non-interest bearing deposits |
2 | 724,457 | 724,457 | 626,396 | 626,396 | |||||||||||||||
Interest bearing deposits |
2 | 1,765,937 | 1,723,941 | 1,554,228 | 1,552,990 | |||||||||||||||
Accrued interest payable |
2 | 2,427 | 2,427 | 1,072 | 1,072 | |||||||||||||||
Revolving line of credit |
2 | 20,650 | 20,650 | | | |||||||||||||||
Federal Home Loan Bank advances |
2 | 313,715 | 313,646 | 38,000 | 38,000 | |||||||||||||||
Securities sold under repurchase agreement |
2 | 17,249 | 17,249 | 12,659 | 12,659 | |||||||||||||||
Junior subordinated debentures |
3 | 26,926 | 26,943 | 24,711 | 24,150 |
F-57
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 19Stock Option Plan
The Company maintained a nonqualified, share-based, stock option plan adopted prior to recapitalization (MBG Plan). There were no options granted or exercised under this plan during the years ended December 31, 2016, and 2015. At the time of the Companys reincorporation into Delaware, the Board of Directors cancelled the MBG Plan and all outstanding options were cancelled.
In October 2014, the Company adopted the Byline Bancorp, Inc. Equity Incentive Plan (BYB Plan). The maximum number of shares available for grants under this Plan is 2,476,122 shares. During 2016 and 2015, the Company granted 212,400 and 1,634,568, respectively. The types of stock options granted 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 1 to 5 years and have 10-year contractual terms. Stock volatility was computed as the average of the volatilities of peer group companies.
Time Options are 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.
The fair values of the stock options were determined using the Black-Scholes-Merton model for Time Options and a Monte Carlo simulation model for Performance Options. The fair values of options under the BYB Plan were determined using the following assumptions as of the grant dates:
Time Options |
||||||||
2016 |
2015 |
|||||||
Risk-free interest rate |
1.34% - 1.40% | 1.68% - 1.85% | ||||||
Expected term (years) |
5.2 - 5.6 | 5.7 - 6.3 | ||||||
Expected stock price volatility |
20.39% | 16.18% - 16.55% | ||||||
Expected dividend yield |
0.00% | 0.00% | ||||||
Weighted average grant date fair value |
$ 3.55 | $ 2.25 | ||||||
Performance Options |
||||||||
2016 |
2015 |
|||||||
Risk-free interest rate |
Implied forward rates | Implied forward rates | ||||||
Expected term (years) |
Variable | Variable | ||||||
Expected stock price volatility |
20.34% - 20.39% | 16.18% - 16.55% | ||||||
Expected dividend yield |
0.00% | 0.00% | ||||||
Weighted average grant date fair value |
$ 3.75 | $ 1.65 |
F-58
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 19Stock Option Plan (Continued)
The following table discloses the activity in shares subject to options and the weighted average exercise prices, in actual dollars, for the year ended December 31, 2016:
BYB Plan |
||||||||||||
Number of Shares |
Weighted
|
Weighted
|
||||||||||
Beginning balance |
1,634,568 | $ | 11.35 | 9.5 | ||||||||
Granted |
212,400 | 16.25 | ||||||||||
Expired |
| | ||||||||||
Exercised |
(19,498 | ) | 11.18 | |||||||||
Forfeited |
(29,247 | ) | 11.18 | |||||||||
|
|
|||||||||||
Ending balance outstanding at December 31 |
1,798,223 | $ | 11.95 | 9.8 | ||||||||
|
|
|||||||||||
Exercisable at December 31 |
628,814 | $ | 11.55 | |||||||||
|
|
During 2016, proceeds from the exercise of stock options were $218,000 and related tax benefit recognized was $40,000. There were no stock options exercised during 2015. The total fair value of stock options vested during the years ended December 31, 2016 and 2015 amounted to $13.0 million and $5.1 million, respectively.
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 share-based compensation expense for the years ended December 31, 2016 and 2015:
Year Ended December 31, |
||||||||
2016 |
2015 |
|||||||
Total share-based compensation |
$ | 899 | $ | 1,045 | ||||
Income tax benefit |
360 | | ||||||
Unrecognized compensation expense |
1,752 | 1,983 | ||||||
Weighted-average amortization period remaining |
1.8 years | 3.8 years |
Note 20Related Party Transactions
Loans to related parties Loans that may be made to the Banks executive officers, as defined in 12 CFR 215 (Regulation O), directors, principal stockholders and their affiliates would be on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and would not involve more than normal risk of collectability. As of December 31, 2016 and 2015, there were no loans made to the related parties described above.
Deposits from related parties Deposits from related parties were not material as of December 31, 2016 and 2015.
Other At December 31, 2016, a short-term receivable of $100,000 was outstanding from a related party for a subscription for the Series B preferred stock subscription and was repaid in January 2017. Refer to
F-59
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 20Related Party Transactions (Continued)
Note 25Stockholders Equity for additional information regarding the transaction. As of December 31, 2015, there were no receivables outstanding from related parties.
Note 21Regulatory Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements administered by their respective banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the 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. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of Common Equity Tier 1 capital (CET1), Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, as defined in the regulations.
As of December 31, 2016, the most recent notification from the FDIC categorized the Bank as well-capitalized under the framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Banks category.
F-60
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 21Regulatory Capital Requirements (Continued)
The required regulatory capital ratios are set forth in the following tables along with the minimum capital amounts required for the Company and the Bank and well capitalized with respect to the Bank. The Companys and the Banks actual capital amounts and ratios as of December 31, 2016 and 2015 are also presented.
2016 |
Actual |
Minimum Capital
|
Required to be
Well Capitalized |
|||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 316,314 | 13.28 | % | $ | 190,527 | 8.00 | % | $ | 238,159 | N/A | |||||||||||||
Bank |
325,465 | 13.61 | % | 191,267 | 8.00 | % | 239,084 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 304,324 | 12.78 | % | $ | 142,895 | 6.00 | % | $ | 190,527 | N/A | |||||||||||||
Bank |
313,474 | 13.11 | % | 143,450 | 6.00 | % | 191,267 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 (CET1) to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 266,760 | 11.20 | % | $ | 107,171 | 4.50 | % | $ | 154,803 | N/A | |||||||||||||
Bank |
313,474 | 13.11 | % | 107,588 | 4.50 | % | 155,404 | 6.50 | % | |||||||||||||||
Tier 1 capital to average assets: |
||||||||||||||||||||||||
Company |
$ | 304,324 | 10.07 | % | $ | 120,850 | 4.00 | % | $ | 151,062 | N/A | |||||||||||||
Bank |
313,474 | 10.35 | % | 121,169 | 4.00 | % | 151,461 | 5.00 | % | |||||||||||||||
2015 |
Actual |
Minimum Capital
|
Required to be
Well Capitalized |
|||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
Total capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 202,578 | 12.51 | % | $ | 129,534 | 8.00 | % | $ | 161,917 | N/A | |||||||||||||
Bank |
192,253 | 11.87 | % | 129,537 | 8.00 | % | 161,921 | 10.00 | % | |||||||||||||||
Tier 1 capital to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 194,364 | 12.00 | % | $ | 97,150 | 6.00 | % | $ | 129,534 | N/A | |||||||||||||
Bank |
184,039 | 11.37 | % | 97,153 | 6.00 | % | 129,537 | 8.00 | % | |||||||||||||||
Common Equity Tier 1 (CET1) to risk weighted assets: |
||||||||||||||||||||||||
Company |
$ | 144,361 | 8.92 | % | $ | 72,863 | 4.50 | % | $ | 105,246 | N/A | |||||||||||||
Bank |
184,039 | 11.37 | % | 72,864 | 4.50 | % | 105,249 | 6.50 | % | |||||||||||||||
Tier 1 capital to average assets: |
||||||||||||||||||||||||
Company |
$ | 194,364 | 7.85 | % | $ | 99,076 | 4.00 | % | $ | 123,845 | N/A | |||||||||||||
Bank |
184,039 | 7.43 | % | 99,077 | 4.00 | % | 123,846 | 5.00 | % |
The Company and the Bank must maintain a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based capital levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses. The capital conservation buffer requirement began to be phased in on January 1, 2016 when a buffer greater than 0.625% of risk-weighted assets was required. This amount increases each year until the buffer requirement is fully implemented on January 1, 2019. The conservation buffers for the Company and the Bank exceed the fully phased in minimum as of December 31, 2016.
F-61
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 21Regulatory Capital Requirements (Continued)
Provisions of state and federal banking regulations may limit, by statute, the amount of dividends that may be paid to the Company by the Bank without prior approval of the Banks regulatory agencies. The Company is economically dependent on the cash dividends received from the Bank. These dividends represent the primary cash flow from operating activities used to service obligations. There were no cash dividends received by the Company from the Bank for the year ended December 31, 2016. Cash dividends of $700,000 to pay the junior subordinated debentures were received by the Company from the Bank for the year ended December 31, 2015.
Note 22Derivative Instruments and Hedging Activities
During 2016, the Company entered into interest rate swaps that are used to manage differences in the amount, timing, and duration of the Companys known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings. The Company also entered into interest rate swaps with certain qualified borrowers to facilitate the borrowers risk management strategies and concurrently entered into mirror-image derivatives with a third party counterparty. There were no interest rate swap agreements entered into during 2015.
The Company recognizes derivative financial instruments at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. The following table presents the fair value of the Companys derivative financial instruments and classification on the Consolidated Statements of Financial Condition as of December 31, 2016:
Derivative Assets |
Derivative Liabilities |
|||||||||||||||
Classification |
Fair Value |
Classification |
Fair Value |
|||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||
Interest rate swaps designated as cash flow hedges |
Other assets | $ | 3,719 | Other liabilities | $ | | ||||||||||
|
|
|
|
|||||||||||||
Total derivatives designated as hedging instruments |
$ | 3,719 | $ | | ||||||||||||
|
|
|
|
|||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
Other interest rate swaps |
Other assets | $ | 598 | Other liabilities | $ | 559 | ||||||||||
|
|
|
|
|||||||||||||
Total derivatives not designated as hedging instruments |
$ | 598 | $ | 559 | ||||||||||||
|
|
|
|
Interest rate swaps designated as cash flow hedges Cash flow hedges of interest payments associated with certain FHLB advances had notional amounts totaling $100.0 million as of December 31, 2016. The aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss), net of taxes, to the extent effective. The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings when the hedged FHLB advances affect earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value of the derivative hedging instrument with the changes in fair value of the designated hedged transactions. The Company expects the hedges to remain highly effective during the remaining terms of the swaps and did not recognize any hedge ineffectiveness in current earnings during the year ended December 31, 2016.
F-62
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 22Derivative Instruments and Hedging Activities (Continued)
The following table reflects the cash flow hedges as of December 31, 2016:
Effective Date |
Maturity Date |
Notional
Amount |
Fair Value as of
|
|||||||
September 20, 2016 | September 20, 2021 | $ | 25,000 | $ | 853 | |||||
September 20, 2016 | September 20, 2021 | 25,000 | 895 | |||||||
December 20, 2016 | December 20, 2021 | 25,000 | 1,111 | |||||||
December 20, 2016 | December 20, 2021 | 25,000 | 860 | |||||||
|
|
|
|
|||||||
$ | 100,000 | $ | 3,719 | |||||||
|
|
|
|
Interest expense recorded on these swap transactions totaled $40,000 during 2016 and is reported as a component of interest expense on FHLB advances. At December 31, 2016, the Company estimates $40,000 of the unrealized gain to be reclassified as a reduction of 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 year ended December 31, 2016:
Amount of Gain
Recognized in OCI (Effective Portion) |
Amount of Loss
Reclassified from OCI to Income as an Increase to Interest Expense |
Amount of Gain (Loss)
Recognized in Other Non-Interest Income (Ineffective Portion) |
||||||||||
Interest rate swaps |
$ | 3,724 | $ | (40 | ) | $ | |
Other interest rate swaps During 2016, the Company entered into nine interest rate swap agreements with borrowers and simultaneously entered into an offsetting interest rate derivative transactions with counterparties. The total combined notional amount was $51.2 million with maturities ranged from April 2023 to October 2026. The fair values of the interest rate swap agreements are reflected in other assets and other liabilities with corresponding gains or losses reflected in non-interest income. During the year ended December 31, 2016, transaction fees related to these derivative instruments were $679,000.
The following table reflects other interest rate swaps as of December 31, 2016:
Notional amounts |
$ | 51,213 | ||
Derivative assets fair value |
598 | |||
Derivative liabilities fair value |
559 | |||
Weighted average pay rates |
4.08 | % | ||
Weighted average receive rates |
2.91 | % | ||
Weighted average maturity |
7.9 years |
Credit risk Derivative instruments are inherently subject to market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the Companys 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 Companys overall asset-liability management process. The credit risk related to derivatives entered into with certain qualified borrowers is managed through the Companys loan underwriting process. The Companys loan underwriting process also approves the Banks swap counterparty used to mirror the borrowers swap. The Company has a bilateral agreement with each swap counterparty that
F-63
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 22Derivative Instruments and Hedging Activities (Continued)
provides that fluctuations in derivative values are to be fully collateralized with either cash or securities. The credit valuation adjustment (CVA) is a fair value adjustment to the derivative to account for this risk. During the year ended December 31, 2016, the CVA resulted in an increase to non-interest income of $39,000.
The Company has agreements with its derivative counterparties that contain a cross-default provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company 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 under the agreements. As of December 31, 2016, derivatives with counterparties resulted in a net asset position.
The Company records interest rate derivatives subject to master netting agreements at their gross value and does not offset derivative asset and liabilities on the Consolidated Statements of Financial Condition. The table below summarizes the Companys interest rate derivatives and offsetting positions as of December 31, 2016:
Derivative Assets
|
Derivative Liabilities
|
|||||||
Gross amounts recognized |
$ | 4,317 | $ | 559 | ||||
Less: Amounts offset in the Consolidated Statements of Financial Condition |
| | ||||||
|
|
|
|
|||||
Net amount presented in the Consolidated Statements of Financial Condition |
$ | 4,317 | $ | 559 | ||||
|
|
|
|
|||||
Gross amounts not offset in the Consolidated Statements of Financial Condition |
||||||||
Offsetting derivative positions |
| | ||||||
Collateral posted |
(4,317 | ) | | |||||
|
|
|
|
|||||
Net credit exposure |
$ | | $ | 559 | ||||
|
|
|
|
As of December 31, 2016, the counterparties posted collateral of $4.8 million, which resulted in excess collateral with the Company. For purposes of this disclosure, the amount of posted collateral by the counterparties is limited to the amount offsetting the derivative asset.
In February 2017 and March 2017, the Company executed four additional cash flow hedges totaling $100.0 million in notional value with maturity dates in March 2022.
F-64
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 23Parent Company Only Condensed Financial Statements
The following represents the condensed financial statements of Byline Bancorp, Inc., the Parent Company, on a stand-alone basis as of December 31, 2016 and 2015:
Statements of Financial Condition
Parent Company Only
(dollars in thousands)
2016 |
2015 |
|||||||
ASSETS |
||||||||
Cash and due from subsidiary bank |
$ | 9,965 | $ | 97 | ||||
Investment in banking subsidiary |
419,801 | 212,949 | ||||||
Other assets |
2,755 | | ||||||
|
|
|
|
|||||
Total assets |
$ | 432,521 | $ | 213,046 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Revolving line of credit |
$ | 20,650 | $ | | ||||
Junior subordinated debentures |
26,926 | 24,711 | ||||||
Accrued expenses and other liabilities |
2,287 | 61 | ||||||
Stockholders equity |
382,658 | 188,274 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 432,521 | $ | 213,046 | ||||
|
|
|
|
Statements of Operations
Parent Company Only
(dollars in thousands)
Years
ended
|
||||||||
2016 |
2015 |
|||||||
Other noninterest income |
$ | 57 | $ | | ||||
Interest expense |
2,460 | 2,295 | ||||||
Other noninterest expense |
381 | 312 | ||||||
|
|
|
|
|||||
Loss before provision for income taxes and equity in undistributed income (loss) of subsidiary |
(2,784 | ) | (2,607 | ) | ||||
Provision for income taxes |
204 | 8 | ||||||
|
|
|
|
|||||
Loss before equity in undistributed income (loss) of subsidiary |
(2,988 | ) | (2,615 | ) | ||||
Equity in undistributed income (loss) of subsidiary |
69,717 | (12,359 | ) | |||||
|
|
|
|
|||||
Net income (loss) |
$ | 66,729 | $ | (14,974 | ) | |||
|
|
|
|
F-65
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 23Parent Company Only Condensed Financial Statements (Continued)
Statements of Cash Flows
Parent Company Only
(dollars in thousands)
Years
ended
|
||||||||
2016 |
2015 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 66,729 | $ | (14,974 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
||||||||
Equity in undistributed (income) loss of subsidiary |
(69,717 | ) | 12,359 | |||||
Stock-based compensation expense |
899 | 1,045 | ||||||
Exercise of share-based awards |
40 | | ||||||
Accretion of junior subordinated debentures discount |
876 | 944 | ||||||
Changes in other assets and other liabilities |
16 | (5,546 | ) | |||||
|
|
|
|
|||||
Net cash used in operating activities |
(1,157 | ) | (6,172 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Investments in and advances to subsidiary |
(32,019 | ) | | |||||
Net cash paid in acquisition of business |
(36,586 | ) | | |||||
|
|
|
|
|||||
Net cash used in investing activities |
(68,605 | ) | | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from revolving line of credit |
30,000 | | ||||||
Repayments of revolving line of credit |
(9,350 | ) | | |||||
Proceeds from issuance of common stock, net |
49,592 | | ||||||
Proceeds from issuance of preferred stock |
9,388 | | ||||||
|
|
|
|
|||||
Net cash provided by financing activities |
79,630 | | ||||||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
9,868 | (6,172 | ) | |||||
CASH AND CASH EQUIVALENTS, beginning of period |
97 | 6,269 | ||||||
|
|
|
|
|||||
CASH AND CASH EQUIVALENTS, end of period |
$ | 9,965 | $ | 97 | ||||
|
|
|
|
Note 24Earnings per Share
A reconciliation of the numerators and denominators for earnings per common share computations for the years ended December 31, 2016 and 2015 is presented below. Options to purchase 1,634,568 shares of common stock under the BYB Plan were outstanding as of December 31, 2015, but were not included in the computation of diluted earnings per share due to a loss for the period and, therefore, were anti-dilutive.
F-66
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 24Earnings per Share (Continued)
The following represent the calculation of basic and diluted earnings per share:
Years ended December 31, |
||||||||
2016 |
2015 |
|||||||
Net income (loss) |
$ | 66,729 | $ | (14,974 | ) | |||
Less: Dividends on preferred shares |
| | ||||||
|
|
|
|
|||||
Net income (loss) available to common stockholders |
$ | 66,729 | $ | (14,974 | ) | |||
|
|
|
|
|||||
Weighted-average common stock outstanding: |
||||||||
Weighted-average common stock outstanding (basic) |
20,141,630 | 17,332,775 | ||||||
Incremental shares (1)(2) |
289,153 | | ||||||
|
|
|
|
|||||
Weighted-average common stock outstanding (dilutive) |
20,430,783 | 17,332,775 | ||||||
|
|
|
|
|||||
Basic earnings per common share |
$ | 3.31 | $ | (0.86 | ) | |||
Diluted earnings per common share |
$ | 3.27 | $ | (0.86 | ) |
(1) | This amount represents outstanding stock options for which the exercise price is less than the average market price of the Companys common stock. |
(2) | During 2015, due to a loss for the period, zero incremental shares are included because the effect would be anti-dilutive. |
Note 25Stockholders Equity
A summary of the Companys common and preferred stock at December 31, 2016 and 2015 is as follows:
2016 |
2015 |
|||||||
Series A non-cumulative perpetual preferred stock |
||||||||
Par value |
$ | 0.01 | $ | 0.01 | ||||
Shares authorized |
15,003 | 15,003 | ||||||
Shares issued |
15,003 | 15,003 | ||||||
Shares outstanding |
15,003 | 15,003 | ||||||
Series B 7.5% fixed to floating non-cumulative perpetual preferred stock |
||||||||
Par value |
$ | 0.01 | N/A | |||||
Shares authorized |
50,000 | N/A | ||||||
Shares issued |
9,388 | N/A | ||||||
Subscription receivable |
1,050 | N/A | ||||||
Shares outstanding |
9,388 | N/A | ||||||
Common stock, voting |
||||||||
Par value |
$ | | $ | | ||||
Shares authorized |
150,000,000 | 150,000,000 | ||||||
Shares issued |
24,616,706 | 17,332,775 | ||||||
Shares outstanding |
24,616,706 | 17,332,775 |
In connection with the recapitalization, the Company authorized and issued voting common stock and Series A non-voting, non-cumulative perpetual preferred stock with liquidation preference. The Series A preferred stock is redeemable at the Companys option on or after July 1, 2018. Under the terms of the Series A
F-67
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data)
Note 25Stockholders Equity (Continued)
preferred stock certificate of designation, the Company would have to declare and pay a dividend or make a distribution prior to paying a dividend on its common stock, redeeming the Series A, or upon liquidation, in accordance with the terms of the preferred stock, which may reduce the earnings available to common stock holders upon declaration.
During 2016, the Company authorized and issued Series B 7.50% fixed-to-floating non-voting, non-cumulative perpetual preferred stock with liquidation preference of $1,000 per share, plus the amount of unpaid dividends, if any, which is redeemable at the Companys option on or after March 31, 2022. Holders of either Series A or Series B preferred stock shall not have any rights to convert such stock into shares of any other class of capital stock of the Company.
On January 30, 2017, the Company issued an additional 1,050 shares of Series B preferred stock, which is reflected as a subscription receivable as of December 31, 2016. On February 7, 2017, the Company declared a full dividend on the Series B preferred stock for the dividend period ending March 31, 2017 and payable on March 31, 2017 to holders of record as of March 16, 2017.
Note 26Subsequent Events
On May 19, 2017, the Company issued a press release announcing its intention to pursue an initial public offering of common stock (the IPO) in 2017. In anticipation of the IPO, the Board of Directors considered the potential benefits afforded by Delaware law to public companies, including greater predictability and enhanced ability to attract and retain qualified independent directors, and determined that it is in the best interests of the Company and its stockholders to reincorporate in Delaware prior to the IPO.
On June 14, 2017, stockholders of record as of May 22, 2017 voted to approve an Agreement and Plan of Merger between Byline Bancorp, Inc., an Illinois corporation (Byline Illinois), and Byline Bancorp, Inc., a wholly owned Delaware subsidiary of the Company, including the amended and restated certificate of incorporation and by-laws of the Company. Each share of Byline Illinois common stock issued and outstanding immediately prior to the effective time of the Merger was converted automatically into the right to receive one fifth (0.20) of a share of common stock of the Company. Fractional shares are to be paid in cash based on the initial public offering price of Byline Bancorp, Inc.s common stock.
F-68
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(dollars in thousands) |
(Unaudited)
|
December 31,
|
||||||
ASSETS | ||||||||
Cash and due from banks |
$ | 15,541 | $ | 17,735 | ||||
Interest bearing deposits with other banks |
67,726 | 28,798 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
83,267 | 46,533 | ||||||
Securities available-for-sale, at fair value |
590,507 | 608,560 | ||||||
Securities held-to-maturity, at amortized cost (fair value March 31, 2017$132,707, December 31, 2016$138,082) |
132,897 | 138,846 | ||||||
Restricted stock, at cost |
9,503 | 14,993 | ||||||
Loans held for sale |
23,492 | 23,976 | ||||||
Loans and leases: |
||||||||
Loans and leases |
2,143,534 | 2,148,011 | ||||||
Allowance for loan and lease losses |
(11,817 | ) | (10,923 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
2,131,717 | 2,137,088 | ||||||
Servicing assets, at fair value |
21,223 | 21,091 | ||||||
Accrued interest receivable |
7,498 | 6,866 | ||||||
Premises and equipment, net |
99,563 | 102,074 | ||||||
Assets held for sale |
13,666 | 14,748 | ||||||
Other real estate owned, net |
13,173 | 16,570 | ||||||
Goodwill |
51,975 | 51,975 | ||||||
Other intangible assets, net |
19,058 | 19,826 | ||||||
Bank-owned life insurance |
6,676 | 6,557 | ||||||
Deferred tax assets, net |
62,925 | 67,760 | ||||||
Other assets |
17,573 | 18,367 | ||||||
|
|
|
|
|||||
Total assets |
$ | 3,284,713 | $ | 3,295,830 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||
LIABILITIES |
||||||||
Non-interest bearing demand deposits |
$ | 732,267 | $ | 724,457 | ||||
Interest bearing deposits: |
||||||||
NOW, savings accounts, and money market accounts |
1,032,536 | 989,421 | ||||||
Time deposits |
811,036 | 776,516 | ||||||
|
|
|
|
|||||
Total deposits |
2,575,839 | 2,490,394 | ||||||
Accrued interest payable |
1,893 | 2,427 | ||||||
Line of credit |
18,150 | 20,650 | ||||||
Federal Home Loan Bank advances |
209,663 | 313,715 | ||||||
Securities sold under agreements to repurchase |
31,940 | 17,249 | ||||||
Junior subordinated debentures issued to capital trusts, net |
27,130 | 26,926 | ||||||
Accrued expenses and other liabilities |
30,415 | 41,811 | ||||||
|
|
|
|
|||||
Total liabilities |
2,895,030 | 2,913,172 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock |
25,441 | 25,441 | ||||||
Common stock, voting $0.01 par value; 150,000,000 shares authorized at March 31, 2017 and December 31, 2016; 24,616,706 shares issued and outstanding at March 31, 2017 and December 31, 2016 |
311,994 | 311,994 | ||||||
Additional paid-in capital |
1,844 | 1,558 | ||||||
Retained earnings |
57,304 | 50,933 | ||||||
Accumulated other comprehensive loss, net of tax |
(6,900 | ) | (7,268 | ) | ||||
|
|
|
|
|||||
Total stockholders equity |
389,683 | 382,658 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 3,284,713 | $ | 3,295,830 | ||||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-69
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(dollars in thousands, except share and per share data) |
Three Months Ended March 31, |
|||||||
2017 |
2016 |
|||||||
INTEREST AND DIVIDEND INCOME |
||||||||
Interest and fees on loans and leases |
$ | 28,396 | $ | 18,999 | ||||
Interest on taxable securities |
3,790 | 3,635 | ||||||
Interest on tax-exempt securities |
133 | 179 | ||||||
Other interest and dividend income |
169 | 64 | ||||||
|
|
|
|
|||||
Total interest and dividend income |
32,488 | 22,877 | ||||||
INTEREST EXPENSE |
||||||||
Deposits |
1,483 | 1,153 | ||||||
Federal Home Loan Bank advances |
660 | 78 | ||||||
Subordinated debentures and other borrowings |
807 | 526 | ||||||
|
|
|
|
|||||
Total interest expense |
2,950 | 1,757 | ||||||
|
|
|
|
|||||
Net interest income |
29,538 | 21,120 | ||||||
PROVISION FOR LOAN AND LEASE LOSSES |
1,891 | 2,513 | ||||||
|
|
|
|
|||||
Net interest income after provision for loan and lease losses |
27,647 | 18,607 | ||||||
|
|
|
|
|||||
NON-INTEREST INCOME |
||||||||
Fees and service charges on deposits |
1,219 | 1,389 | ||||||
Servicing fees |
919 | | ||||||
ATM and interchange fees |
1,348 | 1,408 | ||||||
Net gains on sales of securities available-for-sale |
8 | 923 | ||||||
Net gains on sales of loans |
8,082 | | ||||||
Fees on mortgage loan sales, net |
2 | 20 | ||||||
Other non-interest income |
730 | 548 | ||||||
|
|
|
|
|||||
Total non-interest income |
12,308 | 4,288 | ||||||
|
|
|
|
|||||
NON-INTEREST EXPENSE |
||||||||
Salaries and employee benefits |
16,602 | 11,940 | ||||||
Occupancy expense, net |
3,739 | 3,802 | ||||||
Equipment expense |
563 | 535 | ||||||
Loan and lease related expenses |
569 | 461 | ||||||
Legal, audit and other professional fees |
1,671 | 993 | ||||||
Data processing |
2,409 | 1,820 | ||||||
Net (gain) loss recognized on other real estate owned and other related expenses |
(570 | ) | 899 | |||||
Regulatory assessments |
184 | 850 | ||||||
Other intangible assets amortization expense |
769 | 747 | ||||||
Advertising and promotions |
289 | 235 | ||||||
Telecommunications |
418 | 458 | ||||||
Other non-interest expense |
2,208 | 1,747 | ||||||
|
|
|
|
|||||
Total non-interest expense |
28,851 | 24,487 | ||||||
|
|
|
|
|||||
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES |
11,104 | (1,592 | ) | |||||
PROVISION (BENEFIT) FOR INCOME TAXES |
4,544 | (240 | ) | |||||
|
|
|
|
|||||
NET INCOME (LOSS) |
6,560 | (1,352 | ) | |||||
|
|
|
|
|||||
Dividends on preferred shares |
189 | | ||||||
NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS |
$ | 6,371 | $ | (1,352 | ) | |||
|
|
|
|
|||||
EARNINGS (LOSS) PER SHARE |
||||||||
Basic |
$ | 0.26 | $ | (0.08 | ) | |||
Diluted |
0.25 | (0.08 | ) | |||||
Weighted average common shares outstanding for basic earnings (loss) per common share |
24,616,706 | 17,522,226 | ||||||
Diluted weighted average common shares outstanding for diluted earnings (loss) per common share |
25,078,427 | 17,522,226 |
See accompanying Notes to Consolidated Financial Statements.
F-70
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(dollars in thousands) |
Three Months Ended
March 31, |
|||||||
2017 | 2016 | |||||||
Net income (loss) |
$ | 6,560 | $ | (1,352 | ) | |||
Securities available-for-sale |
||||||||
Unrealized holding gains arising during the period |
1,020 | 9,812 | ||||||
Reclassification adjustments for net gains included in net income (loss) |
(8 | ) | (923 | ) | ||||
Tax effect |
(626 | ) | | |||||
|
|
|
|
|||||
Net of tax |
386 | 8,889 | ||||||
Cash flow hedges |
||||||||
Unrealized holding gains arising during the period |
25 | | ||||||
Reclassification adjustments for losses included in net income (loss) |
(54 | ) | | |||||
Tax effect |
11 | | ||||||
|
|
|
|
|||||
Net of tax |
(18 | ) | | |||||
|
|
|
|
|||||
Total other comprehensive income |
368 | 8,889 | ||||||
|
|
|
|
|||||
Comprehensive income |
$ | 6,928 | $ | 7,537 | ||||
|
|
|
|
Gains
|
Unrealized Gains
|
Total
|
||||||||||
Balance, January 1, 2017 |
$ | 2,233 | $ | (9,501 | ) | $ | (7,268 | ) | ||||
Other comprehensive gain (loss), net of tax |
(18 | ) | 386 | 368 | ||||||||
|
|
|
|
|
|
|||||||
Balance, March 31, 2017 |
$ | 2,215 | $ | (9,115 | ) | $ | (6,900 | ) | ||||
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-71
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Three Months Ended March 31, 2017 and 2016
(Amounts in thousands, except per share data) (Unaudited)
(dollars in thousands, except share data)
|
Preferred Stock |
|
Additional
|
Retained
|
Accumulated
|
Total
|
||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance, January 1, 2016 |
15,003 | $ | 15,003 | 17,332,775 | $ | 193,729 | $ | 1,045 | $ | (15,796 | ) | $ | (5,707 | ) | $ | 188,274 | ||||||||||||||||
Net loss |
| | | | | (1,352 | ) | | (1,352 | ) | ||||||||||||||||||||||
Other comprehensive income, net of tax |
| | | | | | 8,889 | 8,889 | ||||||||||||||||||||||||
Issuance of common stock, net of issuance cost |
| | 2,155,003 | 35,018 | | | | 35,018 | ||||||||||||||||||||||||
Share-based compensation expense |
| | | | 181 | | | 181 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, March 31, 2016 |
15,003 | $ | 15,003 | 19,487,778 | $ | 228,747 | $ | 1,226 | $ | (17,148 | ) | $ | 3,182 | $ | 231,010 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, January 1, 2017 |
25,441 | $ | 25,441 | 24,616,706 | $ | 311,994 | $ | 1,558 | $ | 50,933 | $ | (7,268 | ) | $ | 382,658 | |||||||||||||||||
Net income |
| | | | | 6,560 | | 6,560 | ||||||||||||||||||||||||
Other comprehensive income, net of tax |
| | | | | | 368 | 368 | ||||||||||||||||||||||||
Cash dividends declared on preferred stock |
| | | | | (189 | ) | | (189 | ) | ||||||||||||||||||||||
Share-based compensation expense |
| | | | 286 | | | 286 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Balance, March 31, 2017 |
25,441 | $ | 25,441 | 24,616,706 | $ | 311,994 | $ | 1,844 | $ | 57,304 | $ | (6,900 | ) | $ | 389,683 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-72
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2017 and 2016
(Amounts in thousands) (Unaudited)
Three Months
Ended
|
||||||||
2017 |
2016 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income (loss) |
$ | 6,560 | $ | (1,352 | ) | |||
Adjustments to reconcile net income (loss) to net cash from operating activities: |
||||||||
Provision for loan and lease losses |
1,891 | 2,513 | ||||||
Depreciation and amortization of premises and equipment |
1,298 | 1,390 | ||||||
Net amortization of securities |
1,184 | 1,823 | ||||||
Net gains on sales of securities available-for-sale |
(8 | ) | (923 | ) | ||||
Net gains on sales of assets held for sale |
(162 | ) | | |||||
Net gains on sales of loans |
(8,082 | ) | | |||||
Originations of mortgage loans held for sale |
(4 | ) | (840 | ) | ||||
Proceeds from mortgage loans sold |
155 | 894 | ||||||
Originations of government guaranteed loans |
(61,918 | ) | | |||||
Proceeds from government guaranteed loans sold |
70,410 | | ||||||
Accretion of premiums and discounts on acquired loans, net |
(7,955 | ) | (9,326 | ) | ||||
Net change in servicing assets |
(132 | ) | | |||||
Net valuation adjustments on other real estate owned |
276 | (81 | ) | |||||
Net gains on sales of other real estate owned |
(1,228 | ) | (35 | ) | ||||
Amortization of intangible assets |
769 | 747 | ||||||
Amortization of time deposit premium |
(463 | ) | (24 | ) | ||||
Amortization of Federal Home Loan Bank advances premium |
(52 | ) | | |||||
Accretion of junior subordinated debentures discount |
204 | 222 | ||||||
Share-based compensation expense |
286 | 181 | ||||||
Deferred tax asset |
4,220 | | ||||||
Increase in cash surrender value of bank owned life insurance |
(119 | ) | (115 | ) | ||||
Changes in assets and liabilities: |
||||||||
Accrued interest receivable |
(666 | ) | (1,400 | ) | ||||
Other assets |
588 | 521 | ||||||
Accrued interest payable |
(534 | ) | 188 | |||||
Accrued expenses and other liabilities |
(1,418 | ) | (3,637 | ) | ||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
5,100 | (9,254 | ) | |||||
|
|
|
|
|||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchases of securities available-for-sale |
(745 | ) | (38,252 | ) | ||||
Proceeds from maturities and calls of securities available-for-sale |
1,182 | 4,500 | ||||||
Proceeds from paydowns of securities available-for-sale |
17,718 | 26,992 | ||||||
Proceeds from sales of securities available-for-sale |
8 | 140,001 | ||||||
Purchases of securities held-to-maturity |
| (48,482 | ) | |||||
Proceeds from paydowns of securities held-to-maturity |
5,337 | 3,947 | ||||||
Purchases of Federal Home Loan Bank stock |
(2,610 | ) | (2,742 | ) | ||||
Federal Home Loan Bank stock repurchases |
8,100 | | ||||||
Proceeds from other loans sold |
9,984 | | ||||||
Net change in loans and leases |
(9,403 | ) | (153,365 | ) | ||||
Purchases of premises and equipment |
(797 | ) | (1,484 | ) | ||||
Proceeds from sales of assets held for sale |
2,752 | | ||||||
Proceeds from sales of other real estate owned |
5,148 | 4,756 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) investing activities |
36,674 | (64,129 | ) |
See accompanying Notes to Consolidated Financial Statements.
F-73
BYLINE BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2017 and 2016
(Amounts in thousands) (Unaudited)
See accompanying Notes to Consolidated Financial Statements.
F-74
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 1Basis of Presentation
These unaudited condensed consolidated financial statements include the accounts of Byline Bancorp, Inc., a Delaware corporation (the Company, 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 financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (SEC). In preparing these financial statements, the Company has evaluated events and transactions subsequent to March 31, 2017 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 Companys Consolidated Financial Statements and notes thereto for the years ended December 31, 2016 and 2015.
In accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 855, Subsequent Events, the Companys management has evaluated subsequent events for potential recognition or disclosure through the date of the issuance of these consolidated financial statements. No subsequent events were identified that would have required a change to the consolidated financial statements or disclosure in the notes to the consolidated financial statements, other than as disclosed in Note 20, Subsequent Events.
On June 14, 2017, stockholders of record as of May 22, 2017 voted to approve an Agreement and Plan of Merger between Byline Bancorp, Inc., an Illinois corporation (Byline Illinois), and Byline Bancorp, Inc., a wholly owned Delaware subsidiary of the Company, including the amended and restated certificate of incorporation and by-laws of the Company. Each share of Byline Illinois common stock issued and outstanding immediately prior to the effective time of the Merger was converted automatically into the right to receive one fifth (0.20) of a share of common stock of the Company. Fractional shares are to be paid in cash based on the initial public offering price of Byline Bancorp, Inc. common stock.
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 2Recently Issued Accounting Pronouncements
The following reflect recent accounting pronouncements that have been adopted or are pending adoption by the Company. As the Company qualifies as an emerging growth company and has elected the extended transition period for complying with new or revised accounting pronouncements, it is not subject to new or revised accounting standards applicable to public companies during the extended transition period. The accounting pronouncements pending adoption below reflect effective dates for the Company as an emerging growth company with the extended transition period.
Revenue from Contracts with Customers In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, deferred by ASU No. 2015-14 and clarifying standards, Revenue from Contracts with
F-75
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
Customers , which creates Topic 606 and supersedes Topic 605, Revenue Recognition . The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In general, the new guidance requires companies to use more judgment and make more estimates than under current guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Under the terms of ASU No. 2015-14 the standard is effective for interim and annual periods beginning after December 15, 2017. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company is currently evaluating the provisions of ASU No. 2014-09 to determine the potential impact the standard will have on the Companys Consolidated Financial Statements. As a financial institution, the Companys largest component of revenue, interest income, is excluded from the scope of this ASU. The Company is currently evaluating which, if any, of its sources of non-interest income will be impacted by this ASU. The Company expects to adopt this new guidance on January 1, 2019, with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant. In April 2016, FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing . The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU clarify the following two aspects of Topic 606: (1) identifying performance obligations and (2) licensing implementation guidance, while retaining the related principles for those areas. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606, Revenues from Contracts with Customers . The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Companys Consolidated Financial Statements.
In May 2016, FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients , amending ASC Topic 606, Revenue from Contracts with Customers . The amendments in this ASU do not change the core principle of the guidance in Topic 606. Rather, the amendments in this ASU affect only several narrow aspects of Topic 606. The amendments in this ASU affect the guidance in ASU 2014-09, discussed above, which is not yet effective. The effective date and transition requirements for the amendments in this ASU are the same as the effective date and transition requirements in Topic 606. The Company is evaluating the provisions of this ASU in conjunction with ASU No. 2014-09 to determine the potential impact Topic 606 and its amendments will have on the Companys Consolidated Financial Statements.
Customers Accounting for Fees Paid in a Cloud Computing Arrangement In April 2015, FASB issued ASU No. 2015-05, Customers Accounting for Fees Paid in a Cloud Computing Arrangement . The amendments in this ASU provide guidance to customers in cloud computing arrangements about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments were effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015 and were adopted by the Company as of January 1, 2016. This ASU did not have a material effect on the Companys Consolidated Financial Statements.
F-76
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
Business CombinationsSimplifying the Accounting for Measurement-Period Adjustments In September 2015, FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments . The amendments in this ASU require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period when the adjustment amounts are determined. The acquirer is required to record in the same periods financial statements the effect on earnings from changes in depreciation, amortization, or other income effects resulting from the change to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The acquirer must present separately on the income statement, or disclose in the notes, the amount recorded in current-period earnings that would have been recorded in previous reporting periods if the provisional amount had been recognized at the acquisition date. The amendments in this ASU were effective for fiscal years beginning after December 15, 2015. The Company adopted this new authoritative guidance on January 1, 2016, and it did not have an impact on the Companys Consolidated Financial Statements, but may in the future.
Recognition and Measurement of Financial Assets and Financial Liabilities In January 2016, FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities . The amendments in this ASU require equity securities to be measured at fair value with changes in the fair value recognized through net income. The amendments allow equity investments that do not have readily determinable fair values to be remeasured at fair value under certain circumstances and require enhanced disclosures about those investments. The amendments simplify the impairment assessment of equity investments without readily determinable fair values. The amendments also eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU require separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. This amendment excludes from net income gains or losses that the entity may not realize because those financial liabilities are not usually transferred or settled at their fair values before maturity. The amendments in this ASU require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or in the accompanying notes to the financial statements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the provisions of ASU No. 2016-01 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019 and is not expected to have a significant impact on the Companys Consolidated Financial Statements.
Leases (Topic 842) In February 2016, FASB issued ASU No. 2016-02, Leases . The amendments in this ASU require lessees to recognize the following for all leases (with the exception of short-term) at the commencement date; a lease liability, which is a lessees 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 lessees right to use, or control the use of, a specified asset for the lease term. The amendments in this ASU leave lessor accounting largely unchanged, although certain targeted improvements were made to align lessor accounting with the lessee accounting model. This ASU simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees will no longer be provided with a source of off-balance sheet financing. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
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 Companys Consolidated Statements of Operations and Consolidated Statements of Financial Condition. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company expects an increase in assets and liabilities as a result of recording additional lease contracts where the Company is lessee.
Derivatives and Hedging (Topic 815) In March 2016, FASB issued ASU No. 2016-05, Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships . The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815 (Derivatives and Hedging) does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. An entity has an option to apply the amendments in this ASU on either a prospective basis or a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. This ASU became effective for the Company on January 1, 2017 and did not have a material impact on the Companys Consolidated Financial Statements.
In March 2016, FASB issued ASU No. 2016-06, Contingent Put and Call Options in Debt Instruments . The amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. To determine how to account for debt instruments with embedded features, including contingent put and call options, an entity is required to assess whether the embedded derivatives must be bifurcated from the host contract and accounted for separately. Part of this assessment consists of evaluating whether the embedded derivative features are clearly and closely related to the debt host. Under existing guidance, for contingently exercisable options to be considered clearly and closely related to a debt host, they must be indexed only to interest rates or credit risk. ASU 2016-06 addresses inconsistent interpretations of whether an event that triggers an entitys ability to exercise the embedded contingent option must be indexed to interest rates or credit risk for that option to qualify as clearly and closely related. Diversity in practice has developed because the existing four-step decision sequence in ASC 815 focuses only on whether the payoff was indexed to something other than an interest rate or credit risk. As a result, entities have been uncertain whether they should (1) determine whether the embedded features are clearly and closely related to the debt host solely on the basis of the four-step decision sequence or (2) first apply the four-step decision sequence and then also evaluate whether the event triggering the exercisability of the contingent put or call option is indexed only to an interest rate or credit risk. This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815 as amended by this ASU. The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. This ASU became effective for the Company on January 1, 2017 and did not have a material impact on the Companys Consolidated Financial Statements.
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
CompensationStock Compensation (Topic 718) In March 2016, FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting . FASB issued this ASU as part of its Simplification Initiative. The areas for simplification in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Amendments in this ASU relate to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments in this ASU require recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively.
An entity may elect to apply the amendments in this ASU related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. The amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. This ASU became effective for the Company on January 1, 2017 and did not have a material impact on the Companys Consolidated Financial Statements.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting . The new standard provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017 but early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
Financial InstrumentsCredit Losses (Topic 326) In June 2016, FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments . Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The main objective of this ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this ASU replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this ASU require a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The measurement of expected credit losses will be based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The amendments in this ASU broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss, which will be more decision useful to users of the financial statements. The amendments in this ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2021. The Company is still evaluating the effects this ASU will have on the Companys Consolidated Financial Statements. While the
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
Company has not quantified the impact of this ASU, it does expect changing from the current incurred loss model to an expected loss model will result in an earlier recognition of losses.
Statement of Cash Flows (Topic 230) In August 2016, FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments . There is diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other Topics. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Those eight issues are (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principle. Current GAAP either is unclear or does not include specific guidance on these eight cash flow classification issues. These amendments provide guidance for each of the eight issues, thereby reducing current and potential future diversity in practice. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is currently evaluating the provisions of ASU No. 2016-15 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (230), Restricted Cash . The ASU will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this update apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. The amendment is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of the update is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect this ASU to have a material impact on the Companys Consolidated Financial Statements.
Income Taxes (Topic 740) In October 2016, the FASB issued ASU No. 2016-16, Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory . The ASU was issued to improve the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Current GAAP prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party; this update clarifies that an entity should recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. The amendment is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption of the update is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect this ASU to have a material impact on the Companys Consolidated Financial Statements.
F-80
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
Consolidation (Topic 810) In October 2016, the FASB issued ASU No. 2016-17, Consolidation , Interests Held through Related Parties That Are under Common Control. The ASU was issued to amend the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity (VIE) should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendment is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of the update is permitted. The Company adopted this new authoritative guidance on January 1, 2017 and it did not have an impact on the Companys Consolidated Financial Statements.
Business Combinations (Topic 805) In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business . The guidance clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This guidance is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. Assuming the Company remains an emerging growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company does not expect a material impact of this ASU on the Companys Consolidated Financial Statements.
IntangiblesGoodwill and Other (Topic 350) In January 2017, FASB issued ASU No. 2017-04, Simplifying the Test for Goodwill Impairment . The amendments in this ASU are intended to reduce the cost and complexity of the goodwill impairment test by eliminating step two from the impairment test. The amendments modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. Under the amendments in this ASU, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge should be recognized for the amount which the carrying amount exceeds the reporting units fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this ASU are effective for the Companys annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is early adopting these amendments in 2017 and does not expect a material impact on the Companys Consolidated Financial Statements.
Nonrefundable Fees and Other Costs (Subtopic 310-20) In March 2017, FASB issued ASU No. 2017-08, ReceivablesNonrefundable Fees and Other Costs. The amendments in the ASU shorten the amortization period for certain callable debt securities held at a premium at the earliest call date. Under current GAAP, the Company amortizes the premium as an adjustment of yield over the contractual life of the instrument. As a result, upon exercise of a call on a callable debt security held at a premium, the unamortized premium is charged to earnings. The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for annual periods beginning after December 15, 2019, and interim periods within annual periods beginning after December 15, 2020. Early adoption is permitted. The Company is required to apply the amendments on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Assuming the Company remains an emerging
F-81
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 2Recently Issued Accounting Pronouncements (Continued)
growth company, the new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements.
Other Income (Subtopic 610-20) In February 2017, the FASB issued ASU No. 2017-05, Other Income-Gains and Losses from the Derecognition of Nonfinancial Assets. This ASU will clarify the scope of Subtopic 610-20 and add guidance for partial sales of nonfinancial assets. The amendments should be applied either on retrospectively to each period presented or with a modified retrospective approach. The amendment is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU No. 2017-05 to determine the potential impact the new standard will have on the Companys Consolidated Financial Statements.
Note 3Acquisition of a Business
On October 14, 2016, the Company acquired stock of Ridgestone and its subsidiaries under the terms of a definitive merger agreement (Agreement) dated June 9, 2016. Ridgestone operated two wholly-owned subsidiaries, Ridgestone Bank and RidgeStone Capital Trust I, and specializes in government guaranteed lending as a participant in the SBA and USDA lending programs. Ridgestone provided financial services through its two full-service banking offices in Brookfield, Wisconsin and Schaumburg, Illinois. In addition, Ridgestone had loan production offices located in Wisconsin (Green Bay and Wausau), Indiana (Indianapolis) and California (Newport Beach).
Under the terms of the Agreement, each Ridgestone common share was converted into the right to receive, at the election of the stockholder (subject to proration as outlined in the Agreement), either cash or Company common stock, or the combination of both. Total consideration included aggregate cash in the amount of $36.8 million and the issuance of 4,199,791 shares of the Companys common stock valued at $16.25 per common share. The transaction resulted in goodwill of $26.3 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. Acquisition advisory expenses related to the Ridgestone acquisition of $1.6 million are reflected in non-interest expense on the Consolidated Statements of Operations. Stock issuance costs were not material. There were no contingent assets or liabilities arising from the acquisition.
The acquisition of Ridgestone was accounted for using the acquisition method of accounting in accordance with ASC 805. Assets acquired, liabilities assumed and consideration exchanged were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities involves significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding the closing date fair values become available. Fair values are preliminary estimates due to deferred tax assets and deferred tax liabilities.
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 3Acquisition of a Business (Continued)
The following table presents a summary of the estimates of fair values of assets acquired and liabilities assumed as of the acquisition date:
Assets |
||||
Cash and cash equivalents |
$ | 25,480 | ||
Securities available-for-sale |
27,662 | |||
Restricted stock |
931 | |||
Loans held for sale |
15,363 | |||
Loans |
351,820 | |||
Servicing assets |
20,295 | |||
Premises and equipment |
2,011 | |||
Other real estate owned |
1,525 | |||
Other intangible assets |
486 | |||
Bank-owned life insurance |
2,352 | |||
Other assets |
8,228 | |||
|
|
|||
Total assets acquired |
456,153 | |||
Liabilities |
||||
Deposits |
361,370 | |||
Federal Home Loan Bank advances |
9,773 | |||
Junior subordinated debentures |
1,339 | |||
Accrued expenses and other liabilities |
4,958 | |||
|
|
|||
Total liabilities assumed |
377,440 | |||
|
|
|||
Net assets acquired |
$ | 78,713 | ||
|
|
|||
Consideration paid |
||||
Common stock (4,199,791 shares issued at $16.25 per share) |
68,247 | |||
Cash paid |
36,753 | |||
|
|
|||
Total consideration paid |
105,000 | |||
|
|
|||
Goodwill |
$ | 26,287 | ||
|
|
The following table presents the acquired non-impaired loans as of the acquisition date:
Fair value |
$ | 312,166 | ||
Gross contractual amounts receivable |
450,292 | |||
Estimate of contractual cash flows not expected to be collected (1) |
19,661 | |||
Estimate of contractual cash flows expected to be collected |
430,631 |
(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.
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 3Acquisition of a Business (Continued)
The following table provides the pro forma information for the results of operations for the three months ended March 31, 2016, as if the acquisition had occurred on January 1, 2016. The pro forma results combine the historical results of Ridgestone into the Companys Consolidated Statements of Operations, including the impact of certain acquisition accounting adjustments, which includes loan discount accretion, intangible assets amortization, deposit premium accretion and borrowing 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, 2016. 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.
Three
|
||||
Total revenues (net interest income and non-interest income) |
$ | 41,359 | ||
Net income (loss) |
$ | 3,771 | ||
Earnings per sharebasic |
$ | 0.17 | ||
Earnings per sharediluted |
$ | 0.17 |
The operating results of the Company include the operating results produced by the acquired assets and assumed liabilities of Ridgestone for the period from January 1, 2017 through March 31, 2017. Revenues and earnings of the acquired company since the acquisition date have not been disclosed as it is not practicable as Ridgestone was merged into the Company and separate financial information is not readily available.
Note 4Securities
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:
March 31, 2017 |
Amortized
|
Gross
|
Gross
|
Fair Value |
||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 14,996 | $ | 1 | $ | (71 | ) | $ | 14,926 | |||||||
U.S. Government agencies |
60,197 | 1 | (1,283 | ) | 58,915 | |||||||||||
Obligations of states, municipalities, and political subdivisions |
16,336 | 70 | (216 | ) | 16,190 | |||||||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
360,727 | 7 | (8,175 | ) | 352,559 | |||||||||||
Non-agency |
19,470 | | (207 | ) | 19,263 | |||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency |
77,128 | 47 | (1,597 | ) | 75,578 | |||||||||||
Non-agency |
31,987 | | (926 | ) | 31,061 | |||||||||||
Corporate securities |
17,065 | 443 | (49 | ) | 17,459 | |||||||||||
Other securities |
3,623 | 995 | (62 | ) | 4,556 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 601,529 | $ | 1,564 | $ | (12,586 | ) | $ | 590,507 | |||||||
|
|
|
|
|
|
|
|
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 4Securities (Continued)
Amortized
|
Gross
|
Gross
|
Fair Value |
|||||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | 24,828 | $ | 156 | $ | (130 | ) | $ | 24,854 | |||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
63,530 | 198 | (222 | ) | 63,506 | |||||||||||
Non-agency |
44,539 | 34 | (226 | ) | 44,347 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 132,897 | $ | 388 | $ | (578 | ) | $ | 132,707 | |||||||
|
|
|
|
|
|
|
|
December 31, 2016 |
Amortized
|
Gross
|
Gross
|
Fair Value |
||||||||||||
Available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 14,995 | $ | 4 | $ | (79 | ) | $ | 14,920 | |||||||
U.S. Government agencies |
60,180 | | (1,323 | ) | 58,857 | |||||||||||
Obligations of states, municipalities, and political subdivisions |
16,271 | 60 | (272 | ) | 16,059 | |||||||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
376,800 | | (8,640 | ) | 368,160 | |||||||||||
Non-agency |
20,107 | | (174 | ) | 19,933 | |||||||||||
Commercial mortgage-backed securities |
||||||||||||||||
Agency |
78,954 | | (1,551 | ) | 77,403 | |||||||||||
Non-agency |
32,061 | | (1,009 | ) | 31,052 | |||||||||||
Corporate securities |
17,065 | 350 | (86 | ) | 17,329 | |||||||||||
Other securities |
4,161 | 742 | (56 | ) | 4,847 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 620,594 | $ | 1,156 | $ | (13,190 | ) | $ | 608,560 | |||||||
|
|
|
|
|
|
|
|
Amortized
|
Gross
|
Gross
|
Fair Value |
|||||||||||||
Held-to-maturity |
||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
$ | 24,878 | $ | 105 | $ | (229 | ) | $ | 24,754 | |||||||
Residential mortgage-backed securities |
||||||||||||||||
Agency |
67,692 | 35 | (283 | ) | 67,444 | |||||||||||
Non-agency |
46,276 | 50 | (442 | ) | 45,884 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 138,846 | $ | 190 | $ | (954 | ) | $ | 138,082 | |||||||
|
|
|
|
|
|
|
|
The Company did not classify securities as trading during 2016 or the first quarter of 2017.
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BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 4Securities (Continued)
Gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016 are summarized as follows:
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
March 31, 2017 |
# of
Securities |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
|||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||
U.S. Treasury Notes |
4 | $ | 12,927 | $ | (71 | ) | $ | | $ | | $ | 12,927 | $ | (71 | ) | |||||||||||||
U.S. Government agencies |
9 | 57,915 | (1,283 | ) | | | 57,915 | (1,283 | ) | |||||||||||||||||||
Obligations of states, municipalities and political subdivisions |
13 | 7,184 | (203 | ) | 116 | (13 | ) | 7,300 | (216 | ) | ||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
39 | 330,757 | (8,024 | ) | 3,151 | (151 | ) | 333,908 | (8,175 | ) | ||||||||||||||||||
Non-agency |
2 | 19,263 | (207 | ) | | | 19,263 | (207 | ) | |||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
7 | 57,318 | (1,525 | ) | 6,278 | (72 | ) | 63,596 | (1,597 | ) | ||||||||||||||||||
Non-agency |
5 | 31,061 | (926 | ) | | | 31,061 | (926 | ) | |||||||||||||||||||
Corporate securities |
2 | 2,466 | (49 | ) | | | 2,466 | (49 | ) | |||||||||||||||||||
Other securities |
1 | | | 1,994 | (62 | ) | 1,994 | (62 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
82 | $ | 518,891 | $ | (12,288 | ) | $ | 11,539 | $ | (298 | ) | $ | 530,430 | $ | (12,586 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
# of
Securities |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
17 | $ | 12,052 | $ | (130 | ) | $ | | $ | | $ | 12,052 | $ | (130 | ) | |||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
11 | 23,563 | (222 | ) | | | 23,563 | (222 | ) | |||||||||||||||||||
Non-agency |
5 | 29,152 | (226 | ) | | | 29,152 | (226 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
33 | $ | 64,767 | $ | (578 | ) | $ | | $ | | $ | 64,767 | $ | (578 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-86
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 4Securities (Continued)
December 31, 2016 |
Less than 12 Months |
12 Months or Longer |
Total | |||||||||||||||||||||||||
# of
|
Fair Value |
Unrealized
|
Fair
|
Unrealized
|
Fair Value |
Unrealized
|
||||||||||||||||||||||
Available-for-sale |
||||||||||||||||||||||||||||
U.S. Treasury Notes |
3 | $ | 9,918 | $ | (79 | ) | $ | | $ | | $ | 9,918 | $ | (79 | ) | |||||||||||||
U.S. Government agencies |
10 | 58,857 | (1,323 | ) | | | 58,857 | (1,323 | ) | |||||||||||||||||||
Obligations of states, municipalities and political subdivisions |
14 | 7,799 | (259 | ) | 115 | (13 | ) | 7,914 | (272 | ) | ||||||||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
41 | 364,713 | (8,483 | ) | 3,447 | (157 | ) | 368,160 | (8,640 | ) | ||||||||||||||||||
Non-agency |
2 | 19,933 | (174 | ) | | | 19,933 | (174 | ) | |||||||||||||||||||
Commercial mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
8 | 70,762 | (1,488 | ) | 6,641 | (63 | ) | 77,403 | (1,551 | ) | ||||||||||||||||||
Non-agency |
5 | 31,052 | (1,009 | ) | | | 31,052 | (1,009 | ) | |||||||||||||||||||
Corporate securities |
4 | 5,097 | (78 | ) | 2,522 | (8 | ) | 7,619 | (86 | ) | ||||||||||||||||||
Other securities |
1 | | | 1,994 | (56 | ) | 1,994 | (56 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
88 | $ | 568,131 | $ | (12,893 | ) | $ | 14,719 | $ | (297 | ) | $ | 582,850 | $ | (13,190 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||||||
# of
Securities |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
Fair
Value |
Unrealized
Losses |
||||||||||||||||||||||
Held-to-maturity |
||||||||||||||||||||||||||||
Obligations of states, municipalities, and political subdivisions |
22 | $ | 16,235 | $ | (229 | ) | $ | | $ | | $ | 16,235 | $ | (229 | ) | |||||||||||||
Residential mortgage-backed securities |
||||||||||||||||||||||||||||
Agency |
15 | 52,156 | (283 | ) | | | 52,156 | (283 | ) | |||||||||||||||||||
Non-agency |
5 | 29,245 | (442 | ) | | | 29,245 | (442 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
42 | $ | 97,636 | $ | (954 | ) | $ | | $ | | $ | 97,636 | $ | (954 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At March 31, 2017, the Company evaluated the securities which had an unrealized loss for other than temporary impairment and determined all declines in value to be temporary. There were 115 investment securities with unrealized losses at March 31, 2017, of which only two had a continuous unrealized loss position for 12 consecutive months or longer that is greater than 5% of amortized cost. 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.
F-87
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 4Securities (Continued)
The proceeds from all sales of securities were available-for-sale and the associated gains and losses for the three months ended March 31, 2017 and 2016 are listed below:
For the three months
March 31, |
||||||||
2017 | 2016 | |||||||
Proceeds |
$ | 8 | $ | 140,001 | ||||
Gross gains |
8 | 923 | ||||||
Gross losses |
| |
The amount of net gains reclassified from accumulated other comprehensive loss into earnings for the three months ended March 31, 2017 and 2016 were $8,000 and $923,000, respectively.
Securities pledged at March 31, 2017 and December 31, 2016 had carrying amounts of $219.1 million and $178.6 million, respectively. At March 31, 2017 and December 31, 2016, of those pledged, the carrying amounts of securities pledged as collateral for public fund deposits were $172.9 million and $93.2 million, respectively, and for customer repurchase agreements of $39.4 million, $19.9 million, respectively. There were no securities pledged for advances from the Federal Home Loan Bank as of March 31, 2017. At December 31, 2016 the carrying amount of securities pledged for advances from the Federal Home Loan Bank were $58.7 million. Other securities were pledged for derivative positions, letters of credit and for purposes required or permitted by law. At March 31, 2017 and December 31, 2016, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of stockholders equity.
At March 31, 2017, 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 |
$ | 5,408 | $ | 5,407 | ||||
Due from one to five years |
55,539 | 55,492 | ||||||
Due from five to ten years |
41,656 | 40,724 | ||||||
Due after ten years |
6,521 | 6,396 | ||||||
Mortgage-backed securities |
489,312 | 478,461 | ||||||
Other securities with no defined maturity |
3,093 | 4,027 | ||||||
|
|
|
|
|||||
Total |
$ | 601,529 | $ | 590,507 | ||||
|
|
|
|
|||||
Held-to-maturity |
||||||||
Due from one to five years |
$ | 528 | $ | 528 | ||||
Due from five to ten years |
13,358 | 13,322 | ||||||
Due after ten years |
10,942 | 11,004 | ||||||
Mortgage-backed securities |
108,069 | 107,853 | ||||||
|
|
|
|
|||||
Total |
$ | 132,897 | $ | 132,707 | ||||
|
|
|
|
F-88
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 5Loan and Lease Receivables
Outstanding loan and lease receivables as of the dates shown were categorized as follows:
March 31,
|
December 31,
|
|||||||
Commercial real estate |
$ | 823,500 | $ | 796,950 | ||||
Residential real estate |
601,354 | 610,699 | ||||||
Construction, land development, and other land |
105,592 | 141,122 | ||||||
Commercial and industrial |
449,853 | 439,476 | ||||||
Installment and other |
2,775 | 2,917 | ||||||
Lease financing receivables |
159,489 | 155,999 | ||||||
|
|
|
|
|||||
Total loans and leases |
2,142,563 | 2,147,163 | ||||||
Net unamortized deferred fees and costs |
(2,215 | ) | (2,119 | ) | ||||
Initial direct costs |
3,186 | 2,967 | ||||||
Allowance for loan and lease losses |
(11,817 | ) | (10,923 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
$ | 2,131,717 | $ | 2,137,088 | ||||
|
|
|
|
March 31,
|
December 31,
|
|||||||
Lease financing receivables |
||||||||
Net minimum lease payments |
$ | 172,333 | $ | 168,345 | ||||
Unguaranteed residual values |
1,776 | 1,787 | ||||||
Unearned income |
(14,620 | ) | (14,133 | ) | ||||
|
|
|
|
|||||
Total lease financing receivables |
159,489 | 155,999 | ||||||
Initial direct costs |
3,186 | 2,967 | ||||||
|
|
|
|
|||||
Lease financial receivables before allowance for lease losses |
$ | 162,675 | $ | 158,966 | ||||
|
|
|
|
At March 31, 2017 and December 31, 2016, total loans and leases included U.S. Government guaranteed loans of $394.4 million and $332.9 million, respectively. At March 31, 2017 and December 31, 2016, installment and other loans included overdraft deposits of $1.0 million, which were reclassified as loans. At March 31, 2017 and December 31, 2016, loans and loans held for sale pledged as security for borrowings were $553.6 million and $507.2 million, respectively. Total loans and leases consist of originated loans and leases, acquired impaired loans and acquired non-impaired loans and leases.
The minimum annual lease payments for lease financing receivables as of March 31, 2017 are summarized as follows:
Minimum lease
|
||||
2017 |
$ | 47,026 | ||
2018 |
51,560 | |||
2019 |
37,538 | |||
2020 |
23,718 | |||
2021 |
10,798 | |||
Thereafter |
1,693 | |||
|
|
|||
Total |
$ | 172,333 | ||
|
|
F-89
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 5Loan and Lease Receivables (Continued)
Originated loans and leases represent originations following a business combination. Acquired impaired loans are loans acquired from a business combination with evidence of credit quality deterioration and are accounted for under ASC 310-30. Acquired non-impaired loans and leases represent loans and leases acquired from a business combination without evidence of credit quality deterioration and are accounted for under ASC 310-20. Leases and revolving loans do not qualify to be accounted for as acquired impaired loans and are accounted for under ASC 310-20. The following tables summarize the balances for each respective loan and lease category as of March 31, 2017 and December 31, 2016:
March 31, 2017 |
Originated |
Acquired
|
Acquired
|
Total |
||||||||||||
Commercial real estate |
$ | 380,292 | $ | 201,689 | $ | 240,869 | $ | 822,850 | ||||||||
Residential real estate |
391,940 | 169,676 | 39,791 | 601,407 | ||||||||||||
Construction, land development, and other land |
89,466 | 6,116 | 9,733 | 105,315 | ||||||||||||
Commercial and industrial |
323,422 | 13,114 | 111,931 | 448,467 | ||||||||||||
Installment and other |
2,016 | 439 | 365 | 2,820 | ||||||||||||
Lease financing receivables |
128,666 | | 34,009 | 162,675 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 1,315,802 | $ | 391,034 | $ | 436,698 | $ | 2,143,534 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2016 |
Originated |
Acquired
|
Acquired
|
Total |
||||||||||||
Commercial real estate |
$ | 338,752 | $ | 207,303 | $ | 250,289 | $ | 796,344 | ||||||||
Residential real estate |
394,168 | 175,717 | 40,853 | 610,738 | ||||||||||||
Construction, land development, and other land |
119,357 | 6,979 | 14,430 | 140,766 | ||||||||||||
Commercial and industrial |
309,097 | 13,464 | 115,677 | 438,238 | ||||||||||||
Installment and other |
2,021 | 574 | 364 | 2,959 | ||||||||||||
Lease financing receivables |
118,493 | | 40,473 | 158,966 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans and leases |
$ | 1,281,888 | $ | 404,037 | $ | 462,086 | $ | 2,148,011 | ||||||||
|
|
|
|
|
|
|
|
The outstanding balance and carrying amount of all acquired impaired loans are summarized below. The balances do not include an allowance for loan and lease losses of $1.8 million and $1.6 million, respectively, at March 31, 2017 and December 31, 2016.
March 31, 2017 |
December 31, 2016 |
|||||||||||||||
Outstanding
|
Carrying
|
Outstanding
|
Carrying
|
|||||||||||||
Commercial real estate |
$ | 273,022 | $ | 201,689 | $ | 278,893 | $ | 207,303 | ||||||||
Residential real estate |
230,077 | 169,676 | 236,384 | 175,717 | ||||||||||||
Construction, land development, and other land |
14,974 | 6,116 | 15,292 | 6,979 | ||||||||||||
Commercial and industrial |
22,210 | 13,114 | 23,164 | 13,464 | ||||||||||||
Installment and other |
1,925 | 439 | 1,976 | 574 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total acquired impaired loans |
$ | 542,208 | $ | 391,034 | $ | 555,709 | $ | 404,037 | ||||||||
|
|
|
|
|
|
|
|
F-90
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 5Loan and Lease Receivables (Continued)
The following table summarizes the changes in accretable yield for acquired impaired loans for the three months ended March 31, 2017 and 2016:
Three months
ended
|
||||||||
2017 |
2016 |
|||||||
Beginning balance |
$ | 36,868 | $ | 43,915 | ||||
Accretion to interest income |
(5,684 | ) | (7,747 | ) | ||||
Reclassification from nonaccretable difference |
3,560 | 4,552 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 34,744 | $ | 40,720 | ||||
|
|
|
|
Acquired non-impaired loans and leases The unpaid principal balance and carrying value for acquired non-impaired loans and leases at March 31, 2017 and December 31, 2016 were as follows:
March 31, 2017 |
December 31, 2016 |
|||||||||||||||
Unpaid
|
Carrying
|
Unpaid
|
Carrying
|
|||||||||||||
Commercial real estate |
$ | 248,909 | $ | 240,869 | $ | 259,055 | $ | 250,289 | ||||||||
Residential real estate |
40,170 | 39,791 | 41,282 | 40,853 | ||||||||||||
Construction, land development, and other land |
9,927 | 9,733 | 14,619 | 14,430 | ||||||||||||
Commercial and industrial |
124,178 | 111,931 | 125,806 | 115,677 | ||||||||||||
Installment and other |
358 | 365 | 402 | 364 | ||||||||||||
Lease financing receivables |
33,102 | 34,009 | 40,205 | 40,473 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total acquired non-impaired loans and leases |
$ | 456,644 | $ | 436,698 | $ | 481,369 | $ | 462,086 | ||||||||
|
|
|
|
|
|
|
|
Note 6Allowance 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 or recapitalization, and originated loans and leases. Although all acquired loans and leases are included in the following table, only those with credit deterioration subsequent to acquisition date are actually included in the allowance for loan and lease losses.
F-91
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
The following tables summarize the balance and activity within the allowance for loan and lease losses, the components of the allowance for loan and lease losses in terms of loans and leases individually and collectively evaluated for impairment, and corresponding loan and lease balances by type for the three months ended March 31, 2017 and 2016 are as follows:
March 31, 2017 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Allowance for loan and lease losses |
||||||||||||||||||||||||||||
Beginning balance |
$ | 1,945 | $ | 2,483 | $ | 742 | $ | 4,196 | $ | 334 | $ | 1,223 | $ | 10,923 | ||||||||||||||
Provisions |
340 | 1 | (325 | ) | 855 | (3 | ) | 1,023 | 1,891 | |||||||||||||||||||
Charge-offs |
(238 | ) | (67 | ) | | (215 | ) | | (770 | ) | (1,290 | ) | ||||||||||||||||
Recoveries |
| | | | | 293 | 293 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 2,047 | $ | 2,417 | $ | 417 | $ | 4,836 | $ | 331 | $ | 1,769 | $ | 11,817 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | | $ | 282 | $ | 26 | $ | 966 | $ | 325 | $ | | $ | 1,599 | ||||||||||||||
Collectively evaluated for impairment |
1,622 | 1,470 | 391 | 3,210 | 5 | 1,769 | 8,467 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
425 | 665 | | 660 | 1 | | 1,751 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total allowance for loan and lease losses |
$ | 2,047 | $ | 2,417 | $ | 417 | $ | 4,836 | $ | 331 | $ | 1,769 | $ | 11,817 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Loans and leases ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 9,764 | $ | 1,262 | $ | 85 | $ | 3,317 | $ | 327 | $ | | $ | 14,755 | ||||||||||||||
Collectively evaluated for impairment |
611,397 | 430,469 | 99,114 | 432,036 | 2,054 | 162,675 | 1,737,745 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
201,689 | 169,676 | 6,116 | 13,114 | 439 | | 391,034 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases evaluated for allowance for loan and lease losses |
$ | 822,850 | $ | 601,407 | $ | 105,315 | $ | 448,467 | $ | 2,820 | $ | 162,675 | $ | 2,143,534 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-92
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
March 31, 2016 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Allowance for loan and lease losses |
||||||||||||||||||||||||||||
Beginning balance |
$ | 2,280 | $ | 2,981 | $ | 232 | $ | 1,403 | $ | 357 | $ | 379 | $ | 7,632 | ||||||||||||||
Provisions |
1,264 | 502 | 90 | (51 | ) | 5 | 703 | 2,513 | ||||||||||||||||||||
Charge-offs |
(1,153 | ) | (533 | ) | | (3 | ) | | (682 | ) | (2,371 | ) | ||||||||||||||||
Recoveries |
| | | | | 129 | 129 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance |
$ | 2,391 | $ | 2,950 | $ | 322 | $ | 1,349 | $ | 362 | $ | 529 | $ | 7,903 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 1,309 | $ | 380 | $ | 137 | $ | 163 | $ | 327 | $ | | $ | 2,316 | ||||||||||||||
Collectively evaluated for impairment |
465 | 434 | 178 | 465 | | 529 | 2,071 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
617 | 2,136 | 7 | 721 | 35 | | 3,516 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total allowance for loan and lease losses |
$ | 2,391 | $ | 2,950 | $ | 322 | $ | 1,349 | $ | 362 | $ | 529 | $ | 7,903 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
||||||||||||||||||||||
Loans and leases ending balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 6,943 | $ | 3,335 | $ | 208 | $ | 213 | $ | 327 | $ | | $ | 11,026 | ||||||||||||||
Collectively evaluated for impairment |
295,297 | 441,539 | 46,041 | 156,496 | 649 | 123,572 | 1,063,594 | |||||||||||||||||||||
Loans acquired with deteriorated credit quality |
205,385 | 207,536 | 7,545 | 7,462 | 947 | | 428,875 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total loans and leases evaluated for allowance for loan and lease losses |
$ | 507,625 | $ | 652,410 | $ | 53,794 | $ | 164,171 | $ | 1,923 | $ | 123,572 | $ | 1,503,495 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company increased the allowance for loans and lease losses by $894,000 for the three months ended March 31, 2017. The Company increased the allowance for loan and leases losses by $271,000 for the three months ended March 31, 2016. For acquired impaired loans, the Company increased the allowance for loan and lease losses by $140,000 for the three months ended March 31, 2017 and $226,000 for the three months ended March 31, 2016.
F-93
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
The following tables summarize the recorded investment, unpaid principal balance, and related allowance for loans and leases considered impaired as of March 31, 2017 and December 31, 2016, which excludes acquired impaired loans:
March 31, 2017 |
Recorded
|
Unpaid
|
Related
|
|||||||||
With no related allowance recorded |
||||||||||||
Commercial real estate |
$ | 9,764 | $ | 10,353 | $ | | ||||||
Residential real estate |
778 | 1,902 | | |||||||||
Commercial and Industrial |
1,574 | 1,675 | | |||||||||
With an allowance recorded |
||||||||||||
Residential real estate |
484 | 481 | 282 | |||||||||
Construction, land development and other land |
85 | 87 | 26 | |||||||||
Commercial and industrial |
1,743 | 1,810 | 966 | |||||||||
Installment and Other |
327 | 315 | 325 | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
$ | 14,755 | $ | 16,623 | $ | 1,599 | ||||||
|
|
|
|
|
|
December 31, 2016 |
Recorded
|
Unpaid
|
Related
|
|||||||||
With no related allowance recorded |
||||||||||||
Commercial real estate |
$ | 8,916 | $ | 9,502 | $ | | ||||||
Residential real estate |
804 | 1,999 | | |||||||||
Commercial and Industrial |
521 | 524 | | |||||||||
With an allowance recorded |
||||||||||||
Residential real estate |
496 | 528 | 293 | |||||||||
Commercial and industrial |
861 | 869 | 396 | |||||||||
Installment and Other |
328 | 361 | 328 | |||||||||
|
|
|
|
|
|
|||||||
Total impaired loans |
$ | 11,926 | $ | 13,783 | $ | 1,017 | ||||||
|
|
|
|
|
|
F-94
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
The following table summarize the average recorded investment and interest income recognized for loans and leases considered impaired, which excludes acquired impaired loans, for the periods ended as follows:
March 31, 2017 |
Average
|
Interest
|
||||||
With no related allowance recorded |
||||||||
Commercial real estate |
$ | 9,798 | $ | 130 | ||||
Residential real estate |
787 | 7 | ||||||
Commercial and Industrial |
1,402 | 60 | ||||||
With an allowance recorded |
||||||||
Residential real estate |
488 | 1 | ||||||
Construction, land development and other land |
86 | 6 | ||||||
Commercial and industrial |
1,881 | 3 | ||||||
Installment and Other |
328 | 4 | ||||||
|
|
|
|
|||||
Total impaired loans |
$ | 14,770 | $ | 211 | ||||
|
|
|
|
March 31, 2016 |
Average
|
Interest
|
||||||
With no related allowance recorded |
||||||||
Commercial real estate |
$ | 5,639 | $ | 79 | ||||
Residential real estate |
845 | 14 | ||||||
With an allowance recorded |
||||||||
Residential real estate |
537 | 1 | ||||||
Commercial and industrial |
211 | 1 | ||||||
Installment and Other |
329 | 5 | ||||||
|
|
|
|
|||||
Total impaired loans |
$ | 7,561 | $ | 100 | ||||
|
|
|
|
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.
F-95
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
The following tables summarize the risk rating categories of the loans and leases considered for inclusion in the allowance for loan and lease losses calculation, excluding acquired impaired loans, as of March 31, 2017 and December 31, 2016:
March 31, 2017 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Pass |
$ | 568,820 | $ | 415,599 | $ | 95,839 | $ | 366,399 | $ | 2,049 | $ | 160,299 | $ | 1,609,005 | ||||||||||||||
Watch |
38,032 | 11,838 | 2,124 | 64,247 | 3 | 681 | 116,925 | |||||||||||||||||||||
Special Mention |
6,134 | 3,090 | 1,151 | 1,355 | 1 | 341 | 12,072 | |||||||||||||||||||||
Substandard |
8,175 | 1,204 | 85 | 3,352 | 328 | 1,186 | 14,330 | |||||||||||||||||||||
Doubtful |
| | | | | 168 | 168 | |||||||||||||||||||||
Loss |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 621,161 | $ | 431,731 | $ | 99,199 | $ | 435,353 | $ | 2,381 | $ | 162,675 | $ | 1,752,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
Commercial
|
Residential
|
Construction,
|
Commercial
|
Installment
|
Lease
|
Total |
|||||||||||||||||||||
Pass |
$ | 536,499 | $ | 419,880 | $ | 129,732 | $ | 369,136 | $ | 2,052 | $ | 157,296 | $ | 1,614,595 | ||||||||||||||
Watch |
38,707 | 10,885 | 2,897 | 52,872 | 4 | 324 | 105,689 | |||||||||||||||||||||
Special Mention |
5,377 | 3,116 | 1,158 | 1,258 | 1 | 512 | 11,422 | |||||||||||||||||||||
Substandard |
8,458 | 1,140 | | 1,508 | 328 | 739 | 12,173 | |||||||||||||||||||||
Doubtful |
| | | | | 95 | 95 | |||||||||||||||||||||
Loss |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 589,041 | $ | 435,021 | $ | 133,787 | $ | 424,774 | $ | 2,385 | $ | 158,966 | $ | 1,743,974 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables summarize contractual past due and current loan information for acquired non-impaired and originated loans by category at March 31, 2017 and December 31, 2016:
March 31, 2017 |
30-59 Days
|
60-89 Days
|
Greater than
|
Non-accrual |
Total
|
Current |
Total |
|||||||||||||||||||||
Commercial real estate |
$ | 6,472 | $ | | $ | | $ | 4,442 | $ | 10,914 | $ | 610,247 | $ | 621,161 | ||||||||||||||
Residential real estate |
913 | 31 | | 1,204 | 2,148 | 429,583 | 431,731 | |||||||||||||||||||||
Construction, land development, and other land |
565 | | | 85 | 650 | 98,549 | 99,199 | |||||||||||||||||||||
Commercial and industrial |
1,616 | 1,841 | | 1,241 | 4,698 | 430,655 | 435,353 | |||||||||||||||||||||
Installment and other |
| | | 328 | 328 | 2,053 | 2,381 | |||||||||||||||||||||
Lease Financing Receivables |
473 | 811 | | 543 | 1,827 | 160,848 | 162,675 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 10,039 | $ | 2,683 | $ | | $ | 7,843 | $ | 20,565 | $ | 1,731,935 | $ | 1,752,500 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-96
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 6Allowance for Loan and Lease Losses and Reserve for Unfunded Commitments (Continued)
December 31, 2016 |
30-59 Days
|
60-89 Days
|
Greater than
|
Non-accrual |
Total
|
Current |
Total |
|||||||||||||||||||||
Commercial real estate |
$ | 2,944 | $ | 648 | $ | | $ | 3,935 | $ | 7,527 | $ | 581,514 | $ | 589,041 | ||||||||||||||
Residential real estate |
243 | | | 1,118 | 1,361 | 433,660 | 435,021 | |||||||||||||||||||||
Construction, land development, and other land |
1,363 | | | | 1,363 | 132,424 | 133,787 | |||||||||||||||||||||
Commercial and industrial |
6,066 | 374 | | 958 | 7,398 | 417,376 | 424,774 | |||||||||||||||||||||
Installment and other |
| | | 328 | 328 | 2,057 | 2,385 | |||||||||||||||||||||
Lease Financing Receivables |
2,070 | 390 | | 445 | 2,905 | 156,061 | 158,966 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 12,686 | $ | 1,412 | $ | | $ | 6,784 | $ | 20,882 | $ | 1,723,092 | $ | 1,743,974 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2017 and December 31, 2016, the Company had a recorded investment in troubled debt restructurings of $1.5 million and $1.2 million, respectively. The restructurings were granted due to borrower financial difficulty and provide for a modification of loan repayment terms. The Company has not allocated any specific allowance for these loans at March 31, 2017 and December 31, 2016. In addition, there were no commitments outstanding on troubled debt restructurings.
Loans modified as troubled debt restructurings that occurred during the three months ended March 31, 2017 and year ended December 31, 2016 did not result in any charge-offs or permanent reductions of the recorded investments in the loans. Troubled debt restructurings that subsequently defaulted within twelve months of the restructure date during the year ended December 31, 2016 had a recorded investment of $477,000. No troubled debt restructurings subsequently defaulted within twelve months of the restructure date during the three months ended March 31, 2017.
At March 31, 2017 and December 31, 2016, the reserve for unfunded commitments was $810,000 and $760,000, respectively. During the three months ended March 31, 2017 and 2016, the provisions for unfunded commitments were $50,000 and $(22,000), respectively. There were no charge-offs or recoveries related to the reserve for unfunded commitments during the periods.
Note 7Servicing Assets
As part of the Ridgestone acquisition, the Company acquired loan servicing assets. The Company did not hold any servicing assets until the acquisition on October 14, 2016.
Loans serviced for others are not included in the Consolidated Statements of Financial Condition. The unpaid principal balances of these loans serviced for others were as follows as of March 31, 2017 and December 31, 2016:
March 31,
|
December 31,
|
|||||||
Loan portfolios serviced for: |
||||||||
SBA |
$ | 903,157 | $ | 911,803 | ||||
USDA |
82,965 | 106,125 | ||||||
|
|
|
|
|||||
Total |
$ | 986,122 | $ | 1,017,928 | ||||
|
|
|
|
F-97
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 7Servicing Assets (Continued)
Activity for servicing assets and the related changes in fair value are as follows:
March 31,
|
||||
Beginning balance |
$ | 21,091 | ||
Additions, net |
1,422 | |||
Changes in fair value |
(1,290 | ) | ||
|
|
|||
Ending balance |
$ | 21,223 | ||
|
|
Loan servicing income totaled $919,000, net of the changes in fair value, for the three months ended March 31, 2017.
The fair value of servicing rights is highly sensitive to changes in underlying assumptions. Changes in prepayment speed assumptions have the most significant impact on the fair value of servicing rights.
Generally, as interest rates rise on variable rate loans, loan prepayments increase due to an increase in refinance activity, which may result in a decrease in the fair value of servicing assets. Measurement of fair value is limited to the condition existing and the assumptions used as of a particular point in time, and those assumptions may change over time. Refer to Note 16Fair Value Measurement for further details.
Note 8Other Real Estate Owned
The following table presents the change in other real estate owned (OREO) for the three months ended March 31, 2017 and 2016.
March 31, |
||||||||
2017 |
2016 |
|||||||
Beginning balance |
$ | 16,570 | $ | 26,715 | ||||
Net additions to other real estate owned |
799 | 2,356 | ||||||
Dispositions of OREO |
(3,920 | ) | (4,686 | ) | ||||
Valuation adjustments |
(276 | ) | 81 | |||||
|
|
|
|
|||||
Ending balance |
$ | 13,173 | $ | 24,466 | ||||
|
|
|
|
F-98
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 9Goodwill, Core Deposit Intangible and Other Intangible Assets
The following table summarizes the changes in the Companys goodwill and core deposit intangible assets for the three months ended March 31, 2017 and 2016:
March 31, |
||||||||||||||||
2017 |
2016 |
|||||||||||||||
Goodwill |
Core Deposit
|
Goodwill |
Core Deposit
|
|||||||||||||
Beginning balance |
$ | 51,975 | $ | 19,776 | $ | 25,688 | $ | 22,275 | ||||||||
Amortization or accretion |
| (765 | ) | | (743 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 51,975 | $ | 19,011 | $ | 25,688 | $ | 21,532 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Accumulated amortization or accretion |
N/A | $ | 11,175 | N/A | $ | 8,168 | ||||||||||
Weighted average remaining amortization or accretion period |
N/A | 6.4 Years | N/A | 7.3 Years |
The Company has other intangible assets of $47,000 and $50,000 as of March 31, 2017 and December 31, 2016, respectively, related to trademark-related transactions.
The following table presents the estimated amortization expense for core deposit intangible and other intangible assets recognized at March 31, 2017:
Estimated
|
||||
2017 |
$ | 2,304 | ||
2018 |
3,061 | |||
2019 |
3,050 | |||
2020 |
3,024 | |||
2021 |
3,017 | |||
Thereafter |
4,602 | |||
|
|
|||
Total |
$ | 19,058 | ||
|
|
Note 10Income 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 rates for the three months ended March 31, 2017 and 2016 were 40.9% and 15.1%, respectively. The Company began to recognize income tax expense in the quarter ended December 31, 2016 after the reversal of $61.9 million of the Companys previously established valuation allowance on its net deferred tax assets.
Deferred tax assets decreased $4.8 million from $67.8 million at December 31, 2016 to $62.9 million at March 31, 2017. This decrease was primarily due to a reduction in the Companys net operation loss carryforwards being applied to the current year tax liability.
F-99
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 11Deposits
The composition of deposits was as follows as of March 31, 2017 and December 31, 2016:
March 31,
|
December 31,
|
|||||||
Non-interest bearing demand deposits |
$ | 732,267 | $ | 724,457 | ||||
Interest bearing checking accounts |
192,317 | 173,929 | ||||||
Money market demand accounts |
393,372 | 369,074 | ||||||
Other savings |
446,847 | 446,418 | ||||||
Time deposits (below $100,000) |
407,471 | 392,854 | ||||||
Time deposits ($100,000 and above) |
403,565 | 383,662 | ||||||
|
|
|
|
|||||
Total deposits |
$ | 2,575,839 | $ | 2,490,394 | ||||
|
|
|
|
Time deposits of $100,000 or more included $18.7 million and $30.8 million of brokered deposits at March 31, 2017 and December 31, 2016, respectively. Time deposits in denominations of $250,000 or more at March 31, 2017 and December 31, 2016 were $113.7 million and $117.4 million, respectively.
Note 12Federal Home Loan Bank Advances
The following table summarizes the FHLB advances as of March 31, 2017 and December 31, 2016, which include acquisition accounting adjustments of $176,000 and $228,000, respectively, along with weighted average costs and scheduled maturities:
March 31,
|
December 31,
|
|||||||
Federal Home Loan advances |
$ | 209,663 | $ | 313,715 | ||||
Weighted average cost |
1.08 | % | 0.73 | % | ||||
Scheduled
Maturities |
||||||||
2017 |
$ | 200,000 | ||||||
2018 |
9,663 | |||||||
|
|
|||||||
Total |
$ | 209,663 | ||||||
|
|
At March 31, 2017, advances had fixed terms with interest rates ranging from 0.96% to 3.22% and maturities ranging from June 2017 to February 2018. The Banks advances from the FHLB are collateralized by residential real estate loans and securities. At March 31, 2017 and December 31, 2016, the Bank had additional borrowing capacity from the FHLB of $943.9 million and $647.9 million, respectively, subject to the availability of proper collateral. The Banks maximum borrowing capacity is limited to 35% of total assets.
FHLB advances assumed from the Ridgestone acquisition of $1.5 million are putable quarterly and are required to be repaid upon the request of the FHLB.
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 17Derivative Instruments and Hedge Activities for additional information.
F-100
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 13Other Borrowings
The following is a summary of the Companys other borrowings as of March 31, 2017 and December 31, 2016:
March 31,
|
December 31,
|
|||||||
Securities sold under agreements to repurchase |
$ | 31,940 | $ | 17,249 | ||||
Line of credit |
18,150 | 20,650 | ||||||
|
|
|
|
|||||
Total |
$ | 50,090 | $ | 37,899 | ||||
|
|
|
|
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 4Securities for additional discussion.
On October 13, 2016, in connection with the Ridgestone acquisition, the Company entered into a $30.0 million credit agreement with The PrivateBank and Trust Company with a $300,000 commitment fee payable at such time. The line of credit has a maturity date of October 12, 2017 and bears an interest rate equal to the Prime rate. At March 31, 2017 and December 31, 2016, the interest rate was 4.00% and 3.75%, respectively. As of March 31, 2017 and December 31, 2016, the Company was in compliance with all financial covenants set forth in the line of credit agreement.
The following table presents short-term credit lines available for use, for which the Company did not have an outstanding balance as of March 31, 2017 and December 31, 2016:
March 31,
|
December 31,
|
|||||||
Federal Reserve Bank of Chicago discount window line |
$ | 169,500 | $ | 110,600 | ||||
Available federal funds line |
20,000 | 20,000 |
Note 14Junior Subordinated Debentures
At March 31, 2017 and December 31, 2016, the Companys junior subordinated debentures by issuance were as follows:
Name of Trust |
Aggregate Principal Amount
March 31,
|
Aggregate
Amount
December 31,
|
Stated Maturity |
Contractual Rate at March 31, 2017 |
Interest Rate Spread |
|||||||||||||||
Metropolitan Statutory Trust 1 |
$ | 35,000 | $ | 35,000 | March 17, 2034 | 3.94 | % | Three-month LIBOR + 2.79% | ||||||||||||
RidgeStone Capital Trust I |
1,500 | 1,500 | June 30, 2033 | 5.09 | % | Five-year LIBOR + 3.50% | ||||||||||||||
|
|
|
|
|||||||||||||||||
Total liability, at par |
36,500 | 36,500 | ||||||||||||||||||
Discount |
(9,370 | ) | (9,574 | ) | ||||||||||||||||
|
|
|
|
|||||||||||||||||
Total liability, at fair value |
$ | 27,130 | $ | 26,926 | ||||||||||||||||
|
|
|
|
F-101
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 14Junior Subordinated Debentures (Continued)
In 2004, the Companys 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 London Interbank Offered Rate (LIBOR) plus 2.79% (3.94% and 3.78% at March 31, 2017 and December 31, 2016, 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 $59,000 and $50,000 as of March 31, 2017 and December 31, 2016, 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. Refer to Note 3Acquisition of a Business for additional information. Beginning on June 30, 2008, the interest rate reset to the five-year LIBOR plus 3.50% (5.09% at March 31, 2017 and December 31, 2016), which is in effect until September 30, 2018 and updated every five years. Interest is paid quarterly. The Company has the right to redeem the debentures, in whole or in part, on any interest payment date on or after June 30, 2008. There was no accrued interest payable as of March 31, 2017.
The Trusts are not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trusts as liabilities. The Company owns all of the common securities of each trust. The junior subordinated debentures qualify, and are treated as, Tier 1 regulatory capital of the Company subject to regulatory limitations. The trust preferred securities issued by each trust rank equally with the common securities in right of payment, except that if an event of default under the indenture governing the notes has occurred and is continuing, the preferred securities will rank senior to the common securities in right of payment.
Note 15Commitments 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 Companys Consolidated Statements of Financial Condition as of March 31, 2017 and December 31, 2016 or Consolidated Statements of Operations for the periods ended March 31, 2017 and 2016.
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.
F-102
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 15Commitments and Contingent Liabilities (Continued)
The minimum annual rental commitments for operating leases subsequent to March 31, 2017, exclusive of taxes and other charges, are summarized as follows:
Minimum Rental
|
||||
2017 |
$ | 2,247 | ||
2018 |
2,669 | |||
2019 |
2,315 | |||
2020 |
1,815 | |||
2021 |
1,568 | |||
Thereafter |
2,798 | |||
|
|
|||
Total |
$ | 13,412 | ||
|
|
The Companys rental expenses for the three months ended March 31, 2017 and 2016 were $1.1 million and $891,000, respectively. During the three months ended March 31, 2017 and 2016, the Company received $190,000 and $180,000, respectively, in sublease income which is included in the Consolidated Statements of Operations as a reduction of occupancy expense. In addition to the above required lease payments, the Company has contractual obligations related primarily to information technology contracts and other maintenance contracts. The amounts are not material.
Commitments to extend credit The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Financial Condition. The contractual or notional amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments.
The Banks 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. The Bank uses the same credit policies in making commitments and conditional obligations as it does for funded instruments. The Bank does not anticipate any material losses as a result of the commitments and standby letters of credit.
The following table summarizes the contract or notional amount of outstanding loan and lease commitments at March 31, 2017 and December 31, 2016:
March 31, 2017 |
December 31, 2016 |
|||||||||||||||
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||
Commitments to extend credit |
$ | 35,720 | $ | 367,278 | $ | 37,731 | $ | 332,928 | ||||||||
Standby letters of credit |
954 | 3,239 | 1,060 | 4,135 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 36,674 | $ | 370,517 | $ | 38,791 | $ | 337,063 | ||||||||
|
|
|
|
|
|
|
|
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
F-103
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 15Commitments and Contingent Liabilities (Continued)
without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the counterparty. Collateral is primarily obtained in the form of commercial and residential real estate (including income producing commercial properties).
Standby letters of credit are conditional commitments issued by the Bank to guarantee to a third-party the performance of a customer. Those guarantees are primarily issued to support public and private borrowing arrangements, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 2.1% to 19.5% and maturities up to 2025. Variable rate loan commitments have interest rates ranging from 2.5% to 9.8% and maturities up to 2042.
Note 16Fair 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 Companys own data used to develop unobservable inputs may be adjusted for market considerations when reasonably available.
A financial instruments categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to assets and liabilities.
The Company used the following methods and significant assumptions to estimate fair value for certain assets measured and carried at fair value on a recurring basis:
Securities available-for-sale The Company obtains fair value measurements from an independent pricing service. Management reviews the procedures used by the third party, including significant inputs used in the fair value calculations. The fair value measurements consider observable data that may include dealer quotes,
F-104
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 16Fair Value Measurement (Continued)
market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bonds 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 Companys 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 Companys valuation). In the first quarter of 2017 and 2016, all of the ratings derived by the Company were BBB or better with and without comparable bond proxies. The fair value measurement of municipal bonds is sensitive to the rating input, as a higher rating typically results in an increased valuation. The remaining pricing inputs used in the bond valuation are observable. Based on the rating determined, the Company obtains a corresponding current market yield curve available to market participants. Other terms including coupon, maturity date, redemption price, number of coupon payments per year, and accrual method are obtained from the individual bond term sheets.
Servicing assets Fair value is based on a loan-by-loan basis taking into consideration the original term to maturity, the current age of the loan and the remaining term to maturity. The valuation methodology utilized for the servicing assets begins with generating future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing market-based discount rate assumptions.
Derivative instruments Interest rate swaps are valued by a third party, using models that primarily use market observable inputs, such as yield curves, and are validated by comparison with valuations provided by the respective counterparties. Derivative financial instruments are included in other assets and other liabilities in the Consolidated Statements of Financial Condition.
F-105
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 16Fair Value Measurement (Continued)
The following tables summarize the Companys financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016:
Fair Value Measurements Using |
||||||||||||||||
March 31, 2017 |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Financial assets |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 14,926 | $ | 14,926 | $ | | $ | | ||||||||
U.S. Government agencies |
58,915 | | 58,915 | | ||||||||||||
Obligations of states, municipalities, and political subdivisions |
16,190 | | 15,640 | 550 | ||||||||||||
Mortgage-backed securities; residential |
||||||||||||||||
Agency |
352,559 | | 352,559 | | ||||||||||||
Non-Agency |
19,263 | | 19,263 | | ||||||||||||
Mortgage-backed securities; commercial |
||||||||||||||||
Agency |
75,578 | | 75,578 | | ||||||||||||
Non-Agency |
31,061 | | 31,061 | | ||||||||||||
Corporate securities |
17,459 | | 17,459 | | ||||||||||||
Other securities |
4,556 | 1,931 | 2,094 | 531 | ||||||||||||
Servicing assets (1) |
21,223 | | | 21,223 | ||||||||||||
Derivative assets |
4,652 | | 4,652 | | ||||||||||||
Financial liabilities |
||||||||||||||||
Derivative liabilities |
955 | | 955 | |
(1) | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. |
Fair Value Measurements Using |
||||||||||||||||
December 31, 2016 |
Fair Value |
Level 1 |
Level 2 |
Level 3 |
||||||||||||
Financial assets |
||||||||||||||||
Securities available-for-sale |
||||||||||||||||
U.S. Treasury Notes |
$ | 14,920 | $ | 14,920 | $ | | $ | | ||||||||
U.S. Government agencies |
58,857 | | 58,857 | | ||||||||||||
Obligations of states, municipalities, and political subdivisions |
16,059 | | 15,509 | 550 | ||||||||||||
Mortgage-backed securities; residential |
||||||||||||||||
Agency |
368,160 | | 368,160 | | ||||||||||||
Non-Agency |
19,933 | | 19,933 | | ||||||||||||
Mortgage-backed securities; commercial |
||||||||||||||||
Agency |
77,403 | | 77,403 | | ||||||||||||
Non-Agency |
31,052 | | 31,052 | | ||||||||||||
Corporate securities |
17,329 | | 17,329 | | ||||||||||||
Other securities |
4,847 | 1,938 | 2,379 | 530 | ||||||||||||
Servicing assets (1) |
21,091 | | | 21,091 | ||||||||||||
Derivative assets |
4,317 | | 4,317 | | ||||||||||||
Financial liabilities |
||||||||||||||||
Derivative liabilities |
559 | | 559 | |
F-106
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 16Fair Value Measurement (Continued)
(1) | See Note 7 for a rollforward of recurring Level 3 fair values for servicing assets. |
During 2016, the Company acquired the servicing assets and single-issuer trust preferred securities included in other securities categorized as Level 3 of the fair value hierarchy through a business combination. Refer to Note 7Servicing Assets for the rollforward of recurring Level 3 fair values. During the three months ended March 31, 2017, the Company recognized $1,000 of accretion income for the single-issuer trust preferred securities and no accretion income during the three months ended March 31, 2016.
In addition, during 2016, the Company purchased privately-issued municipal securities that are categorized as Level 3. These municipal securities are bonds issued for one municipal government entity primarily located in the Chicago metropolitan and are privately placed, non-rated bonds without Committee on Uniform Security Identification Procedures numbers.
The Company did not have any transfers between Level 1 and Level 2 of the fair value hierarchy during the three months ended March 31, 2017 and 2016. The Companys policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in transfer between levels.
The following table presents additional information about the unobservable inputs used in the fair value measurements on recurring basis that were categorized within Level 3 of the fair value hierarchy as of March 31, 2017:
Financial Instruments |
Valuation Technique |
Unobservable Inputs |
Range of Inputs |
Weighted
|
Impact to
|
|||||
Obligations of states, municipalities, and political obligations |
Discounted cash flow | Probability of default | 2.0%2.4% | 2.2% | Decrease | |||||
Single issuer trust preferred |
Discounted cash flow | Probability of default | 7.5%12.0% | 8.8% | Decrease | |||||
Servicing assets |
Discounted cash flow | Prepayment speeds | 5.6%9.2% | 7.2% | Decrease | |||||
Discount rate | 7.6%18.6% | 12.7% | Decrease | |||||||
Expected weighted
average loan life |
0.58.2 years | 6.1 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:
Loans held for sale Mortgage loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value based on contract price. Loans transferred to loans held for sale are carried at the lower of cost or fair value, less estimated costs to sell.
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, which are obtained not less than once every twelve months in accordance with the Banks credit policy. Impaired loans that are not collateral dependent are not material.
F-107
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 16Fair Value Measurement (Continued)
Assets held for sale Assets held for sale consist of former branch locations, vacant land, and a house previously purchased for expansion. Assets are considered held for sale when management has approved to sell the assets following a branch closure or other events. The properties are being actively marketed and transferred to assets held for sale based on the lower of carrying value or its fair value, less estimated costs to sell.
Other real estate owned Certain assets held within other real estate owned represent real estate or other collateral that has been adjusted to its estimated fair value, less cost to sell, as a result of transferring from the loan portfolio at the time of foreclosure or repossession and based on managements 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 Companys assets that were measured at fair value on a non-recurring basis, excluding acquired impaired loans, as of March 31, 2017 and December 31, 2016:
March 31, 2017 |
Fair Value Measurements Using |
|||||||||||||||
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Non-recurring |
||||||||||||||||
Impaired loans |
||||||||||||||||
(excluding acquired impaired loans) |
||||||||||||||||
Commercial real estate |
$ | 9,764 | $ | | $ | | $ | 9,764 | ||||||||
Residential real estate |
980 | | | 980 | ||||||||||||
Construction, land development, and other land |
59 | | | 59 | ||||||||||||
Commercial and industrial |
2,351 | | | 2,351 | ||||||||||||
Installment and Other |
2 | | | 2 | ||||||||||||
Assets held for sale |
13,666 | | | 13,666 | ||||||||||||
Other real estate owned |
13,173 | | | 13,173 |
December 31, 2016 |
Fair Value Measurements Using |
|||||||||||||||
Fair Value |
Level 1 |
Level 2 |
Level 3 |
|||||||||||||
Non-recurring |
||||||||||||||||
Impaired loans |
||||||||||||||||
(excluding acquired impaired loans) |
||||||||||||||||
Commercial real estate |
$ | 8,916 | $ | | $ | | $ | 8,916 | ||||||||
Residential real estate |
1,007 | | | 1,007 | ||||||||||||
Construction, land development, and other land |
| | | | ||||||||||||
Commercial and industrial |
986 | | | 986 | ||||||||||||
Installment and Other |
| | | | ||||||||||||
Assets held for sale |
14,748 | | | 14,748 | ||||||||||||
Other real estate owned |
16,570 | | | 16,570 |
F-108
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 16Fair Value Measurement (Continued)
The following table provides a description of the valuation technique, unobservable inputs and qualitative information about the Companys assets and liabilities classified as Level 3 and measured at fair value on a non-recurring basis as of March 31, 2017:
Financial Instruments |
Valuation Technique |
Unobservable Inputs |
Range of Inputs |
Impact to
|
||||
Impaired loans (excluding acquired impaired loans) |
Appraisals |
Appraisal adjustments, sales costs and other discount adjustments for market conditions |
6% - 10% |
Decrease |
||||
Assets held for sale |
List price, contract price |
Sales costs and other discount adjustments for market conditions |
7% |
Decrease |
||||
Other real estate owned |
Appraisals |
Appraisal adjustments, sales costs and other discount adjustments for market conditions |
7% - 20% |
Decrease |
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. The fair value for time certificates with other banks is based on the market values for comparable investments.
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 bonds 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 Companys current origination rates for similar loans adjusted to reflect the inherent credit risk.
Loan and lease receivables, net For certain variable rate loans that reprice frequently and with no significant changes in credit risk, fair value is estimated at carrying value. The fair value of other types of loans is estimated by discounting future cash flows, using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
F-109
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 16Fair Value Measurement (Continued)
Deposit liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows, using rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank advances The fair value of FHLB advances is estimated by discounting the agreements based on maturities using rates currently offered for FHLB advances of similar remaining maturities adjusted for prepayment penalties that would be incurred if the borrowings were paid off on the measurement date.
Securities sold under agreements to repurchase The carrying amount approximates fair value due to maturities of less than ninety days.
Junior subordinated debentures The fair value of junior subordinated debentures, in the form of trust preferred securities, is determined using rates currently available to the Company for debt with similar terms and remaining maturities.
Accrued interest receivable and payable The carrying amount approximates fair value.
Commitments to extend credit and commercial and standby letters of credit The fair values of these off-balance sheet commitments to extend credit and commercial and standby letters of credit are not considered practicable to estimate because of the lack of quoted market prices and the inability to estimate fair value without incurring excessive costs.
The estimated fair values of financial instruments and levels within the fair value hierarchy are as follows:
March 31, 2017 |
December 31, 2016 |
|||||||||||||||||||
Fair Value
|
Carrying
|
Estimated
|
Carrying
|
Estimated
|
||||||||||||||||
Financial assets |
||||||||||||||||||||
Cash and due from banks |
1 | $ | 15,541 | $ | 15,541 | $ | 17,735 | $ | 17,735 | |||||||||||
Interest bearing deposits with other banks |
2 | 67,726 | 67,726 | 28,798 | 28,798 | |||||||||||||||
Securities held-to-maturity |
2 | 132,897 | 132,707 | 138,846 | 138,082 | |||||||||||||||
Other restricted stock |
2 | 9,503 | 9,503 | 14,993 | 14,993 | |||||||||||||||
Loans held for sale |
3 | 23,492 | 26,173 | 23,976 | 26,487 | |||||||||||||||
Loans and lease receivables, net |
3 | 2,131,717 | 2,061,740 | 2,137,088 | 2,068,157 | |||||||||||||||
Accrued interest receivable |
3 | 7,498 | 7,498 | 6,866 | 6,866 | |||||||||||||||
Financial liabilities |
||||||||||||||||||||
Non-interest bearing deposits |
2 | 732,267 | 732,267 | 724,457 | 724,457 | |||||||||||||||
Interest bearing deposits |
2 | 1,843,572 | 1,797,175 | 1,765,937 | 1,723,941 | |||||||||||||||
Accrued interest payable |
2 | 1,893 | 1,893 | 2,427 | 2,427 | |||||||||||||||
Revolving line of credit |
2 | 18,150 | 18,150 | 20,650 | 20,650 | |||||||||||||||
Federal Home Loan Bank advances |
2 | 209,663 | 209,604 | 313,715 | 313,646 | |||||||||||||||
Securities sold under repurchase agreement |
2 | 31,940 | 31,931 | 17,249 | 17,249 | |||||||||||||||
Junior subordinated debentures |
3 | 27,130 | 26,947 | 26,926 | 26,943 |
F-110
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 17Derivative Instruments and Hedge Activities
The Company recognizes derivative financial instruments at fair value regardless of the purpose or intent for holding the instrument. The Company records derivative assets and derivative liabilities on the Consolidated Statements of Financial Condition within accrued interest receivable and other assets and accrued interest payable and other liabilities, respectively. The following tables present the fair value of the Companys derivative financial instruments and classification on the Consolidated Statements of Financial Condition as of March 31, 2017 and December 31, 2016:
March 31, 2017 |
December 31, 2016 |
|||||||||||||||||||||||
Fair Value |
Fair Value |
|||||||||||||||||||||||
Notional
|
Other
|
Other
|
Notional
|
Other
|
Other
|
|||||||||||||||||||
Derivatives designated as hedging instruments |
||||||||||||||||||||||||
Interest rate swaps designated as cash flow hedges |
$ | 200,000 | $ | 3,925 | $ | 254 | $ | 100,000 | $ | 3,719 | $ | | ||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||||||
Other interest rate swaps |
$ | 74,272 | $ | 727 | $ | 701 | $ | 51,213 | $ | 598 | $ | 559 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total derivatives |
$ | 274,272 | $ | 4,652 | $ | 955 | $ | 151,213 | $ | 4,317 | $ | 559 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps designated as cash flow hedges Cash flow hedges of interest payments associated with certain FHLB advances had notional amounts totaling $200.0 million as of March 31, 2017. The aggregate fair value of the swaps is recorded in other assets or other liabilities with changes in fair value recorded in other comprehensive income (loss), net of taxes, to the extent effective. The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings when the hedged FHLB advances affect earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value of the derivative hedging instrument with the changes in fair value of the designated hedged transactions. The Company expects the hedges to remain highly effective during the remaining terms of the swaps and did not recognize any hedge ineffectiveness in current earnings during the quarter ended March 31, 2017.
Interest expense recorded on these swap transactions totaled $54,000 during the first quarter of 2017 and is reported as a component of interest expense on FHLB advances. At March 31, 2017, the Company estimates $449,000 of the unrealized gain 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 quarter ended March 31, 2017.
Amount of Gain
|
Amount of Loss
|
Amount of Gain (Loss)
|
||||||||||
Interest rate swaps |
$ | 3,695 | $ | (54 | ) | $ | |
Other interest rate swaps The total combined notional amount was $74.3 million with maturities ranged from January 2020 to October 2026. The fair values of the interest rate swap agreements are reflected in
F-111
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 17Derivative Instruments and Hedge Activities (Continued)
other assets and other liabilities with corresponding gains or losses reflected in non-interest income. During the quarter ended March 31, 2017, transaction fees related to these derivative instruments were $113,000.
The following table reflects other interest rate swaps as of March 31, 2017:
Notional amounts |
$ | 74,272 | ||
Derivative assets fair value |
727 | |||
Derivative liabilities fair value |
701 | |||
Weighted average pay rates |
4.19 | % | ||
Weighted average receive rates |
3.22 | % | ||
Weighted average maturity |
7.4 years |
Credit risk Derivative instruments are inherently subject to market risk and credit risk. Market risk is associated with changes in interest rates and credit risk relates to the Companys 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 Companys overall asset-liability management process. The credit risk related to derivatives entered into with certain qualified borrowers is managed through the Companys loan underwriting process. The Companys loan underwriting process also approves the Banks 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 credit valuation adjustment (CVA) is a fair value adjustment to the derivative to account for this risk. During the quarter ended March 31, 2017, the CVA resulted in a decrease to non-interest income of $13,000.
The Company has agreements with its derivative counterparties that contain a cross-default provision under which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. The Company 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.
F-112
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 17Derivative Instruments and Hedge Activities (Continued)
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 Companys interest rate derivatives and offsetting positions as of March 31, 2017:
Derivative Assets
|
Derivative Liabilities
|
|||||||
Gross amounts recognized |
$ | 4,652 | $ | 955 | ||||
Less: Amounts offset in the Consolidated Statements of Financial Condition |
| | ||||||
|
|
|
|
|||||
Net amount presented in the Consolidated Statements of Financial Condition |
$ | 4,652 | $ | 955 | ||||
|
|
|
|
|||||
Gross amounts not offset in the Consolidated Statements of Financial Condition |
||||||||
Offsetting derivative positions |
| | ||||||
Collateral posted |
(4,260 | ) | 955 | |||||
|
|
|
|
|||||
Net credit exposure |
$ | 392 | $ | | ||||
|
|
|
|
In February 2017 and March 2017, the Company executed four additional cash flow hedges totaling $100.0 million in notional value with maturity dates in March 2022. Subsequent to March 31, 2017, the Company entered into two addition cash flow hedges totaling $50.0 million in notional value with maturity dates in September 2022 and March 2023.
Note 18Earnings per Share
A reconciliation of the numerators and denominators for earnings per common share computations for the quarters ended March 31, 2017 and 2016 is presented below. Options to purchase 1,634,568 shares of common stock were outstanding as of March 31, 2016, but were not included in the computation of diluted earnings per share due to a loss for the period and, therefore, were anti-dilutive.
The following represent the calculation of basic and diluted earnings per share:
Three months ended March 31, |
||||||||
2017 |
2016 |
|||||||
Net income (loss) |
$ | 6,560 | $ | (1,352 | ) | |||
Less: Dividends on preferred shares |
189 | | ||||||
|
|
|
|
|||||
Net income (loss) available to common stockholders |
$ | 6,371 | $ | (1,352 | ) | |||
|
|
|
|
|||||
Weighted-average common stock outstanding: |
||||||||
Weighted-average common stock outstanding (basic) |
24,616,706 | 17,522,226 | ||||||
Incremental shares (1)(2) |
461,721 | | ||||||
|
|
|
|
|||||
Weighted-average common stock outstanding (dilutive) |
25,078,427 | 17,522,226 | ||||||
|
|
|
|
|||||
Basic earnings per common share |
$ | 0.26 | $ | (0.08 | ) | |||
Diluted earnings per common share |
$ | 0.25 | $ | (0.08 | ) |
(1) | This amount represents outstanding stock options for which the exercise price is less than the average market price of the Companys common stock. |
F-113
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 18Earnings per Share (Continued)
(2) | During the three months ended March 31, 2016, due to a loss for the period, zero incremental shares are included because the effect would be anti-dilutive. The number of shares excluded was 307,820. |
Note 19Stockholders Equity
A summary of the Companys common and preferred stock at March 31, 2017 and December 31, 2016 is as follows:
March 31, 2017 |
December 31, 2016 |
|||||||
Series A non-cumulative perpetual preferred stock |
||||||||
Par value |
$ | 0.01 | $ | 0.01 | ||||
Shares authorized |
15,003 | 15,003 | ||||||
Shares issued |
15,003 | 15,003 | ||||||
Shares outstanding |
15,003 | 15,003 | ||||||
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 | 9,388 | ||||||
Subscription receivable |
| 1,050 | ||||||
Shares outstanding |
10,438 | 9,388 | ||||||
Common stock, voting |
||||||||
Par value |
$ | | $ | | ||||
Shares authorized |
150,000,000 | 150,000,000 | ||||||
Shares issued |
24,616,706 | 24,616,706 | ||||||
Shares outstanding |
24,616,706 | 24,616,706 |
In connection with the recapitalization, the Company authorized and issued voting common stock and Series A non-voting, non-cumulative perpetual preferred stock with liquidation preference. The Series A preferred stock is redeemable at the Companys option on or after July 1, 2018. Under the terms of the Series A preferred stock certificate of designation, the Company would have to declare and pay a dividend or make a distribution prior to paying a dividend on its common stock, redeeming the Series A, or upon liquidation, in accordance with the terms of the preferred stock, which may reduce the earnings available to common stockholders upon declaration.
During 2016, the Company authorized and issued Series B 7.50% fixed-to-floating non-voting, noncumulative perpetual preferred stock with liquidation preference of $1,000 per share, plus the amount of unpaid dividends, if any, which is redeemable at the Companys option on or after March 31, 2022. Holders of either Series A or 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.
On January 30, 2017, the Company issued an additional 1,050 shares of Series B preferred stock, which is reflected as a subscription receivable as of December 31, 2016. On February 7, 2017, the Company declared a full dividend on the Series B preferred stock for the dividend period ending March 31, 2017 and payable on March 31, 2017 to holders of record as of March 16, 2017.
F-114
BYLINE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Table dollars in thousands, except share and per share data) (Unaudited)
Note 20Subsequent Events
On May 19, 2017, the Company issued a press release announcing its intention to pursue an initial public offering of common stock (the IPO) in 2017. In anticipation of the IPO, the Board of Directors considered the potential benefits afforded by Delaware law to public companies, including greater predictability and enhanced ability to attract and retain qualified independent directors, and determined that it is in the best interests of the Company and its stockholders to reincorporate in Delaware prior to the IPO.
On June 14, 2017, stockholders of record as of May 22, 2017 voted to approve an Agreement and Plan of Merger between Byline Bancorp, Inc., an Illinois corporation (Byline Illinois), and Byline Bancorp, Inc., a wholly owned Delaware subsidiary of the Company, including the amended and restated certificate of incorporation and by-laws of the Company. Each share of Byline Illinois common stock issued and outstanding immediately prior to the effective time of the Merger was converted automatically into the right to receive one fifth (0.20) of a share of common stock of the Company. Fractional shares are to be paid in cash based on the initial public offering price of Byline Bancorp, Inc.s common stock. Following the Merger, there will be no change in authorized shares.
F-115
Ridgestone Financial Services, Inc.
Acquired by Byline Bancorp, Inc.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Ridgestone Financial Services, Inc., which comprise the consolidated balance sheets as of October 14, 2016 and December 31, 2015, and the related consolidated statements of income, comprehensive income, shareholders equity, and cash flows for the period from January 1, 2016 to October 14, 2016 and for the year ended December 31, 2015, and the related notes to the financial statements.
Managements Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ridgestone Financial Services, Inc. as of October 14, 2016 and December 31, 2015, and the results of its operations and its cash flows for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015, in accordance with accounting principles generally accepted in the United States of America.
/s/ Crowe Horwath LLP
Oak Brook, Illinois
March 27, 2017
F-116
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
As of October 14, 2016 and December 31, 2015
(In thousands of dollars, except per share data)
October 14,
|
December 31,
|
|||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 24,914 | $ | 12,465 | ||||
Federal funds sold |
566 | 634 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
25,480 | 13,099 | ||||||
Securities available-for-sale |
27,214 | 27,390 | ||||||
Loans held for sale ($8,915 and $2,067 at fair value) |
14,716 | 41,464 | ||||||
Loans carried at fair value and held in portfolio |
3,338 | 4,022 | ||||||
Loans carried at amortized cost and held in portfolio, net of allowance of $8,816 and $8,996 |
343,966 | 306,299 | ||||||
Other real estate owned, net |
1,710 | 1,515 | ||||||
Premises and equipment, net |
2,526 | 2,500 | ||||||
Federal Home Loan Bank stock, at cost |
854 | 724 | ||||||
Company-owned life insurance |
2,352 | 2,317 | ||||||
Servicing assets, at fair value |
21,499 | 19,107 | ||||||
Accrued interest receivable and other assets |
3,748 | 4,386 | ||||||
|
|
|
|
|||||
Total assets |
$ | 447,403 | $ | 422,823 | ||||
|
|
|
|
|||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Deposits |
||||||||
Non-interest bearing |
$ | 40,254 | $ | 34,133 | ||||
Interest bearing |
318,459 | 309,438 | ||||||
|
|
|
|
|||||
Total deposits |
358,713 | 343,571 | ||||||
Federal Home Loan Bank advances |
9,487 | 9,487 | ||||||
Borrowings |
| 775 | ||||||
Subordinated debentures |
1,550 | 1,550 | ||||||
Accrued interest payable and other liabilities |
13,204 | 13,592 | ||||||
|
|
|
|
|||||
Total liabilities |
382,954 | 368,975 | ||||||
Shareholders equity |
||||||||
Preferred stock, no par value; 100,000 shares authorized; no shares issued and outstanding |
| | ||||||
Common stock, no par value; 10,000,000 shares authorized; 3,393,665 and 3,369,041 shares issued and outstanding |
| | ||||||
Additional paid-in capital |
31,538 | 30,826 | ||||||
Accumulated earnings |
32,745 | 23,124 | ||||||
Accumulated other comprehensive income (loss) |
166 | (102 | ) | |||||
|
|
|
|
|||||
Total shareholders equity |
64,449 | 53,848 | ||||||
|
|
|
|
|||||
Total liabilities and shareholders equity |
$ | 447,403 | $ | 422,823 | ||||
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-117
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
October 14,
|
December 31,
|
|||||||
Interest income |
||||||||
Loans, including fees |
$ | 21,645 | $ | 23,333 | ||||
Securities available-for-sale |
347 | 537 | ||||||
Federal funds sold and other |
78 | 55 | ||||||
|
|
|
|
|||||
22,070 | 23,925 | |||||||
Interest expense |
||||||||
Deposits |
2,521 | 2,638 | ||||||
Federal Home Loan Bank advances |
248 | 309 | ||||||
Note payable and subordinated debentures |
72 | 112 | ||||||
|
|
|
|
|||||
2,841 | 3,059 | |||||||
|
|
|
|
|||||
Net interest income |
19,229 | 20,866 | ||||||
Provision for loan losses |
3,632 | 3,340 | ||||||
|
|
|
|
|||||
Net interest income after provision for loan losses |
15,597 | 17,526 | ||||||
Non-interest income |
||||||||
Net gains on loan sales |
29,259 | 25,923 | ||||||
Loan servicing |
2,982 | 3,337 | ||||||
Service charges and fees |
2,024 | 2,486 | ||||||
Earnings on company-owned life insurance |
64 | 77 | ||||||
Gains on sale of securities available-for-sale |
| 99 | ||||||
Gain (loss) on sales of other real estate owned |
(34 | ) | 201 | |||||
Other |
284 | 385 | ||||||
|
|
|
|
|||||
34,579 | 32,508 | |||||||
Non-interest expense |
||||||||
Salaries and employee benefits |
19,220 | 18,721 | ||||||
Occupancy and equipment |
845 | 1,134 | ||||||
Professional fees |
2,727 | 5,561 | ||||||
Data processing |
650 | 341 | ||||||
Federal deposit insurance |
155 | 234 | ||||||
Other real estate owned |
399 | 320 | ||||||
Collection fees |
366 | 76 | ||||||
Other |
4,654 | 4,230 | ||||||
|
|
|
|
|||||
29,016 | 30,617 | |||||||
|
|
|
|
|||||
Income before income taxes |
21,160 | 19,417 | ||||||
Income tax expense |
9,008 | 8,032 | ||||||
|
|
|
|
|||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
|
|
|
|
|||||
Earnings per share: |
||||||||
Basic |
$ | 3.60 | $ | 3.38 | ||||
Diluted |
3.60 | 3.37 |
See accompanying notes to the consolidated financial statements.
F-118
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
October 14,
|
December 31,
|
|||||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
Other comprehensive income: |
||||||||
Unrealized gains on securities: |
||||||||
Unrealized gains on securities, during the period |
446 | 236 | ||||||
Reclassification adjustment for gains included in net income |
| (99 | ) | |||||
Tax effect |
(178 | ) | (54 | ) | ||||
|
|
|
|
|||||
Other comprehensive income |
268 | 83 | ||||||
|
|
|
|
|||||
Comprehensive income |
$ | 12,420 | $ | 11,468 | ||||
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-119
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
Common
|
Additional
|
Accumulated
|
Accumulated
|
Total
|
||||||||||||||||
Balance at January 1, 2015 |
$ | | $ | 30,662 | $ | 15,950 | $ | (185 | ) | $ | 46,427 | |||||||||
Net income |
| | 11,385 | | 11,385 | |||||||||||||||
Other comprehensive income |
| | | 83 | 83 | |||||||||||||||
Common stock dividends ($1.25 per share) |
| | (4,211 | ) | | (4,211 | ) | |||||||||||||
Stock awards earned13,276 shares |
| 164 | | | 164 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at December 31, 2015 |
| 30,826 | 23,124 | (102 | ) | 53,848 | ||||||||||||||
Net income |
| | 12,152 | | 12,152 | |||||||||||||||
Other comprehensive income |
| | | 268 | 268 | |||||||||||||||
Common stock dividends ($0.75 per share) |
| | (2,531 | ) | | (2,531 | ) | |||||||||||||
Stock awards earned24,624 shares |
| 712 | | | 712 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at October 14, 2016 |
$ | | $ | 31,538 | $ | 32,745 | $ | 166 | $ | 64,449 | ||||||||||
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements.
F-120
RIDGESTONE FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
October 14,
|
December 31,
|
|||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
Adjustments to reconcile net income to net cash from operating activities |
||||||||
Provision for loan losses |
3,632 | 3,340 | ||||||
Gains on sale of securities |
| (99 | ) | |||||
Depreciation |
224 | 311 | ||||||
Net amortization of securities |
4 | 14 | ||||||
Earnings on company-owned life insurance, net of expenses |
(35 | ) | (43 | ) | ||||
Stock awards earned |
712 | 164 | ||||||
Net gains on loan sales |
(29,259 | ) | (25,923 | ) | ||||
Loans originated for sale |
(231,188 | ) | (256,543 | ) | ||||
Proceeds from sales of loans held for sale |
281,194 | 255,150 | ||||||
Change in fair value of servicing assets |
3,609 | 4,008 | ||||||
Change in fair value for loans carried at fair value |
(161 | ) | (255 | ) | ||||
Loss (gain) on sale of other real estate owned |
34 | (201 | ) | |||||
Other real estate owned impairment |
46 | 132 | ||||||
Loss on sale of premises and equipment |
| 5 | ||||||
Net change in: |
||||||||
Accrued interest receivable and other assets |
460 | (250 | ) | |||||
Accrued expenses and other liabilities |
454 | 3,729 | ||||||
|
|
|
|
|||||
Net cash from operating activities |
41,878 | (5,076 | ) | |||||
Cash flows from investing activities |
||||||||
Sales of available-for-sale securities |
| 5,930 | ||||||
Purchases of available-for-sale securities |
| (3,989 | ) | |||||
Proceeds from principal pay downs, calls, and maturities of available-for-sale securities |
618 | 817 | ||||||
Loan originations and payments, net |
(41,826 | ) | (24,040 | ) | ||||
Purchases of premises and equipment |
(250 | ) | (91 | ) | ||||
Purchase of FHLB stock |
(130 | ) | | |||||
Proceeds from sales of other real estate owned |
1,097 | 3,622 | ||||||
|
|
|
|
|||||
Net cash from investing activities |
(40,491 | ) | (17,751 | ) | ||||
Cash flows from financing activities |
||||||||
Net change in deposits |
15,142 | 16,218 | ||||||
Repayments on Federal Home Loan Bank advances |
| (5,000 | ) | |||||
Federal Home Loan Bank advances |
| 5,000 | ||||||
Common stock dividends |
(3,373 | ) | (3,369 | ) | ||||
Proceeds from/ (payments on) line of credit |
(775 | ) | 775 | |||||
Repayments of note payable |
| (900 | ) | |||||
|
|
|
|
|||||
Net cash from financing activities |
10,994 | 12,724 | ||||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
12,381 | (10,103 | ) | |||||
Beginning cash and cash equivalents |
13,099 | 23,202 | ||||||
|
|
|
|
|||||
Ending cash and cash equivalents |
$ | 25,480 | $ | 13,099 | ||||
|
|
|
|
|||||
Supplemental cash flow information: |
||||||||
Interest paid |
$ | 2,616 | $ | 2,651 | ||||
Income tax payments, net |
7,762 | 5,320 | ||||||
Supplemental non-cash flow information: |
||||||||
Transfers from loans to other real estate owned |
$ | 1,372 | $ | 494 | ||||
Dividends declared but not paid |
| 842 |
See accompanying notes to the consolidated financial statements.
F-121
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation : The consolidated financial statements include Ridgestone Financial Services, Inc. (the Holding Company) and its wholly owned subsidiary, Ridgestone Bank (the Bank), collectively referred to herein as the Company. Intercompany transactions and balances are eliminated in consolidation.
The Company provides financial services through its offices located in Wisconsin (Brookfield, Green Bay, and Wausau), Illinois (Schaumburg), and Indiana (Indianapolis). The Company also has a loan production office located in Southern California (Newport Beach). Its primary deposit products are checking, savings, and time deposit accounts, and its primary lending products are offered through programs of the Small Business Administration (SBA) and U.S. Department of Agriculture (USDA). Substantially all loans are secured by specific items of collateral including business assets, and commercial real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. However, the customers ability to repay their loans is dependent on the cash flow of the business entity and general economic conditions.
On June 9, 2016, the Company entered into a merger agreement with Byline Bancorp, Inc. (Byline) pursuant to which Ridgestone Financial Services, Inc. would merge into Byline Bancorp, Inc., an Illinois Corporation, and Ridgestone Bank would merge into Byline Bank, an Illinois chartered bank and wholly-owned subsidiary of Byline. The total consideration for the merger was $105 million, with 35% paid in cash and 65% paid in Byline stock. The merger was completed at the close of business on October 14, 2016. The operations of the Company beginning October 15, 2016 are included in the financial reporting of Byline Bancorp, Inc.
Subsequent Events : The Company has evaluated subsequent events for recognition and disclosure through March 27, 2017, which is the date the financial statements were available to be issued.
Use of Estimates : To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ.
Cash Flow : Cash and cash equivalents include cash, deposits with other financial institutions, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, federal funds purchased and sold, and Company-owned life insurance.
Securities : Securities are classified as available-for-sale because they may be sold before maturity, and are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization and accretion of purchase premiums and discounts. Premiums and discounts on securities are amortized and accreted on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition
F-122
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
and near-term prospects of the issuer. Management also assesses whether it intends to sell, or is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment related to credit loss, which must be recognized in the statement of income and 2) other-than-temporary impairment related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The assessment of whether an other-than temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
Loans Held for Sale : The Company is a participant in the SBA and the USDA lending programs and originates SBA and USDA loans.
SBA and USDA loans that management has the intent and ability to sell are designated as held for sale. Loans held for sale are either accounted for at amortized cost or fair value. The Company determines whether to account for SBA and USDA loans at fair value or amortized cost at origination. The SBA and USDA loans accounted for at fair value remain at fair value after the determination. The loans accounted for at amortized cost are carried at the lower of cost or fair value, determined on a loan by loan basis. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.
Gains or losses on held for sale loans are recognized upon completion of the sale and based on the difference between the net sales proceeds, carrying value of sold loan, and fair value of retained loan (if any). The difference between the initial carrying balance of the retained loan and fair value is recorded as a discount to the retained loan, establishing a new carrying balance. The recorded discount is accreted to earnings on a level yield basis. SBA and USDA loans are sold with servicing retained.
Loans at Fair Value : The Company elected the fair value option on certain SBA and USDA loans that are held for sale. The election is being made to allow for immediate gain recognition of the anticipated held for sale loan amount. This election also results in the Companys retained portion of the SBA and USDA loans to be recorded at fair value and to remain at fair value. The Company has elected fair value of certain loans to allow for immediate gain recognition in cases where a sale cannot be completed prior to the end of a specific reporting period or where the economics of a sale might be maximized by delaying the sale.
Loans : Loans that the Company has the intent and ability to hold are stated at the principal amount outstanding, net of deferred loan fees and the allowance for loan losses. Interest on loans is accrued and credited to income over the terms of the respective loans based upon principal balances outstanding.
Loans originated and held for sale in the secondary market are carried at the lower of cost, net of loan fees collected, or estimated fair value in the aggregate. These loans are sold without recourse. Gains and losses from the sale of loans are determined based upon the net proceeds and the carrying value of the loans sold. Net unrealized losses are recognized in a valuation allowance by charges to income.
Loan fees related to non-SBA and non-USDA loans, net of direct loan origination costs, are deferred and amortized over the term of the loan as a yield adjustment without anticipating prepayments. Where serious
F-123
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
doubt exists as to the collectability of a loan, the accrual of interest is discontinued. Past due status is based on the contractual terms of the loan. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. A loan is moved to non-accrual status in accordance with the Companys policy, typically after 90 days of non-payment.
Interest income for all classes of loans is discontinued at the time a loan is 90 days past due unless the loan is both well secured and in the process of collection. All interest accrued but not received on loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses : The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Loan losses are charged against the allowance when management believes that the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in managements judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Construction, commercial, and commercial real estate loans are individually evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
Cash payments on impaired loans representing interest income are reported as such. Other cash payments are recorded as reductions in carrying value.
F-124
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A general component of the allowance for loan losses covers non-impaired loans and is based on actual historical loss experience, by portfolio category, adjusted for current factors. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio category. These economic factors include consideration of the following: levels of and trends in delinquencies; trends in growth; national and local economic trends and conditions; trends in collateral values; and effects of changes in credit concentrations.
The following portfolio categories have been identified: land, construction, commercial real estate, commercial and industrial, SBA and USDA, religious type organization, and consumer and other.
Management considers the following when assessing the risk in the loan portfolio: Commercial and industrial are dependent on the strength of the industries of the related borrowers and the success of their businesses. Commercial loans are advanced for equipment purchases or to provide working capital or meet other financing needs of the business. These loans may be secured by accounts receivable, inventory, equipment or other business assets. Financial information is obtained from the borrower to evaluate the debt service coverage and ability to repay the loans.
Commercial real estate, land, and construction loans are dependent on the industries tied to these loans as well as the local commercial real estate market. The loans are secured by the real estate, and appraisals are obtained to support the loan amount. An evaluation of the projects cash flows is performed to evaluate the borrowers ability to repay the loan at the time of origination and periodically updated during the life of the loan.
Consumer, SBA and USDA, and religious type organization loans are dependent on local economies. Consumer loans are generally secured by consumer assets, but may be unsecured. At the time of origination, the Company evaluates the borrowers repayment ability through a review of debt to income ratios and credit scores.
Servicing Assets : Servicing assets are recognized separately when they are acquired through sales of loans. When loans are sold, servicing assets are recorded at fair value with the income statement effect recorded in gains on sales of loans. 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.
Sales of SBA and USDA loans are executed on a servicing retained basis. The standard SBA loan sale agreement is structured to provide the Company with a servicing spread paid from a portion of the interest cash flow of the loan. SBA regulations require the Company to retain a portion of the cash flow from the interest payments received for a sold loan. The USDA loan sale agreements are not standardized with respect to servicing.
The Company has elected the fair value measurement method and measures servicing rights at fair value at each reporting date. The changes in fair value of servicing assets are reported in earnings in the period in which the changes occur, and are included with loan servicing on the statement of operations. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds, default rates, and losses.
Servicing fee income which is reported on the income statement as loan servicing is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. Late fees and ancillary fees related to loan servicing are not material.
F-125
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Transfers of Financial Assets : Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Other Real Estate Owned : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in the property to satisfy the loan through completion of a deed in lieu of foreclosure or similar legal agreement. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed and permanent improvements that increase the value of other real estate owned are capitalized.
Premises and Equipment : Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Useful lives are estimated to be 7 to 39 years for building and improvements and 3 to 7 years for furniture, fixtures, and equipment.
Federal Home Loan Bank (FHLB) Stock : The Bank is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value.
Company-Owned Life Insurance : The Company owns and is the beneficiary of life insurance policies on former executives. Company-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.
Long-Term Assets : Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Loan Commitments and Related Financial Instruments : Financial instruments include off-balance-sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.
Income Taxes : Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
F-126
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
A tax position is recognized as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded.
The Company recognizes interest and/or penalties related to income tax matters in other expense. No interest and/or penalties related to tax matters were incurred during the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015. The Company is no longer subject to examination by Federal taxing authorities for years before 2013. The Company is no longer subject to examination by Wisconsin taxing authorities for years before 2012. The Company is subject to examination from other state taxing authorities from 2010-2016.
Fair Value of Financial Instruments : Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.
Dividend Restrictions : Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank to the Holding Company or by the Holding Company to its shareholders.
Comprehensive Income : Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available-for-sale which are also recognized as separate component of equity.
Loss Contingencies : Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.
In August 2011, the Bank was named as a defendant in two lawsuits in actions by a company which filed for bankruptcy after its two principal officers were discovered to have stolen funds from its customers. The Bank was the depository bank of an omnibus account, which held subscribers Health Savings Account funds. In this litigation, the bankruptcy trustee sought to recover approximately $15.6 million from the Bank. On July 15, 2015, an order was entered by the bankruptcy court approving a settlement by the Bank of all outstanding claims made against it in connection with the matter. The cases were settled for $4.75 million, of which $750,000 was paid by the Banks insurer. The net settlement expense of $4.0 million is included in professional fees for the year ended December 31, 2015.
Earnings Per Share : Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share show the dilutive effect, if any, of additional common shares issuable from stock awards.
Operating Segments : While management monitors revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
F-127
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reclassifications : Some items in the prior year financial statements were reclassified to conform to the current presentation.
NOTE 2SECURITIES AVAILABLE FOR SALE
The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio as of October 14, 2016 and December 31, 2015 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss):
Amortized
|
Gross
|
Gross
|
Fair
|
|||||||||||||
October 14, 2016 |
||||||||||||||||
Collateralized mortgage obligationsresidential |
$ | 2,327 | $ | 30 | $ | | $ | 2,357 | ||||||||
Mortgage-backedresidential |
480 | 43 | | 523 | ||||||||||||
U.S. government-sponsored entities |
23,431 | 320 | | 23,751 | ||||||||||||
Single issuer trust preferred |
700 | | (117 | ) | 583 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 26,938 | $ | 393 | $ | (117 | ) | $ | 27,214 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2015 |
||||||||||||||||
Collateralized mortgage obligationsresidential |
$ | 2,875 | $ | | $ | (59 | ) | $ | 2,816 | |||||||
Mortgage-backedresidential |
572 | 49 | | 621 | ||||||||||||
U.S. government-sponsored entities |
23,413 | 60 | (103 | ) | 23,370 | |||||||||||
Single issuer trust preferred |
700 | | (117 | ) | 583 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 27,560 | $ | 109 | $ | (279 | ) | $ | 27,390 | ||||||||
|
|
|
|
|
|
|
|
Collateral mortgage obligations and mortgage-backed securities are issued by government sponsored entities.
At October 14, 2016 and December 31, 2015, there were no holdings of securities of any one issuer other than U.S. government sponsored entities in any amount greater than 10% of shareholders equity.
F-128
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 2SECURITIES AVAILABLE FOR SALE (Continued)
The following table summarizes securities with unrealized losses at October 14, 2016 and December 31, 2015, aggregated by major security type and length of time in a continuous unrealized loss position:
Less Than 12 Months |
12 Months or Longer |
Total |
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized Losses |
Fair Value |
Unrealized
|
|||||||||||||||||||
October 14, 2016 |
||||||||||||||||||||||||
Single issuer trust preferred |
$ | | $ | | $ | 583 | $ | (117 | ) | $ | 583 | $ | (117 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale |
$ | | $ | | $ | 583 | $ | (117 | ) | $ | 583 | $ | (117 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less Than 12 Months |
12 Months or Longer |
Total |
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
December 31, 2015 |
||||||||||||||||||||||||
Collateralized mortgage obligations |
$ | 2,816 | $ | (59 | ) | $ | | $ | | $ | 2,816 | $ | (59 | ) | ||||||||||
U.S. government-sponsored entities |
18,869 | (103 | ) | | | 18,869 | (103 | ) | ||||||||||||||||
Single issuer trust preferred |
| | 583 | (117 | ) | 583 | (117 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total available-for-sale |
$ | 21,685 | $ | (162 | ) | $ | 583 | $ | (117 | ) | $ | 22,268 | $ | (279 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The Company owns two single issuer trust preferred securities with total unrealized losses of $117 at October 14, 2016 and December 31, 2015. These securities were issued by two Wisconsin-based bank holding companies. Although the repayment capacity is the obligation of the issuers, the issuers rely substantially on dividends of subsidiary banks. Interest payments on the securities were temporarily deferred for one issuer, but during 2015 this issuer became current on interest payments. The issuers remained current on interest payments through October 14, 2016.
The issuers have the ability to defer interest payments for five years and if not cured within five years, including all accrued but unpaid interest during the deferral period, the issuers will be in default. The Company has evaluated the issuers most recent financial statements available including the financial statements of the subsidiary banks and, based on those financial statements and the issuers curing the deferred interest, management believes no credit loss is expected on these securities.
Unrealized losses on government sponsored entities have not been recognized into income because the issuer bonds are of high credit quality.
For all securities with unrealized losses, management does not intend to sell and it is likely that management will not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates and other market conditions. The fair value is expected to recover as the securities approach maturity.
F-129
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 2SECURITIES AVAILABLE FOR SALE (Continued)
The proceeds from sales of securities and the associated gains and losses are listed below:
Period Ended |
Year Ended |
|||||||
October 14,
|
December 31,
|
|||||||
Proceeds |
$ | | $ | 5,930 | ||||
Gross gains |
| 99 | ||||||
Gross losses |
| |
The fair value of debt securities by contractual maturity at October 14, 2016 were as follows. Securities not due at a single maturity date, collateralized mortgage obligations and mortgage-backed securities, are shown separately.
Amortized
|
Fair
|
|||||||
Due less than one year |
$ | 2,500 | $ | 2,509 | ||||
Due after one year through five years |
20,931 | 21,242 | ||||||
Due after five years through ten years |
| | ||||||
Due after ten years |
700 | 583 | ||||||
Collateralized mortgage obligation and mortgage-backed |
2,807 | 2,880 | ||||||
|
|
|
|
|||||
$ | 26,938 | $ | 27,214 | |||||
|
|
|
|
Securities pledged as collateral for Federal Home Loan Bank advances and other borrowing arrangements at October 14, 2016 and December 31, 2015 had a carrying amount of $26,631 and $15,867.
F-130
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS
The Company has elected to account for certain loans at fair value. The following presents loan balances for loans accounted for at fair value and for loans accounted for at amortized cost, at October 14, 2016 (2016) and December 31, 2015 (2015).
Fair Value |
Amortized Cost |
Total |
||||||||||||||||||||||
2016 |
2015 |
2016 |
2015 |
2016 |
2015 |
|||||||||||||||||||
Land |
||||||||||||||||||||||||
Raw land for development |
$ | | $ | | $ | 1,158 | 1,172 | $ | 1,158 | $ | 1,172 | |||||||||||||
Lots and developed land |
| | 213 | 350 | 213 | 350 | ||||||||||||||||||
Construction |
| | 2,763 | 1,874 | 2,763 | 1,874 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
| | 6,647 | 6,943 | 6,647 | 6,943 | ||||||||||||||||||
Non-owner occupied |
| | 9,648 | 12,449 | 9,648 | 12,449 | ||||||||||||||||||
Commercial and industrial |
| | 13,352 | 13,738 | 13,352 | 13,738 | ||||||||||||||||||
SBA and USDA |
3,338 | 4,022 | 299,350 | 256,219 | 302,688 | 260,241 | ||||||||||||||||||
Religious type organizations |
| | 16,697 | 18,820 | 16,697 | 18,820 | ||||||||||||||||||
Consumer and other |
| | 2,670 | 3,459 | 2,670 | 3,459 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
3,338 | 4,022 | 352,498 | 315,024 | 355,836 | 319,046 | ||||||||||||||||||
Net deferred loan cost |
| | 284 | 271 | 284 | 271 | ||||||||||||||||||
Allowance for loan losses |
| | (8,816 | ) | (8,996 | ) | (8,816 | ) | (8,996 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total loans held in portfolio |
3,338 | 4,022 | 343,966 | 306,299 | 347,304 | 310,321 | ||||||||||||||||||
Loans held for sale |
8,915 | 2,067 | 5,801 | 39,397 | 14,716 | 41,464 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Loans |
$ | 12,253 | $ | 6,089 | $ | 349,767 | $ | 345,696 | $ | 362,020 | $ | 351,785 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
For loans carried at fair value, the fair value and contractual principal of those loans are as follows:
October 14, 2016 |
December 31, 2015 |
|||||||||||||||
Fair
|
Contractual
|
Fair
|
Contractual
|
|||||||||||||
SBA and USDA |
$ | 3,338 | $ | 3,552 | $ | 4,022 | $ | 4,397 | ||||||||
Loans held for sale |
8,915 | 8,006 | 2,067 | 1,893 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
$ | 12,253 | $ | 11,558 | $ | 6,089 | $ | 6,290 | ||||||||
|
|
|
|
|
|
|
|
The Company originates SBA and USDA loans and a portion of such qualifying loans are guaranteed. These loans are secured by specific items of collateral and include guarantees generally ranging from 75% to 90% of outstanding principal loan balance. From time to time, the Company will sell the guaranteed portion of a loan and will retain the unguaranteed loan balance in its loan portfolio.
F-131
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The contractual principal and discounts on unguaranteed SBA and USDA loans, which are included in the total loans were as follows:
October 14,
|
December 31,
|
|||||||
Commercial |
$ | 122,871 | $ | 106,832 | ||||
Commercial real estate |
207,426 | 176,540 | ||||||
|
|
|
|
|||||
Total contractual principal |
330,297 | 283,372 | ||||||
Discount on unguaranteed loans |
(27,609 | ) | (23,131 | ) | ||||
|
|
|
|
|||||
Net carrying value |
$ | 302,688 | $ | 260,241 | ||||
|
|
|
|
Activity in the allowance for loan losses was as follows:
Period Ended
|
Year
Ended
|
|||||||
Beginning balance |
$ | 8,996 | $ | 7,363 | ||||
Provision for loan losses |
3,632 | 3,340 | ||||||
Loans charged off |
(4,279 | ) | (2,877 | ) | ||||
Recoveries |
467 | 1,170 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 8,816 | $ | 8,996 | ||||
|
|
|
|
The following table presents the activity in the allowance for loan losses by portfolio category for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015:
Period Ended October 14, 2016 |
Beginning
|
Provision
|
Loans
|
Recoveries |
Ending
|
|||||||||||||||
Land |
||||||||||||||||||||
Lots and developed land |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Construction |
21 | 22 | | | 43 | |||||||||||||||
Commercial real estate |
||||||||||||||||||||
Owner occupied |
161 | 288 | | | 449 | |||||||||||||||
Non-owner occupied |
1,679 | (578 | ) | | 172 | 1,273 | ||||||||||||||
Commercial and industrial |
77 | 249 | (252 | ) | 19 | 93 | ||||||||||||||
SBA and USDA |
6,732 | 2,635 | (3,279 | ) | 276 | 6,364 | ||||||||||||||
Religious type organizations |
265 | 1,013 | (748 | ) | | 530 | ||||||||||||||
Consumer and other |
61 | 3 | | | 64 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 8,996 | $ | 3,632 | $ | (4,279 | ) | $ | 467 | $ | 8,816 | ||||||||||
|
|
|
|
|
|
|
|
|
|
F-132
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
Year Ended December 31, 2015 |
Beginning Balance |
Provision (Credits) for Loan Losses |
Loans Charged- Off |
Recoveries |
Ending
|
|||||||||||||||
Land |
||||||||||||||||||||
Lots and developed land |
$ | 20 | $ | (20 | ) | $ | | $ | | $ | | |||||||||
Construction |
145 | (124 | ) | | | 21 | ||||||||||||||
Commercial real estate |
||||||||||||||||||||
Owner occupied |
345 | (184 | ) | | | 161 | ||||||||||||||
Non-owner occupied |
1,266 | 1,024 | (668 | ) | 57 | 1,679 | ||||||||||||||
Commercial and industrial |
544 | (478 | ) | | 11 | 77 | ||||||||||||||
SBA and USDA |
4,465 | 3,183 | (1,959 | ) | 1,043 | 6,732 | ||||||||||||||
Religious type organizations |
570 | (364 | ) | | 59 | 265 | ||||||||||||||
Consumer and other |
8 | 303 | (250 | ) | | 61 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 7,363 | $ | 3,340 | $ | (2,877 | ) | $ | 1,170 | $ | 8,996 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table presents the balance in the allowance for loan losses and the recorded investment (recorded investment includes unpaid principal balance only) in loans carried at amortized cost by portfolio category based on impairment method as of October 14, 2016:
Allowance for Loan Losses | Loan Balances | |||||||||||||||||||||||
October 14, 2016 |
Individually
|
Collectively
|
Total |
Individually
|
Collectively
|
Total |
||||||||||||||||||
Land |
||||||||||||||||||||||||
Raw land for development |
$ | | $ | | $ | | $ | | $ | 1,158 | $ | 1,158 | ||||||||||||
Lots and development land |
| | | | 213 | 213 | ||||||||||||||||||
Construction |
| 43 | 43 | | 2,763 | 2,763 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
333 | 116 | 449 | 565 | 6,082 | 6,647 | ||||||||||||||||||
Non-owner occupied |
945 | 328 | 1,273 | 6,014 | 3,634 | 9,648 | ||||||||||||||||||
Commercial and industrial |
| 93 | 93 | | 13,352 | 13,352 | ||||||||||||||||||
SBA and USDA |
1,896 | 4,468 | 6,364 | 8,928 | 290,422 | 299,350 | ||||||||||||||||||
Religious type organizations |
237 | 293 | 530 | 7,973 | 8,724 | 16,697 | ||||||||||||||||||
Consumer and other |
| 64 | 64 | | 2,670 | 2,670 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 3,411 | $ | 5,405 | $ | 8,816 | $ | 23,480 | $ | 329,018 | $ | 352,498 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-133
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The following table presents the balance in the allowance for loan losses and the recorded investment (recorded investment includes unpaid principal balance only) in loans carried at amortized cost by portfolio category based on impairment method as of December 31, 2015:
Allowance for Loan Losses | Loan Balances | |||||||||||||||||||||||
December 31, 2015 |
Individually
|
Collectively
|
Total |
Individually
|
Collectively
|
Total |
||||||||||||||||||
Land |
||||||||||||||||||||||||
Raw land for development |
$ | | $ | | $ | | $ | 1,172 | $ | | $ | 1,172 | ||||||||||||
Lots and development land |
| | | | 350 | 350 | ||||||||||||||||||
Construction |
| 21 | 21 | | 1,874 | 1,874 | ||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||
Owner occupied |
| 161 | 161 | | 6,943 | 6,943 | ||||||||||||||||||
Non-owner occupied |
967 | 712 | 1,679 | 5,144 | 7,305 | 12,449 | ||||||||||||||||||
Commercial and industrial |
| 77 | 77 | | 13,738 | 13,738 | ||||||||||||||||||
SBA and USDA |
2,021 | 4,711 | 6,732 | 13,757 | 242,462 | 256,219 | ||||||||||||||||||
Religious type organizations |
6 | 259 | 265 | 7,596 | 11,224 | 18,820 | ||||||||||||||||||
Consumer and other |
| 61 | 61 | 585 | 2,874 | 3,459 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,994 | $ | 6,002 | $ | 8,996 | $ | 28,254 | $ | 286,770 | $ | 315,024 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-134
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The following table presents information related to impaired loans by class of loans as of and for the period from January 1, 2016 to October 14, 2016:
Recorded
|
Allowance for
|
Average
|
||||||||||
October 14, 2016 |
||||||||||||
With no related allowance recorded: |
||||||||||||
Land |
||||||||||||
Raw land for development |
$ | | $ | | $ | | ||||||
Lots and development land |
| | | |||||||||
Construction |
| | | |||||||||
Commercial real estate |
||||||||||||
Owner occupied |
| | | |||||||||
Non-owner occupied |
1,217 | | 767 | |||||||||
Commercial and industrial |
| | | |||||||||
SBA and USDA |
3,364 | | 3,333 | |||||||||
Religious type organizations |
2,484 | | 3,252 | |||||||||
Consumer and other |
| | | |||||||||
|
|
|
|
|
|
|||||||
7,065 | | 7,352 | ||||||||||
With an allowance recorded: |
||||||||||||
Land |
||||||||||||
Raw land for development |
| | | |||||||||
Lots and development land |
| | | |||||||||
Construction |
| | | |||||||||
Commercial real estate |
||||||||||||
Owner occupied |
565 | 333 | 282 | |||||||||
Non-owner occupied |
4,797 | 945 | 4,812 | |||||||||
Commercial and industrial |
| | | |||||||||
SBA and USDA |
5,564 | 1,896 | 8,010 | |||||||||
Religious type organizations |
5,489 | 237 | 4,533 | |||||||||
Consumer and other |
| | | |||||||||
|
|
|
|
|
|
|||||||
16,415 | 3,411 | 17,637 | ||||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 23,480 | $ | 3,411 | $ | 24,989 | ||||||
|
|
|
|
|
|
Recorded investment approximates the unpaid principal balance.
F-135
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The following table presents information related to impaired loans by class of loans as of and for the year ended December 31, 2015:
Recorded
|
Allowance
|
Average
|
||||||||||
December 31, 2015 |
||||||||||||
With no related allowance recorded: |
||||||||||||
Land |
||||||||||||
Raw land for development |
$ | 1,172 | $ | | $ | 586 | ||||||
Lots and development land |
| | 173 | |||||||||
Construction |
| | | |||||||||
Commercial real estate |
||||||||||||
Owner occupied |
| | 269 | |||||||||
Non-owner occupied |
317 | | 1,797 | |||||||||
Commercial and industrial |
| | | |||||||||
SBA and USDA |
3,301 | | 2,228 | |||||||||
Religious type organizations |
4,020 | | 4,804 | |||||||||
Consumer and other |
585 | | | |||||||||
|
|
|
|
|
|
|||||||
9,395 | | 9,857 | ||||||||||
With an allowance recorded: |
||||||||||||
Land |
||||||||||||
Raw land for development |
| | | |||||||||
Lots and development land |
| | | |||||||||
Construction |
| | | |||||||||
Commercial real estate |
||||||||||||
Owner occupied |
| | | |||||||||
Non-owner occupied |
4,827 | 967 | 3,962 | |||||||||
Commercial and industrial |
| | | |||||||||
SBA and USDA |
10,456 | 2,021 | 5,619 | |||||||||
Religious type organizations |
3,576 | 6 | 1,788 | |||||||||
Consumer and other |
| | | |||||||||
|
|
|
|
|
|
|||||||
18,859 | 2,994 | 11,369 | ||||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 28,254 | $ | 2,994 | $ | 21,226 | ||||||
|
|
|
|
|
|
Recorded investment approximates the unpaid principal balance.
For loans carried at fair value, changes in fair value of $161 and $255 were recorded as net gains on loan sales within the consolidated statement of income for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015, respectively. The changes in fair value recognized in income were attributable to changes in interest rates and not to changes in credit quality of the loans carried at fair value. At October 14, 2016 and December 31, 2015, $114 and $94 of loans are carried at fair value and are past due greater than ninety days, on non-accrual status, or considered to be impaired.
F-136
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The following is a schedule of activity for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015 for loans carried at fair value:
Period Ended
|
Year Ended
|
|||||||||||||||
Portfolio |
Held for
|
Portfolio |
Held for
|
|||||||||||||
Beginning balance |
$ | 4,022 | $ | 2,067 | $ | 6,434 | $ | 4,333 | ||||||||
Originations |
| 8,915 | | 2,067 | ||||||||||||
Sales |
| (1,894 | ) | | (4,319 | ) | ||||||||||
Repayments |
(845 | ) | (173 | ) | (2,667 | ) | (14 | ) | ||||||||
Changes in fair value |
161 | | 255 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 3,338 | $ | 8,915 | $ | 4,022 | $ | 2,067 | ||||||||
|
|
|
|
|
|
|
|
Information on individually impaired, non-performing, and trouble debt restructured loans were as follows:
October 14,
|
December 31,
|
|||||||
Period end loans with no allocated allowance for loan losses |
$ | 7,065 | $ | 9,395 | ||||
Period end loans with allocated allowance for loan losses |
16,415 | 18,859 | ||||||
|
|
|
|
|||||
Total |
$ | 23,480 | $ | 28,254 | ||||
|
|
|
|
|||||
Amount of the allowance for loan losses allocated |
$ | 3,411 | $ | 2,994 | ||||
Average of individually impaired loans during period |
27,447 | 21,226 | ||||||
Non-accrual loans |
$ | 6,456 | $ | 4,957 | ||||
Loans past due more than ninety days and still accruing |
| | ||||||
|
|
|
|
|||||
Total non-performing loans |
$ | 6,456 | $ | 4,957 | ||||
|
|
|
|
|||||
Troubled debt restructuringsaccrual status |
$ | 14,217 | $ | 15,031 | ||||
Troubled debt restructuringsnon-accrual status |
3,405 | 1,374 | ||||||
|
|
|
|
|||||
Total troubled debt restructurings |
$ | 17,622 | $ | 16,405 | ||||
|
|
|
|
|||||
Allowance allocated to troubled debt restructurings |
$ | 240 | $ | 1,476 |
Interest income recognized during impairment was not material for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015. The Company has not committed additional funds to customers whose loans are classified as troubled debt restructuring.
F-137
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The following table presents the aging of the recorded investment in past due loans as of October 14, 2016 by class of loans:
October 14, 2016 |
30 - 59
|
60 - 89
|
Greater than
Past Due |
Total
|
Non-accrual
|
Loans Not
|
Total |
|||||||||||||||||||||
Land |
||||||||||||||||||||||||||||
Raw land for development |
$ | | $ | | $ | | $ | | $ | | $ | 1,158 | $ | 1,158 | ||||||||||||||
Lots and development land |
| | | | | 213 | 213 | |||||||||||||||||||||
Construction |
| | | | | 2,763 | 2,763 | |||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
| 565 | | 565 | | 6,082 | 6,647 | |||||||||||||||||||||
Non-owner occupied |
2,812 | 279 | | 3,091 | 50 | 6,507 | 9,648 | |||||||||||||||||||||
Commercial and industrial |
374 | 175 | | 549 | 439 | 12,364 | 13,352 | |||||||||||||||||||||
SBA and USDA |
5,331 | 224 | | 5,555 | 5,427 | 291,706 | 302,688 | |||||||||||||||||||||
Religious type organizations |
2,603 | | | 2,603 | 540 | 13,554 | 16,697 | |||||||||||||||||||||
Consumer and other |
| | | | | 2,670 | 2,670 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 11,120 | $ | 1,243 | $ | | $ | 12,363 | $ | 6,456 | $ | 337,017 | $ | 355,836 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents the aging of the recorded investment in past due loans as of December 31, 2015 by class of loans:
December 31, 2015 |
30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater than 89 Days Past Due |
Total
|
Non-accrual Loans |
Loans Not Past Due |
Total |
|||||||||||||||||||||
Land |
||||||||||||||||||||||||||||
Raw land for development |
$ | | $ | | $ | | $ | | $ | | $ | 1,172 | $ | 1,172 | ||||||||||||||
Lots and development land |
| | | | | 350 | 350 | |||||||||||||||||||||
Construction |
| | | | | 1,874 | 1,874 | |||||||||||||||||||||
Commercial real estate |
||||||||||||||||||||||||||||
Owner occupied |
| | | | 195 | 6,748 | 6,943 | |||||||||||||||||||||
Non-owner occupied |
| | | | 37 | 12,412 | 12,449 | |||||||||||||||||||||
Commercial and industrial |
| | | | | 13,738 | 13,738 | |||||||||||||||||||||
SBA and USDA |
384 | 388 | | 772 | 4,140 | 255,329 | 260,241 | |||||||||||||||||||||
Religious type organizations |
| 856 | | 856 | | 17,964 | 18,820 | |||||||||||||||||||||
Consumer and other |
| | | | 585 | 2,874 | 3,459 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 384 | $ | 1,244 | $ | | $ | 1,628 | $ | 4,957 | $ | 312,461 | $ | 319,046 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 14, 2016 and December 31, 2015, the Company had $1,001 and $1,017 of non-accrual loans that are less than thirty days past due.
Troubled Debt Restructurings
Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. As of
F-138
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
October 14, 2016 and December 31, 2015, the Company had $17,622 and $16,405 in loans classified as troubled debt restructurings. The Company has allocated $240 and $1,476 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of October 14, 2016 and December 31, 2015. The Company has not committed to lend any additional amounts as of October 14, 2016 and December 31, 2015 to customers with outstanding loans that are classified as troubled debt restructurings.
During the period from January 1, to October 14, 2016 and the year ending December 31, 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; a deferral of principal and interest.
Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from three months to five years. Modifications involving an extension of the maturity date were for periods ranging from three months to five years. Payment deferrals were for period ranging from three to seven months.
The following table presents loans by class modified as troubled debt restructurings that occurred during the period from January 1, 2016 to October 14, 2016:
Number of Loans |
Pre-Modification
|
Post-Modification
|
||||||||||
Troubled Debt Restructurings: |
||||||||||||
SBA and USDA |
13 | $ | 2,979 | $ | 2,979 | |||||||
Religious type organizations |
4 | 1,011 | 1,011 | |||||||||
|
|
|
|
|
|
|||||||
17 | $ | 3,990 | $ | 3,990 | ||||||||
|
|
|
|
|
|
The troubled debt restructurings described above resulted in $281 of additions to the allowance for loan losses and $125 of charge offs during the period from January 1, 2016 to October 14, 2016.
The following table presents loans by class modified as troubled debt restructurings that occurred during the year ending December 31, 2015:
Number of Loans |
Pre-Modification
|
Post-Modification
|
||||||||||
Troubled Debt Restructurings: |
||||||||||||
Lots and development land |
1 | $ | 1,664 | $ | 1,664 | |||||||
Commercial real estate |
||||||||||||
Owner occupied |
1 | 177 | 177 | |||||||||
Non-owner occupied |
3 | 2,200 | 2,200 | |||||||||
SBA and USDA |
6 | 1,826 | 1,826 | |||||||||
Religious type organizations |
2 | 2,291 | 2,291 | |||||||||
|
|
|
|
|
|
|||||||
13 | $ | 8,158 | $ | 8,158 | ||||||||
|
|
|
|
|
|
F-139
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
The troubled debt restructurings described above resulted in $679 of additions to the allowance for loan losses and no charge offs during the year ending December 31, 2015.
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the period from January 1, 2016 to October 14, 2016:
Troubled Debt Restructurings That Subsequently Defaulted: |
Number
|
Recorded
|
||||||
Religious type organizations |
2 | $ | 476 | |||||
SBA and USDA |
3 | 736 | ||||||
|
|
|
|
|||||
5 | $ | 1,212 | ||||||
|
|
|
|
The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the year ending December 31, 2015:
Troubled Debt Restructurings That Subsequently Defaulted: |
Number
|
Recorded
|
||||||
Commercial real estate |
||||||||
Non-owner occupied |
1 | $ | 933 | |||||
SBA and USDA |
3 | 838 | ||||||
|
|
|
|
|||||
4 | $ | 1,771 | ||||||
|
|
|
|
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogeneous loans, such as construction, commercial and commercial real estate loans. This analysis is performed annually on a loan-by-loan basis. The risk category of homogeneous loans is evaluated when a loan becomes delinquent. The Company uses the following definitions for classified risk rating:
Substandard . Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful . Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
F-140
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 3LOANS (Continued)
Loans not meeting the criteria above that are analyzed individually as part of the above-described process are considered to be pass rated loans. As of October 14, 2016 and December 31, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:
Pass |
Classified |
Total |
||||||||||
October 14, 2016 |
||||||||||||
Construction |
$ | 2,763 | $ | | $ | 2,763 | ||||||
Commercial real estate |
12,228 | 4,067 | 16,295 | |||||||||
Commercial |
323,789 | 10,319 | 334,108 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 338,780 | $ | 14,386 | $ | 353,166 | ||||||
|
|
|
|
|
|
Pass |
Classified |
Total |
||||||||||
December 31, 2015 |
||||||||||||
Construction |
$ | 1,874 | $ | | $ | 1,329 | ||||||
Commercial real estate |
17,837 | 1,555 | 19,392 | |||||||||
Commercial |
279,809 | 14,152 | 293,961 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 299,880 | $ | 15,707 | $ | 315,587 | ||||||
|
|
|
|
|
|
NOTE 4OTHER REAL ESTATE OWNED
Changes in the other real estate owned are as follows:
2016 |
2015 |
|||||||
Balance, beginning of year |
$ | 1,515 | $ | 4,574 | ||||
Transfer of loans |
1,372 | 494 | ||||||
Impairment recognized |
(46 | ) | (132 | ) | ||||
Net proceeds from sales |
(1,097 | ) | (3,622 | ) | ||||
Net (loss) gain on sales |
(34 | ) | 201 | |||||
|
|
|
|
|||||
Balance, ending |
$ | 1,710 | $ | 1,515 | ||||
|
|
|
|
Expenses, excluding write-downs and net loss on sales relating to other real estate owned, for the period from January 1, 2016 to October 14, 2016 and for the year ended December 31, 2015 were $399 and $320, respectively.
F-141
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 5PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2016 |
2015 |
|||||||
Land |
$ | 418 | $ | 418 | ||||
Buildings and improvements |
2,087 | 2,005 | ||||||
Furniture, fixtures, and equipment |
2,332 | 2,164 | ||||||
|
|
|
|
|||||
4,837 | 4,587 | |||||||
Accumulated depreciation |
(2,311 | ) | (2,087 | ) | ||||
|
|
|
|
|||||
Premises and equipment, net |
$ | 2,526 | $ | 2,500 | ||||
|
|
|
|
The Company leases certain branch properties under operating leases. Rent expense was $273 and $399 for the period from January 1, 2016 to October 14, 2016 and during the year ended December 31, 2015, respectively. Rent commitments at October 14, 2016, before considering renewal options that generally are present, were as follows:
2017 |
$ | 350 | ||
2018 |
317 | |||
2019 |
98 | |||
2020 |
| |||
2021 |
| |||
|
|
|||
Total |
$ | 765 | ||
|
|
NOTE 6SERVICING ASSETS
Loans serviced for others are not included in the accompanying consolidated balance sheet. The principal balances of these loans were as follows:
October 14,
2016 |
December 31,
2015 |
|||||||
Loan portfolios serviced for: |
||||||||
SBA |
$ | 873,150 | $ | 700,231 | ||||
USDA |
87,878 | 107,724 | ||||||
|
|
|
|
|||||
$ | 961,028 | $ | 807,955 | |||||
|
|
|
|
Activity for servicing assets and the related changes in fair value are as follows:
Period Ended
October 14, 2016 |
Year Ended
December 31, 2015 |
|||||||
Servicing assets: |
||||||||
Beginning of year fair value |
$ | 19,107 | $ | 17,587 | ||||
Additions |
6,001 | 5,528 | ||||||
Changes in fair value |
(3,609 | ) | (4,008 | ) | ||||
|
|
|
|
|||||
End of year fair value |
$ | 21,499 | $ | 19,107 | ||||
|
|
|
|
F-142
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 6SERVICING ASSETS (Continued)
Components of loan servicing income are as follows:
Period Ended
October 14, 2016 |
Year Ended
December 31, 2015 |
|||||||
Servicing fee income |
$ | 6,591 | $ | 7,345 | ||||
Changes in fair value |
(3,609 | ) | (4,008 | ) | ||||
|
|
|
|
|||||
$ | 2,982 | $ | 3,337 | |||||
|
|
|
|
The fair value of servicing rights at October 14, 2016 was determined using discount rates ranging from 7.59% to 18.64%, prepayment speeds ranging from 5.55% to 9.19%, depending on the stratification of the specific right, and a weighted average default rate of 1.20%. The fair value of servicing rights at December 31, 2015 was determined using discount rates ranging from 9.21% to 17.83%, prepayment speeds ranging from 5.57% to 11.59%, depending on the stratification of the specific right, and a weighted average default rate of 1.20%.
NOTE 7DEPOSITS
Time deposits of $250 or more were $28,446 and $26,877 at October 14, 2016 and December 31, 2015.
Brokered deposits were $42,129 and $40,538 at October 14, 2016 and December 31, 2015.
Scheduled maturities of all time deposits for the next five years were as follows:
Period ended December 31, |
Non-Brokered | Brokered | Total | |||||||||
2016 |
$ | 29,932 | $ | 11,302 | $ | 41,234 | ||||||
2017 |
197,697 | 30,827 | 228,524 | |||||||||
2018 |
1,547 | | 1,547 | |||||||||
2019 |
352 | | 352 | |||||||||
2020 |
160 | | 160 | |||||||||
Thereafter |
327 | | 327 | |||||||||
|
|
|
|
|
|
|||||||
$ | 230,015 | $ | 42,129 | $ | 272,144 | |||||||
|
|
|
|
|
|
NOTE 8FEDERAL HOME LOAN BANK ADVANCES
At year end, advances from the Federal Home Loan Bank were as follows:
Maturity Date |
Fixed Rate | 2016 | 2015 | |||||||||
January 16, 2018 (Putable quarterly) |
3.15 | % | $ | 1,500 | $ | 1,500 | ||||||
February 5, 2018 |
3.22 | % | 7,987 | 7,987 | ||||||||
|
|
|
|
|||||||||
$ | 9,487 | $ | 9,487 | |||||||||
|
|
|
|
Each advance is payable at its maturity date, with a prepayment penalty for fixed rate advances. At October 14, 2016 and December 31, 2015, the advances were collateralized by pledged securities totaling
F-143
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 8FEDERAL HOME LOAN BANK ADVANCES (Continued)
$24,607 and $10,353 and qualifying loans of $3,292 and $5,278. Based on this collateral and the Companys holdings of FHLB stock, the Company was eligible to borrow an additional $15,120 at October 14, 2016. Putable advances are required to be repaid upon the request of the FHLB.
NOTE 9BORROWINGS
Note Payable : On January 18, 2015 the Company executed a promissory note with a correspondent bank with an interest rate equal to the 30 day LIBOR Rate plus 3.00% and required monthly principal payments of $18,750 plus interest, with final payment of the remaining balance on the note due on January 19, 2017. During 2015, the Company repaid the note payable in full.
Line of Credit : On June 15, 2015, The Company executed a new loan agreement with a correspondent bank for a line of credit of $3,000,000 at the Prime Rate, as set forth in the Wall Street Journal (3.75% at October 14, 2016) with an initial maturity date of June 15, 2016. The maturity date of the line of credit was extended to June 15, 2017. A portion of the line was used to pay off the note descried above. Payments of interest only are required quarterly. The loan is secured by all of the stock of the Bank and contains covenants related to the Banks capital and non-performing assets. At October 14, 2016, management believes that the Company was in compliance with the debt covenants. At October 14, 2016 and December 31, 2015, the Company had $0 and $775 outstanding on the line of credit.
NOTE 10SUBORDINATED DEBENTURES
In 2003, the Companys predecessor formed RidgeStone Capital Trust I (the Trust). The Trust was formed as a statutory business trust formed under the laws of the state of Delaware and is wholly owned by the Company. The Trust issued floating rate capital trust preferred securities with an aggregate liquidation amount of $1,500 ($1 per preferred security) to third-party institutional investors. The Company then issued junior subordinated debentures aggregating $1,550 to the Trust in exchange for ownership of all of the common securities of the Trust and the proceeds from the preferred securities sold by the Trust. The junior subordinated debentures are the sole assets of the Trust. The junior subordinated debentures and the preferred securities pay interest and dividends on a quarterly basis. Beginning on June 30, 2008, the rate reset to LIBOR plus 3.50% and resets every five years thereafter. At October 14, 2016 and December 31, 2015 the rate was 5.09%.
The Companys investment in the common stock of the Trust is $50 and is included in other assets. Consistent with generally accepted accounting principles, the Trust is not consolidated with the Company. Accordingly, the Company reports the subordinated debentures held by the Trust as a liability.
The subordinated debentures will mature on June 30, 2033, at which time the preferred securities must be redeemed. The subordinated debentures and preferred securities can be redeemed contemporaneously, in whole or in part. The Company has the right, at any time, as long as there are no continuing events of default, to defer payments of interest on the debentures for consecutive periods not exceeding five years; but not beyond the stated maturity of the debentures. The subordinated debentures qualify as regulatory capital, subject to regulatory limitation.
F-144
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 11INCOME TAXES
Income tax expense was as follows:
Period Ended
October 14, 2016 |
Year Ended
December 31, 2015 |
|||||||
Current expense |
$ | 7,853 | $ | 7,832 | ||||
Deferred expense |
1,155 | 200 | ||||||
|
|
|
|
|||||
Total |
$ | 9,008 | $ | 8,032 | ||||
|
|
|
|
Effective tax rates differ from federal statutory rates applied to financial statement income due to the following:
Period Ended
October 14, 2016 |
Year Ended
December 31, 2015 |
|||||||
Income tax at federal statutory rate of 35% |
$ | 7,406 | $ | 6,779 | ||||
Effect of: |
||||||||
Earnings on Company-owned life insurance |
(12 | ) | (15 | ) | ||||
State taxes |
1,054 | 1,149 | ||||||
Non-deductible transaction expenses |
336 | 18 | ||||||
Other, net |
224 | 101 | ||||||
|
|
|
|
|||||
Total |
$ | 9,008 | $ | 8,032 | ||||
|
|
|
|
|||||
Effective tax rate |
42.57 | % | 41.37 | % | ||||
|
|
|
|
F-145
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 11INCOME TAXES (Continued)
Year-end deferred tax assets and liabilities were as follows:
October 14,
2016 |
December 31,
2015 |
|||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 587 | $ | | ||||
Accrued expenses |
301 | 1,251 | ||||||
Other real estate owned |
25 | 22 | ||||||
State net operating loss carryforward |
83 | 86 | ||||||
Net unrealized loss on available for sale securities |
| 68 | ||||||
Other, net |
8 | 4 | ||||||
|
|
|
|
|||||
1,004 | 1,431 | |||||||
Deferred tax liabilities: |
||||||||
Allowance for loan losses |
| (300 | ) | |||||
Premises and equipment |
(230 | ) | (215 | ) | ||||
Prepaids |
(29 | ) | (55 | ) | ||||
FHLB stock dividends |
(2 | ) | (2 | ) | ||||
Servicing rights |
(8,331 | ) | (7,224 | ) | ||||
Net unrealized gain on available for sale securities |
(110 | ) | | |||||
|
|
|
|
|||||
(8,702 | ) | (7,796 | ) | |||||
|
|
|
|
|||||
Net deferred tax liability |
$ | (7,698 | ) | $ | (6,365 | ) | ||
|
|
|
|
Unused Wisconsin net operating losses of $1,564 and $1,668 as of October 14, 2016 and December 31, 2015, respectively, begin to expire in 2031. The Company files a U.S. federal income tax return and state income tax returns in various states. Income tax returns filed by the Company are no longer subject to examination by federal for tax years prior to 2013 and state income tax authorities for tax years prior to 2012.
NOTE 12RELATED-PARTY TRANSACTIONS
Certain directors, officers, and shareholders of the Company (including their affiliates, families, and companies in which they are principal owners) are considered to be related parties of the Company. From time to time, these related parties may enter into loan and deposit relationships. At October 14, 2016 and December 31, 2015, no related parties had outstanding loan balances. Deposits from these related parties totaled $150 and $361 as of October 14, 2016 and December 31, 2015.
NOTE 13INCENTIVE PLAN AND EMPLOYMENT AGREEMENTS
The Company has a Long Term Incentive Plan (the Plan) for certain officers and employees. The Plan provides a cash incentive based on the achievement of specific performance goals and stock awards. Benefits vest over a three to five year period, and the cash awards are paid when vested. A Plan provision requires the benefits to fully vest upon a change in control, and accordingly, the unvested cash and stock benefits fully vested by October 14, 2016.
The Plan permits the issuance of incentive stock options, stock appreciation rights, and restricted stock awards. The Plan provides a means to attract, retain, and reward individuals who can and do contribute to such
F-146
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 13INCENTIVE PLAN AND EMPLOYMENT AGREEMENTS (Continued)
success and to further align their interests with those of the Companys shareholders. Each employee or director of, or service provider to, the Company or any related company of the Company is available to be a participant in the Plan. The Plan provides that the maximum number of shares of stock that may be delivered to participants shall be equal to 207,000. No incentive stock options or stock appreciation rights have been awarded. Awards consist of performance-based stock incentives based on the performance of the Company and the award represents the right of the participant to receive a payment in the future subject to the terms of the agreement. A summary of changes in the Companys nonvested shares for the year follows:
Nonvested Shares |
Shares |
Weighted-Average Grant-Date Fair Value |
||||||
Nonvested at January 1, 2016 |
19,617 | $ | 13.66 | |||||
Granted |
| | ||||||
Vested |
19,617 | 13.66 | ||||||
Forfeited |
| | ||||||
|
|
|
|
|||||
Nonvested at October 14, 2016 |
| $ | | |||||
|
|
|
|
During the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015, 5,210 and 13,276 shares, respectively, were also issued to certain executives based on performance. The shares were vested on award date.
During 2016, the 19,617 nonvested shares were fully vested due to the plans change in control provisions triggered by the merger transaction. At October 14, 2016, there was no unrecognized compensation cost related to nonvested shares under the plan.
Certain executives entered into change in control agreements with the Company during June 2014, which provide benefits upon termination due to a change in control. No amounts have been accrued or expensed under these employment agreements since the merger transaction did not cause termination.
A key executive has an employment agreement which provides benefits, including: compensation, performance bonus, severance, other benefits, and a change in control provision. The change in control benefits were triggered by the merger transaction, and accordingly, benefits were accrued and paid during the period ended October 14, 2016.
The Company recognized expenses, reported in salaries and employee benefits on the consolidated statements of income, totaling $2,847 and $1,334 under the incentive plan, including the stock incentive vesting, and employment agreements during the period from January 1, 2016 to October 14, 2016, and the year ended December 31, 2015, respectively.
F-147
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 14EARNINGS PER COMMON SHARE
The table below calculates the earnings per share for the period from January 1, 2016 to October 14, 2016, and for the year ended December 31, 2015:
Period Ended
October 14, 2016 |
Year Ended
December 31, 2015 |
|||||||
Basic: |
||||||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
Weighted average common shares outstanding |
3,374,318 | 3,369,041 | ||||||
|
|
|
|
|||||
Basic earnings per share |
$ | 3.60 | $ | 3.38 | ||||
|
|
|
|
|||||
Diluted: |
||||||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
Weighted-average common shares outstanding for basic |
3,374,318 | 3,369,041 | ||||||
Add dilutive effects of assumed exercise of stock awards |
| 9,808 | ||||||
|
|
|
|
|||||
Weighted-average common shares outstanding for diluted |
3,374,318 | 3,378,849 | ||||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 3.60 | $ | 3.37 | ||||
|
|
|
|
At October 14, 2016 and December 31, 2015, there were no anti-dilutive stock awards.
NOTE 15REGULATORY MATTERS
Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Since the Company has consolidated assets of less than $1 billion and meets the criteria of the Federal Reserves Small Bank Holding Company Policy Statement, regulatory minimum capital tests are applied primarily at the subsidiary bank level. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.
The final rules implementing Basel Committee on Banking Supervisions capital guideline for U.S. Banks (Basel III rules) became effective for the Company on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is being phased in at 0.625% per year beginning in 2016 until fully phased in at 2.5% in 2019. The required capitalization buffer at October 14, 2016 was $2,476. The net unrealized gain or loss on available for sale securities is not included in computing regulatory capital. Management believes as of October 14, 2016 and December 31, 2015, the Bank meets all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. As of October 14, 2016 and the year ended December 31, 2015, the
F-148
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 15REGULATORY MATTERS (Continued)
most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutions category.
Actual and required capital amounts and ratios at October 14, 2016 and December 31, 2015 are presented below:
Actual |
Required
For
|
To Be
Well
|
||||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
2016 |
||||||||||||||||||||||||
Total Capital (to risk weighted assets) |
$ | 65,752 | 16.62 | % | $ | 31,640 | 8.0 | % | $ | 39,550 | 10.0 | % | ||||||||||||
Tier 1 Capital (to risk weighted assets) |
60,731 | 15.36 | 23,730 | 6.0 | 31,640 | 8.0 | ||||||||||||||||||
Common Tier 1 (CET 1) |
60,731 | 15.36 | 17,798 | 4.5 | 25,708 | 6.5 | ||||||||||||||||||
Tier 1 Capital (to average assets) |
60,731 | 13.60 | 17,860 | 4.0 | 22,325 | 5.0 |
Actual |
Required
For
|
To Be Well
Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount |
Ratio |
Amount |
Ratio |
Amount |
Ratio |
|||||||||||||||||||
2015 |
||||||||||||||||||||||||
Total Capital (to risk weighted assets) |
$ | 57,464 | 14.59 | % | $ | 31,518 | 8.0 | % | $ | 39,398 | 10.0 | % | ||||||||||||
Tier 1 Capital (to risk weighted assets) |
52,477 | 13.32 | 23,631 | 6.0 | 31,508 | 8.0 | ||||||||||||||||||
Common Tier 1 (CET 1) |
52,477 | 13.32 | 17,723 | 4.5 | 25,601 | 6.5 | ||||||||||||||||||
Tier 1 Capital (to average assets) |
52,477 | 12.35 | 16,995 | 4.0 | 21,244 | 5.0 |
NOTE 16LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
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 standby letters of credit and commitments to fund loans. The Companys exposure to credit loss in the event of nonperformance by the parties to these financial instruments is represented by the contractual amount of the instruments. Commitments may expire without being used. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment and other performance measures as may be required by the Company. Commitments to fund loans include SBA and USDA loans, which based on market conditions, the Company may choose to sell. These financial instruments are summarized as follows:
October 14, 2016 |
December 31, 2015 |
|||||||||||||||
Fixed Rate |
Variable Rate |
Fixed Rate |
Variable Rate |
|||||||||||||
Financial instruments whose contract amounts represent credit risk |
||||||||||||||||
Standby letters of credit |
$ | | $ | 1,111 | $ | | $ | 1,047 | ||||||||
Commitments to fund loans |
| 201,602 | | 229,595 |
F-149
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 16LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES (Continued)
Commitments to fund loans are generally made for periods of 180 days or less.
NOTE 17FAIR VALUE
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. There are three levels of inputs that may be used to measure fair value:
Level 1Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3Significant unobservable inputs that reflect a companys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value.
Securities : The fair value of securities available-for-sale are calculated based on market prices of similar securities or by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities (Level 2). For securities where market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Level 3 securities include single issuer trust preferred securities that are not traded in a market. The fair value measurement of a Level 3 security is based on a discounted cash flow model that incorporates the probability of default assumption to measure the fair value of the security. The Company evaluates the issuers most recent financial statements available including the financial statements of the subsidiary banks and incorporates the interest deferrals into the calculation.
Impaired Loans : The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrowers financial statements, or aging reports, adjusted or discounted based on managements historical knowledge, changes in market conditions from the time of the valuation, and managements expertise and knowledge of the client and clients business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Other Real Estate Owned : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate
F-150
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 17FAIR VALUE (Continued)
appraisals which are updated no less frequently than annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Real estate owned properties are evaluated on a periodic basis for additional impairment and adjusted accordingly.
Appraisals for both collateral-dependent impaired loans and other real estate owned are generally performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Upon sale of collateral, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value for the remaining assets carried at fair value.
Servicing Rights : Fair value is based on market prices for comparable servicing contracts valued 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 rights begins with generating future cash flows for each servicing asset, based on their unique characteristics and market-based assumptions for prepayment speeds. The present value of the future cash flows are then calculated utilizing market-based discount rate assumptions. Fair value at October 14, 2016 and year end 2015 was determined using the following weighted average assumptions:
2016 |
2015 |
|||||||
Discount rate |
12.7 | % | 12.1 | % | ||||
Prepayment speed |
7.2 | % | 7.4 | % | ||||
Expected weighted average loan life |
6.1 years | 6.3 years |
Loans : As described in earlier Notes, the Company accounts for certain loans at fair value. Fair value is calculated quarterly based on market prices for comparable loans valued on a loan-by-loan basis taking into consideration the original term to maturity, the current age of the loan, the remaining term to maturity, and credit quality indicators. The valuation methodology utilized begins with generating future cash flows for each loan based on their unique characteristics and market-based assumptions. The present value of the future cash flows are then calculated utilizing market-based discount rate assumptions. The fair value of loans held for sale is estimated based upon quotes from third party investors resulting in a Level 2 classification.
F-151
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 17FAIR VALUE (Continued)
Assets measured at fair value on a recurring basis at October 14, 2016 and December 31, 2015 are summarized below:
Total |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
October 14, 2016 |
||||||||||||||||
Collateralized mortgage obligationsresidential |
$ | 2,357 | $ | | $ | 2,357 | $ | | ||||||||
Mortgage-backedresidential |
523 | | 523 | | ||||||||||||
U.S. government sponsored entities |
23,751 | | 23,751 | | ||||||||||||
Single issuer trust preferred |
583 | | | 583 | ||||||||||||
Loans |
3,338 | | 3,338 | | ||||||||||||
Loans held for sale |
8,915 | | 8,915 | | ||||||||||||
Servicing assets |
21,499 | | 21,499 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 60,966 | $ | | $ | 60,383 | $ | 583 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2015 |
||||||||||||||||
Collateralized mortgage obligationsresidential |
$ | 2,816 | $ | | $ | 2,816 | $ | | ||||||||
Mortgage-backedresidential |
621 | | 621 | | ||||||||||||
U.S. government sponsored entities |
23,370 | | 23,370 | | ||||||||||||
Single issuer trust preferred |
583 | | | 583 | ||||||||||||
Loans |
4,022 | | 4,022 | | ||||||||||||
Loans held for sale |
2,067 | | 2,067 | | ||||||||||||
Servicing assets |
19,107 | | 19,107 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 52,586 | $ | | $ | 52,003 | $ | 583 | |||||||||
|
|
|
|
|
|
|
|
The following table presents quantitative information about recurring Level 3 fair value measurements at October 14, 2016 and December 31, 2015:
Fair Value |
Valuation Techniques |
Unobservable Input |
Range |
|||||||||||||
October 14, 2016 |
||||||||||||||||
Single issuer trust preferred |
$ | 583 | Discounted cash flow | Probability of default | 8%-11% | |||||||||||
December 31, 2015 |
||||||||||||||||
Single issuer trust preferred |
$ | 583 | Discounted cash flow | Probability of default | 8%-11% |
The change in the fair value of securities with a fair value measured using Level 3 inputs during the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015 was $0 and $0.
The Company has elected the fair value option for certain loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Companys policy on loans held for investment. None of these loans are 90 days or more past due and all are accruing interest as of October 14, 2016 and December 31, 2015. Interest income recognized during the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015 was $226 and $258. For those loans carried at fair value, changes in fair value
F-152
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 17FAIR VALUE (Continued)
of $161 and $255 were recognized during the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015.
Servicing assets, which are carried at fair value, included changes in fair value of $(3,609) and $(4,008) during the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015.
There were no transfers between Level 1, Level 2, and Level 3 during the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015.
Assets measured at fair value on a non-recurring basis at October 14, 2016 and December 31, 2015 are summarized below:
Total |
Quoted Prices in
(Level 1) |
Significant
(Level 2) |
Significant
(Level 3) |
|||||||||||||
October 14, 2016 |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial real estate |
$ | 4,084 | $ | | $ | | $ | 4,084 | ||||||||
SBA and USDA |
3,668 | | | 3,668 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 7,752 | $ | | $ | | $ | 7,752 | |||||||||
|
|
|
|
|
|
|
|
Total |
Quoted Prices in
(Level 1) |
Significant
|
Significant
(Level 3) |
|||||||||||||
December 31, 2015 |
||||||||||||||||
Impaired loans |
||||||||||||||||
Commercial real estate |
$ | 3,860 | $ | | $ | | $ | 3,860 | ||||||||
SBA and USDA |
8,435 | | | 8,435 | ||||||||||||
Real estate owned |
||||||||||||||||
Commercial real estate |
1,394 | | | 1,394 | ||||||||||||
Construction |
121 | | | 121 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 13,810 | $ | | $ | | $ | 13,810 | |||||||||
|
|
|
|
|
|
|
|
At October 14, 2016 and December 31, 2015, there were no liabilities measured at fair value.
At October 14, 2016, impaired loans carried at fair value had a carrying amount of $10,926 with valuation allowances of $3,174. At December 31, 2015, impaired loans carried at fair value had a carrying amount of $15,283 with valuation allowances of $2,988. Additional provisions recognized on impaired loans for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015 were $1,736 and $2,021.
At October 14, 2016 and December 31, 2015, there was no valuation allowance recorded for other real estate owned.
F-153
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 17FAIR VALUE (Continued)
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at October 14, 2016:
Fair Value |
Valuation Technigue(s) |
Unobservable lnput(s) |
Range |
|||||||||
Impaired loans-commercial real estate |
$ | 4,084 | Sales comparison approach | Adjustment for differences between the comparable sales | (14)%-84% | |||||||
Impaired loans-SBA and USDA |
$ | 3,668 | Sales comparison approach | Adjustment for differences between the comparable sales | (6)%-29% |
The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2015:
Fair Value |
Valuation Technigue(s) |
Unobservable lnput(s) |
Range |
|||||||||
Impaired loans-commercial real estate |
$ | 3,860 | Sales comparison approach | Adjustment for differences between the comparable sales | 0%-26% | |||||||
Impaired loans-SBA and USDA |
$ | 8,435 | Sales comparison approach | Adjustment for differences between the comparable sales | 1%-37% | |||||||
Real estate owned- commercial real estate |
$ | 1,394 | Sales comparison approach | Adjustment for differences between the comparable sales | 11%-57% | |||||||
Real estate owned- construction |
$ | 121 | Sales comparison approach | Adjustment for differences between the comparable sales | 0%-78% |
Carrying amounts and estimated fair values of financial instruments, not previously presented, at October 14, 2016 and December 31, 2015 are presented in the following table.
2016 |
2015 |
|||||||||||||||
Carrying
|
Fair Value |
Carrying
|
Fair Value |
|||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 25,480 | $ | 25,480 | $ | 13,099 | $ | 13,099 | ||||||||
Loans, net (less impaired at fair value) |
332,212 | 327,976 | 292,489 | 282,659 | ||||||||||||
Federal Home Loan Bank stock |
854 | N/A | 724 | N/A | ||||||||||||
Accrued interest receivable |
1,321 | 1,321 | 2,286 | 2,286 | ||||||||||||
Financial liabilities |
||||||||||||||||
Deposits |
$ | 358,713 | $ | 359,243 | $ | 343,571 | $ | 344,021 | ||||||||
Federal Home Loan Bank advances |
9,487 | 9,781 | 9,487 | 9,858 | ||||||||||||
Borrowings |
| | 775 | 775 | ||||||||||||
Subordinated debentures |
1,550 | 1,475 | 1,550 | 1,442 | ||||||||||||
Accrued interest payable |
1,399 | 1,399 | 1,174 | 1,174 |
The methods and assumptions, not previously presented, used to estimate fair values are as follows:
Cash and Cash Equivalents The carrying amounts of cash and short-term instruments approximate fair values.
F-154
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 17FAIR VALUE (Continued)
Loans Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
FHLB Stock It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.
Deposits The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount). The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances, borrowings, and subordinated debentures The carrying amounts of short-term borrowings, generally maturing within ninety days, approximate their fair values. The fair values of the Companys long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements. The fair values of the Companys subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangement.
Accrued Interest Receivable/Payable The carrying amounts of accrued interest approximate fair value.
Off-Balance-Sheet Instruments Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. The fair value of commitments is not material.
F-155
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 18PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
The following are the condensed balance sheets and statements of income and cash flows for Ridgestone Financial Services, Inc. as of October 14, 2016 and December 31, 2015 and for the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015:
Condensed Balance Sheets
October 14,
|
December 31,
|
|||||||
Assets |
||||||||
Cash and cash equivalents |
$ | 167 | $ | 361 | ||||
Investment in bank subsidiary |
65,028 | 54,899 | ||||||
Other |
807 | 1,756 | ||||||
|
|
|
|
|||||
$ | 66,002 | $ | 57,016 | |||||
|
|
|
|
|||||
Liabilities and Stockholders Equity |
||||||||
Liabilities |
$ | 1,553 | $ | 3,168 | ||||
Stockholders equity |
64,449 | 53,848 | ||||||
|
|
|
|
|||||
$ | 66,002 | $ | 57,016 | |||||
|
|
|
|
Condensed Statements of Income
Period ended
|
Year
ended
|
|||||||
Income: |
||||||||
Dividend from bank subsidiary |
$ | 3,135 | $ | 4,625 | ||||
Interest income |
2 | 2 | ||||||
|
|
|
|
|||||
3,137 | 4,627 | |||||||
Expenses: |
||||||||
Interest expense |
72 | 112 | ||||||
Other operating expenses |
62 | 57 | ||||||
|
|
|
|
|||||
134 | 169 | |||||||
|
|
|
|
|||||
Income before income tax benefit and equity in undistributed earnings |
3,003 | 4,458 | ||||||
Income tax benefit |
| (17 | ) | |||||
|
|
|
|
|||||
Income before equity in undistributed net income of bank subsidiary |
3,003 | 4,475 | ||||||
Equity in undistributed net income from bank subsidiary |
9,149 | 6,910 | ||||||
|
|
|
|
|||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
|
|
|
|
F-156
RIDGESTONE FINANCIAL SERVICES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the period from January 1, 2016 to October 14, 2016 and the year ended December 31, 2015
(In thousands of dollars, except per share data)
NOTE 18PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (Continued)
Condensed Statements of Cash Flows
Period ended
|
Year
ended
|
|||||||
Operating activities: |
||||||||
Net income |
$ | 12,152 | $ | 11,385 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Equity in undistributed net income of bank subsidiary |
(9,149 | ) | (6,910 | ) | ||||
Stock awards earned |
712 | 164 | ||||||
Change in other assets and liabilities |
(536 | ) | (105 | ) | ||||
|
|
|
|
|||||
Net cash from operating activities |
3,179 | 4,534 | ||||||
Financing activities: |
||||||||
Repayment of note payable |
| (900 | ) | |||||
Dividends paid on common stock |
(3,373 | ) | (3,369 | ) | ||||
|
|
|
|
|||||
Net cash from financing activities |
(3,373 | ) | (4,269 | ) | ||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
(194 | ) | 265 | |||||
Cash and cash equivalents at beginning of year |
361 | 96 | ||||||
|
|
|
|
|||||
Cash and cash equivalents at end of year |
$ | 167 | $ | 361 | ||||
|
|
|
|
F-157
Through and including, , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to a dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
5,700,000 Shares
Common Stock
PROSPECTUS
BofA Merrill Lynch
Keefe, Bruyette & Woods
A Stifel Company
Piper Jaffray
Sandler ONeill + Partners, L.P.
Stephens Inc.
, 2017
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses, other than underwriting discounts and commissions, in connection with the sale of the registrants common stock are as follows:
Amount to be Paid | ||||
SEC registration fee |
$ | 16,000 | ||
Financial Industry Regulatory Authority, Inc. filing fee |
21,000 | |||
Listing fees and expenses |
25,000 | |||
Printing fees and expenses |
709,000 | |||
Legal and accounting fees and expenses |
3,755,000 | |||
Miscellaneous |
21,000 | |||
|
|
|||
Total |
$ | 4,547,000 | ||
|
|
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law, or DGCL, grants each corporation organized thereunder the power to indemnify any person who is or was a director, officer, employee or agent of a corporation or enterprise against expenses (including attorneys fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of being or having been in any such capacity, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe such persons conduct was unlawful, except that with respect to an action or suit brought by or in the right of the corporation such indemnification is limited to expenses (including attorneys fees) in connection with the defense or settlement of such action or suit. The DGCL provides that Section 145 is not exclusive of other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise. The registrants amended and restated bylaws provide for indemnification by the registrant of its directors, officers, employees and agents to the fullest extent permitted by the DGCL, subject to limited exceptions.
Section 102(b)(7) of the DGCL permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the directors duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions or (iv) for any transaction from which the director derived an improper personal benefit. The registrants amended and restated certificate of incorporation provides for such limitation of liability.
The registrant maintains insurance policies under which coverage is provided (a) to its directors and officers, in their respective capacities as such, against loss arising from a claim made for any actual or alleged wrongful act, and (b) to itself with respect to payments which the registrant may make to such officers and directors pursuant to the above indemnification provision or otherwise as a matter of law.
II-1
Reference is made to the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto for provisions providing that the underwriters are obligated, under certain circumstances, to indemnify the registrants directors, officers and controlling persons against certain liabilities under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the registrant has not issued any securities that were not registered under the Securities Act, other than in connection with the transactions described herein that were exempt from registration.
In March 2016 and September 2016, the Company sold 3,078,075 shares of common stock for an aggregate purchase price of $50.0 million to certain existing stockholders and, in December 2016 and January 2017, the Company sold 10,438 shares of Series B preferred stock for an aggregate purchase price of $10.4 million. These sales were made solely to accredited investors and did not involve a public offering. Accordingly such sales were exempt from registration under the Securities Act pursuant to the exemption provided by Section 4(a)(2) of the Securities Act and Regulation D under the Securities Act.
In addition, in connection with the Ridgestone acquisition on October 14, 2016, the Company issued 4,199,791 shares of common stock to existing Ridgestone stockholders in a private placement exempt from registration pursuant to Regulation D under the Securities Act. For further information regarding the Ridgestone acquisition, see Note 3 of Bylines Consolidated Financial Statements as of December 31, 2016 and 2015.
In 2015 and 2016, the Company also granted certain of its employees and directors 1,846,968 stock options under the Byline Bancorp Equity Incentive Plan. These grants were made in reliance upon exemptions from registration requirements under Section 4(a)(2) of the Securities Act and pursuant to Rule 701 under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits: The following exhibits are filed as part of this Registration Statement:
Number |
Description |
|
1.1 | Form of Underwriting Agreement | |
3.1 | Amended and Restated Certificate of Incorporation | |
3.2 | Amended and Restated Bylaws | |
3.3 | Certificate of Designations of Noncumulative Perpetual Preferred Stock, Series A | |
3.4 | Certificate of Designations of 7.50% Fixed-to-Floating Noncumulative Perpetual Preferred Stock, Series B | |
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. | |
5.1 | Opinion of Sullivan & Cromwell LLP | |
10.1 | Revolving Credit Agreement, dated October 13, 2016, by and between Byline Bancorp, Inc. and The PrivateBank and Trust Company | |
10.2 | Waiver Letter, dated June 7, 2017, by and between Byline Bancorp, Inc. and The PrivateBank and Trust Company | |
10.3 | Employment Agreement with Alberto J. Paracchini | |
10.4 | Employment Agreement with Timothy C. Hadro |
II-2
Number |
Description |
|
10.5 | Employment Agreement with Bruce W. Lammers | |
10.6 | Employment Agreement with Donald J. Meyer | |
10.7 | Byline Bancorp Equity Incentive Plan | |
10.8 | Form of Byline Bancorp Equity Incentive Plan Stock Option Agreement | |
10.9 | Form of Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan | |
10.10 | Form of Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan IPO Restricted Share Award Agreement | |
10.11 | Form of Byline Bancorp, Inc. Employee Stock Purchase Plan | |
21.1 | Subsidiaries of Byline Bancorp, Inc. | |
23.1 | Consent of Moss Adams LLP | |
23.2 | Consent of Crowe Horwath LLP | |
23.3 | Consent of Sullivan & Cromwell LLP (contained in Exhibit 5.1) | |
24.1 | Power of Attorney (included on signature page to the Registration Statement)* |
* | Previously filed. |
| Indicates a management contract or compensatory plan. |
(b) Consolidated Financial Statement Schedules: All schedules are omitted because the required information is inapplicable or the information is presented in the consolidated financial statements and the related notes.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(a) to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser;
(b) that insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue;
(c) that for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective; and
(d) that for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Chicago, State of Illinois on June 19, 2017.
BYLINE BANCORP, INC. | ||
By: |
/s/ Alberto J. Paracchini |
|
Name: Alberto J. Paracchini | ||
Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature |
Title |
Date |
||
/s/ Alberto J. Paracchini Alberto J. Paracchini |
President, Chief Executive Officer and Director (Principal Executive Officer) |
June 19, 2017 | ||
/s/ Lindsay Corby Lindsay Corby |
Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
June 19, 2017 | ||
* Roberto R. Herencia |
Chairman | June 19, 2017 | ||
* L. Gene Beube |
Director | June 19, 2017 | ||
* Phillip R. Cabrera |
Director | June 19, 2017 | ||
* Antonio del Valle Perochena |
Director | June 19, 2017 | ||
* Steven M. Rull |
Director | June 19, 2017 | ||
* Jaime Ruiz Sacristán |
Director | June 19, 2017 |
* | /s/ Alberto J. Paracchini | |
By: |
Alberto J. Paracchini Attorney-in-fact |
II-4
INDEX TO EXHIBITS
Number |
Description |
|
1.1 | Form of Underwriting Agreement | |
3.1 | Amended and Restated Certificate of Incorporation | |
3.2 | Amended and Restated Bylaws | |
3.3 | Certificate of Designations of Noncumulative Perpetual Preferred Stock, Series A | |
3.4 | Certificate of Designations of 7.50% Fixed-to-Floating Noncumulative Perpetual Preferred Stock, Series B | |
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. | |
5.1 | Opinion of Sullivan & Cromwell LLP | |
10.1 | Revolving Credit Agreement, dated October 13, 2016, by and between Byline Bancorp, Inc. and The PrivateBank and Trust Company | |
10.2 | Waiver Letter, dated June 7, 2017, by and between Byline Bancorp, Inc. and The PrivateBank and Trust Company | |
10.3 | Employment Agreement with Alberto J. Paracchini | |
10.4 | Employment Agreement with Timothy C. Hadro | |
10.5 | Employment Agreement with Bruce W. Lammers | |
10.6 | Employment Agreement with Donald J. Meyer | |
10.7 | Byline Bancorp Equity Incentive Plan | |
10.8 | Form of Byline Bancorp Equity Incentive Plan Stock Option Agreement | |
10.9 | Form of Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan | |
10.10 | Form of Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan IPO Restricted Share Award Agreement | |
10.11 | Form of Byline Bancorp, Inc. Employee Stock Purchase Plan | |
21.1 | Subsidiaries of Byline Bancorp, Inc. | |
23.1 | Consent of Moss Adams LLP | |
23.2 | Consent of Crowe Horwath LLP | |
23.3 | Consent of Sullivan & Cromwell LLP (contained in Exhibit 5.1) | |
24.1 | Power of Attorney (included on signature page to the Registration Statement)* |
* | Previously filed. |
| Indicates a management contract or compensatory plan. |
II-5
Exhibit 1.1
BYLINE BANCORP, INC.
(A Delaware corporation)
[●] Shares of Common Stock
FORM OF UNDERWRITING AGREEMENT
Dated: [●], 2017
BYLINE BANCORP, INC.
(A Delaware corporation)
[●] Shares of Common Stock
($0.01 Par Value)
UNDERWRITING AGREEMENT
[●], 2017
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Keefe, Bruyette & Woods, Inc.
as Representatives of the several Underwriters
c/o Merrill Lynch, Pierce, Fenner & Smith
Incorporated
One Bryant Park
New York, New York 10036
c/o Keefe, Bruyette & Woods, Inc.
787 Seventh Avenue, 4 th Floor
New York, New York 10019
Ladies and Gentlemen:
Byline Bancorp, Inc., a Delaware corporation (the Company), and the persons listed in Schedule B hereto (the Selling Stockholders), confirm their respective agreements with Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and Keefe, Bruyette & Woods, Inc. (KBW) and each of the other Underwriters named in Schedule A hereto (collectively, the Underwriters, which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch and KBW are acting as representatives (in such capacity, the Representatives), with respect to (i) the sale by the Company and the Selling Stockholders, acting severally and not jointly, and the purchase by the Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $0.01 per share, of the Company (Common Stock) set forth in Schedules A and B hereto and (ii) the grant by the Company to the Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of [●] additional shares of Common Stock. The aforesaid [●] shares of Common Stock (the Initial Securities) to be purchased by the Underwriters and all or any part of the [●] shares of Common Stock subject to the option described in Section 2(b) hereof (the Option Securities) are herein called, collectively, the Securities.
The Company and the Selling Stockholders understand that the Underwriters propose to make a public offering of the Securities as soon as the Representatives deem advisable after this Agreement has been executed and delivered.
The Company, the Selling Stockholders and the Underwriters agree that up to 10% of the Initial Securities to be purchased by the Underwriters (the Reserved Securities) shall be reserved for sale by the Underwriters to certain persons designated by the Company (the Invitees), as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the Financial Industry Regulatory Authority, Inc. (FINRA) and all other applicable laws, rules and regulations. The Company solely determined, without any direct or indirect participation by the Underwriters, the Invitees who will purchase Reserved Securities (including the amount to be purchased by such persons) sold by the Underwriters. To the extent that such Reserved Securities are not orally confirmed for purchase by Invitees by 11:59 P.M. (New York City time) on the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the Commission) a registration statement on Form S-1 (No. 333-218362), including the related preliminary prospectus or prospectuses, covering the registration of the sale of the Securities under the Securities Act of 1933, as amended (the 1933 Act). Promptly after execution and delivery of this Agreement, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A (Rule 430A) of the rules and regulations of the Commission under the 1933 Act (the 1933 Act Regulations) and Rule 424(b) (Rule 424(b)) of the 1933 Act Regulations. The information included in such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to Rule 430A(b) is herein called the Rule 430A Information. Such registration statement, including the amendments thereto, the exhibits thereto and any schedules thereto, at the time it became effective, and including the Rule 430A Information, is herein called the Registration Statement. Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein called the Rule 462(b) Registration Statement and, after such filing, the term Registration Statement shall include the Rule 462(b) Registration Statement. Each prospectus used prior to the effectiveness of the Registration Statement, and each prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a preliminary prospectus. The final prospectus, in the form first furnished to the Underwriters for use in connection with the offering of the Securities, is herein called the Prospectus. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system or any successor system (EDGAR).
As used in this Agreement:
Applicable Time means [ :00 P./A.M.], New York City time, on [●], 2017 or such other time as agreed by the Company and the Representatives.
General Disclosure Package means any Issuer General Use Free Writing Prospectuses issued at or prior to the Applicable Time, the most recent preliminary prospectus that is distributed to investors prior to the Applicable Time and the information included on Schedule C-1 hereto, all considered together.
Issuer Free Writing Prospectus means any issuer free writing prospectus, as defined in Rule 433 of the 1933 Act Regulations (Rule 433), including without limitation any free writing prospectus (as defined in Rule 405 of the 1933 Act Regulations (Rule 405)) relating to the Securities that is (i) required to be filed with the Commission by the Company, (ii) a road show that is a written communication within the meaning of Rule 433(d)(8)(i), whether or not required to be filed with the Commission, or (iii) exempt from filing with the Commission
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pursuant to Rule 433(d)(5)(i) because it contains a description of the Securities or of the offering that does not reflect the final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Companys records pursuant to Rule 433(g).
Issuer General Use Free Writing Prospectus means any Issuer Free Writing Prospectus that is intended for general distribution to prospective investors (other than a bona fide electronic road show, as defined in Rule 433 (the Bona Fide Electronic Road Show)), as evidenced by its being specified in Schedule C-2 hereto.
Issuer Limited Use Free Writing Prospectus means any Issuer Free Writing Prospectus that is not an Issuer General Use Free Writing Prospectus.
Testing-the-Waters Communication means any oral or written communication with potential investors undertaken in reliance on Section 5(d) of the 1933 Act.
Written Testing-the-Waters Communication means any Testing-the-Waters Communication that is a written communication within the meaning of Rule 405 under the 1933 Act.
SECTION 1. Representations and Warranties .
(a) Representations and Warranties by the Company . The Company represents and warrants to each Underwriter as of the date hereof, the Applicable Time, the Closing Time (as defined below) and any Date of Delivery (as defined below), and agrees with each Underwriter, as follows:
(i) Registration Statement and Prospectuses . Each of the Registration Statement and any post-effective amendment thereto has become effective under the 1933 Act. No stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted by or are pending before or, to the Companys knowledge, threatened by the Commission. The Company has complied with or otherwise satisfied each request (if any) from the Commission for additional information.
Each of the Registration Statement and any post-effective amendment thereto, at the time it became effective, complied in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. Each preliminary prospectus, the Prospectus and any amendment or supplement thereto, at the time each was filed with the Commission, complied in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations. Each preliminary prospectus delivered to the Underwriters for use in connection with this offering and the Prospectus was or will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Accurate Disclosure . Neither the Registration Statement nor any amendment thereto, at its effective time, at the Closing Time or at any Date of Delivery, contained, contains or will contain an untrue statement of a material fact or omitted, omits or will omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. As of the Applicable Time, none of (A) the General Disclosure Package (B) any individual Issuer Limited Use Free Writing Prospectus, when considered together with the General Disclosure Package and (C) any individual Written Testing-the-Waters Communication,
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when considered together with the General Disclosure Package, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither the Prospectus nor any amendment or supplement thereto, as of its issue date, at the time of any filing with the Commission pursuant to Rule 424(b), at the Closing Time or at any Date of Delivery, included, includes or will include an untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement (or any post-effective amendment thereto), the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives expressly for use therein. For purposes of this Agreement, the only information so furnished shall be the information in the first paragraph under the heading UnderwritingCommissions and Discounts, the information in the second, third and fourth paragraphs under the heading UnderwritingPrice Stabilization, Short Positions and Penalty Bids and the information under the heading UnderwritingElectronic Distribution in each case contained in the Prospectus (collectively, the Underwriter Information).
(iii) Issuer Free Writing Prospectuses . No Issuer Free Writing Prospectus conflicts or will conflict with the information contained in the Registration Statement or the Prospectus, and any preliminary or other prospectus deemed to be a part thereof that has not been superseded or modified. The Company has made available a Bona Fide Electronic Road Show in compliance with Rule 433(d)(8)(ii) such that no filing of any road show (as defined in Rule 433(h)) is required in connection with the offering of the Securities. The representations and warranties in this subsection shall not apply to statements in or omissions from any Issuer Free Writing Prospectuses made in reliance upon or in connection with Underwriter Information.
(iv) Testing-the-Waters Materials . The Company (A) has not alone engaged in any Testing-the-Waters Communication other than Testing-the-Waters Communications with the consent of the Representatives with entities that are qualified institutional buyers within the meaning of Rule 144A under the 1933 Act or institutions that are accredited investors within the meaning of Rule 501 under the 1933 Act and (B) has not authorized anyone other than the Representatives to engage in Testing-the-Waters Communications. The Company reconfirms that the Representatives have been authorized to act on its behalf in undertaking Testing-the-Waters Communications. The Company has not distributed any Written Testing-the-Waters Communications [other than those listed on Schedule [●] hereto].
(v) Company Not Ineligible Issuer . At the time of filing the Registration Statement and any post-effective amendment thereto, at the earliest time thereafter that the Company or another offering participant made a bona fide offer (within the meaning of Rule 164(h)(2) of the 1933 Act Regulations) of the Securities and at the date hereof, the Company was not and is not an ineligible issuer, as defined in Rule 405, without taking account of any determination by the Commission pursuant to Rule 405 that it is not necessary that the Company be considered an ineligible issuer.
(vi) Emerging Growth Company Status. From the time of the initial confidential submission of the Registration Statement to the Commission through the date hereof, the Company has been and is an emerging growth company, as defined in Section 2(a) of the 1933 Act (an Emerging Growth Company).
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(vii) Independent Accountants . Moss Adams LLP, the accounting firm that certified the financial statements and supporting schedules of the Company included in the Registration Statement, the General Disclosure Package and the Prospectus is an independent public accounting firm as required by the 1933 Act, the 1933 Act Regulations and the Public Company Accounting Oversight Board. Crowe Horwath LLP, the accounting firm that certified the financial statements and supporting schedules of Ridgestone Financial Services, Inc. included in the Registration Statement, the General Disclosure Package and the Prospectus is an independent auditor as required by applicable American Institute of Certified Public Accountants standards.
(viii) Financial Statements; Non-GAAP Financial Measures . The financial statements included in the Registration Statement, the General Disclosure Package and the Prospectus, together with the related schedules and notes, present fairly, in all material respects, the financial position, the statement of operations, stockholders equity and cash flows of the Company and its consolidated subsidiaries and, to the Companys knowledge, Ridgestone Financial Services, Inc. (Ridgestone), at the dates indicated and for the periods specified; the financial statements of the Company and its consolidated subsidiaries and, to the Companys knowledge, the financial statements of Ridgestone, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) applied on a consistent basis throughout the periods involved, except in the case of unaudited interim financial statements, which are subject to normal year-end audit adjustments that are not expected to be material and the exclusion of certain footnotes. The supporting schedules of the Companys financial statements, if any, and, to the Companys knowledge, the supporting schedules, if any, of Ridgestones financial statements, present fairly, in all material respects, in accordance with GAAP the information required to be stated therein. The selected historical and pro forma financial data and the summary historical and pro forma financial information included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly, in all material respects, the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included therein. The pro forma financial statements and the related notes thereto included in the Registration Statement, the General Disclosure Package and the Prospectus present fairly, in all material respects, the information shown therein, have been prepared in accordance with the Commissions rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. Except as included therein, no historical or pro forma financial statements or supporting schedules are required to be included in the Registration Statement, the General Disclosure Package or the Prospectus under the 1933 Act or the 1933 Act Regulations. All disclosures contained in the Registration Statement, the General Disclosure Package or the Prospectus regarding non-GAAP financial measures (as such term is defined by the rules and regulations of the Commission) comply with Regulation G of the Securities Exchange Act of 1934, as amended (the 1934 Act) and Item 10 of Regulation S-K of the 1933 Act, to the extent applicable.
(ix) No Material Adverse Change in Business . Except as otherwise stated therein, since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a Material Adverse Effect), (B) there have been no transactions
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entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock other than regularly declared quarterly dividends on the Companys 7.50% Fixed-to-Floating Non-Cumulative Perpetual Preferred Stock, Series B.
(x) Good Standing of the Company . The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required (or such equivalent concept to the extent it exists under the laws of such jurisdiction), whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not reasonably be expected to result in a Material Adverse Effect.
(xi) Good Standing of Subsidiaries . Each significant subsidiary of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (including Byline Bank (the Bank)) (each a Significant Subsidiary and, collectively the Significant Subsidiaries) has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its incorporation or organization, has corporate or similar power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement, the General Disclosure Package and the Prospectus and is duly qualified to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or to be in good standing would not reasonably be expected to result in a Material Adverse Effect. Except as otherwise disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, all of the issued and outstanding capital stock of each Significant Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. None of the outstanding shares of capital stock of any Significant Subsidiary were issued in violation of the preemptive or similar rights of any securityholder of such Significant Subsidiary. The only subsidiaries of the Company are the subsidiaries listed on Exhibit 21 to the Registration Statement.
(xii) Capitalization . The authorized, issued and outstanding shares of capital stock of the Company are as set forth in the Registration Statement, the General Disclosure Package and the Prospectus in the column entitled Actual under the caption Capitalization (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements, employee benefit or equity incentive plans referred to in the Registration Statement, the General Disclosure Package and the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Registration Statement, the General Disclosure Package and the Prospectus). The outstanding shares of capital stock of the Company, including the Securities to be purchased by the Underwriters from the Selling Stockholders, have been duly authorized and validly issued and are fully paid and non-assessable. None of the outstanding shares of capital stock of the Company, including the Securities to be purchased by the Underwriters from the Selling Stockholders, were issued in violation of the preemptive or other similar rights of any securityholder of the Company.
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(xiii) Authorization of Agreement . This Agreement has been duly authorized, executed and delivered by the Company.
(xiv) Authorization and Description of Securities . The Securities to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment of the consideration set forth herein, will be validly issued and fully paid and non-assessable; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. The Common Stock conforms in all material respects to all statements relating thereto contained in the Registration Statement, the General Disclosure Package and the Prospectus and such description conforms in all material respects to the rights set forth in the instruments defining the same. No holder of Securities will be subject to personal liability by reason of being such a holder.
(xv) Registration Rights . There are no persons with registration rights or other similar rights to have any securities registered for sale pursuant to the Registration Statement or otherwise registered for sale or sold by the Company under the 1933 Act pursuant to this Agreement, other than those rights that have been disclosed in the Registration Statement, the General Disclosure Package and the Prospectus and have been waived.
(xvi) Absence of Violations, Defaults and Conflicts . Neither the Company nor any of its subsidiaries is (A) in violation of its charter, by-laws or similar organizational document, (B) in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound or to which any of the properties or assets of the Company or any subsidiary is subject (collectively, Agreements and Instruments), except for such defaults that would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect, or (C) in violation of any law, statute, rule, regulation, judgment, order, writ or decree of any arbitrator, court, governmental body, regulatory body, administrative agency or other authority, body or agency having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations (each, a Governmental Entity), except for such violations that would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect. The execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and in the Registration Statement, the General Disclosure Package and the Prospectus (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described therein under the caption Use of Proceeds) and compliance by the Company with its obligations hereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any properties or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches, defaults or Repayment Events or liens, charges or encumbrances that would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect), nor will such action result in any violation of the provisions of (i) the charter, by-laws or similar organizational document of the Company or any of its subsidiaries or (ii) any law, statute, rule, regulation, judgment, order, writ or decree of any Governmental Entity, except in the case of clause (ii) above, for such violation that would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect. As used herein, a Repayment Event means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holders behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries.
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(xvii) Absence of Labor Dispute . No labor dispute with the employees of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent, which, in either case, would reasonably be expected to result in a Material Adverse Effect.
(xviii) Absence of Proceedings . Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, there is no action, suit, proceeding, inquiry or, to the knowledge of the Company, investigation before or brought by any Governmental Entity now pending or, to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries, which would reasonably be expected to result in a Material Adverse Effect, or which would reasonably be expected to materially and adversely affect their respective properties or assets or the consummation of the transactions contemplated in this Agreement or the performance by the Company of its obligations hereunder; and the aggregate of all pending legal or governmental proceedings to which the Company or any such subsidiary is a party or of which any of their respective properties or assets is the subject which are not described in the Registration Statement, the General Disclosure Package and the Prospectus, including ordinary routine litigation incidental to the business, could not result in a Material Adverse Effect.
(xix) Bank Regulatory Matters .
(a) The Bank is a state-chartered bank organized under the laws of the State of Illinois and authorized to engage in the business of banking. The deposit accounts of the Bank are insured by the Federal Deposit Insurance Corporation (the FDIC) through the Deposit Insurance Fund to the fullest extent permitted by law, and all premiums and assessments required to be paid in connection therewith have been paid when due, and no proceedings for the termination of such insurance are pending or, to the Companys knowledge, threatened. The Bank has received a rating of satisfactory under the Community Reinvestment Act (the CRA) and does not have any reason to believe that such rating may become less than satisfactory. The Bank is well capitalized as that term is defined at 12 CFR part 225.
(b) The Company is duly registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the Bank Holding Company Act). The Company does not, directly or indirectly, own or control the stock or voting securities of any depository institution other than the Bank. The direct and indirect activities and investments of the Company are authorized for a bank holding company and its subsidiaries pursuant to the Bank Holding Company Act. The Company is well capitalized as that term is defined at 12 CFR part 225.
(c) The Company and its subsidiaries (which, for the avoidance of doubt, include the Bank) are, and during the past three years have been, in compliance in all material respects with all laws, rules, regulations and regulatory directives applicable to them, including those administered by the Illinois Department of Financial and Professional Regulation, the FDIC, the Board of Governors of the Federal Reserve System (the Federal Reserve), the Consumer Financial Protection Board or any other federal or state bank or financial regulatory authority having jurisdiction over them (all such agencies described in this sentence, the Bank Regulatory Authorities), and the Equal Credit Opportunity Act and Regulation B, the Fair Housing Act, the Fair Credit Reporting Act, the Truth in Lending Act and Regulation Z, the Home Mortgage Disclosure Act, the Fair Debt Collection Practices Act, the Electronic Fund Transfer Act, the Real Estate Settlement Procedures Act and Regulation X, any other law related to discriminatory lending, agency requirements relating to the origination, sale and servicing of mortgage and
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consumer loans, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act of 2001, the Bank Secrecy Act, any other law related to the prevention of money laundering or terrorist financing, the Dodd-Frank Wall Street Reform and Consumer Protection Act, Regulation O, any other law related to transactions with insiders, Sections 23A and 23B of the Federal Reserve Act and Regulation W, and limits on loans to one borrower.
(d) Since January 1, 2015, none of the Company or its subsidiaries has been a party to, or the subject of, any cease-and-desist order, consent order, written agreement, order for civil money penalty, refund, restitution, prompt corrective action directive, memorandum of understanding, supervisory letter, individual minimum capital requirement, operating agreement, or any other formal or informal enforcement action issued or required by, or entered into with, any Bank Regulatory Authority that, individually or in the aggregate, would be material to the Company and its subsidiaries on a consolidated basis. Except for (i) the Foreign National Commitments that certain investors of the Company, the predecessor of the Company and the predecessor of the Bank entered into with the Federal Reserve and (ii) the Passivity and Anti-Association Commitments that certain investors of the Company entered into with the Federal Reserve, none of the Company or its subsidiaries currently is a party to or is subject to any commitment, board resolution, policy, or procedure at the request or recommendation of any Bank Regulatory Authority that, individually or in the aggregate, would be material to the Company and its subsidiaries on a consolidated basis. None of the Company or its subsidiaries has reason to believe that any Regulatory Agency or other Governmental Entity is considering issuing, initiating, ordering, requesting, recommending, or otherwise proceeding with any of the items referenced in this paragraph.
(e) Except for examinations of the Company or its subsidiaries conducted by their respective primary functional regulators in the ordinary course of business, no Bank Regulatory Authority has initiated, threatened, or has pending any proceeding or, to the knowledge of Company, any inquiry or investigation into the business or operations of the Company or its subsidiaries that, individually or in the aggregate, would be material to the Company and its subsidiaries on a consolidated basis. There is no unresolved violation, apparent violation, criticism, matter requiring attention, or exception cited, made, or threatened by any Bank Regulatory Authority in any report of examination, report of inspection, supervisory letter or other communication with the Company or its subsidiaries that (i) would reasonably be expected to give rise to the effect of any of the actions referenced in paragraph (xix)(d) or (ii) would reasonably be likely to prevent or materially delay the transactions contemplated by this Agreement.
(xx) Accuracy of Exhibits . There are no contracts or documents which are required to be described in the Registration Statement, the General Disclosure Package or the Prospectus or to be filed as exhibits to the Registration Statement which have not been so described and filed as required.
(xxi) Absence of Further Requirements . No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any Governmental Entity is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except (A) such as have been already obtained or as may be required under the 1933 Act, the 1933 Act Regulations, the rules of the New York Stock Exchange, state securities laws or the rules of FINRA, (B) such as have been obtained from the Federal Reserve under the Foreign National Commitments and (C) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities were offered.
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(xxii) Possession of Licenses and Permits . The Company and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, Governmental Licenses) issued by the appropriate Governmental Entities necessary to conduct the business now operated by them, except where the failure so to possess would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect. The Company and its subsidiaries are in compliance with the terms and conditions of all Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect. All of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would reasonably be expected to result in a Material Adverse Effect.
(xxiii) Title to Property . The Company and its subsidiaries have good and marketable title to all real property owned by them and good title to all other properties owned by them , in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (A) are described in the Registration Statement, the General Disclosure Package and the Prospectus or (B) do not, singly or in the aggregate, materially and adversely affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Registration Statement, the General Disclosure Package or the Prospectus, are in full force and effect, and neither the Company nor any such subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease.
(xxiv) Possession of Intellectual Property . The Company and its subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, Intellectual Property) necessary to carry on the business now operated by them, except for those the failure to own or have such legal right to use would not reasonably be expected to result in a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice or has any knowledge of of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would reasonably be expected to result in a Material Adverse Effect.
(xxv) Environmental Laws . Except as described in the Registration Statement, the General Disclosure Package and the Prospectus or would not, singly or in the aggregate,
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reasonably be expected to result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any applicable federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products, asbestos-containing materials or mold (collectively, Hazardous Materials) or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, Environmental Laws), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the knowledge of the Company, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) to the knowledge of the Company, there are no events or circumstances that would reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or Governmental Entity, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws.
(xxvi) Accounting Controls . The Company and each of its subsidiaries maintain effective internal control over financial reporting (as defined under Rule 13-a15 and 15d-15 under the regulations of the Commission under the 1934 Act (the 1934 Act Regulations) and a system of internal accounting controls sufficient to provide reasonable assurances that (A) transactions are executed in accordance with managements general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain accountability for assets; (C) access to assets is permitted only in accordance with managements general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Except as described in the Registration Statement, the General Disclosure Package and the Prospectus, since the end of the Companys most recent audited fiscal year, there has been (1) no material weakness in the Companys internal control over financial reporting (whether or not remediated) and (2) no change in the Companys internal control over financial reporting that has materially and adversely affected, or is reasonably likely to materially and adversely affect, the Companys internal control over financial reporting.
(xxvii) Compliance with the Sarbanes-Oxley Act. The Company has taken all necessary actions to enable the Company, upon the effectiveness of the Registration Statement, to be in compliance in all material respects with all provisions of the Sarbanes-Oxley Act of 2002 and all rules and regulations promulgated thereunder or implementing the provisions thereof (the Sarbanes-Oxley Act) that are then in effect and with which the Company is then required to comply as an emerging growth company.
(xxviii) Payment of Taxes . All United States federal income tax returns of the Company and its subsidiaries required by law to be filed have been filed and all taxes shown as due on such returns or otherwise assessed, which are due and payable, have been paid, except assessments as are being contested in good faith and as to which adequate reserves have been provided, and except in any case in which the failure to so file or pay would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. The statutes of limitations for all United States federal income tax returns of the Company through the fiscal year
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ended December 31, 2012 have expired and no assessment in connection therewith has been made against the Company. The Company and its subsidiaries have filed all other tax returns that are required to have been filed by them pursuant to applicable foreign, state, local or other law except insofar as the failure to file such returns would not reasonably be expected to result in a Material Adverse Effect, and has paid all taxes shown as due on such returns or pursuant to any assessment received by the Company and its subsidiaries, except for such taxes, if any, as are being contested in good faith and as to which adequate reserves have been established by the Company, except in any case in which the failure to pay would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
(xxix) Insurance . The Company and its subsidiaries carry or are entitled to the benefits of insurance, with financially sound and reputable insurers, in such amounts and covering such risks the Company reasonably believes is adequate for the conduct of its business, and the business of its subsidiaries, and all such insurance is in full force and effect, except where failure to carry such insurance would not reasonably be expected to result in a Material Adverse Effect. The Company has no reason to believe that it or any of its subsidiaries will not be able (A) to renew its existing insurance coverage as and when such policies expire or (B) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Effect.
(xxx) Investment Company Act . The Company is not required, and upon the issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Registration Statement, the General Disclosure Package and the Prospectus will not be required, to register as an investment company under the Investment Company Act of 1940, as amended (the 1940 Act).
(xxxi) Absence of Manipulation . Neither the Company nor, to the knowledge of the Company, any affiliate of the Company has taken, nor will the Company or any of its Subsidiaries take, directly or indirectly, without giving effect to activities by the Underwriters, any action which is designed, or would reasonably be expected, to cause or result in, or which constitutes, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or to result in a violation of Regulation M under the 1934 Act.
(xxxii) Foreign Corrupt Practices Act . None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee, controlled affiliate or other person acting on behalf of the Company or any of its subsidiaries is aware of or has taken any action, directly or indirectly, that would result in a violation by such persons of the Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder (the FCPA), including, without limitation, making use of the mails or any means or instrumentality of interstate commerce corruptly in furtherance of an offer, payment, promise to pay or authorization of the payment of any money, or other property, gift, promise to give, or authorization of the giving of anything of value to any foreign official (as such term is defined in the FCPA) or any foreign political party or official thereof or any candidate for foreign political office, in contravention of the FCPA and the Company and, to the knowledge of the Company, its controlled affiliates have conducted their businesses in compliance with the FCPA and have instituted and maintain policies and procedures designed to ensure, and which are reasonably expected to continue to ensure, continued compliance therewith.
(xxxiii) Money Laundering Laws . The operations of the Company and its subsidiaries are and have been conducted at all times in compliance with applicable financial recordkeeping
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and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the applicable money laundering statutes of all applicable jurisdictions, the rules and regulations thereunder and any related or similar applicable rules, regulations or guidelines, issued, administered or enforced by any Governmental Entity (collectively, the Money Laundering Laws); and no action, suit or proceeding by or before any Governmental Entity involving the Company or any of its subsidiaries with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.
(xxxiv) OFAC . None of the Company, any of its subsidiaries or, to the knowledge of the Company, any director, officer, agent, employee, controlled affiliate or representative of the Company or any of its subsidiaries is an individual or entity (Person) currently the subject or target of any sanctions administered or enforced by the United States Government, including, without limitation, the U.S. Department of the Treasurys Office of Foreign Assets Control (OFAC), the United Nations Security Council (UNSC), the European Union, Her Majestys Treasury (HMT), or other relevant sanctions authority (collectively, Sanctions), nor is the Company located, organized or resident in a country or territory that is the subject of Sanctions; and the Company will not directly or indirectly use the proceeds of the sale of the Securities, or lend, contribute or otherwise make available such proceeds to any subsidiaries, joint venture partners or other Person, to fund any activities of or business with any Person, or in any country or territory, that, at the time of such funding, is the subject of Sanctions or in any other manner that will result in a violation by any Person (including any Person participating in the transaction, whether as underwriter, advisor, investor or otherwise) of Sanctions.
(xxxv) Sales of Reserved Securities . In connection with any offer and sale of Reserved Securities outside the United States, each preliminary prospectus, the Prospectus and any amendment or supplement thereto, at the time it was filed, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the same is distributed. The Company has not offered, or caused the Representatives to offer, Reserved Securities to any person with the specific intent to unlawfully influence (i) a customer or supplier of the Company or any of its affiliates to alter the customers or suppliers level or type of business with any such entity or (ii) a trade journalist or publication to write or publish favorable information about the Company or any of its affiliates, or their respective businesses or products.
(xxxvi) ERISA. The Company and each of its subsidiaries or their ERISA Affiliates (as defined below) are in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (ERISA), except as would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect. No reportable event (as defined in ERISA) has occurred with respect to any employee benefit plan (as defined in ERISA) established or maintained by the Company, its subsidiaries or their ERISA Affiliates that would, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect. Except as would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect, (i) the Company and each of its subsidiaries or their ERISA Affiliates have not incurred and do not expect to incur liability under (A) Title IV of ERISA with respect to termination of, or withdrawal from, any employee benefit plan or (B) Sections 412, 4971, 4975 or 4980B of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (collectively the Code); and (ii) each employee benefit plan for which the Company and each of its subsidiaries or any of their ERISA Affiliates would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which
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would cause the loss of such qualification; and for the purposes of this Section 1(a)(xxxvi), ERISA Affiliate means, with respect to the Company or a Subsidiary, any member of any group of organizations described in Sections 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA of which the Company or such Subsidiary is a member.
(xxxvii) Lending Relationship . Except as disclosed in the Registration Statement, the General Disclosure Package and the Prospectus, the Company (i) does not have any material lending or other relationship with any bank or lending affiliate of any Underwriter and (ii) does not intend to use any of the proceeds from the sale of the Securities to repay any outstanding debt owed to any affiliate of any Underwriter.
(xxxviii) Affiliated Transactions or Relationships. No transaction has occurred or relationship exists between or among the Company or any of its subsidiaries, on the one hand, and its affiliates, officers or directors, on the other hand, that is required to be described in the Registration Statement, the General Disclosure Package or the Prospectus that is not so described therein.
(xxxix) Statistical and Market-Related Data . Any statistical and market-related data included in the Registration Statement, the General Disclosure Package or the Prospectus are based on or derived from sources that the Company believes, after reasonable inquiry, to be reliable and accurate in all material respects and, to the extent required, the Company has obtained the written consent to the use of such data from such sources.
(xl) Not a U.S. Real Property Holding Corporation . The Company has not been, is not, and does not anticipate becoming, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended (the Code).
(xli) No Broker Fees. Other than as contemplated by this Agreement, there is no broker, finder or other party that is entitled to receive from the Company or any of its subsidiaries any brokerage or finders fee or any other fee, commission or payment as a result of the transactions contemplated by this Agreement.
(b) Representations and Warranties by the Selling Stockholders . Each Selling Stockholder severally represents and warrants to each Underwriter as of the date hereof, as of the Applicable Time and as of the Closing Time, and agrees with each Underwriter, as follows:
(i) Accurate Disclosure . Neither the General Disclosure Package nor the Prospectus or any amendments or supplements thereto includes any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that such representations and warranties set forth in this subsection (b)(i) apply only to statements or omissions made in reliance upon and in conformity with information relating to the Selling Stockholder furnished in writing by or on behalf of the Selling Stockholder expressly for use in the Registration Statement, the General Disclosure Package, the Prospectus or any other Issuer Free Writing Prospectus or any amendment or supplement thereto, it being understood and agreed that the only such information furnished by the Selling Stockholder consists of the information relating to the Selling Stockholder (including, for the avoidance of doubt, the number of offered shares) that appears under the caption Principal and Selling Stockholders therein (the Selling Stockholder Information); such Selling Stockholder is not prompted to sell the Securities to be sold by such Selling Stockholder hereunder by any information concerning the Company or any subsidiary of the Company which is not set forth in the General Disclosure Package or the Prospectus.
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(ii) Authorization of this Agreement . This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder.
(iii) Authorization of Power of Attorney and Custody Agreement . The Power of Attorney and Custody Agreement, in the form heretofore furnished to the Representatives (the Power of Attorney and Custody Agreement), has been duly authorized, executed and delivered by such Selling Stockholder and is the valid and binding agreement of such Selling Stockholder.
(iv) Noncontravention . The execution and delivery of this Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Stockholder and the consummation of the transactions contemplated herein and compliance by such Selling Stockholder with its obligations hereunder do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities to be sold by such Selling Stockholder or any property or assets of such Selling Stockholder pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, license, lease or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder may be bound, or to which any of the property or assets of such Selling Stockholder is subject (except for such conflicts, breaches or defaults, or taxes, liens, charges or encumbrances that would not, individually or in the aggregate, reasonably be expected to materially impair the power or ability of the Selling Stockholder to perform its obligations under this Agreement, or to consummate the transactions contemplated hereby), nor will such action result in any violation of (A) the provisions of the charter or by-laws or other organizational instrument of such Selling Stockholder, if applicable, or (B) any applicable treaty, law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Stockholder or any of its properties except in the case of clause (B) hereto for such violations that would not, individually or in the aggregate, reasonably be expected to materially impair the power or ability of the Selling Stockholder to perform its obligations under this Agreement or to contemplate the transaction contemplated hereby.
(v) Valid Title . Such Selling Stockholder has, and at the Closing Time will have, valid title to the Securities to be sold by such Selling Stockholder free and clear of all security interests, claims, liens, equities or other encumbrances and the legal right and power, and all authorization and approval required by law, to enter into this Agreement and the Power of Attorney and Custody Agreement and to sell, transfer and deliver the Securities to be sold by such Selling Stockholder or a valid security entitlement in respect of such Securities.
(vi) Delivery of Securities . Upon payment of the purchase price for the Securities to be sold by such Selling Stockholder pursuant to this Agreement, delivery of such Securities, as directed by the Underwriters, to Cede & Co. (Cede) or such other nominee as may be designated by The Depository Trust Company (DTC), registration of such Securities in the name of Cede or such other nominee, and the crediting of such Securities on the books of DTC to securities accounts (within the meaning of Section 8-501(a) of the UCC) of the Underwriters (assuming that neither DTC nor any such Underwriter has notice of any adverse claim, within the meaning of Section 8-105 of the Uniform Commercial Code then in effect in the State of New York (UCC), to such Securities), (A) under Section 8-501 of the UCC, the Underwriters will acquire a valid security entitlement in respect of such Securities and (B) no action (whether framed in conversion, replevin, constructive trust, equitable lien, or other theory) based on any adverse claim, within the meaning of Section 8-102 of the UCC, to such Securities may be asserted against the Underwriters with respect to such security entitlement; for purposes of this
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representation, such Selling Stockholder may assume that when such payment, delivery (if necessary) and crediting occur, (I) such Securities will have been registered in the name of Cede or another nominee designated by DTC, in each case on the Companys share registry in accordance with its certificate of incorporation, bylaws and applicable law, (II) DTC will be registered as a clearing corporation, within the meaning of Section 8-102 of the UCC, (III) appropriate entries to the accounts of the several Underwriters on the records of DTC will have been made pursuant to the UCC, (IV) to the extent DTC, or any other securities intermediary which acts as clearing corporation with respect to the Securities, maintains any financial asset (as defined in Section 8-102(a)(9) of the UCC in a clearing corporation pursuant to Section 8-111 of the UCC, the rules of such clearing corporation may affect the rights of DTC or such securities intermediaries and the ownership interest of the Underwriters, (V) claims of creditors of DTC or any other securities intermediary or clearing corporation may be given priority to the extent set forth in Section 8-511(b) and 8-511(c) of the UCC and (VI) if at any time DTC or other securities intermediary does not have sufficient Securities to satisfy claims of all of its entitlement holders with respect thereto then all holders will share pro rata in the Securities then held by DTC or such securities intermediary.
(vii) Absence of Manipulation . Such Selling Stockholder has not taken, and will not take, directly or indirectly, any action which is designed to or which constituted or would be reasonably expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities.
(viii) Absence of Further Requirements . No filing with, or consent, approval, authorization, order, registration, qualification or decree of any arbitrator, court, governmental body, regulatory body, administrative agency or other authority, body or agency, domestic or foreign, is necessary or required for the performance by each Selling Stockholder of its obligations hereunder or in the Power of Attorney and Custody Agreement, or in connection with the sale and delivery of the Securities hereunder or the consummation of the transactions contemplated by this Agreement, except (A) such as have been already obtained or as may be required under the 1933 Act, the 1933 Act Regulations, the rules of the New York Stock Exchange, state securities laws or the rules of FINRA, (B) such as have been obtained under the laws and regulations of jurisdictions outside the United States in which the Reserved Securities were offered and (C) such consents, approvals, authorizations and orders for which a failure to obtain would not, individually or in the aggregate, reasonably be expected to impair in any material respect the power or ability of the Selling Stockholder to perform its obligations under this Agreement or to consummate the transactions contemplated hereby.
(ix) No Registration or Other Similar Rights . Such Selling Stockholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement.
(x) No Free Writing Prospectuses . Such Selling Stockholder has not prepared or had prepared on its behalf or used or referred to, any free writing prospectus (as defined in Rule 405), and has not distributed any written materials in connection with the offer or sale of the Securities.
(xi) No Association with FINRA . Neither such Selling Stockholder nor any of such Selling Stockholders affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with any member firm of FINRA or is a person associated with a member (within the meaning of the FINRA By-Laws) of FINRA.
(xii) ERISA . Such Selling Stockholder is not (A) an employee benefit plan subject to Title I of ERISA, (B) a plan or account subject to Section 4975 of the Code or (C) an entity deemed to hold plan assets of any such plan or account under Section 3(42) of ERISA, 29 C.F.R. 2510.3-101, or otherwise.
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(c) Officers Certificates . Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Representatives or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; and any certificate signed by or on behalf of the Selling Stockholders as such and delivered to the Representatives or to counsel for the Underwriters pursuant to the terms of this Agreement shall be deemed a representation and warranty by such Selling Stockholder to the Underwriters as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing .
(a) Initial Securities . On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and each Selling Stockholder, severally and not jointly, agree to sell to each Underwriter, severally and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company and each Selling Stockholder, at the price per share set forth in Schedule A, that proportion of the number of Initial Securities set forth in Schedule B opposite the name of the Company or such Selling Stockholder, as the case may be, which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter, plus any additional number of Initial Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial Securities, subject, in each case, to such adjustments among the Underwriters as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional shares.
(b) Option Securities . In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase up to an additional [●] shares of Common Stock, as set forth in Schedule B, at the price per share set forth in Schedule A, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities. The option hereby granted may be exercised for 30 days after the date hereof and may be exercised in whole or in part at any time from time to time upon notice by the Representatives to the Company setting forth the number of Option Securities as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for such Option Securities. Any such time and date of delivery (a Date of Delivery) shall be determined by the Representatives, but shall not be later than seven full business days nor earlier than two full business days, after the exercise of said option, nor in any event prior to the Closing Time. If the option is exercised as to all or any portion of the Option Securities, each of the Underwriters, acting severally and not jointly, will purchase that proportion of the total number of Option Securities then being purchased which the number of Initial Securities set forth in Schedule A opposite the name of such Underwriter bears to the total number of Initial Securities, subject, in each case, to such adjustments as the Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional shares.
(c) Payment . Payment of the purchase price for, and delivery of certificates or security entitlements for, the Initial Securities shall be made at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Times Square, New York, New York 10036, or at such other place as shall be agreed upon by the Representatives and the Company and the Selling Stockholders, at 9:00 A.M. (New York City time) on the third (fourth, if the pricing occurs after 4:30 P.M. (New York City time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of
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Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company and the Selling Stockholders (such time and date of payment and delivery being herein called Closing Time).
In addition, in the event that any or all of the Option Securities are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates or security entitlements for, such Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Representatives and the Company, on each Date of Delivery as specified in the notice from the Representatives to the Company.
Payment shall be made to the Company and the Selling Stockholders by wire transfer of immediately available funds to bank accounts designated by the Company and the Custodian pursuant to each Selling Stockholders Power of Attorney and Custody Agreement, as the case may be, against delivery to the Representatives for the respective accounts of the Underwriters of certificates or security entitlements for the Securities to be purchased by them. It is understood that each Underwriter has authorized the Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial Securities and the Option Securities, if any, which it has agreed to purchase. Merrill Lynch and KBW, individually and not as representatives of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial Securities or the Option Securities, if any, to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder.
SECTION 3. Covenants of the Company and the Selling Stockholders . The Company covenants with each Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests . The Company, subject to Section 3(b), will comply with the requirements of Rule 430A, and will notify the Representatives as soon as practicable, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective or any amendment or supplement to the Prospectus shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes or of any examination pursuant to Section 8(d) or 8(e) of the 1933 Act concerning the Registration Statement and (v) if the Company becomes the subject of a proceeding under Section 8A of the 1933 Act in connection with the offering of the Securities. The Company will effect all filings required under Rule 424(b), in the manner and within the time period required by Rule 424(b) (without reliance on Rule 424(b)(8)), and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order, prevention or suspension and, if any such order is issued, to obtain the lifting thereof as soon as practicable.
(b) Continued Compliance with Securities Laws . The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement and in the Registration Statement, the General Disclosure Package and the Prospectus. If at any time when a prospectus relating to the Securities is (or, but for the exception
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afforded by Rule 172 of the 1933 Act Regulations (Rule 172), would be) required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to (i) amend the Registration Statement in order that the Registration Statement will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, (ii) amend or supplement the General Disclosure Package or the Prospectus in order that the General Disclosure Package or the Prospectus, as the case may be, will not include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser or (iii) amend the Registration Statement or amend or supplement the General Disclosure Package or the Prospectus, as the case may be, in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly (A) give the Representatives notice of such event, (B) prepare any amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement, the General Disclosure Package or the Prospectus comply with such requirements and, a reasonable amount of time prior to any proposed filing or use, furnish the Representatives with copies of any such amendment or supplement and (C) file with the Commission any such amendment or supplement; provided that the Company shall not file or use any such amendment or supplement to which the Representatives or counsel for the Underwriters shall reasonably object. The Company will furnish to the Underwriters such number of copies of such amendment or supplement as the Underwriters may reasonably request.
(c) Delivery of Registration Statements . The Company has furnished or will deliver to the Representatives and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and each amendment thereto (including exhibits filed therewith) and signed copies of all consents and certificates of experts, and will also deliver to the Representatives, without charge, a conformed copy of the Registration Statement as originally filed and each amendment thereto (without exhibits) for each of the Underwriters, in each case if requested by the Representatives. The copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses . The Company has delivered to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when a prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, such number of copies of the Prospectus (as amended or supplemented) as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Blue Sky Qualifications . The Company will use its reasonable best efforts, in cooperation with the Underwriters, to qualify the Securities for offering and sale by the Company under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as shall be mutually agreed between the Representatives and the Company and to maintain such qualifications in effect so long as required to complete the distribution of the Securities; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject.
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(f) Rule 158 . The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide to the Underwriters the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(g) Use of Proceeds . The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Registration Statement, the General Disclosure Package and the Prospectus under Use of Proceeds.
(h) Listing . The Company will use its best efforts to effect and maintain the listing of the Common Stock (including the Securities) on the New York Stock Exchange.
(i) Restriction on Sale of Securities . During a period of 180 days from the date of the Prospectus, the Company will not, without the prior written consent of Merrill Lynch and KBW, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Registration Statement, the General Disclosure Package and the Prospectus, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Registration Statement, the General Disclosure Package and the Prospectus, (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan referred to in the Registration Statement, the General Disclosure Package and the Prospectus or (E) the filing by the Company of a registration statement on Form S-8 covering the registration of any shares of Common Stock or other securities issued under existing employee benefits plans of the Company described in the Registration Statement, the General Disclosure Package and the Prospectus and the issuance by the Company of any securities pursuant to such plans.
(j) If Merrill Lynch and KBW, in their sole discretion, agree to release or waive the restrictions set forth in a lock-up agreement described in Section 5(l) hereof for an officer or director of the Company and provide the Company with notice of the impending release or waiver at least three business days before the effective date of the release or waiver, the Company agrees to announce the impending release or waiver by a press release substantially in the form of Exhibit E hereto through a major news service at least two business days before the effective date of the release or waiver.
(k) Reporting Requirements . The Company, during the period when a Prospectus relating to the Securities is (or, but for the exception afforded by Rule 172, would be) required to be delivered under the 1933 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and 1934 Act Regulations. Additionally, the Company shall report the use of proceeds from the issuance of the Shares as may be required under Rule 463 under the 1933 Act.
(l) Issuer Free Writing Prospectuses . Each of the Company and each Selling Stockholder agrees that, unless it obtains the prior written consent of the Representatives, it will not make any offer relating to the Securities that would constitute an Issuer Free Writing Prospectus or that would otherwise
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constitute a free writing prospectus, or a portion thereof, required to be filed by the Company with the Commission or retained by the Company under Rule 433; provided that the Representatives will be deemed to have consented to the Issuer Free Writing Prospectuses listed on Schedule C-2 hereto and any road show that is a written communication within the meaning of Rule 433(d)(8)(i) that has been reviewed by the Representatives. Each of the Company and each Selling Stockholder represents that it has treated or agrees that it will treat each such free writing prospectus consented to, or deemed consented to, by the Representatives as an issuer free writing prospectus, as defined in Rule 433, and that it has complied and will comply with the applicable requirements of Rule 433 with respect thereto, including timely filing with the Commission where required, legending and record keeping. If at any time following issuance of an Issuer Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement, any preliminary prospectus or the Prospectus or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement, at its own expense, such Issuer Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission.
(m) Compliance with FINRA Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by FINRA or the FINRA rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.
(n) Testing-the-Waters Materials. If at any time following the distribution of any Written Testing-the-Waters Communication there occurred or occurs an event or development as a result of which such Written Testing-the-Waters Communication included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances existing at that subsequent time, not misleading, the Company will promptly notify the Representatives and will promptly amend or supplement, at its own expense, such Written Testing-the-Waters Communication to eliminate or correct such untrue statement or omission.
(o) Emerging Growth Company Status. The Company will promptly notify the Representatives if the Company ceases to be an Emerging Growth Company at any time prior to the later of (i) completion of the distribution of the Securities within the meaning of the Securities Act and (ii) completion of the 180-day restricted period referred to in Section 3(i).
SECTION 4. Payment of Expenses .
(a) Expenses . The Company and the Selling Stockholders will pay or cause to be paid all expenses incident to the performance of their obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of copies of each preliminary prospectus, each Issuer Free Writing Prospectus and the Prospectus and any amendments or supplements thereto and any reasonable costs associated with electronic delivery of any of the foregoing by the Underwriters to investors, (iii) the preparation, issuance and delivery of the certificates or security entitlements for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery
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of the Securities to the Underwriters, (iv) the fees and disbursements of the Companys counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(e) hereof, including filing fees and the reasonable and documented fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the fees and expenses of any transfer agent or registrar for the Securities, (vii) the costs and expenses of the Company relating to investor presentations on any road show undertaken in connection with the marketing of the Securities, including without limitation, reasonable and documented expenses associated with the production of road show slides and graphics, fees and expenses of any consultants engaged in connection with the road show presentations, travel and lodging expenses of the representatives and officers of the Company and any such consultants, and 50% of the cost of aircraft and other transportation chartered in connection with the road show (it being understood that the other 50% of the cost of aircraft and other transportation chartered in connection with the roadshow shall be the responsibility of the Underwriters), (viii) the filing fees incident to, and the reasonable and documented fees and disbursements of counsel to the Underwriters in connection with, the review by FINRA of the terms of the sale of the Securities (provided that such fees and disbursements of counsel to the Underwriters pursuant to this clause (viii) shall not exceed $50,000), (ix) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange and (x) the costs and expenses (including, without limitation, any damages or other amounts payable in connection with legal or contractual liability) associated with the reforming of any contracts for sale of the Securities made by the Underwriters caused by a breach of the representation contained in the third sentence of Section 1(a)(ii).
(b) Expenses of the Selling Stockholders . The Selling Stockholders, jointly and severally, will pay all expenses incident to the performance of their respective obligations under, and the consummation of the transactions contemplated by, this Agreement, including (i) any Commission fees, FINRA fees or NYSE fees relating to the registration, sale or listing of their Securities, (ii) any stamp and other duties and stock and other transfer taxes, if any, payable upon the sale of the Securities to the Underwriters and their transfer between the Underwriters pursuant to an agreement between such Underwriters, and (iii) the fees and disbursements of their respective counsel and other advisors.
(c) Termination of Agreement . If this Agreement is terminated by the Representatives in accordance with the provisions of Section 5, Section 9(a)(i) or (iii), Section 10 or Section 11 hereof, the Company and the Selling Stockholders shall reimburse the non-defaulting Underwriters for all of their reasonably incurred and documented out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. For the avoidance of doubt, in the case of termination in accordance with the provisions of Section 10 hereof, the Company and the Selling Stockholders shall have no obligation to reimburse any defaulting Underwriters pursuant to this Section 4(c).
(d) Allocation of Expenses . The provisions of this Section shall not affect any agreement that the Company and the Selling Stockholders may make for the sharing of such costs and expenses.
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SECTION 5. Conditions of Underwriters Obligations . The obligations of the several Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and the Selling Stockholders contained herein or in certificates of any officer of the Company or any of its subsidiaries or on behalf of any Selling Stockholder delivered pursuant to the provisions hereof, to the performance by the Company and each Selling Stockholder of their respective covenants and other obligations hereunder, and to the following further conditions:
(a) Effectiveness of Registration Statement; Rule 430A Information . The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and, at the Closing Time, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto has been issued under the 1933 Act, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted by or are pending before or, to the Companys knowledge, threatened by the Commission; and the Company has complied with, or otherwise satisfied, each request (if any) from the Commission for additional information. A prospectus containing the Rule 430A Information shall have been filed with the Commission in the manner and within the time frame required by Rule 424(b) without reliance on Rule 424(b)(8) or a post-effective amendment providing such information shall have been filed with, and declared effective by, the Commission in accordance with the requirements of Rule 430A.
(b) Opinion of Counsel for Company . At the Closing Time, the Representatives shall have received the favorable opinion, dated the Closing Time, of Sullivan & Cromwell LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit A hereto and to such further effect as counsel to the Underwriters may reasonably request.
(c) Opinion of Legal Counsel of Company . At the Closing Time, the Representatives shall have received the favorable opinion, dated the Closing Time, of Legal Counsel of the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters to the effect set forth in Exhibit B hereto and to such further effect as counsel to the Underwriters may reasonably request.
(d) Opinions of Counsel for the Selling Stockholders . At the Closing Time, the Representatives shall have received the favorable opinions, each dated the Closing Time, of Dorsey & Whitney LLP, Santamarina y Steta, S.C. and Paul Hastings LLP, counsel for the Selling Stockholders, in the forms and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letters for each of the other Underwriters to the effect set forth in Exhibits C-1, C-2 and C-3 hereto and to such further effect as counsel to the Underwriters may reasonably request.
(e) Opinion of Counsel for Underwriters . At the Closing Time, the Representatives shall have received the favorable opinion, dated the Closing Time, of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters with respect to such matters as the Representatives may require. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York and the federal securities laws of the United States, upon the opinions of counsel satisfactory to the Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers and other representatives of the Company and its subsidiaries and certificates of public officials.
(f) Officers Certificate . At the Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, any Material Adverse Effect, and the Representatives shall have received a certificate of the Chief Executive Officer or the President of the Company and of the chief financial or chief accounting officer of the Company, dated the Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties of the Company in this Agreement are true and correct with the same force and effect as though expressly made at and as of
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the Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement under the 1933 Act has been issued, no order preventing or suspending the use of any preliminary prospectus or the Prospectus has been issued and no proceedings for any of those purposes have been instituted or are pending or, to their knowledge, threatened by the Commission.
(g) Certificate of Selling Stockholders . At the Closing Time, the Representatives shall have received a certificate of an Attorney-in-Fact on behalf of each Selling Stockholder, dated the Closing Time, to the effect that (i) the representations and warranties of each Selling Stockholder in this Agreement are true and correct with the same force and effect as though expressly made at and as of the Closing Time and (ii) each Selling Stockholder has complied with all agreements and all conditions on its part to be performed under this Agreement at or prior to the Closing Time.
(h) Accountants Comfort Letter . At the time of the execution of this Agreement, the Representatives shall have received from (i) Moss Adams LLP a letter, dated such date, in form and substance reasonably satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information of the Company, including pro forma financial information, contained in the Registration Statement, the General Disclosure Package and the Prospectus, and (ii) Crowe Horwath LLP a letter, dated such date, in form and substance reasonably satisfactory to the Representatives, together with signed or reproduced copies of such letter for each of the other Underwriters containing statements and information of the type ordinarily included in accountants comfort letters to underwriters with respect to the financial statements and certain financial information of Ridgestone Financial Services, Inc. contained in the Registration Statement, the General Disclosure Package and the Prospectus.
(i) Bring-down Comfort Letter . At the Closing Time, the Representatives shall have received from (i) Moss Adams LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (h)(i) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time, and (ii) Crowe Horwath LLP a letter, dated as of the Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (h)(ii) of this Section, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time.
(j) Approval of Listing . At the Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance.
(k) No Objection . FINRA has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements relating to the offering of the Securities.
(l) Lock-up Agreements . At the date of this Agreement, the Representatives shall have received an agreement substantially in the form of Exhibit D hereto signed by the persons listed on Schedule D hereto.
(m) Maintenance of Rating . Neither the Company nor its subsidiaries have any debt securities or preferred stock that are rated by any nationally recognized statistical rating agency (as defined in Section 3(a)(62) of the 1934 Act).
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(n) Conditions to Purchase of Option Securities . In the event that the Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the Option Securities, the representations and warranties of the Company and the Selling Stockholders contained herein and the statements in any certificates furnished by the Company, any of its subsidiaries and the Selling Stockholders hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Representatives shall have received:
(i) Officers Certificate . A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(f) hereof remains true and correct as of such Date of Delivery.
(ii) Certificate of Selling Stockholders . A certificate, dated such Date of Delivery, of an Attorney-in-Fact on behalf of each Selling Stockholder confirming that the certificate delivered at the Closing Time pursuant to Section 5(g) remains true and correct as of such Date of Delivery.
(iii) Opinion of Counsel for Company . If requested by the Representatives, the favorable opinion of Sullivan & Cromwell LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof.
(iv) Opinion of Counsel for the Selling Stockholders . If requested by the Representatives, the favorable opinions of Dorsey & Whitney LLP, Santamarina y Steta, S.C. and Paul Hastings LLP, counsel for the Selling Stockholders, in the forms and substance satisfactory to counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(d) hereof.
(v) Opinion of Counsel for Underwriters . If requested by the Representatives, the favorable opinion of Skadden, Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(e) hereof.
(vi) Bring-down Comfort Letter . If requested by the Representatives, a letter from (i) Moss Adams LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(h)(i) hereof, except that the specified date in the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery, and (ii) Crowe Horwath LLP, in form and substance satisfactory to the Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Representatives pursuant to Section 5(h)(ii) hereof, except that the specified date in the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery.
(o) Additional Documents . At the Closing Time and at each Date of Delivery (if any) counsel for the Underwriters shall have been furnished with such documents as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company and the
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Selling Stockholders in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Representatives and counsel for the Underwriters.
(p) Termination of Agreement . If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several Underwriters to purchase the relevant Option Securities, may be terminated by the Representatives by written notice to the Company and the Selling Stockholders at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7, 8, 15, 16 and 17 shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification .
(a) Indemnification of Underwriters . The Company agrees to indemnify and hold harmless each Underwriter, its affiliates (as such term is defined in Rule 501(b) under the 1933 Act (each, an Affiliate)), its selling agents and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included (A) in any preliminary prospectus, any Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto), or (B) in any materials or information provided to investors by, or with the approval of, the Company in connection with the marketing of the offering of the Securities (Marketing Materials), including any roadshow or investor presentations made to investors by the Company (whether in person or electronically), or the omission or alleged omission in any preliminary prospectus, Issuer Free Writing Prospectus, any Written Testing-the-Waters Communication, Prospectus or in any Marketing Materials of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(e) below) any such settlement is effected with the written consent of the Company and the Selling Stockholders;
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of one counsel, in addition to any local counsel chosen by the Representatives), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above;
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provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information.
(b) Indemnification of Underwriters by Selling Stockholders . Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter, its Affiliates and selling agents and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (a)(i), (ii) and (iii) above and in Section 6(f); provided that the Selling Stockholders shall be liable only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any preliminary prospectus, the General Disclosure Package, the Prospectus (or any amendment or supplement thereto) or any Issuer Free Writing Prospectus in reliance upon and in conformity with the Selling Stockholder Information; provided, further, that the liability under this subsection of the Selling Stockholder shall be limited to an amount equal to the aggregate gross proceeds after underwriting commissions and discounts, but before expenses, to the Selling Stockholder from the sale of Securities sold by the Selling Stockholder hereunder.
(c) Indemnification of Company, Directors and Officers and Selling Stockholders . Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling Stockholder and each person, if any, who controls a Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, the General Disclosure Package or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with the Underwriter Information.
(d) Actions against Parties; Notification . Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) and 6(b) above, counsel to the indemnified parties shall be selected by the Representatives, and, in the case of parties indemnified pursuant to Section 6(c) above, counsel to the indemnified parties shall be selected by the Company and the Selling Stockholders. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of
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each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
(e) Settlement without Consent if Failure to Reimburse . If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) or settlement of any claim in connection with any violation referred to in Section 6(f) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
(f) Indemnification for Reserved Securities . In connection with the offer and sale of the Reserved Securities, the Company agrees to indemnify and hold harmless the Underwriters, their Affiliates and selling agents and each person, if any, who controls any Underwriter within the meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any and all loss, liability, claim, damage and expense (including, without limitation, any legal or other expenses reasonably incurred in connection with defending, investigating or settling any such action or claim), as incurred, (i) arising out of the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered, (ii) arising out of any untrue statement or alleged untrue statement of a material fact contained in any other material prepared by or with the consent of the Company for distribution to Invitees in connection with the offering of the Reserved Securities or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, (iii) caused by the failure of any Invitee to pay for and accept delivery of Reserved Securities which have been orally confirmed for purchase by any Invitee by 11:59 P.M. (New York City time) on the date of the Agreement or (iv) related to, or arising out of or in connection with, the offering of the Reserved Securities.
(g) Other Agreements with Respect to Indemnification . The provisions of this Section shall not affect any agreement among the Company and the Selling Stockholders with respect to indemnification.
SECTION 7. Contribution . If the indemnification provided for in Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders, on the one hand, and of the Underwriters, on the other hand, in connection with the statements or omissions, or in connection with any violation of the nature referred to in Section 6(f) hereof, which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the
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offering of the Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Stockholders, on the one hand, and the total underwriting discount received by the Underwriters, on the other hand, in each case as set forth on the cover of the Prospectus, bear to the aggregate initial public offering price of the Securities as set forth on the cover of the Prospectus.
The relative fault of the Company and the Selling Stockholders, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders or by the Underwriters and the parties relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(f) hereof.
The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Shares underwritten by it and distributed to the public, and no Selling Stockholder shall be required to contribute any amount in excess of the aggregate gross proceeds after underwriting commissions and discounts, but before expenses, received by the Selling Stockholder.
No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and each Underwriters Affiliates and selling agents shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company or any Selling Stockholder within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company or such Selling Stockholder, as the case may be. The Underwriters respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial Securities set forth opposite their respective names in Schedule A hereto and not joint.
The provisions of this Section shall not affect any agreement among the Company and the Selling Stockholders with respect to contribution.
SECTION 8. Representations, Warranties and Agreements to Survive . All representations, warranties and agreements contained in this Agreement or in certificates of officers of the Company or any of its subsidiaries or the Selling Stockholders submitted pursuant hereto, shall remain operative and in full force and effect regardless of (i) any investigation made by or on behalf of any Underwriter or its Affiliates or selling agents, any person controlling any Underwriter, its officers or directors, any person controlling the Company or any person controlling any Selling Stockholder and (ii) delivery of and payment for the Securities.
29
SECTION 9. Termination of Agreement .
(a) Termination . The Representatives may terminate this Agreement, by notice to the Company and the Selling Stockholders, at any time at or prior to the Closing Time (i) if there has been, in the judgment of the Representatives, since the time of execution of this Agreement or since the respective dates as of which information is given in the Registration Statement, the General Disclosure Package or the Prospectus, any Material Adverse Effect, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Representatives, impracticable or inadvisable to proceed with the completion of the offering or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or (iv) if trading generally on the NYSE MKT or the New York Stock Exchange or in the Nasdaq Global Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by order of the Commission, FINRA or any other governmental authority, or (v) a material disruption has occurred in commercial banking or securities settlement or clearance services in the United States, or (vi) if a banking moratorium has been declared by either Federal, New York or Illinois authorities.
(b) Liabilities . If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7, 8, 15, 16 and 17 shall survive such termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters . If one or more of the Underwriters shall fail at the Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the Defaulted Securities), the Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Representatives shall not have completed such arrangements within such 24-hour period, then:
(i) if the number of Defaulted Securities does not exceed 10% of the number of Securities to be purchased on such date, each of the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of the number of Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the Underwriters to purchase, and the Company to sell, the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of its default.
30
In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the Underwriters to purchase and the Company to sell the relevant Option Securities, as the case may be, either the (i) Representatives or (ii) the Company and any Selling Stockholder shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement, the General Disclosure Package or the Prospectus or in any other documents or arrangements. As used herein, the term Underwriter includes any person substituted for an Underwriter under this Section 10.
SECTION 11. Default by one or more of the Selling Stockholders or the Company . (a) If a Selling Stockholder shall fail at the Closing Time or a Date of Delivery, as the case may be, to sell and deliver the number of Securities (the Selling Stockholder Securities) which such Selling Stockholder or Selling Stockholders are obligated to sell hereunder (a Selling Stockholder Default), then either (A) the remaining Selling Stockholder may increase the number of Securities to be sold by it hereunder to the total number to be sold by all Selling Stockholders as set forth in Schedule B hereto or (B) the Company may increase the number of Securities to be sold by the Company in an amount equal to the number of Selling Stockholder Securities which such defaulting Selling Stockholder was obligated to sell.
In the event of a Selling Stockholder Default and (A) the remaining Stockholder does not exercise the right granted hereby to increase the number of Securities to be sold by it hereunder, and (B) the Company does not increase the number of Securities to be sold by the Company in amount equal to the number of Selling Stockholder Securities which such defaulting Selling Stockholder was obligated to sell, then the Underwriters may, at option of the Representatives, by notice from the Representatives to the Company and the non-defaulting Selling Stockholders, either (i) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7, 8, 15, 16 and 17 shall remain in full force and effect or (ii) elect to purchase the Securities which the non-defaulting Selling Stockholders and the Company have agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Stockholder so defaulting from liability, if any, in respect of such default.
In the event of a default by any Selling Stockholder as referred to in this Section 11, each of the Representatives, the Company and the non-defaulting Selling Stockholders shall have the right to postpone the Closing Time or any Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required change in the Registration Statement, the General Disclosure Package or the Prospectus or in any other documents or arrangements.
(b) If the Company shall fail at the Closing Time or a Date of Delivery, as the case may be, to sell the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party; provided, however, that the provisions of Sections 1, 4, 6, 7, 8, 15, 16 and 17 shall remain in full force and effect. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default.
SECTION 12. Notices . All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication.
31
Notices to the Underwriters shall be directed to:
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
One Bryant Park
New York, New York 10036
Attention: Syndicate Department (facsimile: (646) 855-3073), with a copy to ECM Legal (facsimile: (212) 230-8730)
and
Keefe, Bruyette & Woods, Inc.
787 Seventh Avenue, 4 th Floor
New York, New York 10019
notices to the Company shall be directed to:
Byline Bancorp, Inc.
180 North LaSalle Street, Suite 300
Chicago, Illinois 60601
Attention: Alberto J. Parrachini
and notices to the Selling Stockholders shall be directed to:
c/o Byline Bancorp, Inc.
180 North LaSalle Street, Suite 300
Chicago, Illinois 60601
Attention: Alberto J. Parrachini
SECTION 13. No Advisory or Fiduciary Relationship . Each of the Company and each Selling Stockholder acknowledges and agrees that (a) the purchase and sale of the Securities pursuant to this Agreement, including the determination of the initial public offering price of the Securities and any related discounts and commissions, is an arms-length commercial transaction between the Company and the Selling Stockholder, on the one hand, and the several Underwriters, on the other hand, (b) in connection with the offering of the Securities and the process leading thereto, each Underwriter is and has been acting solely as a principal and is not the agent or fiduciary of the Company, any of its subsidiaries or any Selling Stockholder, or its respective stockholders, creditors, employees or any other party, (c) no Underwriter has assumed or will assume an advisory or fiduciary responsibility in favor of the Company or any Selling Stockholder with respect to the offering of the Securities or the process leading thereto (irrespective of whether such Underwriter has advised or is currently advising the Company, any of its subsidiaries or any Selling Stockholder on other matters) and no Underwriter has any obligation to the Company or any Selling Stockholder with respect to the offering of the Securities except the obligations expressly set forth in this Agreement, (d) the Underwriters and their respective affiliates may be engaged in a broad range of transactions that involve interests that differ from those of each of the Company and each Selling Stockholder, and (e) the Underwriters have not provided any legal, accounting, regulatory or tax advice with respect to the offering of the Securities and the Company and each of the Selling Stockholders has consulted its own respective legal, accounting, regulatory and tax advisors to the extent it deemed appropriate.
SECTION 14. Parties . This Agreement shall each inure to the benefit of and be binding upon the Underwriters, the Company and the Selling Stockholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters, the Company and the Selling Stockholders and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof
32
are intended to be for the sole and exclusive benefit of the Underwriters, the Company and the Selling Stockholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase.
SECTION 15. Trial by Jury . The Company (on its behalf and, to the extent permitted by applicable law, on behalf of its stockholders and affiliates), each of the Selling Stockholders and each of the Underwriters hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Agreement or the transactions contemplated hereby.
SECTION 16. GOVERNING LAW . THIS AGREEMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF, THE STATE OF NEW YORK WITHOUT REGARD TO ITS CHOICE OF LAW PROVISIONS.
SECTION 17. Consent to Jurisdiction; Waiver of Immunity . Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby (Related Proceedings) shall be instituted in (i) the federal courts of the United States of America located in the City and County of New York, Borough of Manhattan or (ii) the courts of the State of New York located in the City and County of New York, Borough of Manhattan (collectively, the Specified Courts), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a Related Judgment), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such partys address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum.
SECTION 18. TIME . TIME SHALL BE OF THE ESSENCE OF THIS AGREEMENT. EXCEPT AS OTHERWISE SET FORTH HEREIN, SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 19. Counterparts . This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same Agreement.
SECTION 20. Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.
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If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Attorneys-in-Fact for the Selling Stockholders a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement among the Underwriters, the Company and the Selling Stockholders in accordance with its terms.
CONFIRMED AND ACCEPTED, as of the date first above written: |
||
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED |
||
KEEFE, BRUYETTE & WOODS, INC. | ||
By: |
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED |
|
By |
|
|
Authorized Signatory | ||
By: | KEEFE, BRUYETTE & WOODS, INC. | |
By |
|
|
Authorized Signatory |
For themselves and as Representatives of the other Underwriters named in Schedule A hereto.
34
SCHEDULE A
The initial public offering price per share for the Securities shall be $[●].
The purchase price per share for the Securities to be paid by the several Underwriters shall be $[●], being an amount equal to the initial public offering price set forth above less $[●] per share, subject to adjustment in accordance with Section 2(b) for dividends or distributions declared by the Company and payable on the Initial Securities but not payable on the Option Securities.
Name of Underwriter |
Number of
Initial Securities |
|||
Merrill Lynch, Pierce, Fenner & Smith Incorporated |
||||
Keefe, Bruyette & Woods, Inc. |
||||
Piper Jaffray & Co. |
||||
Sandler ONeill & Partners, L.P. |
||||
Stephens Inc. |
||||
|
|
|||
Total |
[●] | |||
|
|
Sch A-1
SCHEDULE B
Number of Initial
Securities to be Sold |
Maximum Number of Option
Securities to Be Sold |
|||||||
BYLINE BANCORP, INC. |
||||||||
Fambeck Servicios Financieros del Exterior, S.A. de C.V. |
||||||||
Trinity Universal Insurance Company |
||||||||
Total |
Sch B-1
SCHEDULE C-1
Pricing Terms
1. The Company and the Selling Stockholders are selling [●] shares of Common Stock.
2. The Company has granted an option to the Underwriters, severally and not jointly, to purchase up to an additional [●] shares of Common Stock.
3. The initial public offering price per share for the Securities shall be $[●].
SCHEDULE C-2
Free Writing Prospectuses
[SPECIFY EACH ISSUER GENERAL USE FREE WRITING PROSPECTUS]
Sch C-1
SCHEDULE D
List of Persons and Entities Subject to Lock-up
Sch D - 1
Exhibit A
FORM OF OPINION OF COMPANYS COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)
A-1
Exhibit B
FORM OF OPINION OF COMPANYS LEGAL COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(c)
B-1
Exhibit C-1
FORM OF OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(d)
C-1
Exhibit C-2
FORM OF OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(d)
C-2
Exhibit C-3
FORM OF OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS
TO BE DELIVERED PURSUANT TO SECTION 5(d)
C-3
Exhibit D
FORM OF LOCK-UP FROM DIRECTORS, OFFICERS
OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(l)
[●], 2017
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
Keefe, Bruyette & Woods, Inc.
as Representatives of the several
Underwriters to be named in the
within-mentioned Underwriting Agreement
c/o Merrill Lynch, Pierce, Fenner & Smith
Incorporated
One Bryant Park
New York, New York 10036
Re: | Proposed Public Offering by BYLINE BANCORP, INC. |
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of BYLINE BANCORP, INC., a Delaware corporation (the Company), understands that Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch) and Keefe, Bruyette & Woods, Inc. (KBW) propose to enter into an Underwriting Agreement (the Underwriting Agreement) with the Company and the Selling Stockholders providing for the public offering of shares of the Companys common stock, par value $0.01 per share (the Common Stock). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Underwriting Agreement that, during the period beginning on the date hereof and ending on the date that is 180 days from the date of the Underwriting Agreement (the Lock-Up Period), the undersigned will not, without the prior written consent of the Representatives, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any shares of the Companys Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition (collectively, the Lock-Up Securities), or exercise any right with respect to the registration of any of the Lock-up Securities, or file or cause to be filed any registration statement in connection therewith, under the Securities Act of 1933, as amended, or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Lock-Up Securities, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. If the undersigned is an officer or director of the Company, the undersigned further agrees that the foregoing provisions shall be equally applicable to any issuer-directed Securities the undersigned may purchase in the offering.
D-1
If the undersigned is an officer or director of the Company, (1) the Representatives agree that, at least three business days before the effective date of any release or waiver of the foregoing restrictions in connection with a transfer of shares of the Common Stock, the Representatives will notify the Company of the impending release or waiver, and (2) the Company has agreed in the Underwriting Agreement to announce the impending release or waiver by press release through a major news service at least two business days before the effective date of the release or waiver. Any release or waiver granted by the Representatives hereunder to any such officer or director shall only be effective two business days after the publication date of such press release. The provisions of this paragraph will not apply if (i) the release or waiver is effected solely to permit a transfer not for consideration and (ii) the transferee has agreed in writing to be bound by the same terms described in this letter to the extent and for the duration that such terms remain in effect at the time of the transfer.
Notwithstanding the foregoing, and subject to the conditions below, the undersigned may transfer the Lock-Up Securities without the prior written consent of the Representatives, provided that (1) the Representatives receive a signed lock-up agreement for the balance of the lockup period from each donee, trustee, distributee, or transferee, as the case may be, (2) such transfers are not required to be reported with the Securities and Exchange Commission on Form 4 in accordance with Section 16 of the Securities Exchange Act of 1934, as amended, and (3) the undersigned does not otherwise voluntarily effect any public filing or report regarding such transfers:
(i) | as a bona fide gift or gifts; or |
(ii) | to any immediate family member, any trust for the direct or indirect benefit of the undersigned or the immediate family of the undersigned or any of their respective successors upon death (for purposes of this lock-up agreement, immediate family shall mean any relationship by blood, marriage or adoption, not more remote than first cousin); or |
(iii) | as a distribution to limited partners or stockholders of the undersigned; or |
(iv) | as part of any net or cashless exercise of stock options or vesting, delivery or settlement of restricted shares, restricted stock units or other awards granted pursuant to any of the Companys equity incentive plans in effect as of the date of the Underwriting Agreement; or |
(v) | to any beneficiary of the undersigned pursuant to a will, other testamentary document or applicable laws of descent; or |
(vi) | to the Company, to satisfy any tax withholding obligations of the Company or the undersigned, or to satisfy the exercise price of stock options by the undersigned, upon the exercise or vesting of equity awards outstanding or hereinafter granted under any equity incentive plan of the Company described in the Registration Statement or established during the Lock-Up Period; or |
(vii) | to the undersigneds affiliates or to any investment fund or other entity controlled or managed by the undersigned. |
In addition, nothing in this agreement shall prohibit the undersigned from establishing a Rule 10b5-1 trading plan during the Lock-Up Period so long as (1) no transactions under such plan are made until after the expiration of the Lock-Up Period and (2) no public disclosure of such plan shall be required or voluntarily made until after the expiration of the Lock-Up Period.
D-2
Furthermore, the undersigned may sell shares of Common Stock of the Company purchased by the undersigned on the open market following the Public Offering if and only if (i) such sales are not required to be reported in any public report or filing with the Securities and Exchange Commission, or otherwise and (ii) the undersigned does not otherwise voluntarily effect any public filing or report regarding such sales.
Notwithstanding any other provision contained herein, the undersigned shall be permitted to make transfers, sales, tenders or other dispositions of Lock-Up Securities pursuant to a tender offer for securities of the Company or any other transaction, including, without limitation, a merger, consolidation or other business combination, involving a change of control of the Company (including, without limitation, entering into any lock-up, voting or similar agreement pursuant to which the undersigned may agree to transfer, sell, tender or otherwise dispose of Lock-Up Securities in connection with any such transaction, or vote any Lock-Up Securities in favor of any such transaction); provided that all Lock-Up Securities subject to this agreement that are not so transferred, sold, tendered or otherwise disposed of remain subject to this agreement; and, provided, further, that it shall be a condition to transfer, sale, tender or other disposition that if such tender offer or other transaction is not completed, any Lock-Up Securities subject to his agreement shall remain subject to the restrictions herein.
The undersigned also agrees and consents to the entry of stop transfer instructions with the Companys transfer agent and registrar against the transfer of the Lock-Up Securities except in compliance with the foregoing restrictions.
The undersigned understands that the undersigned shall be released from all obligations under this lock-up agreement and this lock-up agreement shall be terminated automatically and without further action on the part on the part of any of the parties hereto if (i) the Company notifies the Representatives, prior to execution of the Underwriting Agreement, that it does not intend to proceed with the public offering, (ii) the Underwriting Agreement does not become effective, or if the Underwriting Agreement (other than the provisions thereof which survive termination) shall terminate or be terminated prior to payment for and delivery of the Common Stock to be sold thereunder, (iii) the Company completes an application with the SEC to withdraw the Registration Statement and the Registration Statement is withdrawn or (iv) the public offering is not completed by December 31, 2017.
Very truly yours, | ||
Signature: |
|
|
Print Name: |
|
D-3
Exhibit E
FORM OF PRESS RELEASE
TO BE ISSUED PURSUANT TO SECTION 3(j)
BYLINE BANCORP, INC.
[Date]
BYLINE BANCORP, INC. (the Company) announced today that BofA Merrill Lynch and Keefe, Bruyette & Woods, the lead book-running managers in the Companys recent public sale of [●] shares of common stock, are [waiving] [releasing] a lock-up restriction with respect to shares of the Companys common stock held by [certain officers or directors] [an officer or director] of the Company. The [waiver] [release] will take effect on , 20 , and the shares may be sold on or after such date.
This press release is not an offer for sale of the securities in the United States or in any other jurisdiction where such offer is prohibited, and such securities may not be offered or sold in the United States absent registration or an exemption from registration under the United States Securities Act of 1933, as amended.
E-1
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
BYLINE BANCORP, INC.
Byline Bancorp, Inc., a Delaware corporation (the Corporation), hereby certifies as follows:
1. | The date of the filing of its original certificate of incorporation with the Secretary of State was March 24, 2017. |
2. | This amended and restated certificate of incorporation (this Certificate of Incorporation) amends, restates and integrates the provisions of the certificate of incorporation of said corporation and has been duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware (the DGCL) by written consent of the holder of all of the outstanding stock entitled to vote thereon in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. |
3. | The text of the certificate of incorporation is hereby amended and restated to read herein as set forth in full: |
FIRST. The name of the Corporation is Byline Bancorp, Inc.
SECOND. The address of the Corporations registered office in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle, Zip Code 19808. The name of its registered agent at such address is Corporation Service Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL.
FOURTH. The total number of shares of all classes of stock which the corporation shall have authority to issue is 175 million, of which 150 million shares of the par value of $0.01 per share shall be designated as Common Stock and 25 million shares of the par value of $0.01 per share shall be designated as Preferred Stock.
Shares of Preferred Stock may be issued in one or more series from time to time by the Board of Directors, and the Board of Directors is expressly authorized to fix by resolution or resolutions the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, of the shares of each series of Preferred Stock, including, without limitation, the following:
(a) the distinctive serial designation of such series which shall distinguish it from other series;
(b) the number of shares included in such series;
(c) the dividend rate (or method of determining such rate) payable to the holders of the shares of such series, any conditions upon which such dividends shall be paid and the date or dates upon which such dividends shall be payable;
(d) whether dividends on the shares of such series shall be cumulative and, in the case of shares of any series having cumulative dividend rights, the date or dates or method of determining the date or dates from which dividends on the shares of such series shall be cumulative;
(e) the amount or amounts which shall be payable out of the assets of the corporation to the holders of the shares of such series upon voluntary or involuntary liquidation, dissolution or winding up of the corporation, and the relative rights of priority, if any, of payment of the shares of such series;
(f) the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series may be redeemed, in whole or in part, at the option of the corporation or at the option of the holder or holders thereof or upon the happening of a specified event or events;
-2-
(g) the obligation, if any, of the corporation to purchase or redeem shares of such series pursuant to a sinking fund or otherwise and the price or prices at which, the period or periods within which and the terms and conditions upon which the shares of such series shall be redeemed or purchased, in whole or in part, pursuant to such obligation;
(h) whether or not the shares of such series shall be convertible or exchangeable, at any time or times at the option of the holder or holders thereof or at the option of the corporation or upon the happening of a specified event or events, into shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation, and the price or prices or rate or rates of exchange or conversion and any adjustments applicable thereto;
(i) whether or not the holders of the shares of such series shall have voting rights, in addition to the voting rights provided by law, and if so, the terms of such voting rights; and
(j) any other powers, preferences and rights and qualifications, limitations and restrictions not inconsistent with the DGCL.
For all purposes, this Certificate of Incorporation shall include each certificate of designations setting forth the terms of a series of Preferred Stock.
Unless otherwise provided in the resolution or resolutions of the Board of Directors or a duly authorized committee thereof establishing the terms of a series of Preferred Stock, no holder of any share of Preferred Stock shall be entitled as of right to vote on any amendment or alteration of the Certificate of Incorporation to authorize or create, or increase the authorized amount of, any other class or series of Preferred Stock or any alteration, amendment or repeal of any provision of any other series of Preferred Stock that does not adversely affect in any material respect the rights of the series of Preferred Stock held by such holder.
-3-
Except as otherwise required by the DGCL or provided in the resolution or resolutions of the Board of Directors or a duly authorized committee thereof establishing the terms of a series of Preferred Stock, no holder of Common Stock, as such, shall be entitled to vote on any amendment or alteration of the Certificate of Incorporation that alters, amends or changes the powers, preferences, rights or other terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other series of Preferred Stock, to vote thereon pursuant to the Certificate of Incorporation or pursuant to the DGCL.
Subject to the rights of the holders of any series of Preferred Stock, the number of authorized shares of any class or series of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of such class or series, voting together as a single class, irrespective of the provisions of Section 242(b)(2) of the DGCL or any corresponding provision hereafter enacted.
Unless otherwise provided in the resolution or resolutions of the Board of Directors or a duly authorized committee thereof establishing the terms of a series of Preferred Stock, no holder of any share of Preferred Stock shall, in such capacity, be entitled to bring a derivative action, suit or proceeding on behalf of the Corporation.
FIFTH. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal by-laws of the Corporation.
SIXTH. Elections of directors need not be by written ballot except and to the extent provided in the by-laws of the corporation.
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SEVENTH. The number of directors of the corporation shall be fixed from time to time pursuant to the by-laws of the corporation.
EIGHTH. No action required or permitted to be taken by the holders of any class or series of stock of the corporation, including but not limited to the election of directors, may be taken by one or more written consents.
NINTH. To the fullest extent authorized by the DGCL, a director of the corporation shall not be liable to the corporation or its stockholders for monetary damages for breach of such directors fiduciary duty as a director, except to the extent that such exemption from liability or limitation thereof is not permitted under the DGCL as currently in effect or as the same may hereafter be amended.
To the fullest extent permitted by the DGCL, the corporation is authorized to provide indemnification of (and advancement of expenses to) the corporations directors, officers, employees and agents (and any other persons to which the DGCL permits the corporation to provide indemnification) through the Corporations by-laws, agreements with such persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the DGCL, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to the corporation, its stockholders and others, and by any applicable federal or state bank regulatory laws or regulations. Such right to indemnification and advancement of expenses shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.
No amendment, modification or repeal of this Article NINTH shall adversely affect any right or protection of a director, officer, employee or agent or other person existing at the time of, or increase the liability of any person with respect to any acts or omissions of such person occurring prior to, such amendment, modification or repeal.
TENTH. The corporation expressly elects not to be governed by Section 203 of the DGCL.
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IN WITNESS WHEREOF, Byline Bancorp, Inc. has caused this certificate to be signed by Alberto J. Paracchini, its President and Chief Executive Officer, on the 16th day of June, 2017.
/s/ Alberto J. Paracchini |
Alberto J. Paracchini |
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Exhibit 3.2
AMENDED AND RESTATED BY-LAWS
OF
BYLINE BANCORP, INC.
ARTICLE I
Stockholders
Section 1.1. Annual Meetings . An annual meeting of stockholders shall be held for the election of directors at such date, time and place either within or without the State of Delaware, or may not be held at any place, but may instead be held solely by means of remote communication, as may be designated by the Board of Directors of the Corporation (the Board of Directors) from time to time. Any other proper business may be transacted at the annual meeting.
Section 1.2. Special Meetings . Special meetings of stockholders may be called at any time by the Chairperson of the Board of Directors, the Chief Executive Officer, the President (if any), an Executive Vice President, or the Board of Directors, to be held at such date, time and place either within or without the State of Delaware, or may not be held at any place, but may instead be held by means of remote communication, as may be stated in the notice of the meeting.
Section 1.3. Notice of Meetings . Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour of the meeting, the means of remote communications, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, the record date for determining the stockholders entitled to vote at the meeting, if such date is different from the record date for determining stockholders entitled to notice of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise provided by law, the written notice of any meeting shall be given not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting as of the record date for determining the stockholders entitled to notice of the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholders address as it appears on the records of the Corporation. In addition, if stockholders have consented to receive notices by a form of electronic transmission, then such notice, by facsimile telecommunication, or by electronic mail, shall be deemed to be given when directed to a number or an electronic mail address, respectively, at which the stockholder has consented to receive notice. If such notice is transmitted by a posting on an electronic network together with separate notice to the stockholder of such specific posting, such notice shall be deemed to be given upon the later of (i) such posting, and (ii) the giving of such separate notice. If such notice is transmitted by any other form of
electronic transmission, such notice shall be deemed to be given when directed to the stockholder. Notice shall be deemed to have been given to all stockholders of record who share an address if notice is given in accordance with the householding rules set forth in the rules of the Securities and Exchange Commission (the SEC) under the Securities Exchange Act of 1934 (the Exchange Act) and Section 233 of the Delaware General Corporation Law (the DGCL). For purposes of these amended and restated by-laws (these By-laws), electronic transmission means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form through an automated process.
Section 1.4. Adjournments . Any meeting of stockholders, annual or special, may be adjourned from time to time, to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, thereof, are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.
Section 1.5. Quorum . At each meeting of stockholders, except where otherwise provided by law or the amended and restated certificate of incorporation (the Certificate of Incorporation) or these By-laws, the holders of a majority of the outstanding shares of stock entitled to vote on a matter at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, where a separate vote by class or classes is required for any matter, the holders of a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum to take action with respect to that vote on that matter. Two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum of the holders of any class of stock entitled to vote on a matter, either (a) the holders of such class so present or represented may, by majority vote, adjourn the meeting of such class from time to time in the manner provided by Section 1.4 of these By-laws until a quorum of such class shall be so present or represented or (b), the Chairperson of the meeting may on his or her own motion adjourn the meeting from time to time in the manner provided by Section 1.4 of these By-laws until a quorum of such class shall be so present and represented without the approval of the stockholders who are present in person or represented by proxy and entitled to vote, without notice other than announcement at the meeting. Shares of its own capital stock belonging on the record date for determining stockholders entitled to vote at the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided , however , that the foregoing shall not limit the right of the Corporation to vote stock, including but not limited to its own stock, held by it in a fiduciary capacity.
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Section 1.6. Organization .
(a) Meetings of stockholders shall be presided over by the Chairperson of the Board of Directors, or in the absence of the Chairperson of the Board by the Chief Executive Officer, or in the absence of the Chief Executive Officer by the President (if any), or in the absence of the President by an Executive Vice President, or in the absence of the foregoing persons by a chairperson designated by the Board of Directors, or in the absence of such designation by a chairperson chosen at the meeting. The Secretary, or in the absence of the Secretary, an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairperson of the meeting may appoint any person to act as secretary of the meeting.
(b) The order of business at each such meeting shall be as determined by the chairperson of the meeting. The chairperson of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls, for each item on which a vote is to be taken.
Section 1.7. Inspectors .
(a) Prior to any meeting of stockholders, the Board of Directors or the Chief Executive Officer shall appoint one or more inspectors to act at such meeting and make a written report thereof and may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at the meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall ascertain the number of shares outstanding and the voting power of each, determine the shares represented at the meeting and the validity of proxies and ballots, count all votes and ballots, determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors and certify their determination of the number of shares represented at the meeting and their count of all votes and ballots. The inspectors may appoint or retain other persons to assist them in the performance of their duties.
(b) The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxy or vote, nor any revocation thereof or change thereto, shall be accepted by the inspectors after the closing of the polls.
(c) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted
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therewith, any information provided by a stockholder who submits a proxy by telegram, cablegram, or other electronic transmission from which it can be determined that the proxy was authorized by the stockholder, any written ballot or, if authorized by the Board of Directors, a ballot submitted by electronic transmission together with any information from which it can be determined that the electronic transmission was authorized by the stockholder, any information provided in a record of a vote if such vote was taken at the meeting by means of remote communication along with any information used to verify that any person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder, ballots and the regular books and records of the Corporation, and they may also consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for such purpose, they shall, at the time they make their certification, specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors belief that such information is accurate and reliable.
Section 1.8. Voting .
(a) Unless otherwise provided in the Certificate of Incorporation, each stockholder entitled to vote at any meeting of stockholders shall be entitled to one vote for each share of stock held by such stockholder which has voting power upon the matter in question.
(b) Voting at meetings of stockholders need not be by written ballot unless the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or represented by proxy at such meeting shall so determine.
(c) Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. In all other matters, unless otherwise provided by law or by the Certificate of Incorporation or these By-laws, the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the subject matter shall be the act of the stockholders. Where a separate vote by class or classes is required, the affirmative vote of the holders of a majority of the shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class or classes, except as otherwise provided by law or by the Certificate of Incorporation or these By-laws. For purposes of this Section 1.8, votes cast for or against and abstentions with respect to such matter shall be counted as shares of stock of the Corporation entitled to vote on such matter, while broker non-votes (or other shares of stock of the Corporation similarly not entitled to vote) shall not be counted as shares entitled to vote on such matter.
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Section 1.9. Proxies . Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for such stockholder by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power, regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation.
Section 1.10. Fixing Date for Determination of Stockholders of Record .
(a) In order that the Corporation may determine the stockholders entitled to notice of any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If the Board of Directors so fixes a date, such date shall also be the record date for determining the stockholders entitled to vote at such meeting unless the Board of Directors determines, at the time it fixes such record date, that a later date on or before the date of the meeting shall be the date for making such determination. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of and to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided , however , that the Board of Directors may fix a new record date for determination of stockholders entitled to vote at the adjourned meeting, and in such case shall also fix the record date for stockholders entitled to notice of such adjourned meeting the same or an earlier date as that fixed for determination of stockholders entitled to vote in accordance with the foregoing provisions of this Section 1.10(a) at the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 1.11. List of Stockholders Entitled to Vote . The Secretary shall prepare and make, at least ten days before every meeting of stockholders, a complete list
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of the stockholders entitled to vote at the meeting; provided, however, if the record date for determining the stockholders entitled to vote is less than 10 days before the meeting date, the list shall reflect the stockholders entitled to vote as of the 10 th day before the meeting date, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Nothing in this Section 1.11 shall require the Corporation to include electronic mail addresses or other electronic content information on such list. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting for a period of at least 10 days prior to the meeting (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting, or (b) during ordinary business hours, at the principal place of business of the Corporation. In the event that the Corporation determines to make the list available on an electronic network, the Corporation may take reasonable steps to ensure that such information is available only to stockholders of the Corporation. If the meeting is to be held at a place, then a list of stockholders entitled to vote at the meeting shall be produced and kept at the time and place of the meeting during the whole time thereof and may be examined by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then such list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting.
Section 1.12. Advance Notice of Stockholder Nominees for Director and Other Stockholder Proposals .
(a) The matters to be considered and brought before any annual or special meeting of stockholders of the Corporation shall be limited to only such matters, including the nomination and election of directors, as shall be brought properly before such meeting in compliance with the procedures set forth in this Section 1.12.
(b) For any matter to be brought properly before the annual meeting of stockholders, the matter must be (i) specified in the notice of the annual meeting given by or at the direction of the Board of Directors, (ii) otherwise brought before the annual meeting by or at the direction of the Board of Directors or (iii) brought before the annual meeting by a stockholder who is a stockholder of record of the Corporation on the date the notice provided for in this Section 1.12 is delivered to the Secretary of the Corporation, who is entitled to vote at the annual meeting and who complies with the procedures set forth in this Section 1.12.
(c) In addition to any other requirements under applicable law and the Certificate of Incorporation and By-laws of the Corporation, written notice (the Stockholder Notice) of any nomination or other proposal must be timely and any proposal, other than a nomination, must constitute a proper matter for stockholder action. To be timely, the Stockholder Notice must be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not less than 90 nor more than 120 days prior to the first anniversary date of the annual meeting for the preceding year (for these purposes, the annual meeting for the year 2017 shall be deemed to have
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occurred on June 14, 2017); provided , however , that if (and only if) the annual meeting is not scheduled to be held within a period that commences 30 days before such anniversary date and ends within 60 days after such anniversary date (an annual meeting date outside such period being referred to herein as an Other Meeting Date), the Stockholder Notice shall be given in the manner provided herein by the later of the close of business on (i) the date 90 days prior to such Other Meeting Date or (ii) the 10 th day following the date such Other Meeting Date is first publicly announced or disclosed. A Stockholder Notice must contain the following information: (i) whether the stockholder is providing the notice at the request of a beneficial holder of shares, whether the stockholder, any such beneficial holder or any nominee has any agreement, arrangement or understanding with, or has received any financial assistance, funding or other consideration from, any other person with respect to the investment by the stockholder or such beneficial holder in the Corporation or the matter the Stockholder Notice relates to, and the details thereof, including the name of such other person (the stockholder, any beneficial holder on whose behalf the notice is being delivered, any nominees listed in the notice and any persons with whom such agreement, arrangement or understanding exists or from whom such assistance has been obtained are hereinafter collectively referred to as Interested Persons); (ii) the name and address of all Interested Persons; (iii) a complete listing of the record and beneficial ownership positions (including number or amount) of all equity securities and debt instruments, whether held in the form of loans or capital market instruments, of the Corporation or any of its subsidiaries held by all Interested Persons; (iv) whether and the extent to which any hedging, derivative or other transaction is in place or has been entered into within the prior six months preceding the date of delivery of the Stockholder Notice by or for the benefit of any Interested Person with respect to the Corporation or its subsidiaries or any of their respective securities, debt instruments or credit ratings, the effect or intent of which transaction is to give rise to gain or loss as a result of changes in the trading price of such securities or debt instruments or changes in the credit ratings for the Corporation, its subsidiaries or any of their respective securities or debt instruments (or, more generally, changes in the perceived creditworthiness of the Corporation or its subsidiaries), or to increase or decrease the voting power of such Interested Person, and if so, a summary of the material terms thereof; and (v) a representation that the stockholder is a holder of record of stock of the Corporation that would be entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to propose the matter set forth in the Stockholder Notice. As used herein, beneficially owned has the meaning provided in Rules 13d-3 and 13d-5 under the Exchange Act . The Stockholder Notice shall be updated not later than 10 days after the record date for the determination of stockholders entitled to vote at the meeting to provide any material changes in the foregoing information as of the record date. Any Stockholder Notice relating to the nomination of directors must also contain (i) the information regarding each nominee required by paragraphs (a), (e) and (f) of Item 401 of Regulation S-K adopted by the Securities and Exchange Commission (or the corresponding provisions of any successor regulation), (ii) each nominees signed consent to serve as a director of the Corporation if elected and (iii) whether each nominee is eligible for consideration as an independent director under the relevant standards contemplated by Item 407(a) of Regulation S-K (or the corresponding provisions of any successor regulation). The Corporation may also require any proposed nominee to
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furnish such other information, including completion of the Corporations directors questionnaire, as it may reasonably require to determine whether the nominee would be considered independent as a director or as a member of the audit committee of the Board of Directors under the various rules and standards applicable to the Corporation. Any Stockholder Notice with respect to a matter other than the nomination of directors must contain (i) the text of the proposal to be presented, including the text of any resolutions to be proposed for consideration by stockholders and (ii) a brief written statement of the reasons why such stockholder favors the proposal.
Notwithstanding anything in this Section 1.12(c) to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and either all of the nominees for director or the size of the increased Board of Directors is not publicly announced or disclosed by the Corporation at least 100 days prior to the first anniversary of the preceding years annual meeting, a Stockholder Notice shall also be considered timely hereunder, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the 10 th day following the first date all of such nominees or the size of the increased Board of Directors shall have been publicly announced or disclosed.
(d) For any matter to be brought properly before a special meeting of stockholders, the matter must be set forth in the Corporations notice of the meeting given by or at the direction of the Board of Directors. In the event that the Corporation calls a special meeting of stockholders for the purpose of electing one or more persons to the Board of Directors, any stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporations notice of the meeting, if the Stockholder Notice required by Section 1.12(c) hereof shall be delivered to the Secretary of the Corporation at the principal executive office of the Corporation not later than the close of business on the 10 th day following the day on which the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is publicly announced or disclosed.
(e) For purposes of this Section 1.12, a matter shall be deemed to have been publicly announced or disclosed if such matter is disclosed in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission.
(f) Only persons who are nominated in accordance with the procedures set forth in this Section 1.12 shall be eligible for election as directors of the Corporation. In no event shall the postponement or adjournment of an annual meeting already publicly noticed, or any announcement of such postponement or adjournment, commence a new period (or extend any time period) for the giving of notice as provided in this Section 1.12. This Section 1.12 shall not apply to (i) stockholders proposals made pursuant to Rule 14a-8 under the Exchange Act or (ii) the election of directors selected by or pursuant to the provisions of the Certificate of Incorporation relating to the rights of the
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holders of any class or series of stock of the Corporation having a preference over the Common Stock as to dividends or upon liquidation to elect directors under specified circumstances.
(g) The person presiding at any meeting of stockholders, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall have the power and duty to determine whether notice of nominees and other matters proposed to be brought before a meeting has been duly given in the manner provided in this Section 1.12 and, if not so given, shall direct and declare at the meeting that such nominees and other matters are not properly before the meeting and shall not be considered. Notwithstanding the foregoing provisions of this Section 1.12, if the stockholder or a qualified representative of the stockholder does not appear at the annual or special meeting of stockholders of the Corporation to present any such nomination, or make any such proposal, such nomination or proposal shall be disregarded, notwithstanding that proxies in respect of such vote may have been received by the Corporation.
ARTICLE II
Board of Directors
Section 2.1. Powers; Number; Qualifications . The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise provided by law or in the Certificate of Incorporation. The Board shall consist of one or more members, each of whom shall be a natural person. Directors need not be stockholders. There shall initially be seven directors, and the number of directors may be designated from time to time by resolution of the Board of Directors.
Section 2.2. Election; Term of Office; Resignation; Removal; Vacancies . Each director shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any director may resign at any time upon notice given in writing or by electronic transmission to the Board of Directors or to the Chief Executive Officer, the President (if any) or the Secretary of the Corporation. Such resignation shall take effect at the time it is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. Unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of any class or series of stock are entitled to elect one or more directors by the Certificate of Incorporation , the provisions of the preceding sentence shall apply, in respect to the removal without cause of a director or directors so elected, to the vote of the holders of the outstanding shares of that class or series and not to the vote of the outstanding shares as a whole. Unless otherwise provided in the Certificate of Incorporation or these By-laws, vacancies and newly created directorships resulting from any increase in the authorized number of directors
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elected by all of the stockholders having the right to vote as a single class or from any other cause may be filled by a majority of the directors then in office, although less than a quorum, or by the sole remaining director. Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation , vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by the sole remaining director so elected. Any director elected or appointed to fill a vacancy shall hold office until the next annual meeting of the stockholders and his or her successor is elected and qualified or until his or her earlier resignation or removal.
Section 2.3. Regular Meetings . Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine, and if so determined notice thereof need not be given.
Section 2.4. Special Meetings . Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairperson of the Board of Directors, the Chief Executive Officer, the President (if any), an Executive Vice President or by any two directors. Reasonable notice thereof shall be given by the person or persons calling the meeting.
Section 2.5. Participation in Meetings by Conference Telephone Permitted . Unless otherwise restricted by the Certificate of Incorporation or these By-laws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or of such committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this by-law shall constitute presence in person at such meeting.
Section 2.6. Quorum; Vote Required for Action . At all meetings of the Board of Directors a majority of the entire Board of Directors shall constitute a quorum for the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the amended and restated certificate of incorporation or these By-laws shall require a vote of a greater number. In case at any meeting of the Board of Directors a quorum shall not be present, the members of the Board of Directors present may adjourn the meeting from time to time until a quorum shall be present.
Section 2.7. Organization . Meetings of the Board of Directors shall be presided over by the Chairperson of the Board of Directors, or in the absence of the Chairperson of the Board of Directors, by the Chief Executive Officer, or in the absence of the Chief Executive Officer, by the President (if any), or in the absence of the President by an Executive Vice President or in their absence by a chairperson chosen at the meeting. The Secretary, or in the absence of the Secretary an Assistant Secretary, shall act as secretary of the meeting, but in the absence of the Secretary and any Assistant Secretary the chairperson of the meeting may appoint any person to act as secretary of the meeting.
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Section 2.8. Action by Directors Without a Meeting . Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board of Directors or of such committee, as the case may be, consent thereto in writing or by electronic transmission, and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board of Directors or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.
Section 2.9. Compensation of Directors . Unless otherwise restricted by the Certificate of Incorporation or these By-laws, the Board of Directors shall have the authority to fix the compensation of directors.
ARTICLE III
Committees
Section 3.1. Committees . The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in these By-laws, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to the following matters: (a) approving or adopting, or recommending to the stockholders, any action or matter (other than the election or removal of directors) expressly required by law to be submitted to stockholders for approval, (b) adopting, amending or repealing these By-laws or (c) indemnifying directors.
Section 3.2. Committee Rules . Unless the Board of Directors otherwise provides, each committee designated by the Board may adopt, amend and repeal rules for the conduct of its business. In the absence of a provision by the Board of Directors or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the
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time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these By-laws.
ARTICLE IV
Officers
Section 4.1. Officers; Election . The Board of Directors shall take such action as may be necessary from time to time to ensure that the Corporation has a Chief Executive Officer, a Chief Financial Officer and a Secretary. The Board of Directors may, if it so determines, elect a President, and from among its members, a Chairperson of the Board of Directors and a Vice Chairperson of the Board of Directors. The Board of Directors may also elect one or more Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or more Assistant Treasurers and such other officers as the Board of Directors may deem desirable or appropriate and may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person unless the Certificate of Incorporation or these By-laws otherwise provide.
Section 4.2. Term of Office; Resignation; Removal; Vacancies . Unless otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice or electronic transmission to the Board of Directors or to the Chief Executive Officer, the President (if any) or the Secretary of the Corporation. Such resignation shall take effect at the time it is delivered unless the resignation specifies a later effective date or an effective date determined upon the happening of an event or events. Unless otherwise specified therein no acceptance of such resignation shall be necessary to make it effective. The Board of Directors may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election of an officer shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise, may be filled by the Board of Directors at any regular or special meeting.
Section 4.3. Powers and Duties . The officers of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in these By-laws or in a resolution of the Board of Directors which is not inconsistent with these By-laws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Secretary shall have the duty to record the proceedings of the meetings of the stockholders, the Board of Directors and any committees in a book to be kept for that purpose. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his or her duties.
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ARTICLE V
Stock
Section 5.1. Stock Certificates and Uncertificated Shares .
(a) The shares of stock in the Corporation may be either represented by certificates or as provided by resolution of the Board of Directors some or all of any or all classes or series of the Corporations stock may be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate theretofore issued until such certificate is surrendered to the Corporation. Every holder of stock represented by certificates shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson of the Board of Directors, the Chief Executive Officer, the President (if any), an Executive Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, representing the number of shares of stock registered in certificate form owned by such holder. If such certificate is manually signed by one officer or manually countersigned by a transfer agent or by a registrar, any other signature on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. The Corporation may not issue stock certificates in bearer form.
(b) If the Corporation is authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided by law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Within a reasonable time after the issuance or transfer of uncertificated shares, the Corporation shall send to the registered owner thereof a written notice containing the information required by law to be set forth or stated on certificates or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
(c) Except as otherwise expressly provided by law, the rights and obligations of the holders of uncertificated shares and the rights and obligations of the holders of certificates representing stock of the same class and series shall be identical.
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Section 5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates . The Corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the Corporation may require the owner of the lost, stolen or destroyed certificate, or such owners legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares.
Section 5.3. Transfer of Shares . Transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation, which books may be maintained by a registered stock transfer agent.
ARTICLE VI
Indemnification
Section 6.1. Indemnification .
(a) Except as provided in this Article VI, the Corporation shall indemnify Indemnitees to the full extent permitted by Delaware law. Expenses reasonably incurred by Indemnitee in defending any action, suit, or proceeding, as described in this by-law, shall be paid or reimbursed by the Corporation promptly upon receipt by it of an undertaking of Indemnitee to repay such Expenses if it shall ultimately be determined that he or she is not entitled to be indemnified by the Corporation. Indemnitees obligation to reimburse the Corporation shall be unsecured and no interest shall be charged thereon. The Corporation shall not indemnify Indemnitee or advance or reimburse Indemnitees Expenses if the action, suit or proceeding alleges (1) claims under Section 16(b) of the Exchange Act, (2) violations of the Corporations Code of Ethics or Insider Trading Policy or (3) violations of Federal or state insider trading laws, unless, in each case, Indemnitee has been successful on the merits, received the written consent to incurring the Expense or settled the case with the written consent of the Corporation, in which case the Corporation shall indemnify and reimburse Indemnitee. In addition, the Corporation shall not indemnify Indemnitee or advance or reimburse Indemnitees Expenses if such indemnification or payment would constitute a prohibited indemnification payment under the regulations of the Federal Deposit Insurance Corporation (or any successor provisions) or any other applicable laws, rules or regulations.
(b) No claim for indemnification shall be paid by the Corporation unless the Corporation has determined that Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interest of the Corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful. Unless ordered by a court, such determinations shall be made by (1) a majority vote of the directors who are not parties to the action, suit or proceeding for which indemnification is sought, even though less than a
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quorum, or (2) by a committee of such directors designated by a majority vote of directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion or (4) by stockholders.
(c) Indemnitee shall promptly notify the Corporation in writing upon the sooner of (i) becoming aware of an action, suit or proceeding where indemnification or the advance payment or reimbursement of Expenses may be sought or (ii) being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may be subject to indemnification or the advance payment or reimbursement of Expenses covered hereunder. Except as provided in this Article VI, the failure of Indemnitee to so notify the Corporation shall not relieve the Corporation of any obligation which it may have to Indemnitee pursuant to this by-law.
(d) As a condition to indemnification or the advance payment or reimbursement of Expenses, any demand for payment by Indemnitee hereunder shall be in writing and shall provide reasonable accounting for the Expenses to be paid by the Corporation.
(e) For the purposes of this Article VI,
(i) the term Indemnitee shall mean any person made or threatened to be made a party, or otherwise involved in any civil, criminal, administrative or investigative action, suit or proceeding by reason of the fact that such person or such persons testator or intestate is or was a director, officer, employee or agent of the Corporation or serves or served at the request of the Corporation any other enterprise as a director, officer, or employee or agent;
(ii) the term Corporation shall include any predecessor of the Corporation and any constituent corporation (including any constituent of a constituent) absorbed by the Corporation in a consolidation or merger; the term other enterprise shall include any corporation, limited liability company, public limited company, partnership, joint venture, trust, employee benefit plan, fund or other enterprise;
(iii) service at the request of the Corporation shall include service as a director, officer, or employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries provided, however that such request for service is in writing; and action by a person with respect to an employee benefit plan which such person reasonably believes to be in the interest of the participants and beneficiaries of such plan shall be deemed to be action not opposed to the best interests of the Corporation;
(iv) the term Expenses shall include all reasonable out-of-pocket fees, costs and expenses, including without limitation, attorneys fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, ERISA
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excise taxes or penalties assessed on Indemnitee with respect to an employee benefit plan, Federal, state, local or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this by-law, penalties and all other disbursements or expenses of the types customarily incurred in connection with defending, preparing to defend, or investigating an actual or threatened action, suit or proceeding (including Indemnitees counterclaims that directly respond to and negate the affirmative claim made against Indemnitee (Permitted Counterclaims) in such action, suit or proceeding, whether civil, criminal, administrative or investigative, but shall exclude the costs of (x) any of Indemnitees counterclaims, other than Permitted Counterclaims (y) the costs of acquiring and maintaining an appeal or supersedeas bond or similar instrument or (z) the fees and costs of enforcing a right to indemnification or advance payment or reimbursement under this Article VI.
(f) In the event of any payment under this Article VI, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee (under any insurance policy or otherwise), who shall execute all papers required and shall do everything necessary to secure such rights, including the execution of such documents necessary to enable the Corporation to effectively bring suit to enforce such rights.
(g) Except as required by law or as otherwise becomes public, Indemnitee will keep confidential any information that arises in connection with this by-law, including but not limited to, claims for indemnification or the advance payment or reimbursement of Expenses, amounts paid or payable under this Article VI and any communications between the parties.
(h) The indemnification and advancement of Expenses provided in this Article VI shall not be deemed exclusive of any other rights to which any person may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, statute, provision of the Certificate of Incorporation , or otherwise, both as to action in such persons official capacity and as to action in another capacity while holding such official capacity (including, without limitation, rights to indemnification or advancement of Expenses incurred in connection with an action, suit or proceeding commenced by such person to enforce a right to indemnification or advancement, to the extent such person is successful in such action, suit or proceeding).
(h) No amendment of the Certificate of Incorporation or this Article VI shall impair the rights of any Indemnitee arising at any time with respect to events occurring prior to such amendment.
ARTICLE VII
Miscellaneous
Section 7.1. Fiscal Year . The fiscal year of the Corporation shall be determined by the Board of Directors.
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Section 7.2. Seal . The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced.
Section 7.3. Waiver of Notice of Meetings of Stockholders, Directors and Committees . Whenever notice is required to be given by law or under any provision of the amended and restated certificate of incorporation or these By-laws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors or members of a committee of directors need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the amended and restated certificate of incorporation or these By-laws.
Section 7.4. Interested Directors; Quorum . No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction, or solely because such directors or officers votes are counted for such purpose, if: (i) the material facts as to directors or officers relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors are less than a quorum; (ii) the material facts as to directors or officers relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction.
Section 7.5. Exclusive Forum . Unless the Corporation consents in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Corporation to the Corporation or the Corporations stockholders, (iii) any action asserting a claim against the Corporation or any director or officer or other
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employee of the Corporation arising pursuant to any provision of the General Corporation Law of the State of Delaware or the amended and restated certificate of incorporation or these By-laws (in each case, as they may be amended from time to time) or (iv) any action asserting a claim against the Corporation or any director or officer or other employee of the Corporation governed by the internal affairs doctrine shall be a state court located within the State of Delaware (or, if no state court located within the State of Delaware has jurisdiction, the federal district court for the District of Delaware).
Section 7.6. Form of Records . Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or by means of, or be in the form of, any information storage device, or method, provided that the records so kept can be converted into clearly legible paper form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect such records in accordance with law.
Section 7.7. Amendment of By-Laws . These By-laws may be amended or repealed, and new by-laws adopted, by the Board of Directors, but the stockholders entitled to vote may adopt additional by-laws and may amend or repeal any by-law whether or not adopted by them.
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Exhibit 3.3
CERTIFICATE OF DESIGNATIONS
OF
NONCUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A
(Par Value $0.01 Per Share)
OF
BYLINE BANCORP, INC.
BYLINE BANCORP, INC ., a corporation organized and existing under the General Corporation Law of the State of Delaware (the Company), in accordance with the provisions of Sections 103 and 151 thereof, DOES HEREBY CERTIFY :
The board of directors of the Company (the Board of Directors), at a meeting duly called and held on June 6, 2017, adopted the following resolution creating a series of 15,003 shares of Preferred Stock of the Company designated as Noncumulative Perpetual Preferred Stock, Series A.
RESOLVED , that pursuant to the authority vested in the Board of Directors, the provisions of the amended and restated certificate of incorporation and the amended and restated bylaws of the Company and applicable law, a series of Preferred Stock, par value $.01 per share, of the Company be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:
Section 1. Designation and Number of Shares. There is hereby created out of the authorized and unissued shares of preferred stock of the Company a series of preferred stock designated as the Noncumulative Perpetual Preferred Stock, Series A (the Series A Preferred Stock ). The number of shares constituting such series shall be 15,003. The Series A Preferred Stock shall have a par value of $0.01 per share.
Section 2. Ranking . The Series A Preferred Stock shall, with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company, rank junior to all other preferred stock of the Company, including any class or series of preferred stock established after the Effective Date by the Company, unless the terms of such other class or series expressly provide that such class or series will rank on a parity with or junior to the Series A Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company. The Series A Preferred Stock shall rank on a parity with the Companys common stock, $0.01 par value (the Common Stock ) with respect to dividend rights and senior to the Common Stock with respect to rights on liquidation, winding-up and dissolution of the Company.
Section 3. Definitions . Unless the context or use indicates another meaning or intent, the following terms shall have the following meanings, whether used in the singular or the plural:
(a) Board of Directors means the board of directors of the Company.
(b) Business Day means any day other than a Saturday, Sunday or any other day on which banks in the city of Chicago, Illinois are generally required or authorized by law to be closed.
(c) By-laws means the By-laws of the Company as may be amended from time to time.
(d) Certificate of Incorporation means the Amended and Restated Certificate of Incorporation of the Company, as may be amended from time to time.
(e) Common Stock has the meaning set forth in Section 2.
(f) Common Stock Multiplier means, on any relevant date, the number that is equal to the quotient of (x) 1,000 divided by (y) the Multiplier Price.
(g) Company means Byline Bancorp, Inc., a Delaware corporation.
(h) Current Market Price means, as of any Business Day, (i) the average of the last reported sale prices for the shares of Common Stock on a national securities exchange which is the principal trading market for the Common Stock for the twenty (20) Trading Days immediately preceding such date as reported by Bloomberg, or (ii) if no national securities exchange is the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Current Market Price shall be the fair market value of one share of Common Stock as reasonably determined in good faith by (A) the Board of Directors, or (B) at the option of a majority-in-interest of the Holders, by an independent investment bank or financial advisory or accounting firm with recognized standing nationally or in the Chicago metropolitan area in the valuation of businesses similar to the business of the Company, which firm shall be selected in good faith by the Board of Directors.
(i) Distribution means the transfer from the Company to its stockholders of cash, securities or other assets or property, including, without limitation, evidences of indebtedness, shares of capital stock or securities (including, without limitation, any dividend or distribution of (1) shares of capital stock of any class or series, or similar equity interests, of or relating to a subsidiary or other business unit in a spin-off transaction or (2) rights or warrants to purchase shares of Common Stock (other than rights issued pursuant to a shareholders rights plan, a dividend reinvestment plan or other similar plans)), without consideration, whether by way of dividend or otherwise.
(j) Effective Date means the date on which shares of the Series A Preferred Stock are first issued.
(k) Holder means the Person in whose name the shares of the Series A Preferred Stock are registered, which may be treated by the Company as the absolute owner of the shares of Series A Preferred Stock for the purpose of making payment and for all other purposes.
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(l) Liquidation Preference has the meaning set forth in Section 5(a).
(m) Multiplier Price means 11.177, subject to adjustment pursuant to Section 10.
(n) Parity Securities means each class or series of Preferred Stock (other than the Series A Preferred Stock) the terms of which expressly provide that such class or series will rank on parity with the Series A Preferred Stock.
(o) Person has the meaning given to it in Section 3(a)(9) of the Securities Exchange Act of 1934 (the Exchange Act) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.
(p) Preferred Stock means any and all series of preferred stock of the Company, including the Series A Preferred Stock.
(q) Record Date means the date established by the Board of Directors or duly authorized committee of the Board of Directors in accordance with the Certificate of Incorporation, the By-laws and Delaware law.
(r) Regulatory Capital Treatment Event means, with respect to the Series A Preferred Stock, the good faith determination by the Company that, as a result of (i) any amendment to, or change in, the laws or regulations of the United States or any political subdivision of or in the United States that is enacted or becomes effective after the initial issuance of any share of Series A Preferred Stock; (ii) any proposed change in those laws or regulations that is announced after the initial issuance of any share of Series A Preferred Stock; or (iii) any official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after the initial issuance of any share of Series A Preferred Stock, there is more than an insubstantial risk that the Company will not be entitled to treat the full initial issuance price (which is equal to $1,000 per share) of such Series A Preferred Stock then outstanding as Tier 1 Capital (or its equivalent) for purposes of the capital adequacy guidelines of the Board of Governors of the Federal Reserve System (or, as and if applicable, the capital adequacy guidelines or regulations of any successor federal banking agency), as then in effect and applicable, for as long as any such Series A Preferred Stock are outstanding.
(s) Series A Preferred Stock has the meaning set forth in Section 1.
Section 4. Dividends. (a) From and after the Effective Date, Holders shall be entitled to receive, when, as and if declared by the Board of Directors or a duly authorized committee of the Board of Directors, out of the funds legally available therefor, non-cumulative dividends and Distributions in the amount determined as set forth in Section 4(b) and no more.
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(b) From and after the Effective Date, so long as any shares of Series A Preferred Stock are outstanding, the Company shall not declare, pay or set apart for payment any dividend or make any other Distribution on any Common Stock, unless at the time of such dividend or other Distribution the Company simultaneously declares and pays a dividend or makes a Distribution, which dividend or Distribution shall be payable in cash or the same securities or other assets or other property as is paid to holders of Common Stock, on each outstanding share of Series A Preferred Stock in an amount equal to the product of (x) the per share dividend or Distribution paid on one share of Common Stock multiplied by (y) the Common Stock Multiplier.
(c) Each dividend or other Distribution payable pursuant to Section 4(b) will be payable to Holders of record as they appear in the records of the Company on the applicable Record Date, which, with respect to dividends or Distributions payable pursuant to Section 4(b), shall be the same day as the record date for the payment of the corresponding dividends or Distributions to the holders of shares of Common Stock.
(d) If the Board of Directors does not declare a dividend with respect to the Common Stock in respect of any dividend period, the Holders will have no right to receive any dividend for such dividend period, and the Company will have no obligation to pay a dividend for such dividend period, whether or not dividends are declared and paid for any future dividend period with respect to the Series A Preferred Stock, the Common Stock or any other class or series of the Preferred Stock.
Section 5. Liquidation. (a) In the event of any liquidation, dissolution or winding up of the affairs of the Company, whether voluntary or involuntary, the Holders of Series A Preferred Stock will be entitled, before any distribution or payment is made on any date to the holders of the Common Stock or any other stock of the Company ranking junior to Series A Preferred Stock upon liquidation, to receive in full an amount per share equal to the greater of (the Liquidation Preference ) (i) $10 plus an amount equal to any dividends that have been declared on Series A Preferred Stock but not paid and (ii) the amount that a holder of one share of Series A Preferred Stock would be entitled to receive if such share were instead equal to a number of shares of Common Stock equal to the Common Stock Multiplier immediately prior to such liquidation, dissolution or winding up, together with any declared but unpaid dividend prior to such distribution or payment date. If such payment has been made in full to all Holders of shares of Series A Preferred Stock, the Holders of shares of Series A Preferred Stock as such will have no right or claim to any of the remaining assets of the Company.
(b) In the event the assets of the Company available for distribution to stockholders upon any liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary, shall be insufficient to pay in full the amounts payable with respect to all outstanding shares of the Series A Preferred Stock and the corresponding amounts payable on any other class or series of Preferred Stock ranking on a parity with the shares of Series A Preferred Stock, Holders and the holders of any such parity securities shall share ratably in any distribution of assets of the Company in proportion to the full respective liquidating distributions to which they would otherwise be respectively entitled.
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(c) Upon the liquidation, dissolution or winding up of the Company, the Holders of shares of Series A Preferred Stock then outstanding will be entitled to be paid out of assets of the Company available for distribution to its shareholders all amounts to which such Holders are entitled pursuant to Section 5(a) before any payment is made to the holders of Common Stock or any other stock of the Company ranking junior upon liquidation to Series A Preferred Stock.
(d) The Companys consolidation or merger with or into any other entity, the consolidation or merger of any other entity with or into the Company, or the sale of all or substantially all of the Companys property or business or other similar business combination transaction will not constitute its liquidation, dissolution or winding-up.
Section 6. Maturity . The Series A Preferred Stock shall be perpetual unless redeemed in accordance with the Certificate of Incorporation.
Section 7. Redemptions . (a) On July 1, 2018 or on any date thereafter, the Series A Preferred Stock may be redeemed at the Companys option, in whole or in part, at a redemption price equal to the product of (x) the Current Market Price multiplied by (y) the Common Stock Multiplier, plus an amount equal to any dividends that have been declared but not paid up to the redemption date, without accumulation of any undeclared dividends. Notwithstanding the foregoing, the Company may not redeem shares of Series A Preferred Stock without having received the prior approval of the Board of Governors of the Federal Reserve System if then required under capital adequacy guidelines applicable to the Company.
(b) The Series A Preferred Stock may be redeemed at the Companys option in whole, but not in part, upon the occurrence of a Regulatory Capital Treatment Event, at a redemption price equal to the product of (x) the Current Market Price multiplied by (y) the Common Stock Multiplier, plus an amount equal to any dividends that have been declared but not paid up to the redemption date, without accumulation of any undeclared dividends. Notwithstanding the foregoing, the Company may not redeem shares of Series A Preferred Stock without having received the prior approval of the Board of Governors of the Federal Reserve System if then required under capital adequacy guidelines applicable to the Company.
(c) No Sinking Fund . Shares of Series A Preferred Stock are not subject to the operation of a sinking fund.
(d) Holders of Series A Preferred Stock will not have the right to require the redemption or repurchase of the Series A Preferred Stock at any time.
(e) Notice of every redemption by the Company of Series A Preferred Stock shall be given by first class mail, postage prepaid, addressed to the Holders of record of the Series A Preferred Stock to be redeemed at their respective last addresses
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appearing on the books of the Company not less than 30 days and not more than 60 days before the date of redemption. Any notice mailed or otherwise given as provided in this subsection shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice, and failure duly to give such notice by mail, or any defect in such notice or in the mailing or provision thereof, to any Holder of Series A Preferred Stock designated for redemption shall not affect the validity of the proceedings for the redemption of any other shares of Series A Preferred Stock.
Section 8. Voting Rights . (a) Holders will not have any voting rights, including the right to elect any directors, consent rights with respect to the authorization or issuance of any Preferred Stock or Common Stock or other securities of the Company or consent rights with respect to the authorization or issuance of any right convertible or exchangeable for any Preferred Stock or Common Stock or other securities of the Company, except (i) voting rights, if any, required by the General Corporation Law of the State of Delaware, as amended, or other applicable law, and (ii) voting rights, if any, described in this Section 8.
(b) So long as any shares of Series A Preferred Stock are outstanding, the vote or consent of the Holders of a majority of the shares of Series A Preferred Stock at the time outstanding voting as a single class with all other classes and series of Parity Securities having similar voting rights then outstanding, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, will be necessary for effecting or validating, whether or not such approval is required by Delaware law:
(i) any amendment, alteration or repeal (including by means of a merger, consolidation or otherwise) of any provision of the Certificate of Incorporation or the By-laws that would alter or change the rights, preferences or privileges of the Series A Preferred Stock so as to affect them adversely; provided , that any increase in the amount of the authorized Preferred Stock or any securities convertible into Preferred Stock or the creation and issuance, or an increase in the authorized or issued amount, of any series of Preferred Stock or any securities convertible into preferred stock ranking senior to, equally with and/or junior to the Series A Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and/or the distribution of assets upon the Companys liquidation, dissolution or winding-up will not, in and of itself, be deemed to adversely affect the voting powers, preferences or special rights of the Series A Preferred Stock and, notwithstanding any provision of Delaware law, Holders will have no right to vote solely by reason of such an increase, creation or issuance; or
(ii) the consummation of a merger or consolidation of the Company with another entity where (A) the Company is not the surviving corporation in such merger or consolidation and (B) the Series A Preferred Stock is changed in such merger or consolidation into anything other than a class or series of preferred stock of the surviving or resulting corporation, or a corporation controlling such corporation, having voting powers, preferences and special rights that, if such
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change were effected by amendment of the Certificate of Incorporation, would not require a vote of the holders of the Series A Preferred Stock under the preceding paragraph.
No vote or consent of the holders of Series A Preferred Stock shall be required pursuant to clauses (i) or (ii) above if, at or prior to the time when any such vote or consent would otherwise be required pursuant to such clause, all outstanding shares of Series A Preferred Stock shall have been redeemed, or shall have been called for redemption upon proper notice and sufficient funds shall have been set aside for such redemption, in each case pursuant to Section 7 above.
Each holder of Series A Preferred Stock will have one vote per share on any matter on which holders of Series A Preferred Stock are entitled to vote, including any action by written consent.
If an amendment, alteration, repeal, share exchange, reclassification, merger or consolidation described above would adversely affect one or more but not all series of Preferred Stock with like voting rights (including the Series A Preferred Stock for this purpose), then only the series affected and entitled to vote shall vote as a class in lieu of all such series of Preferred Stock.
Section 9. Conversion . Holders of Series A Preferred Stock shall not have any rights to convert such Series A Preferred Stock into shares of any other class of capital stock of the Company.
Section 10. Anti-Dilution Adjustment to Multiplier Price .
(a) Anti-Dilution Adjustments . The Multiplier Price shall be subject to the following adjustments:
(i) Stock Dividends and Distributions . If the Company pays dividends or other distributions on the Common Stock in shares of Common Stock, then the Multiplier Price in effect immediately prior to the ex-date for such dividend or distribution will be multiplied by the following fraction:
OS
|
||||
OS 0 |
Where,
OS = | the sum of the number of shares of Common Stock outstanding immediately prior to the ex-date for such dividend or distribution plus the total number of shares of Common Stock constituting such dividend or distribution. | |
OS 0 = | the number of shares of Common Stock outstanding immediately prior to the opening of business on the ex-date for such dividend or distribution. |
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(ii) Subdivisions, Splits and Combination of the Common Stock . If the Company subdivides, splits, or combines the shares of Common Stock, then the Multiplier Price in effect immediately prior to the ex-date for such dividend or distribution will be multiplied by the following fraction:
OS
|
||||
OS 0 |
Where,
OS = | the number of shares of Common Stock outstanding immediately after the opening of business on the effective date of such share subdivision, split, or combination. | |
OS 0 = | the number of shares of Common Stock outstanding immediately prior to opening of business on the effective date of such share subdivision, split, or combination. |
(iii) Issuance of Stock Purchase Rights . If the Company issues to all holders of shares of Common Stock rights or warrants (other than rights or warrants issued pursuant to a dividend reinvestment plan or share purchase plan or other similar plans) entitling them, for a period of up to 180 days (or any shorter period) from the date of issuance of such rights or warrants, to subscribe for or purchase the shares of Common Stock at less than the Current Market Price on the date fixed for the determination of stockholders entitled to receive such rights or warrants, then the Multiplier Price in effect immediately prior to the ex-date for such distribution will be multiplied by the following fraction:
OS 0 + Y
|
||||
OS 0 + X |
Where,
OS 0 = | the number of shares of Common Stock outstanding immediately prior to the opening of business on the ex-date for such distribution. | |
Y= | the number of shares of Common Stock equal to the aggregate price payable to exercise such rights or warrants divided by the Current Market Price. | |
X= | the total number of shares of Common Stock issuable pursuant to such rights or warrants. |
To the extent that such rights or warrants are not exercised prior to their expiration or shares of Common Stock are otherwise not delivered pursuant to such rights or warrants upon the exercise of such rights or warrants, the Multiplier
8
Price shall be readjusted to such Multiplier Price that would then be in effect had the adjustment made upon the issuance of such rights or warrants been made on the basis of the delivery of only the number of shares of Common Stock actually delivered. In determining the aggregate offering price payable for such shares of Common Stock, the conversion agent will take into account any consideration received for such rights or warrants and the value of such consideration (if other than cash, to be determined by the Board of Directors).
(iv) Debt or Asset Distributions .
(A) If the Company shall distribute to all holders of its Common Stock evidences of its indebtedness, shares of capital stock, securities, cash or other assets (excluding any dividend or distribution referred to in Section 10(a)(i) or Section 10(a)(ii) hereof, any rights or warrants referred to in Section 10(a)(iii) hereof, any dividend or distribution paid exclusively in cash, any consideration payable in connection with a tender or exchange offer made by the Company or any subsidiary of the Company, and any dividend of shares of capital stock of any class or series, or similar equity interests, of or relating to a subsidiary or other business unit in the case of a spin-off referred to in Section 10(a)(iv)(B) below), then the Multiplier Price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution will be multiplied by the following fraction:
SP 0
|
||||
SP 0 FMV |
Where,
SP 0 = | the Current Market Price per share of Common Stock on the date fixed for distribution. | |
FMV = | the fair market value of the portion of the distribution applicable to one share of Common Stock as determined by the Board of Directors. |
(B) In a spin-off, where the Company makes a distribution to all holders of shares of Common Stock consisting of capital stock of, or similar equity interests in, or relating to a subsidiary or other business unit, the Multiplier Price will be adjusted on the fifteenth Trading Day after the ex-date for the distribution by multiplying the Multiplier Price in effect immediately prior to the close of business on the date fixed for the determination of shareholders entitled to receive such distribution by the following fraction:
9
MP 0 + MP s
|
||||
MP 0 |
Where,
MP 0 = | the Current Market Price per share of Common Stock on the fifteenth Trading Day after the ex-date for the distribution. | |
MP s = | the Current Market Price of the shares of the subsidiary representing the portion of distribution applicable to one share of Common Stock on the fifteenth Trading Day after the ex-date for the distribution. |
(v) Self Tender Offers and Exchange Offers . If the Company or any of its subsidiaries successfully complete a tender or exchange offer for Common Stock where the cash and the value of any other consideration included in the payment per share of Common Stock exceeds the Current Market Price per share of Common Stock on the tenth Trading Day after the expiration of the tender or exchange offer, immediately prior to the opening of business on the eleventh Trading Day after the expiration date of the tender or exchange offer, then the Multiplier Price in effect on the eleventh Trading Day after the expiration of the tender or exchange offer will be divided by the following fraction:
(SP 0 x OS 0 ) AC
|
||||
SP 0 x (OS 0 TS) |
Where,
SP 0 = | the Current Market Price per share of Common Stock on the tenth Trading Day after the expiration of the tender or exchange offer. | |
OS 0 = | the number of shares of Common Stock outstanding at the expiration of the tender or exchange offer, including any shares validly tendered and not withdrawn. | |
AC = | the aggregate cash and fair market value of the other consideration payable in the tender or exchange offer, as determined by the Board of Directors. | |
TS = | the number of shares of Common Stock validly tendered and not withdrawn at the expiration of the tender or exchange offer. |
10
(vi) Shareholder Rights Plans . If, following the Effective Date, the Company establishes a rights plan and the rights have separated from the Common Stock, then the Multiplier Price shall be equally and ratably adjusted at the time of the separation, subject to readjustment in the event of the expiration, termination or redemption of such rights.
(b) Adjustment for Tax Reasons . The Company may make such increases in the Multiplier Price, in addition to any other increases required by this Section 10, if the Board of Directors deems it advisable to avoid or diminish any income tax (imposed or to be imposed by any governmental authority) to holders of the Common Stock resulting from any dividend or distribution (or issuance of rights or warrants to acquire shares) or from any event treated as such for income tax purposes or for any other reason.
(c) Calculation of Adjustments .
(i) Adjustments to the Multiplier Price shall be calculated to and rounded to the fourth decimal point. Prior to a redemption date, no adjustment in the Multiplier Price shall be required unless such adjustment would require an increase or decrease of at least 1% therein; provided that any adjustments which by reason of this subparagraph are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided , further , that adjustments to the Multiplier Price will be made on any redemption date with respect to any such adjustment carried forward and which has not been taken into account before such date.
(ii) Notwithstanding anything to contrary contained in this Section 10, to the extent the Holders of Series A Preferred Stock participate in dividends and Distributions declared on shares of Common Stock in accordance with Section 4(b), then no adjustments will be made to the Multiplier Price as a result of any such dividends and Distributions in which the Holders of Series A Preferred Stock participate.
(iii) The Multiplier Price shall not be adjusted:
(A) upon the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on the Companys securities and the investment of additional optional amounts in shares of Common Stock under any plan;
(B) upon the issuance of any shares of Common Stock or rights or warrants to purchase those shares pursuant to any present or future employee, director or consultant benefit plan or program of or assumed by the Company or any of its subsidiaries;
(C) upon the issuance of any shares of the Common Stock pursuant to any option, warrant, right or exercisable, exchangeable or convertible security outstanding as of the date shares of the Preferred Stock were first issued;
11
(D) for a change in the par value or no par value of the Common Stock; or
(E) for accumulated and unpaid dividends.
(d) Whenever the Multiplier Price is to be adjusted in accordance with Section 10(a) or Section 10(b), the Company shall: (i) compute the Multiplier Price in accordance with Section 10(a) or Section 10(b), taking into account the 1% threshold set forth in Section 10(c) hereof; (ii) as soon as practicable following the occurrence of an event that requires an adjustment to the Multiplier Price pursuant to Section 10(a) or Section 10(b), taking into account the 1% threshold set forth in Section 10(c) hereof (or if the Company is not aware of such occurrence, as soon as practicable after becoming so aware), provide, or cause to be provided, a written notice to the Holders of the occurrence of such event; and (iii) as soon as practicable following the determination of the revised Multiplier Price in accordance with Section 10(a) or Section 10(b) hereof, provide, or cause to be provided, a written notice to the Holders setting forth in reasonable detail the method by which the adjustment to the Multiplier Price was determined and setting forth the revised Multiplier Price.
(e) The Company shall have the power to resolve any ambiguity or correct any error in this Section 10 and its action in so doing, as evidenced by a resolution of the Board of Directors, or a duly authorized committee thereof, shall be final and conclusive.
Section 11. Miscellaneous .
(a) All notices or communications in respect of the Series A Preferred Stock shall be sufficiently given if given in writing and delivered in person or by first class mail, postage prepaid, or if given in such other manner as may be permitted in the Certificate of Incorporation or By-laws or by applicable law.
(b) No share of Series A Preferred Stock shall have any rights of preemption whatsoever as to any securities of the Company, or any warrants, rights or options issued or granted with respect thereto, regardless of how such securities, or such warrants, rights or options, may be designated issued or granted.
(c) The shares of Series A Preferred Stock shall not have any voting powers, preferences or relative, participating, optional or other special rights, or qualifications, limitations or restrictions thereof, other than as set forth herein or in the Certificate of Incorporation or as provided by applicable law.
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I N W ITNESS W HEREOF , BYLINE BANCORP, INC. has caused this certificate to be signed by Alberto J. Paracchini, its President and Chief Executive Officer, this 16 th day of June, 2017.
BYLINE BANCORP, INC. |
By |
/s/ Alberto J. Paracchini |
|
Name: Alberto J. Paracchini | ||
Title: President and Chief Executive Officer |
Exhibit 3.4
CERTIFICATE OF DESIGNATIONS
OF
7.50% FIXED-TO-FLOATING NONCUMULATIVE PERPETUAL PREFERRED STOCK, SERIES B
(Par Value $0.01 Per Share)
OF
BYLINE BANCORP, INC.
BYLINE BANCORP, INC ., a corporation organized and existing under the General Corporation Law of the State of Delaware (the Company), in accordance with the provisions of Sections 103 and 151 thereof, DOES HEREBY CERTIFY :
The board of directors of the Company (the Board of Directors), at a meeting duly called and held on June 6, 2017, adopted the following resolution creating a series of 50,000 shares of Preferred Stock of the Company designated as 7.50% Fixed-to-Floating Noncumulative Perpetual Preferred Stock, Series B.
RESOLVED , that pursuant to the authority vested in the Board of Directors, the provisions of the amended and restated certificate of incorporation and the amended and restated bylaws of the Company and applicable law, a series of Preferred Stock, par value $.01 per share, of the Company be and hereby is created, and that the designation and number of shares of such series, and the voting and other powers, preferences and relative, participating, optional or other rights, and the qualifications, limitations and restrictions thereof, of the shares of such series, are as follows:
Section 1. Dividends.
(a) Payment of Dividends . Holders of Series B Preferred Stock shall be entitled to receive, when, as and if authorized and declared by the Board (which shall include any authorized committee thereof), out of funds of the Company legally available therefor, cash dividends based on the liquidation preference of the Series B Preferred Stock of $1,000.00 per share at a rate (the Dividend Rate ) of (i) 7.50% per annum (equivalent to $75.00 per share per annum) for each Dividend Period (as defined below) from the original issue date (the Issue Date ) to, but excluding, December 31, 2021 (the Fixed Rate Period ), and (ii) three-month LIBOR (as defined below) plus 5.41% per annum, for each Dividend Period beginning on or after December 31, 2021 (the Floating Rate Period ). Such cash dividends shall be noncumulative and payable, if authorized and declared, quarterly in arrears on each March 31, June 30, September 30 and December 31, commencing on June 30, 2017 (each such date, a Dividend Payment Date ); provided, however , that (i) if any such Dividend Payment Date before December 31, 2021 is not a day other than a Saturday,
Sunday or day on which banking institutions in New York, New York are authorized or obligated pursuant to legal requirements or executive order to be closed (each such day, a Business Day ), then such date shall nevertheless be a Dividend Payment Date but dividends on the Series B Preferred Stock shall be paid on the next succeeding Business Day (without any adjustment to the amount of the dividend per share of Series B Preferred Stock) and (ii) if any such Dividend Payment Date on or after December 31, 2021 is not a Business Day, then the next succeeding Business Day shall be the applicable Dividend Payment Date relating to such Dividend Period and dividends shall accrue to and be paid on the next succeeding Business Day. A Dividend Period is the period from and including a Dividend Payment Date to, but excluding, the next succeeding Dividend Payment Date, except that the initial Dividend Period will commence on and include March 31, 2017 and continue to but exclude June 30, 2017 (or, for any shares of Series B Preferred Stock issued after the Issue Date, the initial Dividend Period for such shares shall commence on and include the later of the March 31, 2017 and the most recent Dividend Payment Date). Dividends payable on Series B Preferred Stock for the Fixed Rate Period will be computed on the basis of a 360-day year consisting of twelve 30-day months. Dividends payable on the Series B Preferred Stock for the Floating Rate Period will be computed by multiplying the per annum dividend rate in effect for that Floating Rate Period by a fraction, the numerator of which shall be the actual number of days in that Floating Rate Period and the denominator of which shall be 360, and multiplying the rate obtained by $1,000.00 to determine the dividend per share of Series B Preferred Stock. Dollar amounts resulting from dividend calculations will be rounded to the nearest cent, with one-half cent being rounded upwards. Dividends on the Series B Preferred Stock will cease to accrue on the redemption date, if any, with respect to the Series B Preferred Stock, unless the Company defaults in the payment of the redemption price of the Series B Preferred Stock called for redemption. Each authorized and declared dividend shall be payable to holders of record of the Series B Preferred Stock as they appear on the stock books of the Company at the close of business on the 15 th calendar day before such Dividend Payment Date or such other record date, not more than 60 calendar days nor less than 10 calendar days preceding the Dividend Payment Date therefor, as may be determined by the Board (each such date, a Record Date ); provided, however , that if the date fixed for redemption of any of the Series B Preferred Stock occurs after a dividend is authorized and declared but before it is paid, such dividend shall be paid as part of the redemption price to the person to whom the redemption price is paid.
The dividend rate for each Dividend Period during the Floating Rate Period will be determined by the calculation agent using three-month LIBOR (as defined below) as in effect on the second London business day immediately preceding the first day of the Dividend Period, which date is the dividend determination date for the applicable Dividend Period. The calculation agent then will add the spread of 5.41% per annum to the three-month LIBOR rate as determined on the dividend determination date. Absent manifest error, the
calculation agents determination of the dividend rate, and its calculation of the amount of dividends, for a Dividend Period will be binding and conclusive on holders of Series B Preferred Stock, the transfer agent and the Company. A London business day is any day that is a Monday, Tuesday, Wednesday, Thursday or Friday and is a day on which dealings in U.S. dollars are transacted in the London interbank market.
The term three-month LIBOR means the London interbank offered rate for deposits in U.S. dollars having an index maturity of three months in amounts of at least $1,000,000, as that rate appears on Reuters screen page LIBOR01 (or any successor or replacement page) at approximately 11:00 a.m., London time, on the relevant dividend determination date. If no offered rate appears on Reuters screen page LIBOR01 (or any successor or replacement page) on the relevant dividend determination date at approximately 11:00 a.m., London time, then the calculation agent, after consultation with the Corporation, will select four major banks in the London interbank market and will request each of their principal London offices to provide a quotation of the rate at which three-month deposits in U.S. dollars in amounts of at least $1,000,000 are offered by it to prime banks in the London interbank market, on that date and at that time, that is representative of single transactions at that time. If at least two quotations are provided, three-month LIBOR will be the arithmetic average (rounded upward, if necessary, to the nearest .00001 of 1%) of the quotations provided. Otherwise, the calculation agent will select three major banks in New York City and will request each of them to provide a quotation of the rate offered by it at approximately 11:00 a.m., New York City time, on the dividend determination date for loans in U.S. dollars to leading European banks having an index maturity of three months for the applicable Dividend Period in an amount of at least $1,000,000 that is representative of single transactions at that time. If three quotations are provided, three-month LIBOR will be the arithmetic average (rounded upward, if necessary, to the nearest .00001 of 1%) of the quotations provided. Otherwise, the calculation agent, after consulting such sources as it deems comparable to any of the foregoing quotations or display page, or any such source as it deems reasonable from which to estimate three-month LIBOR or any of the foregoing lending rates, shall determine three-month LIBOR for the next Dividend Period in its sole discretion.
Holders of the Series B Preferred Stock shall not be entitled to any interest, or any sum of money in lieu of interest, in respect of any dividend payment or payments on the Series B Preferred Stock authorized and declared by the Board that may be unpaid. Any dividend payment made on the Series B Preferred Stock shall first be credited against the earliest authorized and declared but unpaid cash dividend with respect to the Series B Preferred Stock.
Dividends on the Series B Preferred Stock shall not be declared or set aside for payment if and to the extent such dividends would cause the Company to fail to comply with the capital adequacy guidelines of the Board of Governors of
the Federal Reserve System (or, as and if applicable, the capital adequacy guidelines or regulations of any successor Appropriate Federal Banking Agency (as defined below)) applicable to the Company.
(b) Dividends Noncumulative . The right of holders of Series B Preferred Stock to receive dividends is noncumulative. Accordingly, except as hereinafter expressly provided, if the Board does not authorize or declare a dividend payable in respect of any Dividend Period, holders of Series B Preferred Stock shall have no right to receive a dividend in respect of such Dividend Period and the Company shall have no obligation to pay a dividend in respect of such Dividend Period, whether or not dividends have been or are authorized and declared payable in respect of any prior or subsequent Dividend Period.
(c) Priority as to Dividends; Limitations on Dividends on Junior Stock . If full dividends on the Series B Preferred Stock for any completed Dividend Period shall not have been declared and paid, or declared and a sum sufficient for the payment thereof shall not have been set apart for such payments, no dividends or distributions shall be authorized, declared or paid or set aside for payment (other than as provided in the second paragraph of this Section 1(c)) with respect to the Companys common stock, no par value (the Common Stock ), the Companys Noncumulative Perpetual Preferred Stock, Series A (the Series A Preferred Stock ) or any other classes or series of stock of the now or hereafter authorized, issued or outstanding that by their terms rank junior to the Series B Preferred Stock as to dividends or amounts distributed upon liquidation, dissolution or winding up of the affairs of the Company (together with the Common Stock and Series A Preferred Stock, Junior Stock ), other than (x) dividends payable on Junior Stock in Junior Stock and (y) cash in lieu of fractional shares in connection with any such dividend, nor shall any Junior Stock or any stock ranking on parity with the Series B Preferred Stock as to dividends or amounts upon liquidation, dissolution or winding up of the affairs of the Company ( Parity Stock ) be redeemed, purchased or otherwise acquired for any consideration (or any monies to be paid to or made available for a sinking fund for the redemption of any such stock) by the Company (except (x) by conversion into or exchange for other Junior Stock or (y) by the tendering of Junior Stock in payment for the exercise of stock options under the Companys equity incentive plans then in effect), until such time as dividends on all outstanding Series B Preferred Stock have been authorized, declared and paid, or a sum sufficient for the payment thereof has been set apart for payment, as of the Dividend Payment Date for the current Dividend Period.
When dividends are not paid in full (or a sum sufficient for such full payment is not so set apart) for any Dividend Period on the Series B Preferred Stock, all dividends declared on the Series B Preferred Stock and any other series ranking on a parity as to dividends with the Series B Preferred Stock shall be declared pro rata so that the amount of dividends declared per share on the Series B Preferred Stock and each such other series of capital stock shall in all cases bear
to each other the same ratio that full dividends, for the then current Dividend Period, per share of Series B Preferred Stock (which shall not include any accumulation in respect of unpaid dividends for prior Dividend Periods) and full dividends, including required or permitted accumulations, if any, on the stock of each such other series ranking on a parity as to dividends with the Series B Preferred Stock bear to each other.
(d) Dividend Reference . Any reference to dividends or distributions in this Section 1 shall not be deemed to include any distribution made in connection with any voluntary or involuntary dissolution, liquidation or winding up of the Company.
Section 2. Redemption .
(a) Optional Redemption . Subject to the further terms and conditions provided herein, the Company, at its option, subject to the approval of the appropriate Federal banking agency with respect to the Company (as defined in Section 3(q) of the Federal Deposit Insurance Act or any successor provision) (the Appropriate Federal Banking Agency ), may, upon notice given as provided in Section 2(d), redeem shares of the Series B Preferred Stock at the time outstanding in whole or in part, from time to time, on any Dividend Payment Date on or after the Dividend Payment Date on March 31, 2022, at a cash redemption price equal to the sum of (i) $1,000.00 per share plus (ii) the amount of any declared and unpaid dividends for any prior Dividend Period (the Redemption Price ), without any accumulation for any undeclared dividends.
(b) Regulatory Event Redemption . Notwithstanding Section 2(a), the Company, at its option, subject to the approval of the Appropriate Federal Banking Agency, may redeem all (but not less than all) of the shares of Series B Preferred Stock at the time outstanding, upon notice given as provided in section 2(d), at the Redemption Price at any time within 90 days following the Companys good faith determination that, as a result of (i) any amendment to, or change in, the laws or regulations of the United States or (including, for the avoidance of doubt, any agency or instrumentality of the United States, including the Board of Governors of the Federal Reserve System and other federal bank regulatory agencies) any political subdivision of or in the United States that is enacted or becomes effective after December 28, 2016; (ii) any proposed change in such laws or regulations that is announced after December 28, 2016; or (iii) any official administrative decision or judicial decision or administrative action or other official pronouncement interpreting or applying those laws or regulations that is announced after December 28, 2016, there is more than an insubstantial risk that the Company will not be entitled to treat the full liquidation value of the shares of Series B Preferred Stock then outstanding as Tier 1 Capital (or its equivalent), for purposes of the capital adequacy regulations of the Board of Governors of the Federal Reserve System (or, as and if applicable, the capital adequacy rules or regulations of any successor Appropriate Federal Banking Agency), as then in effect and applicable, for as long as any share of Series B Preferred Stock is outstanding.
(c) Partial Redemption . In the event that fewer than all the outstanding shares of Series B Preferred Stock are to be redeemed, the number of shares of Series B Preferred Stock to be redeemed shall be determined by the Board, and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board.
Unless full dividends on the Series B Preferred Stock have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof has been set apart for payment for the then current Dividend Period, no Series B Preferred Stock shall be redeemed unless all outstanding Series B Preferred Stock are redeemed, and the Company shall not purchase or otherwise acquire any Series B Preferred Stock; provided, however , that the Company may purchase or acquire Series B Preferred Stock pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding Series B Preferred Stock.
(d) Notice of Redemption . A notice by the Company pursuant to this Section 2 shall be sufficiently given if in writing and mailed, first class postage prepaid, to each record holder of Series B Preferred Stock at the holders address as it appears in the records of the Companys transfer agent. In any case where notice is given by mail, neither the failure to mail such notice nor any defect in the notice to any particular holder shall affect the sufficiency of such notice to any other holder. Any notice mailed to a holder in the manner described above shall be deemed given on the date mailed, whether or not the holder actually receives the notice. A notice of redemption shall be given not less than 30 days and not more than 60 days prior to the date of redemption specified in the notice, and shall specify (i) the redemption date, (ii) the number of shares of Series B Preferred Stock to be redeemed, (iii) the Redemption Price and (iv) the manner in which holders of Series B Preferred Stock called for redemption may obtain payment of the Redemption Price in respect of those shares. Notwithstanding anything to the contrary in this paragraph, if the Series B Preferred Stock are issued in book-entry form through The Depositary Trust Company or any other similar facility, notice of redemption may be given to the holders of Series B Preferred Stock at such time and in any manner permitted by such facility.
(e) Effect of Redemption . Any shares of Series B Preferred Stock that are duly called for redemption pursuant to this Section 2 shall be deemed no longer to be outstanding for any purpose from and after that time that the Company shall have irrevocably deposited with the paying agent identified in the notice of redemption funds in an amount equal to the aggregate redemption price. From and after that time, the holders of the Series B Preferred Stock so called for redemption shall have no further rights as shareholders of the Company and in lieu thereof shall have only the right to receive the Redemption Price, without interest.
Series B Preferred Stock redeemed pursuant to this Section 2 or purchased or otherwise acquired for value by the Company shall, after such acquisition, have the status of authorized and unissued shares of Preferred Stock and may be reissued by the Company at any time as shares of any series of Preferred Stock other than as Series B Preferred Stock.
Section 3. Liquidation Rights .
(a) Liquidation Value . In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of the Series B Preferred Stock at the time outstanding will be entitled to be paid out of assets of the Company available for distribution to shareholders, before any distribution of assets is made to holders of Common Stock or any other classes or series of stock of the now or hereafter authorized, issued or outstanding that expressly provide that they are junior to the Series B Preferred Stock as to amounts distributed upon liquidation, dissolution or winding up of the affairs of the Company, liquidating distributions in an amount equal to the sum of (i) $1,000.00 per share plus (ii) the amount of the declared and unpaid dividends thereon from the beginning of the Dividend Period in which the liquidation occurs to the date of liquidation, computed on the basis of the number of days elapsed in the Dividend Period using a 360-day year comprised of twelve 30-day months.
After payment of the full amount of the liquidating distributions to which they are entitled, pursuant to the preceding paragraph, the holders of Series B Preferred Stock will have no right or claim to any of the remaining assets of the Company.
(b) Partial Payment . In the event that, upon any such voluntary or involuntary liquidation, dissolution or winding up, the available assets of the Company are insufficient to pay the amount of the liquidating distributions on all outstanding shares of Series B Preferred Stock and the corresponding amounts payable on all shares of other classes or series of capital stock of the Company ranking on a parity with the Series B Preferred Stock in the distribution of assets upon any liquidation, dissolution or winding up of the affairs of the Company, then the holders of the Series B Preferred Stock and such other classes or series of capital stock ranking on parity with the Series B Preferred Stock shall share ratably in any such distribution of assets in proportion to the full liquidating distributions to which they otherwise respectively would be entitled.
(c) Consolidation, Merger or Sale of Assets not Liquidation . For the purposes of this Section 3, the merger or consolidation of the Company with or into any other entity or by another entity with or into the Company, or the sale, lease, conveyance, exchange or transfer (for cash, shares of stock, securities or
other consideration) of all or substantially all of the property or business of the Company, shall not be deemed to constitute the liquidation, dissolution or winding up of the Company. If the Company enters into any merger or consolidation transaction with or into any other entity and the Company is not the surviving entity in such transaction, the Series B Preferred Stock may be converted into shares of the surviving or successor corporation or the direct or indirect parent of the surviving or successor corporation having terms identical to the terms of the Series B Preferred Stock set forth herein.
Section 4. Voting Rights.
(a) General . Except as expressly provided in this Section 4 and as required by law, holders of Series B Preferred Stock shall have no voting rights. When the holders of Series B Preferred Stock are entitled to vote, each share of Series B Preferred Stock will be entitled to one vote.
(b) Certain Voting Rights . The affirmative vote or consent of the holders of at least two-thirds of the outstanding shares of the Series B Preferred Stock, will be required for the Company to (i) create any class or series of the Companys stock (or right or instrument convertible or exchangeable into such class or series of stock) which shall, as to dividends or distribution of assets, rank prior to the Series B Preferred Stock or (ii) alter or change the provisions of the Companys Certificate of Incorporation (including the terms of the Series B Preferred Stock) or By-laws, including by consolidation or merger, so as to adversely affect the voting powers, preferences or special rights of the holders of the Series B Preferred Stock. Notwithstanding the foregoing, an alteration or change to the provisions of the Companys Certificate of Incorporation or By-laws shall not be deemed to affect the voting powers, preferences or special rights of the holders of the Series B Preferred Stock, provided that: (x) the Series B Preferred Stock remain outstanding with the terms thereof unchanged; or (y) the Series B Preferred Stock are converted in a merger or consolidation transaction into shares of the surviving or successor corporation or the direct or indirect parent of the surviving or successor corporation having terms substantially identical to the terms of the Series B Preferred Stock set forth herein. Additionally, (i) any increase in the amount of the authorized Common Stock or Preferred Stock or the creation or issuance of any other Junior Stock or Parity Stock and (ii) any change to the number of directors or number or classes of directors shall not be deemed to adversely affect the voting powers, preferences or special rights of the holders of the Series B Preferred Stock.
Section 5. Ranking .
(a) Ranking with Respect to Distributions upon Liquidation . With respect to rights upon liquidation, dissolution or winding up of the Company, the Series B Preferred Stock shall rank: (i) senior to the Common Stock and to all other classes or series of stock of the Company now or hereafter authorized, issued or outstanding that do not expressly provide that they rank on a parity with
or senior to the Series B Preferred Stock as to distributions upon liquidation, dissolution or winding up, (ii) on a parity with the Series A Preferred Stock and all other classes or series of Preferred Stock of the Company now or hereafter authorized, issued or outstanding that expressly provide that they will rank on a parity with the Series B Preferred Stock as to distributions upon liquidation, dissolution or winding up, and (iii) junior to (A) all other classes or series of Preferred Stock of the Company now or hereafter authorized, issued or outstanding that expressly provide that they are senior to the Series B Preferred Stock as to distributions upon liquidation, dissolution or winding up and (B) all future series of preferred stock issued by a trust or other subsidiary of the Company.
(b) Ranking with Respect to Dividends . With respect to dividends, the Series B Preferred Stock shall rank: (i) senior to (A) the Common Stock, (B) the Series A Preferred Stock and (C) all other classes or series of stock of the Company now or hereafter authorized, issued or outstanding that do not expressly provide that they rank on a parity with or senior to the Series B Preferred Stock with respect to dividends, (ii) on a parity with all other classes or series of Preferred Stock of the Company now or hereafter authorized, issued or outstanding that expressly provide that they will rank on parity with the Series B Preferred Stock with respect to dividends, and (iii) junior to (A) all other classes or series of Preferred Stock of the Company now or hereafter authorized, issued or outstanding that expressly provide that they are senior to the Series B Preferred Stock with respect to dividends and (B) all future series of preferred stock issued by a trust or other subsidiary of the Company.
Section 6. No Conversion Rights . The holders of Series B Preferred Stock shall not have any rights to convert such shares into shares of any other class or series of stock or into any other securities of, or any interest or property in, the Company.
Section 7. No Sinking Fund . No sinking fund shall be established for the retirement or redemption of Series B Preferred Stock.
Section 8. Preemptive or Subscription Rights . No holder of Series B Preferred Stock of the Company shall, as such holder, have any preemptive right to purchase or subscribe for any additional shares of stock of the Company or any other security of the Company that it may issue or sell.
Section 9. No Other Rights . The Series B Preferred Stock shall not have any other designations, preferences or relative, participating, optional or other special rights except as set forth in the Companys Certificate of Incorporation or as otherwise required by law.
Section 10. Calculation Agent . The Company shall appoint a calculation agent for the Series B Preferred Stock. The Company may, in its sole
discretion, remove the calculation agent in accordance with the agreement between the Company and the calculation agent; provided that the Company shall appoint a successor calculation agent who shall accept such appointment prior to the effectiveness of such removal. The calculation agent may be the Company or a person or entity affiliated with the Company.
Section 11. Compliance with Applicable Law . Declaration by the Board and payment by the Company of dividends to holders of the Series B Preferred Stock and repurchase, redemption or other acquisition by the Company (or another entity as provided in subsection (c) of Section 3 hereof) of Series B Preferred Stock shall be subject in all respects to any and all restrictions and limitations placed on dividends, redemptions or other distributions by the Company (or any such other entity) under (i) laws, regulations and regulatory conditions or limitations applicable to or regarding the Company (or any such other entity) from time to time and (ii) agreements with federal or state banking authorities with respect to the Company (or any such other entity) from time to time in effect.
I N W ITNESS W HEREOF , BYLINE BANCORP, INC. has caused this certificate to be signed by Alberto J. Paracchini, its President and Chief Executive Officer, this 16 th day of June, 2017.
BYLINE BANCORP, INC. |
By |
/s/ Alberto J. Paracchini |
|
Name: Alberto J. Paracchini | ||
Title: President and Chief Executive Officer |
Exhibit 5.1
June 19, 2017
Byline Bancorp, Inc.,
180 North LaSalle Street, Suite 300,
Chicago, Illinois 60601.
Ladies and Gentlemen:
In connection with the registration under the Securities Act of 1933 (the Act) of 6,555,000 shares (the Securities) of Common Stock, par value $0.01 per share, of Byline Bancorp, Inc., a Delaware corporation (the Company), of which up to 4,630,194 shares will be issued and sold by the Company (the Primary Shares) and 1,924,806 shares will be sold by selling stockholders (the Secondary Shares), we, as your counsel, have examined such corporate records, certificates and other documents, and such questions of law, as we have considered necessary or appropriate for the purposes of this opinion. Upon the basis of such examination, it is our opinion that (i) when the registration statement relating to the Primary Shares (the Registration Statement) has become effective under the Act, the terms of the sale of the Primary Shares have been duly established in conformity with the Companys amended and restated certificate of incorporation, and the Primary Shares have been duly issued and sold as contemplated by the Registration Statement, the Primary Shares will be validly issued, fully paid and nonassessable and (ii) the Secondary Shares have been validly issued and are fully paid and nonassessable.
In rendering the foregoing opinion, we are not passing upon, and assume no responsibility for, any disclosure in any registration statement or any related prospectus or other offering material relating to the offer and sale of the Securities.
The foregoing opinion is limited to the Federal laws of the United States and the General Corporation Law of the State of Delaware, and we are expressing no opinion as to the effect of the laws of any other jurisdiction.
We have relied as to certain factual matters on information obtained from public officials, officers of the Company and other sources believed by us to be responsible.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to us under the heading Validity of Common Stock in the Prospectus. In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Act.
Very truly yours, |
/s/ Sullivan & Cromwell LLP |
Exhibit 10.1
REVOLVING CREDIT AGREEMENT
dated as of October 13, 2016
BETWEEN
BYLINE BANCORP, INC., an Illinois corporation
as Borrower,
and
THE PRIVATEBANK AND TRUST COMPANY,
as Lender
Table of Contents
Page | ||||||||
SECTION 1. |
DEFINITIONS |
1 | ||||||
1.1. |
Definitions |
1 | ||||||
1.2. |
Other Interpretive Provisions |
10 | ||||||
SECTION 2. |
COMMITMENT OF LENDER; BORROWING, EVIDENCING OF LOANS |
10 | ||||||
2.1. |
Revolving Loan Commitment |
10 | ||||||
2.2. |
Notice of Borrowing |
10 | ||||||
2.3. |
Note |
11 | ||||||
2.4. |
Recordkeeping |
11 | ||||||
SECTION 3. |
INTEREST |
11 | ||||||
3.1. |
Interest Rate |
11 | ||||||
3.2. |
Default Interest |
11 | ||||||
3.3. |
Interest Payment Dates |
11 | ||||||
3.4. |
Computation of Interest |
11 | ||||||
SECTION 4. |
REDUCTION OR TERMINATION OF THE REVOLVING LOAN COMMITMENT; PREPAYMENTS |
12 | ||||||
4.1. |
Voluntary Reduction or Termination of the Revolving Loan Commitment |
12 | ||||||
4.2. |
Prepayments |
12 | ||||||
4.2.1. |
Voluntary Prepayments |
12 | ||||||
4.2.2. |
Mandatory Prepayments |
12 | ||||||
4.2.3. |
Loan Clean-up |
12 | ||||||
4.3. |
Repayments |
12 | ||||||
4.3.1. |
Revolving Loan |
12 | ||||||
SECTION 5. |
MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES |
12 | ||||||
5.1. |
Making of Payments |
12 | ||||||
5.2. |
Application of Payments |
12 | ||||||
5.3. |
Due Date Extension |
13 | ||||||
5.4. |
Setoff |
13 | ||||||
5.5. |
Taxes |
13 | ||||||
SECTION 6. |
INCREASED COSTS |
14 | ||||||
6.1. |
Increased Costs |
14 | ||||||
6.2. |
Discretion of Lender as to Manner of Funding |
14 | ||||||
6.3. |
Mitigation of Circumstances |
14 | ||||||
6.4. |
Conclusiveness of Statements; Survival of Provisions |
14 | ||||||
SECTION 7. |
REPRESENTATIONS AND WARRANTIES |
15 | ||||||
7.1. |
Organization |
15 | ||||||
7.2. |
Authorization; No Conflict |
15 | ||||||
7.3. |
Validity and Binding Nature |
15 | ||||||
7.4. |
Financial Condition |
15 | ||||||
7.5. |
No Material Adverse Change |
15 | ||||||
7.6. |
Regulatory Enforcement Actions |
15 | ||||||
7.7. |
Litigation and Contingent Liabilities |
15 | ||||||
7.8. |
Ownership of Properties; Liens |
16 | ||||||
7.9. |
Use of Proceeds |
16 | ||||||
7.10. |
Equity Ownership; Stock of Subsidiaries |
16 |
i
Table of Contents (continued)
Page | ||||||||
7.11. |
Pension Plans |
16 | ||||||
7.12. |
Investment Company Act |
17 | ||||||
7.13. |
Compliance with Laws |
17 | ||||||
7.14. |
Regulation U |
17 | ||||||
7.15. |
Taxes |
17 | ||||||
7.16. |
Solvency, etc. |
17 | ||||||
7.17. |
Environmental Matters |
18 | ||||||
7.18. |
Insurance |
18 | ||||||
7.19. |
Information |
18 | ||||||
7.20. |
Intellectual Property |
18 | ||||||
7.21. |
Burdensome Obligations |
18 | ||||||
7.22. |
Labor Matters |
19 | ||||||
7.23. |
Anti-Terrorism Laws |
19 | ||||||
7.24. |
No Default |
19 | ||||||
7.25. |
Hedging Agreements |
19 | ||||||
7.26. |
Subordination |
19 | ||||||
7.27. |
Borrower Information |
20 | ||||||
SECTION 8. |
AFFIRMATIVE COVENANTS |
20 | ||||||
8.1. |
Reports, Certificates and Other Information |
20 | ||||||
8.1.1. |
Annual Report |
20 | ||||||
8.1.2. |
Quarterly Report |
20 | ||||||
8.1.3. |
Interim Reports |
20 | ||||||
8.1.4. |
Regulatory Reports |
20 | ||||||
8.1.5. |
Compliance Certificates |
20 | ||||||
8.1.6. |
Reports to the SEC and to Shareholders |
20 | ||||||
8.1.7. |
Notice of Default, Litigation and ERISA Matters |
21 | ||||||
8.1.8. |
Management Reports |
21 | ||||||
8.1.9. |
Projections |
21 | ||||||
8.1.10. |
Other Debt Notices |
22 | ||||||
8.1.11. |
Other Information |
22 | ||||||
8.2. |
Books, Records and Inspections |
22 | ||||||
8.3. |
Maintenance of Property; Insurance |
22 | ||||||
8.4. |
Compliance with Laws; Payment of Taxes and Liabilities |
23 | ||||||
8.5. |
Maintenance of Existence, etc. |
23 | ||||||
8.6. |
Use of Proceeds |
23 | ||||||
8.7. |
Lenders Fees |
23 | ||||||
8.8. |
Employee Benefit Plans |
23 | ||||||
8.9. |
Environmental Matters |
24 | ||||||
8.10. |
Further Assurances |
24 | ||||||
8.11. |
Changes in Locations, Name, etc. |
24 | ||||||
8.12. |
Acquisitions; Changes in Control |
24 | ||||||
8.13. |
Intentionally Omitted |
25 | ||||||
8.14. |
This Agreement |
25 | ||||||
SECTION 9. |
ADDITIONAL FINANCIAL COVENANTS |
25 | ||||||
9.1. |
Regulatory Capital |
25 | ||||||
9.1.1. |
Total Capital to Risk-Weighted Assets |
25 | ||||||
9.1.2. |
Tier 1 Leverage Capital Ratio |
25 | ||||||
9.1.3. |
Non-performing Loans to Primary Capital |
25 |
ii
Table of Contents (continued)
Page | ||||||||
9.2. |
Quarterly Tests |
25 | ||||||
9.3. |
Minimum Liquidity |
25 | ||||||
9.4. |
External Loan Reviews |
25 | ||||||
SECTION 10. |
NEGATIVE COVENANTS |
25 | ||||||
10.1. |
Debt |
25 | ||||||
10.2. |
Restricted Payments |
26 | ||||||
10.3. |
Distributions |
26 | ||||||
10.4. |
Liens |
26 | ||||||
10.5. |
Mergers, Consolidations, Sales |
27 | ||||||
10.6. |
Modification of Organizational Documents |
27 | ||||||
10.7. |
Transactions with Affiliates |
27 | ||||||
10.8. |
Unsafe and Unsound Practices |
27 | ||||||
10.9. |
Inconsistent Agreements |
27 | ||||||
10.10. |
Business Activities |
27 | ||||||
10.11. |
Investments |
27 | ||||||
10.12. |
Fiscal Year |
28 | ||||||
10.13. |
Cancellation of Debt |
28 | ||||||
10.14. |
Principal / Interest Payments on Trust Preferred Securities (TruPS) |
28 | ||||||
SECTION 11. |
EFFECTIVENESS; CONDITIONS OF LENDING, ETC. |
28 | ||||||
11.1. |
Initial Credit Extension |
28 | ||||||
11.1.1. |
The Loan Documents |
28 | ||||||
11.1.2. |
Pledged Securities |
28 | ||||||
11.1.3. |
Authorization Documents |
28 | ||||||
11.1.4. |
Consents, etc. |
28 | ||||||
11.1.5. |
Letter of Direction |
29 | ||||||
11.1.6. |
Opinion of Counsel |
29 | ||||||
11.1.7. |
Insurance |
29 | ||||||
11.1.8. |
Payment of Fees |
29 | ||||||
11.1.9. |
Search Results; Lien Terminations |
29 | ||||||
11.1.10. |
Closing Certificate, Consents and Permits |
29 | ||||||
11.1.11. |
Other |
29 | ||||||
11.2. |
Conditions |
29 | ||||||
11.2.1. |
Compliance with Warranties, No Default, etc. |
29 | ||||||
11.2.2. |
Confirmatory Certificate |
29 | ||||||
SECTION 12. |
EVENTS OF DEFAULT AND THEIR EFFECT |
30 | ||||||
12.1. |
Events of Default |
30 | ||||||
12.1.1. |
Non-Payment of the Loan, etc. |
30 | ||||||
12.1.2. |
Non-Payment of Other Debt |
30 | ||||||
12.1.3. |
Other Material Obligations |
30 | ||||||
12.1.4. |
Bankruptcy, Insolvency, etc. |
30 | ||||||
12.1.5. |
Troubled Condition |
31 | ||||||
12.1.6. |
Regulatory Enforcement |
31 | ||||||
12.1.7. |
Non-Compliance with Loan Documents |
31 | ||||||
12.1.8. |
Representations; Warranties |
31 | ||||||
12.1.9. |
Pension Plans |
31 | ||||||
12.1.10. |
Judgments |
31 | ||||||
12.1.11. |
Orders |
32 |
iii
Table of Contents (continued)
Page | ||||||||
12.1.12. |
Invalidity of Collateral Documents, etc. |
32 | ||||||
12.1.13. |
Invalidity of Subordination Provisions, etc. |
32 | ||||||
12.1.14. |
Change of Control |
32 | ||||||
12.1.15. |
Material Adverse Effect |
32 | ||||||
12.1.16. |
Mandatory Payments |
32 | ||||||
12.1.17. |
Consummation of Merger and the Bank Merger |
32 | ||||||
12.1.18. |
Delivery of Pledged Stock |
32 | ||||||
12.1.19. |
Consummation of Preferred Stock Offering |
32 | ||||||
12.2. |
Effect of Event of Default |
32 | ||||||
SECTION 13. |
GENERAL |
33 | ||||||
13.1. |
Waiver; Amendments |
33 | ||||||
13.2. |
Confirmations |
33 | ||||||
13.3. |
Notices |
33 | ||||||
13.4. |
Computations |
33 | ||||||
13.5. |
Costs, Expenses and Taxes |
34 | ||||||
13.6. |
Governing Law |
34 | ||||||
13.7. |
Confidentiality |
34 | ||||||
13.8. |
Severability |
35 | ||||||
13.9. |
Nature of Remedies |
35 | ||||||
13.10. |
Entire Agreement |
35 | ||||||
13.11. |
Counterparts |
35 | ||||||
13.12. |
Successors and Assigns |
35 | ||||||
13.13. |
Assignments; Participations |
36 | ||||||
13.13.1. |
Assignments |
36 | ||||||
13.13.2. |
Participations |
36 | ||||||
13.14. |
Captions |
36 | ||||||
13.15. |
Customer Identification - USA Patriot Act Notice |
36 | ||||||
13.16. |
Indemnification by Borrower |
37 | ||||||
13.17. |
Nonliability of Lender |
37 | ||||||
13.18. |
Forum Selection and Consent to Jurisdiction |
37 | ||||||
13.19. |
Waiver of Jury Trial |
38 |
iv
ANNEXES
ANNEX A | Commitment | |
ANNEX B | Addresses for Notices |
SCHEDULES
SCHEDULE 7.7 | Litigation and Contingent Liabilities | |
SCHEDULE 7.27 | Borrower Information | |
SCHEDULE 10.4 | Liens |
EXHIBITS
EXHIBIT B | Form of Revolving Note | |
EXHIBIT C | Form of Pledge and Security Agreement | |
EXHIBIT D | Form of Opinion of Borrowers Counsel | |
EXHIBIT E | Form of Notice of Borrowing | |
EXHIBIT F | Form of Compliance Certificate |
v
REVOLVING CREDIT AGREEMENT
THIS REVOLVING CREDIT AGREEMENT, dated as of October 13, 2016 (this Agreement ), is entered into by and between BYLINE BANCORP, INC., an Illinois corporation, as Borrower ( Borrower ) and THE PRIVATEBANK AND TRUST COMPANY, as Lender ( PrivateBank or Lender ).
R E C I T A L S:
A. Borrower is a bank holding company that owns one hundred percent (100%) of the issued and outstanding capital stock of Byline Bank, an Illinois banking corporation, of Chicago, Illinois ( Byline Bank ), and is acquiring (a) Ridgestone Financial Services, Inc., a Wisconsin corporation ( Ridgestone Financial ), by causing Ridgestone Financial to merge with and into Borrower (the Merger ); and (b) Ridgestone Bank, a Wisconsin banking corporation ( Ridgestone Bank ), by causing Ridgestone Bank to merge with and into Byline Bank (the Bank Merger ), pursuant to the terms and conditions of an Agreement and Plan of Merger, dated as of June 9, 2016, among Borrower and Ridgestone Financial (the Merger Agreement ), all to occur simultaneously on the Closing Date thereof. The banks identified in the immediately preceding sentence may be referred to collectively as the Depository Institution Subsidiaries and individually as a Depository Institution Subsidiary . Byline Bank may also be referred to herein as the Depository Institution Subsidiary .
B. Borrower is internally raising capital through a private placement with personal and institutional investors in order to raise approximately Thirty Million and 00/100ths Dollars ($30,000,000.00) in a preferred stock offering, whereby the Borrower will be issuing noncumulative perpetual preferred stock pursuant to Rule 506 of Regulation D, which stock shall be non-callable for five (5) years, will have a dividend rate per annum, and no minimum investment (the Preferred Stock Offering ).
C. Borrower has requested that Lender provide it with a revolving line-of-credit facility (the Revolving Loans or Loan ) in the principal amount of up to Thirty Million and 00/100ths Dollars ($30,000,000.00) (the Revolving Loan Amount ), subject to permanent reduction to Five Million and 00/100ths Dollars ($5,000,000.00), as further provided and limited herein.
D. The proceeds of the Revolving Loan shall initially be used by Borrower to fund the acquisition of Ridgestone Financial and Ridgestone Bank, in order to bridge the gap between the Merger and Bank Merger and the consummation of Preferred Stock Offering, as further provided and limited herein, and thereafter for general corporate purposes.
E. Lender is willing to lend to Borrower the principal amount of up to $30,000,000.00 under the Loan in accordance with the terms, subject to the conditions and in reliance on the recitals, representations, warranties, covenants and agreements set forth herein and in the other Loan Documents (as defined below).
SECTION 1. | DEFINITIONS |
1.1. Definitions . The following terms shall have the following meanings:
Acquisition means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or a substantial portion of the assets of a Person, or of all or a substantial portion of any business or division of a Person, (b) the acquisition of in excess of 50% of the Capital Securities of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is already a Subsidiary).
Affiliate of any Person means (a) any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person, (b) any officer or director of such Person and (c) with respect to Lender, any entity administered or managed by Lender or an Affiliate or investment advisor thereof and which is engaged in making, purchasing, holding or otherwise investing in commercial loans. A Person shall be deemed to be controlled by any other Person if such Person possesses, directly or indirectly, power to vote 5% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managers or power to direct or cause the direction of the management and policies of such Person whether by contract or otherwise.
Agreement is defined in the recitals to this Agreement.
Anti-Terrorism Laws are defined in Section 7.23(a) .
Anti-Terrorism Order is defined in Section 7.23(a)
Assignee is defined in Section 13.13.1 .
Attorney Costs means, with respect to any Person, all reasonable fees and charges of any counsel to such Person, the reasonable allocable cost of internal legal services of such Person, all reasonable disbursements of such internal counsel and all court costs and similar legal expenses.
Average Total Assets shall have the definition provided in, and shall be determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
Bank Merger is defined in the recitals to this Agreement.
Bank Product Agreements means those certain cash management service agreements entered into from time to time between Borrower or any Depository Institution Subsidiary and Lender or its Affiliates in connection with any of the Bank Products.
Bank Product Obligations means all obligations, liabilities, contingent reimbursement obligations, fees, and expenses owing by Borrower or any Depository Institution Subsidiary to Lender or its Affiliates pursuant to or evidenced by the Bank Product Agreements and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising, and including all such amounts that Borrower or any Depository Institution Subsidiary is obligated to reimburse to Lender as a result of Lender purchasing participations or executing indemnities or reimbursement obligations with respect to the Bank Products provided to Borrower or any Depository Institution Subsidiary pursuant to the Bank Product Agreements.
Bank Products means any service or facility extended to Borrower or any Depository Institution Subsidiary by Lender or its Affiliates, including, without limitation, (a) deposit accounts, (b) cash management services, including, without limitation, controlled disbursement, lockbox, electronic funds transfers (including, without limitation, book transfers, fedwire transfers, ACH transfers), online reporting and other services relating to accounts maintained with Lender or its Affiliates, (c) debit cards and (d) Hedging Agreements.
Borrower is defined in the preamble of this Agreement.
2
BSA is defined in Section 8.4 .
Business Day means any day on which PrivateBank is open for commercial banking business in Chicago, Illinois.
Byline Bank is defined in the recitals to this Agreement.
Call Report means the quarterly report of income and condition filed by any Depository Institution Subsidiary with its primary federal regulator.
Capital Lease means, with respect to any Person, any lease of (or other agreement conveying the right to use) any real or personal property by such Person that, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of such Person.
Capital Securities means, with respect to any Person, all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of such Persons capital, whether now outstanding or issued or acquired after the Closing Date, including common shares, preferred shares, membership interests in a limited liability company, limited or general partnership interests in a partnership, interests in a trust, interests in other unincorporated organizations or any other equivalent of such ownership interest.
Closing Date is defined in Section 11.1 .
Code means the Internal Revenue Code of 1986, as amended or recodified.
Code Provisions are defined in Section 12.1.4(c) .
Collateral means all the property (including all tangible and intangible property) in which the Collateral Documents grant (or purport to grant) Lender a security interest.
Collateral Documents means the Pledge and Security Agreement and such other certificates, documents, and instruments entered into or delivered in connection with or relating to the Collateral, pursuant to which Borrower, any Subsidiary or any other Person grants or purports to grant collateral to Lender or otherwise relates to the Collateral.
Commitment means Lenders commitment to make the Loan under this Agreement. The initial amount of Lenders commitment to make the Loan is set forth on Annex A .
Compliance Certificate means a Compliance Certificate as described in Section 8.1.5 .
Control means the possession, directly or indirectly, of the power to cause the direction of management and/or policies of any Person, whether through the ownership or control of or power to vote twenty five percent (25%) or more of the outstanding securities of such Person, by contract or otherwise.
Controlled Group means all members of a controlled group of corporations, all members of a controlled group of trades or businesses (whether or not incorporated) under common control and all members of an affiliated service group which, together with Borrower or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.
Debt of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all indebtedness evidenced by bonds, debentures, notes or similar instruments, (c) all
3
obligations of such Person as lessee under Capital Leases which have been or should be recorded as liabilities on a balance sheet of such Person in accordance with GAAP, (d) all obligations of such Person to pay the deferred purchase price of property or services (excluding trade accounts payable in the ordinary course of business), (e) all indebtedness secured by a Lien on the property of such Person, whether or not such indebtedness shall have been assumed by such Person; provided, that if such Person has not assumed or otherwise become liable for such indebtedness, such indebtedness shall be measured at the fair market value of such property securing such indebtedness at the time of determination, (f) all obligations, contingent or otherwise, with respect to the face amount of all letters of credit (whether or not drawn), bankers acceptances and similar obligations issued for the account of such Person, (g) all Hedging Obligations of such Person, (h) all contingent liabilities of such Person, (i) all Debt of any partnership of which such Person is a general partner, (j) all non-compete payment obligations, earn-outs and similar obligations, and (k) any Capital Securities or other equity instrument, whether or not mandatorily redeemable, that under GAAP is characterized as debt, whether pursuant to Financial Accounting Standards Board issuance No. 150 or otherwise.
Default means any event that, if it continues uncured, will, with lapse of time or notice or both, constitute an Event of Default.
Default Rate is defined in Section 3.2 .
Depository Institution Subsidiary means any Subsidiary of Borrower that is a depository institution having as its primary federal regulator the FRB, OCC or FDIC.
Dollar and the sign $ mean lawful money of the United States of America.
Environmental Claims means all claims, however asserted, by any governmental, regulatory or judicial authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment.
Environmental Laws means all present or future federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative or judicial orders, consent agreements, directed duties, requests, licenses, authorizations and permits of, and agreements with, any governmental authority, in each case relating to any matter arising out of or relating to public health and safety, or pollution or protection of the environment or workplace, including any of the foregoing relating to the presence, use, production, generation, handling, transport, treatment, storage, disposal, distribution, discharge, emission, release, threatened release, control or cleanup of any Hazardous Substance.
ERISA means the Employee Retirement Income Security Act of 1974, as amended or recodified.
Event of Default means any of the events described in Section 12.1 .
Excluded Taxes means taxes based upon, or measured by, Lenders (or a branch of Lenders) overall net income, overall net receipts, or overall net profits (including franchise taxes imposed in lieu of such taxes), but only to the extent such taxes are imposed by a taxing authority (a) in a jurisdiction in which Lender is organized, (b) in a jurisdiction which Lenders principal office is located, or (c) in a jurisdiction in which Lenders lending office (or branch) in respect of which payments under this Agreement are made is located.
Federal Funds Rate means, for any day, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of
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the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Lender from three Federal funds brokers of recognized standing selected by Lender. Lenders determination of such rate shall be binding and conclusive absent manifest error.
FDI Act means the Federal Deposit Insurance Act, as amended or recodified.
FDIC means the Federal Deposit Insurance Corporation or any successor thereto.
Fiscal Quarter means a fiscal quarter of a Fiscal Year.
Fiscal Year means the fiscal year of Borrower and its Subsidiaries, which period shall be the 12-month period ending on December 31st of each year.
FRB means the Board of Governors of the Federal Reserve System or any successor thereto.
GAAP means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) and the SEC, which are applicable to the circumstances as of the date of determination.
Hazardous Substances means hazardous waste, hazardous substance, pollutant, contaminant, toxic substance, oil, hazardous material, chemical or other substance regulated by any Environmental Law.
Hedging Agreement means any agreement with respect to any swap, collar, cap, future, forward or derivative transaction, whether exchange-traded, over-the-counter or otherwise, including any involving, or settled by reference to, one or more interest rates, currencies, commodities, equity or debt instruments, any economic, financial or pricing index or basis, or any similar transaction, including any option with respect to any of these transactions and any combination of these transactions.
Hedging Obligation means, with respect to any Person, any liability of such Person under any Hedging Agreement, including any and all cancellations, buy backs, reversals, terminations or assignments under any Hedging Agreement.
IDFPR means the Illinois Department of Financial and Professional Regulation, Division of Banking, or any successor thereto.
Intellectual Property means the collective reference to all rights, priorities and privileges relating to intellectual property, whether arising under United States, multinational or foreign laws or otherwise, including copyrights, copyright licenses, patents, patent licenses, trademarks and trademark licenses, and all rights to sue at law or in equity for any infringement or other impairment thereof, including the right to receive all proceeds and damages therefrom.
Lender is defined in the preamble of this Agreement.
Lender Party is defined in Section 13.16 .
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Lien means, with respect to any Person, any interest granted by such Person in any real or personal property, asset or other right owned or being purchased or acquired by such Person (including an interest in respect of a Capital Lease) which secures payment or performance of any obligation and shall include any mortgage, lien, encumbrance, title retention lien, charge or other security interest of any kind, whether arising by contract, as a matter of law, by judicial process or otherwise.
Liquidity means outstanding cash and/or cash equivalents in such account or accounts with financial and/or investment institutions including the Lender.
Loan has the meaning ascribed to such term in the recitals hereto
Loan Documents means those documents and instruments (including, without limitation, all agreements, instruments and documents, including, without limitation, Hedging Agreements, guaranties, mortgages, deeds of trust, pledges, powers of attorney, consents, assignments, contracts, notices and all other written matter heretofore, now and/or from time to time hereafter executed by and/or on behalf of Borrower in connection with this Agreement and the Loan) entered into or delivered in connection with or relating to the Loan, including the Collateral Documents and any other documents listed on the schedule of closing documents prepared in connection with the Loan.
Loan Loss Reserve means the provisions made by any Depository Institution Subsidiary in anticipation of potential loan or lease losses (ALLL) with such provision or allowance having been determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
Margin Stock means any margin stock as defined in Regulation U.
Material Adverse Effect means (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, assets, business, properties or prospects of Borrower and its Subsidiaries taken as a whole, (b) a material impairment of the ability of Borrower to perform any of the Obligations under any Loan Document or (c) a material adverse effect upon any substantial portion of the Collateral under the Collateral Documents or upon the legality, validity, binding effect or enforceability against Borrower of any Loan Document.
Maturity Date means the Revolving Loan Maturity Date as the context may indicate.
Merger is defined in the recitals to this Agreement.
Merger Agreement is defined in the recitals to this Agreement.
Multiemployer Pension Plan means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which Borrower or any other member of the Controlled Group may have any liability.
Net Income shall have the definition provided in, and shall be determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
Non-performing Loans means the sum of non-accrual loans and loans on which any payment is ninety (90) or more days past due but which continue to accrue interest of the Depository Institution Subsidiary.
Note means the Revolving Note.
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Notice of Borrowing is defined in Section 2.2 .
Obligations means all obligations (monetary (including post-petition interest, allowed or not) or otherwise) of Borrower under this Agreement, Note and any other Loan Document including Attorney Costs, all Hedging Obligations permitted hereunder which are owed to Lender or its Affiliates, and all other Bank Product Obligations, all in each case howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due.
OFAC is defined in Section 8.4 .
Participant is defined in Section 13.13.2 .
Patriot Act is defined in Section 13.15 .
PBGC means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA.
Pension Plan means a pension plan, as such term is defined in Section 3(2) of ERISA, which is subject to Title IV of ERISA or the minimum funding standards of ERISA (other than a Multiemployer Pension Plan), and as to which Borrower or any member of the Controlled Group may have any liability, including any liability by reason of having been a substantial employer within the meaning of Section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under Section 4069 of ERISA.
Permitted Lien means a Lien expressly permitted hereunder pursuant to Section 10.4 .
Person means any natural person, corporation, partnership, trust, limited liability company, association, governmental authority or unit, or any other entity, whether acting in an individual, fiduciary or other capacity.
Pledge Agreement means the Pledge and Security Agreement dated as of the Closing Date between Borrower and Lender in the form attached as Exhibit C hereto (as amended, restated, supplemented or modified from time to time), pursuant to which the Pledged Stock is pledged to Lender.
Pledged Stock has the meaning ascribed to such term in the Pledge and Security Agreement.
Preferred Stock Offering is defined in the recitals to this Agreement.
Primary Capital means the sum of Tier 1 Capital plus the Loan Loss Reserve.
Prime Rate means, for any day, the rate of interest in effect for such day as announced from time to time by Lender as its prime rate (whether or not such rate is actually charged by Lender), which is not intended to be Lenders lowest or most favorable rate of interest at any one time. Any change in the Prime Rate announced by Lender shall take effect at the opening of business on the day specified in the public announcement of such change; provided , that Lender shall not be obligated to give notice of any change in the Prime Rate.
PrivateBank is defined in the preamble of this Agreement.
Regulation D means Regulation D of the FRB.
Regulation U means Regulation U of the FRB.
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Reportable Event means a reportable event as defined in Section 4043 of ERISA and the regulations issued thereunder as to which the PBGC has not waived the notification requirement of Section 4043(a), or the failure of a Pension Plan to meet the minimum funding standards of Section 412 of the Code (without regard to whether the Pension Plan is a plan described in Section 4021(a)(2) of ERISA) or under Section 302 of ERISA.
Return on Assets means Net Income divided by Average Total Assets.
Revolving Loan is defined in the recitals to this Agreement.
Revolving Loan Amount is defined in the recitals to this Agreement.
Revolving Loan Commitment means Thirty Million and 00/100ths Dollars ($30,000,000.00), as shall or may be reduced from time to time pursuant to Section 4.1 and Section 4.2 hereto.
Revolving Loan Maturity Date means the earlier to occur of October 12, 2017 or the Termination Date.
Revolving Note means a promissory note in the form attached as Exhibit A hereto in the principal amount of the Revolving Loan Commitment, as amended, restated, supplemented or modified from time to time and each note delivered in substitution or exchange for such note.
Revolving Outstandings means, at any time, the sum of the aggregate principal amount of all outstanding Revolving Loans.
Ridgestone Bank is defined in the Recitals to this Agreement.
Ridgestone Financial is defined in the Recitals to this Agreement.
Risk-Weighted Assets shall have the definition provided in, and shall be determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
SEC means the Securities and Exchange Commission or any other governmental agency with authority to regulate securities activities or any successors thereto.
Senior Debt means all Debt of Borrower and its Subsidiaries outstanding as of the date hereof except for Subordinated Debt outstanding as of the date hereof.
Senior Officer means, with respect to Borrower or any Subsidiary, any of the chief executive officer, the chief financial officer, the chief operating officer or the treasurer of such Person.
Subordinated Debt is defined in Section 7.26 .
Subordinated Debt Documents means all documents and instruments relating to the Subordinated Debt and all amendments and modifications thereof approved by Lender.
Subsidiary means, with respect to any Person, a corporation, partnership, limited liability company or other entity of which such Person owns, directly or indirectly, such number of outstanding Capital Securities as have more than 50% of the ordinary voting power for the election of directors or other managers of such corporation, partnership, limited liability company or other entity. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of Borrower and shall include any Depository Institution Subsidiary.
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Taxes means any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings, and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing, but excluding Excluded Taxes.
Termination Date means the date on which the Commitment terminates as provided in Section 12.2 .
Termination Event means, with respect to a Pension Plan that is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of Borrower or any other member of the Controlled Group from such Pension Plan during a plan year in which Borrower or any other member of the Controlled Group was a substantial employer as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) the termination of such Pension Plan, the filing of a notice of intent to terminate the Pension Plan or the treatment of an amendment of such Pension Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Pension Plan or (e) any event or condition that might constitute grounds under Section 4042 of ERISA for the termination of, or appointment of a trustee to administer, such Pension Plan.
Tier 1 Capital shall have the definition provided in, and shall be determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
Total Capital shall have the definition provided in, and shall be determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
Total Liabilities shall have the definition provided in, and shall be determined in accordance with, the rules, regulations, guidance and instructions of the FRB, FDIC or other primary federal regulator.
Total Loans means the total loans reported on the Depository Institution Subsidiarys Call Report less the Loan Loss Reserve.
Total Plan Liability means, at any time, the present value of all vested and unvested accrued benefits under all Pension Plans, determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.
Trust Preferred Securities (TruPS ) means the cumulative preferred stock issued by Borrower as defined in accordance with the definition provided in, and to be determined in accordance with, the rules and regulations of the FRB.
UCC means the Uniform Commercial Code as in effect on the date hereof and from time to time in the State of Illinois; provided , that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interests in any Collateral or the availability of any remedy hereunder is governed by the Uniform Commercial Code as in effect on or after the date hereof in any other jurisdiction, UCC means the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection or availability of such remedy.
Unfunded Liability means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Pension Plans exceeds the fair market value of all assets allocable to those benefits, all determined as of the then most recent valuation date for each Pension Plan, using PBGC actuarial assumptions for single employer plan terminations.
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WDFI means the Wisconsin Department of Financial Institutions or any successor thereto.
Wholly-Owned Subsidiary means, as to any Person, a Subsidiary all of the Capital Securities of which (except directors qualifying Capital Securities) are at the time directly or indirectly owned by such Person and/or another Wholly-Owned Subsidiary of such Person.
1.2. Other Interpretive Provisions .
(a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.
(b) Section, Annex, Schedule and Exhibit references are to this Agreement unless otherwise specified.
(c) The term including is not limiting and means including without limitation.
(d) In the computation of periods of time from a specified date to a later specified date, the word from means from and including; the words to and until each mean to but excluding, and the word through means to and including.
(e) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement and the other Loan Documents) and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements and other modifications thereto, but only to the extent such amendments, restatements, supplements and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation shall be construed as including all statutory and regulatory provisions amending, replacing, supplementing or interpreting such statute or regulation.
(f) This Agreement and the other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and each shall be performed in accordance with its terms.
(g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to Lender, Borrower and the other parties thereto and are the products of all parties. Accordingly, they shall not be construed against Lender merely because of Lenders involvement in their preparation.
SECTION 2. | COMMITMENT OF LENDER; BORROWING, EVIDENCING OF LOANS |
2.1. Revolving Loan Commitment . Except as such Revolving Loan Commitment may or shall be reduced pursuant to Section 4.1 and Section 4.2 hereto, on and subject to the terms and conditions of this Agreement, Lender agrees to make the Revolving Loans to Borrower on a revolving basis up to a maximum aggregate principal amount of Thirty Million and 00/100ths Dollars ($30,000,000.00) (to be permanently reduced to Five Million and 00/100ths Dollars as provided in Section 4.2 herein) from time to time until the Revolving Loan Maturity Date as Borrower may request from Lender; provided , further , that after giving effect to such Revolving Loans, the Revolving Outstandings will not at any time exceed the Revolving Loan Commitment.
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2.2. Notice of Borrowing . Borrower shall give written notice (each such written notice, a Notice of Borrowing ) substantially in the form of Exhibit E or telephonic notice (followed immediately by a Notice of Borrowing) to Lender not later than 11:00 A.M., Chicago time, at least one (1) Business Day prior to the proposed date of any Revolving Loan. Such notice shall be effective upon receipt by Lender, shall be irrevocable, and shall specify the date and amount of borrowing. Each borrowing shall be on a Business Day. Each borrowing shall be in an aggregate amount of at least $100,000 and an integral multiple of at least $50,000. Notwithstanding the foregoing, Lender may, in its sole discretion, process an advance against the Revolving Loan Commitment on the same Business Day provided that Borrower shall have provided Lender with a Notice of Borrowing not later than 11:00 A.M., Chicago time on such day.
2.3. Note . The Loan shall be evidenced by the Revolving Note, with appropriate insertions, payable to the order of Lender.
2.4. Recordkeeping . Lender shall record in its records, the date and amount of the Revolving Loans made by Lender and each repayment. The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Revolving Loans owing and unpaid. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the Obligations of Borrower hereunder or under any Note to repay the principal amount of the Loan hereunder, together with all interest accruing thereon.
SECTION 3. | INTEREST |
3.1. Interest Rate . Lender agrees to extend the Revolving Loan to Borrower in accordance with the terms of, and subject to the conditions set forth in, this Agreement, the Revolving Note and the other Loan Documents. Borrower promises to pay interest on the unpaid principal amount of the Loan for the period commencing on the date of such Loan until such Loan is paid in full. All sums advanced and outstanding from time to time under any Revolving Loan shall bear interest per annum at a rate equal to the Prime Rate, floating . The unpaid principal balance plus all accrued but unpaid interest on the Revolving Loan shall be due and payable on the Revolving Loan Maturity Date in accordance with the terms of the Revolving Note and this Agreement.
3.2. Default Interest . Notwithstanding the rates of interest specified above, at any time an Event of Default exists, at Lenders election, the interest rate per annum applicable to the Loan shall be increased by five percent (5%) (the Default Rate ). Notwithstanding the foregoing, upon the occurrence and continuance of an Event of Default under Sections 12.1.1 or 12.1.4 , such increase shall occur automatically. In no event shall interest payable by Borrower to Lender hereunder exceed the maximum rate permitted under applicable law, and if any such provision of this Agreement is in contravention of any such law, such provision shall be deemed modified to limit such interest to the maximum rate permitted under such law.
3.3. Interest Payment Dates . Accrued interest on the Loan shall be payable on the first day each calendar quarter (commencing on January 1, 2017), upon a prepayment of such Loan, and at maturity. After maturity, and at any time an Event of Default exists, accrued interest on the Loan shall be payable on demand.
3.4. Computation of Interest . Interest shall be computed for the actual number of days elapsed on the basis of a year of 360 days for interest calculated at the Prime Rate. The applicable rate for the Loan shall change simultaneously with each change in the Prime Rate.
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SECTION 4. | REDUCTION OR TERMINATION OF THE REVOLVING LOAN COMMITMENT; PREPAYMENTS |
4.1. Voluntary Reduction or Termination of the Revolving Loan Commitment . Borrower may from time to time on at least five (5) Business Days prior written notice received by Lender permanently reduce the Revolving Loan Commitment to an amount not less than the Revolving Outstandings. Any such reduction shall be in an amount not less than $500,000 or a higher integral multiple of $100,000. Concurrently with any reduction of the Revolving Loan Commitment to zero, Borrower shall pay all interest on the Revolving Loans.
4.2. Prepayments .
4.2.1. Voluntary Prepayments . Borrower may from time to time prepay the Revolving Loan in whole or in part; provided , that Borrower shall give Lender notice thereof not later than 11:00 A.M., Chicago time, on the day of such prepayment (which shall be a Business Day), specifying the date and amount of prepayment. Any such partial prepayment shall be in an amount equal to $100,000 or a higher integral multiple of $50,000.
4.2.2. Mandatory Prepayments . Borrower shall apply one hundred percent (100%) of the net proceeds of (a) any sales or issuance of equity securities by Borrower (except with respect to the Preferred Stock Offering, the Borrower shall apply up to the first $30,000,000.00 received from the consummation of the Preferred Stock Offering) ; and (b) any sales or issuance of debt securities by Borrower; and (c) any sale or disposition of any assets outside the normal course, to repay the outstanding Loan. In addition, the Revolving Loan Commitment shall be permanently reduced to Five Million and 00/100ths Dollars ($5,000,000.00) upon the earlier to occur of April 13, 2017 or the consummation of the Preferred Stock Offering. Upon such date, the Revolving Loan Commitment shall be a maximum of $5,000,000.00 and any Revolving Outstandings in excess of that amount shall be paid off.
4.2.3. Loan Clean-up . In addition to all other requirements and covenants, upon the earlier to occur of April 13, 2017 or the consummation of the Preferred Stock Offering, the Revolving Loans shall be subject to a minimum clean up of thirty (30) consecutive days from and after that date, during which period the Revolving Outstandings shall be paid to a zero balance, and failure to do so shall be an event of default hereunder.
4.3. Repayments .
4.3.1. Revolving Loan . The Revolving Loans, including all outstanding principal and accrued interest, shall be indefeasibly paid in full and the Revolving Loan Commitment shall terminate on the Revolving Loan Maturity Date.
SECTION 5. | MAKING AND PRORATION OF PAYMENTS; SETOFF; TAXES |
5.1. Making of Payments . All payments of principal or interest on the Note, and of all fees, shall be made by Borrower to Lender, without condition or reservation of right and free of set-off or counterclaim, in U.S. Dollars of immediately available funds at the office specified by Lender not later than noon, Chicago time, on the date due; and funds received after that hour shall be deemed to have been received by Lender on the following Business Day. All payments under Section 6.1 shall be made by Borrower directly to Lender without setoff, counterclaim or other defense.
5.2. Application of Payments . So long as no Default or Event of Default has occurred and is continuing, payments matching specific scheduled payments then due shall be applied to
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those scheduled payments. After the occurrence and during the continuance of a Default or Event of Default, all amounts collected or received by Lender as proceeds from the sale of, or other realization upon, all or any part of the Collateral or as payments from Borrower shall be applied first, to the payment of expenses incurred by Lender in connection with the Collateral, including reasonable attorneys fees and expenses pursuant to Section 13.5 , second, to the payment of any other fees and other amounts then owing by Borrower to the Lender pursuant to this Agreement, third, to the payment of the Obligations, and fourth, to the payment of the Borrower, or its respective successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining.
5.3. Due Date Extension . If any payment of principal or interest with respect to the Loan, or of any fees, falls due on a day which is not a Business Day, then such due date shall be extended to the immediately following Business Day and, in the case of principal, additional interest shall accrue and be payable for the period of any such extension.
5.4. Setoff . Borrower agrees that Lender has all rights of set-off and bankers lien provided by applicable law, and in addition thereto, Borrower agrees that at any time any Event of Default exists, Lender may apply to the payment of any Obligations of Borrower, whether or not then due, any and all balances, credits, deposits, accounts or moneys of Borrower with Lender.
5.5. Taxes .
(a) All payments made by Borrower hereunder or under any Loan Documents shall be made without setoff, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any person shall be made by Borrower free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.
(b) If Borrower makes any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Taxes, Borrower shall increase the payment hereunder or under any such Loan Document such that after the reduction for the amount of Taxes withheld (and any taxes withheld or imposed with respect to the additional payments required under this Section 5.5(b) ), the amount paid to Lender equals the amount that was payable hereunder or under any such Loan Document without regard to this Section 5.5(b) . To the extent Borrower withholds any Taxes on payments hereunder or under any Loan Document, Borrower shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to Lender within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to Lender) evidencing the payment of all amounts so required to be deducted or withheld from such payment.
(c) If Lender is required by law to make any payments of any Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Tax is assessed against Lender with respect to amounts received or receivable hereunder or under any other Loan Document, Borrower will indemnify such person against (i) such Tax (and any Attorney Cost associated with such Tax) and (ii) any taxes imposed as a result of the receipt of the payment under this Section 5.5(c) . A certificate prepared in good faith as to the amount of such payment by Lender shall, absent manifest error, be final, conclusive, and binding on all parties.
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SECTION 6. | INCREASED COSTS |
6.1. Increased Costs .
(a) If, after the date hereof, the adoption of, or any change in, any applicable law, rule or regulation, or any change in the interpretation or administration of any applicable law, rule or regulation by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by Lender with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency: (i) shall impose, modify or deem applicable any reserve (including any reserve imposed by the FRB), special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by Lender; or (ii) shall impose on Lender any other condition affecting the Note; and the result of anything described in clauses (i) and (ii) above is to increase the cost to (or to impose a cost on) Lender of making or maintaining the Loan, or to reduce the amount of any sum received or receivable by Lender under this Agreement or under the Note with respect thereto, then upon demand by Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), Borrower shall pay directly to Lender such additional amount as will compensate Lender for such increased cost or such reduction.
(b) If Lender shall reasonably determine that any change in, or the adoption or phase-in of, any applicable law, rule or regulation regarding capital adequacy, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or the compliance by Lender or any Person controlling Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on Lenders or such controlling Persons capital as a consequence of Lenders obligations hereunder to a level below that which Lender or such controlling Person could have achieved but for such change, adoption, phase-in or compliance (taking into consideration Lenders or such controlling Persons policies with respect to capital adequacy) by an amount deemed by Lender or such controlling Person to be material, then from time to time, upon demand by Lender (which demand shall be accompanied by a statement setting forth the basis for such demand and a calculation of the amount thereof in reasonable detail), Borrower shall pay to Lender such additional amount as will compensate Lender or such controlling Person for such reduction.
6.2. Discretion of Lender as to Manner of Funding . Notwithstanding any provision of this Agreement to the contrary, Lender shall be entitled to fund and maintain its funding of the Loan in any manner it sees fit.
6.3. Mitigation of Circumstances . Lender shall promptly notify Borrower of any event of which it has knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in Lenders sole judgment, otherwise disadvantageous to Lender) to mitigate or avoid any obligation by Borrower to pay any amount pursuant to Sections 5.5 or 6.1 (and, if Lender has given notice of any such event described above and thereafter such event ceases to exist, Lender shall promptly so notify Borrower).
6.4. Conclusiveness of Statements; Survival of Provisions . Determinations and statements of Lender pursuant to Sections 6.1 shall be conclusive absent demonstrable error. Lender may use reasonable averaging and attribution methods in determining compensation under Sections 6.1, and the provisions of such Sections shall survive repayment of the Obligations, cancellation of the Note and the termination of this Agreement.
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SECTION 7. | REPRESENTATIONS AND WARRANTIES |
To induce Lender to enter into this Agreement and to induce Lender to make the Loan hereunder, Borrower represents and warrants to Lender that:
7.1. Organization . Each of Borrower and its Subsidiaries is validly existing and in good standing under the laws of its jurisdiction of organization; and each of Borrower and its Subsidiaries is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.
7.2. Authorization; No Conflict . Borrower is duly authorized to execute and deliver each Loan Document to which it is a party; Borrower is duly authorized to borrow monies hereunder; and Borrower is duly authorized to perform its Obligations under each Loan Document to which it is a party. The execution, delivery and performance by Borrower of each Loan Document to which it is a party, and the borrowings by Borrower hereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws or other organizational documents of Borrower or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon Borrower or any of its properties or (c) require, or result in, the creation or imposition of any Lien on any asset of Borrower (other than Liens in favor of Lender created pursuant to the Collateral Documents).
7.3. Validity and Binding Nature . Each of this Agreement and each other Loan Document to which Borrower is a party is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors rights generally and to general principles of equity.
7.4. Financial Condition . The audited consolidated financial statements of Borrower and its Subsidiaries as at December 31, 2015, copies of which have been delivered to Lender, and the unaudited consolidated financial statements of Borrower and its Subsidiaries as at June 30, 2016, copies of which have been delivered to Lender, have been prepared in accordance with GAAP and present fairly in all material respects the consolidated financial condition of Borrower and its Subsidiaries as at such dates and the results of their operations for the periods then ended.
7.5. No Material Adverse Change . Since June 30, 2016, there has been no material adverse change in the financial condition, operations, assets, business, properties or prospects of Borrower and its Subsidiaries taken as a whole.
7.6. Regulatory Enforcement Actions . Except as previously discussed or disclosed in due diligence prior to the Closing Date, neither Borrower nor any of its Subsidiaries, nor any of the officers or directors or any of them, is now operating under any restrictions, agreements, memoranda, or commitments (other than restrictions of general application), including any restrictions on dividends from Subsidiary to Borrower, imposed by any governmental agency, nor are any such restrictions to the knowledge of Borrower threatened or agreements, memoranda or commitments being sought by any governmental agency.
7.7. Litigation and Contingent Liabilities . No litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is pending or, to Borrowers knowledge, threatened against either Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect, except as set forth in Schedule 7.7 . Other than any liability incident to such litigation or proceedings, neither Borrower nor any Subsidiary has any material contingent liabilities not listed on Schedule 7.7 .
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7.8. Ownership of Properties; Liens . Borrower and each Subsidiary owns good and, in the case of real property, marketable title to all of its properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights), free and clear of all Liens, charges and claims (including infringement claims with respect to patents, trademarks, service marks, copyrights and the like) except as permitted by Section 10.4 . No financing statement or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except filings evidencing Permitted Liens and filings for which termination statements have been delivered to Lender.
7.9. Use of Proceeds . Borrower intends to use the proceeds of the Loan initially to fund the acquisition of Ridgestone Financial and Ridgestone Bank, in order to bridge the gap between the Merger and Bank Merger and the consummation of Preferred Stock Offering, as further provided and limited herein, and thereafter for general corporate purposes. In addition, all acquisitions must comply with all financial covenants herein on a pro-forma basis and Borrower must obtain all necessary regulatory approvals to comply with this provision. If any of the proceeds of the Loan are intended to be used for any other purpose, Borrower must first obtain Lenders written consent.
7.10. Equity Ownership; Stock of Subsidiaries . Byline Bank has one Fifty Thousand (50,000) shares of authorized common stock, $10.00 par value, all of which shares are issued and outstanding. Borrower owns directly or indirectly all of the issued and outstanding capital stock of its Subsidiaries free and clear of any claim, lien or other encumbrance, except for the security interests granted to Lender pursuant to the Pledge Agreement. As of the Closing Date, there are no pre-emptive or other outstanding rights, options, warrants, conversion rights or other similar agreements or understandings for the purchase or acquisition of any Capital Securities of either Borrower or any Subsidiary. As of the Closing Date, Borrower does not have any Subsidiaries other than Byline Bank.
7.11. Pension Plans .
(a) The Unfunded Liability of all Pension Plans does not in the aggregate exceed twenty percent (20%) of the Total Plan Liability for all such Pension Plans. Each Pension Plan complies in all material respects with all applicable requirements of law and regulations. No contribution failure under Section 412 of the Code, Section 302 of ERISA or the terms of any Pension Plan has occurred with respect to any Pension Plan, sufficient to give rise to a Lien under Section 302(f) of ERISA, or otherwise to have a Material Adverse Effect. There are no pending or, to the knowledge of Borrower, threatened, claims, actions, investigations or lawsuits against any Pension Plan, any fiduciary of any Pension Plan, or Borrower or other any member of the Controlled Group with respect to a Pension Plan or a Multiemployer Pension Plan which could reasonably be expected to have a Material Adverse Effect. Neither Borrower nor any other member of the Controlled Group has engaged in any prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Pension Plan or Multiemployer Pension Plan which would subject that Person to any material liability. Within the past five years, neither Borrower nor any other member of the Controlled Group has engaged in a transaction which resulted in a Pension Plan with an Unfunded Liability being transferred out of the Controlled Group, which could reasonably be expected to have a Material Adverse Effect. No Termination Event has occurred or is reasonably expected to occur with respect to any Pension Plan, which could reasonably be expected to have a Material Adverse Effect.
(b) All contributions (if any) have been made to any Multiemployer Pension Plan that are required to be made by Borrower or any other member of the Controlled Group under the terms of the
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plan or of any collective bargaining agreement or by applicable law; neither Borrower nor any other member of the Controlled Group has withdrawn or partially withdrawn from any Multiemployer Pension Plan, incurred any withdrawal liability with respect to any such plan or received notice of any claim or demand for withdrawal liability or partial withdrawal liability from any such plan, and no condition has occurred which, if continued, could result in a withdrawal or partial withdrawal from any such plan; and neither Borrower nor any other member of the Controlled Group has received any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of any excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent.
7.12. Investment Company Act . Neither Borrower nor any of its Subsidiaries is an investment company or a company controlled by an investment company or a subsidiary of an investment company, within the meaning of the Investment Company Act of 1940.
7.13. Compliance with Laws . Borrower and each of its Subsidiaries is in compliance in all material respects with the requirements of all laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
7.14. Regulation U . Neither Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.
7.15. Taxes . Borrower and each of its Subsidiaries has timely filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges due and payable with respect to such return, except any such taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. Borrower and each its Subsidiaries have made adequate reserves on their books and records in accordance with GAAP for all taxes that have accrued but which are not yet due and payable. Neither Borrower nor any of its Subsidiaries has participated in any transaction that relates to a year of the taxpayer (which is still open under the applicable statute of limitations) which is a reportable transaction within the meaning of Treasury Regulation Section 1.6011-4(b)(2) (irrespective of the date when the transaction was entered into).
7.16. Solvency, etc . On the Closing Date, and immediately prior to and after giving effect to each borrowing hereunder and the use of the proceeds thereof, (a) the fair value of Borrower and its Subsidiaries assets on a consolidated basis is greater than the amount of its liabilities (including disputed, contingent and unliquidated liabilities) on a consolidated basis as such value is established and liabilities evaluated in accordance with GAAP, (b) the present fair saleable value of Borrower and its Subsidiaries assets on a consolidated basis is not less than the amount that will be required to pay the probable liability on its debts on a consolidated basis as they become absolute and matured, (c) Borrower and its Subsidiaries are able to realize upon their assets and pay their debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business, (d) they do not intend to, and do not believe they will, incur debts or liabilities on a consolidated basis beyond their ability to pay as such debts and liabilities mature and (e) they are not engaged in business or a transaction, and are not about to engage in business or a transaction, for which their property would constitute unreasonably small capital.
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7.17. Environmental Matters . The on-going operations of Borrower and each of its Subsidiaries comply in all respects with all Environmental Laws, except such non-compliance which could not (if enforced in accordance with applicable law) reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. Borrower and each of its Subsidiaries has obtained, and maintained in good standing, all licenses, permits, authorizations, registrations and other approvals required under any Environmental Law and required for their respective ordinary course operations, and for their reasonably anticipated future operations, and each of Borrower and each of its Subsidiaries is in compliance with all terms and conditions thereof, except where the failure to do so could not reasonably be expected to result in material liability to Borrower or any of its Subsidiaries and could not reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. Neither Borrower nor any of its Subsidiaries nor any of their properties or operations is subject to, or reasonably anticipates the issuance of, any written order from or agreement with any Federal, state or local governmental authority, nor subject to any judicial or docketed administrative or other proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Substance. There are no Hazardous Substances or other conditions or circumstances existing with respect to any property, arising from operations prior to the Closing Date, or relating to any waste disposal, that would reasonably be expected to result, either individually or in the aggregate, in a Material Adverse Effect. Neither Borrower nor any of its Subsidiaries has any underground storage tanks that are not properly registered or permitted under applicable Environmental Laws or that at any time have released, leaked, disposed of or otherwise discharged Hazardous Substances.
7.18. Insurance . Borrower and each of its Subsidiaries and their properties are insured with financially sound and reputable insurance companies which are not Affiliates, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where Borrower and its Subsidiaries operate.
7.19. Information . All information heretofore or contemporaneously herewith furnished in writing by Borrower to Lender for purposes of or in connection with this Agreement and the transactions contemplated hereby is, and all written information hereafter furnished by or on behalf of Borrower to Lender pursuant hereto or in connection herewith will be, true and accurate in every material respect on the date as of which such information is dated or certified, and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading in light of the circumstances under which made (it being recognized by Lender that any projections and forecasts provided by Borrower are based on good faith estimates and assumptions believed by Borrower to be reasonable as of the date of the applicable projections or assumptions and that actual results during the period or periods covered by any such projections and forecasts may differ from projected or forecasted results).
7.20. Intellectual Property . Borrower and each of its Subsidiaries owns and possesses or has a license or other right to use all patents, patent rights, trademarks, trademark rights, trade names, trade name rights, service marks, service mark rights and copyrights as are necessary for the conduct of the businesses, without any infringement upon rights of others which could reasonably be expected to have a Material Adverse Effect. None of the material Intellectual Property is the subject of any licensing or franchise agreement pursuant to which Borrower or any Subsidiary is the licensor or franchisor.
7.21. Burdensome Obligations . Neither Borrower nor any of its Subsidiaries is a party to any agreement or contract or subject to any restriction contained in its organizational documents which could reasonably be expected to have a Material Adverse Effect.
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7.22. Labor Matters . Neither Borrower nor any of its Subsidiaries is subject to any labor or collective bargaining agreement. There are no existing or threatened strikes, lockouts or other labor disputes that singly or in the aggregate could reasonably be expected to have a Material Adverse Effect. Hours worked by and payment made to employees of Borrower and each of its Subsidiaries are not in violation of the Fair Labor Standards Act or any other applicable law, rule or regulation dealing with such matters.
7.23. Anti-Terrorism Laws .
(a) Neither Borrower nor any of its Subsidiaries (and, to the knowledge of each, no joint venture or subsidiary thereof) is in violation in any material respects of any United States requirements of law relating to terrorism, sanctions or money laundering (the Anti-Terrorism Laws ), including the United States Executive Order No. 13224 on Terrorist Financing (the Anti-Terrorism Order ) and the Patriot Act.
(b) Neither Borrower nor any of its Subsidiaries (and, to the knowledge of each, no joint venture or subsidiary thereof) (i) is listed in the annex to, or is otherwise subject to the provisions of, the Anti-Terrorism Order, (ii) is owned or controlled by, or acting for or on behalf of, any person listed in the annex to, or is otherwise subject to the provisions of, the Anti-Terrorism Order, (iii) commits, threatens or conspires to commit or supports terrorism as defined in the Anti-Terrorism Order or (iv) is named as a specially designated national and blocked person in the most current list published by OFAC.
(c) Neither Borrower nor any of its Subsidiaries (and, to the knowledge of each, no joint venture or Affiliate thereof) (i) conducts any business or engages in making or receiving any contribution of funds, goods or services to or for the benefit of any person described in clauses (b)(i) through (b)(iv) above, (ii) deals in, or otherwise engages in any transactions relating to, any property or interests in property blocked pursuant to the Anti-Terrorism Order or (iii) engages in or conspires to engage in any transaction that evades or avoids, or has the purpose of evading or avoiding, or attempts to violate, any of the prohibitions set forth in any Anti-Terrorism Law.
7.24. No Default . No Default or Event of Default exists or would result from the incurrence by Borrower of any Debt hereunder or under any other Loan Document. Neither Borrower nor any of its Subsidiaries is in material default in the performance, observance or fulfillment of any of the terms, obligations, covenants, conditions or provisions contained in any indenture or other agreement creating, evidencing or securing indebtedness of any kind or pursuant to which any such indebtedness is issued, or other agreement or instrument to which Borrower or any of its Subsidiaries is a party or by which it or its properties may be bound or affected, which default would reasonably be expected to have a Material Adverse Effect on the financial condition, results of operations or business of Borrower and its Subsidiaries, taken as a whole.
7.25. Hedging Agreements . Neither Borrower nor any of its Subsidiaries is a party to any Hedging Agreement other than (i) Hedging Agreements in favor of Lender, and (ii) a bona fide (not speculative) unsecured Hedging Agreement, in form and substance reasonably acceptable to Lender, to protect Borrower and its Subsidiaries against fluctuations in interest rates.
7.26. Subordination . Any (i) unsecured Debt of Borrower and its Subsidiaries and (ii) any indebtedness of Borrower to any Affiliate, outstanding as of the date hereof, is expressly subordinate and junior, in right of payment, to the Loan (the Subordinated Debt ). Further, the subordination provisions of the Subordinated Debt are enforceable against the holders of the Subordinated Debt by Lender. All Obligations constitute Senior Debt entitled to the benefits of the subordination provisions contained in the Subordinated Debt. Borrower acknowledges that Lender is entering into this Agreement and is extending the Commitment and making the Loan in reliance upon the subordination provisions of the Subordinated Debt and this Section 7.26 .
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7.27. Borrower Information . On the date hereof, Schedule 7.27 sets forth (a) Borrowers jurisdiction of organization, (b) the location of Borrowers chief executive office, (c) Borrowers exact legal name as it appears on its organizational documents and (d) Borrowers organizational identification number (to the extent the jurisdiction of organization assigns such a number) and federal employer identification number.
SECTION 8. | AFFIRMATIVE COVENANTS |
Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full, Borrower agrees that, unless at any time Lender shall otherwise expressly consent in writing, it will:
8.1. Reports, Certificates and Other Information . Furnish to Lender:
8.1.1. Annual Report . Promptly when available and in any event within one hundred twenty (120) days after the close of each Fiscal Year, a copy of the annual audit report of Borrower and its Subsidiaries for such Fiscal Year, including therein consolidated balance sheets and statements of earnings and cash flows of Borrower and its Subsidiaries as at the end of such Fiscal Year, certified without adverse reference to going concern value and without qualification by independent auditors of recognized standing selected by Borrower and reasonably acceptable to Lender.
8.1.2. Quarterly Report . As soon as the reports contemplated by this Section are filed with the applicable federal bank regulatory agencies, but in any event not more than forty five (45) days after the end of each Fiscal Quarter, or within such further time as Lender may permit, each Form FR Y-9LP filed by Borrower with federal bank regulatory agencies.
8.1.3. Interim Reports . Promptly when available and in any event within forty five (45) days after the end of each Fiscal Quarter, Watch List Reports of any subject credits for each Depository Institution Subsidiary all such reports understood to be unaudited and in the form presented to such Depository Institution Subsidiarys board of directors.
8.1.4. Regulatory Reports . As soon as the reports contemplated by this Section are filed with the applicable federal bank regulatory agencies, but in any event not more than forty five (45) days after the close of each quarterly period of each fiscal year of each Depository Institution Subsidiary, or within such further time as Lender may permit, the Call Reports filed by each Depository Institution Subsidiary with federal bank regulatory agencies.
8.1.5. Compliance Certificates . Contemporaneously with the furnishing of a copy of each report pursuant to Sections 8.1.2, 8.1.3 and 8.1.4 , a duly completed Compliance Certificate in the form of Exhibit E hereto, with appropriate insertions, dated the date of such quarterly statements and signed by a Senior Officer of Borrower, containing (a) a computation of each of the financial ratios and restrictions set forth in Section 9 ; and (b) a statement to the effect that such officer has not become aware of any Default or Event of Default that has occurred and is continuing or, if there is any such event, describing it and the steps, if any, being taken to cure it.
8.1.6. Reports to the SEC and to Shareholders . Promptly upon the filing or sending thereof, copies of any regular, periodic or special reports of Borrower and copies of any proxy statements or other communications made to security holders generally.
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8.1.7. Notice of Default, Litigation and ERISA Matters . Promptly upon becoming aware of any of the following, written notice describing the same and the steps being taken by Borrower or any of its Subsidiaries affected thereby with respect thereto:
(a) the occurrence of an Event of Default or a Default;
(b) any litigation, arbitration or governmental investigation or proceeding not previously disclosed by Borrower to Lender which has been instituted or, to the knowledge of Borrower, is threatened against any Borrower or any Subsidiary or to which any of the properties of any thereof is subject which might reasonably be expected to have a Material Adverse Effect;
(c) the institution of any steps by any member of the Controlled Group or any other Person to terminate any Pension Plan, or the failure of any member of the Controlled Group to make a required contribution to any Pension Plan (if such failure is sufficient to give rise to a Lien under Section 302(f) of ERISA) or to any Multiemployer Pension Plan, or the taking of any action with respect to a Pension Plan which could result in the requirement that Borrower furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan or Multiemployer Pension Plan which could result in the incurrence by any member of the Controlled Group of any material liability, fine or penalty (including any claim or demand for withdrawal liability or partial withdrawal from any Multiemployer Pension Plan), or any material increase in the contingent liability of Borrower with respect to any post-retirement welfare benefit plan or other employee benefit plan of Borrower or another member of the Controlled Group, or any notice that any Multiemployer Pension Plan is in reorganization, that increased contributions may be required to avoid a reduction in plan benefits or the imposition of an excise tax, that any such plan is or has been funded at a rate less than that required under Section 412 of the Code, that any such plan is or may be terminated, or that any such plan is or may become insolvent;
(d) any cancellation or material change in any insurance maintained by Borrower or any Subsidiary;
(e) any other event (including (i) any violation of any Environmental Law or the assertion of any Environmental Claim or (ii) the enactment or effectiveness of any law, rule or regulation) which might reasonably be expected to have a Material Adverse Effect; or
(f) the occurrence of any other event which could reasonably be expected to have a Material Adverse Effect on the aggregate value of the Collateral or on the Liens created hereby.
8.1.8. Management Reports . Promptly upon receipt thereof, copies of all detailed financial and management reports submitted to Borrower by independent auditors in connection with each annual or interim audit made by such auditors of the books of Borrower, including copies of all third party loan reviews.
8.1.9. Projections . As soon as practicable, and in any event not later than (ninety) 90 days after the commencement of each Fiscal Year, financial projections for Borrower and its Subsidiaries for such Fiscal Year prepared in a manner consistent with the projections delivered by Borrower to Lender prior to the Closing Date or otherwise in a manner reasonably satisfactory to Lender accompanied by a certificate of a Senior Officer of Borrower on behalf of Borrower to the effect that (a) such projections were prepared by Borrower in good faith, (b) Borrower has a reasonable basis for the assumptions contained in such projections and (c) such projections have been prepared in accordance with such assumptions.
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8.1.10. Other Debt Notices . Promptly following receipt, copies of any notices (including notices of default or acceleration) received from any holder or trustee of, under or with respect to any outstanding Debt or Subordinated Debt.
8.1.11. Other Information . Promptly from time to time, such other information (including, without limitation, business or financial data, reports, appraisals and projections) concerning Borrower and its Subsidiaries, their properties or business, as Lender may reasonably request.
8.2. Books, Records and Inspections . Except to the extent prohibited by applicable laws and regulations, Borrower shall, and shall cause each Subsidiary to, permit the Lender and its duly authorized representatives and agents to visit and inspect the corporate books and financial records of Borrower and each of its Subsidiaries, to examine and make copies of the books of accounts and other financial records of Borrower and each of its Subsidiaries, and to discuss the affairs, finances and accounts of Borrower and each of its Subsidiaries with, and to be advised as to the same by, its officers, employees and independent public accountants (and by this provision Borrower hereby authorizes such accountants to discuss with the Lender the finances and affairs of Borrower and of each of its Subsidiaries) at such reasonable times and reasonable intervals as the Lender may designate; provided , however , that this right shall not be exercised more than twice per year so long as no Event of Default shall have occurred and be continuing; and provided , further , that Lender agrees to maintain the confidentiality of all information regarding Borrower and its Subsidiaries, obtained as a result of the exercise of this right and through any other means, except for disclosure to Lenders Representatives or as required otherwise by law or regulation, and that neither Borrower nor any of its Subsidiaries shall be required to make available to the Lender any customer lists or other proprietary information unless such information is required by the Lender to determine the financial condition of Borrower or any of its Subsidiaries or to determine the ability of either to meet its obligations hereunder.
8.3. Maintenance of Property; Insurance .
(a) Keep, and cause each Subsidiary to keep, all property useful and necessary in the business in good working order and condition, ordinary wear and tear excepted.
(b) Maintain, and cause each Subsidiary to maintain, with responsible insurance companies, such insurance coverage as may be required by any law or governmental regulation or court decree or order applicable to it and such other insurance, to such extent and against such hazards and liabilities, as is customarily maintained by companies similarly situated; and, upon request of Lender, furnish to Lender original or electronic copies of policies evidencing such insurance, and a certificate setting forth in reasonable detail the nature and extent of all insurance maintained by Borrower and each Subsidiary. Borrower shall cause each issuer of an insurance policy to provide Lender with an endorsement (i) naming Lender as an additional insured with respect to each policy of liability insurance, (ii) providing that 30 days notice will be given to Lender prior to any cancellation of, material reduction or change in coverage provided by or other material modification to such policy and (iii) reasonably acceptable in all other respects to Lender.
(c) UNLESS BORROWER PROVIDES LENDER WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT, LENDER MAY PURCHASE INSURANCE AT BORROWER S EXPENSE TO PROTECT LENDERS INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT BORROWER S INTERESTS. THE COVERAGE THAT LENDER PURCHASES MAY NOT PAY ANY CLAIM THAT IS MADE AGAINST BORROWER IN CONNECTION WITH THE COLLATERAL. BORROWER MAY LATER CANCEL ANY INSURANCE PURCHASED BY LENDER, BUT ONLY AFTER PROVIDING LENDER WITH EVIDENCE THAT BORROWER HAS
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OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF LENDER PURCHASES INSURANCE FOR THE COLLATERAL, BORROWER WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT MAY BE IMPOSED WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE PRINCIPAL AMOUNT OF THE LOAN OWING HEREUNDER. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF THE INSURANCE BORROWER MAY BE ABLE TO OBTAIN ON ITS OWN.
8.4. Compliance with Laws; Payment of Taxes and Liabilities . (a) Comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, rules, regulations, decrees, orders, judgments, licenses and permits, except where failure to comply could not reasonably be expected to have a Material Adverse Effect; (b) without limiting clause (a) above, ensure, and cause each Subsidiary to ensure, that no person who owns a controlling interest in or otherwise controls Borrower or any Subsidiary is or shall be (i) listed on the Specially Designated Nationals and Blocked Person List maintained by the Office of Foreign Assets Control ( OFAC ), Department of the Treasury, and/or any other similar lists maintained by OFAC pursuant to any authorizing statute, Executive Order or regulation or (ii) a person designated under Section 1(b), (c) or (d) of Executive Order No. 13224 (September 23, 2001), any related enabling legislation or any other similar Executive Orders, (c) without limiting clause (a) above, comply, and cause each Subsidiary to comply, with all applicable Bank Secrecy Act ( BSA ) and anti-money laundering laws and regulations and (d) pay, and cause each Subsidiary to pay, prior to delinquency, all taxes and other governmental charges against it or any of its property, as well as claims of any kind which, if unpaid, could become a Lien on any of its property; provided , that the foregoing shall not require Borrower or any Subsidiary to pay any such tax or charge so long as it shall contest the validity thereof in good faith by appropriate proceedings and shall set aside on its books adequate reserves with respect thereto in accordance with GAAP and, in the case of a claim which could become a Lien on any collateral, such contest proceedings shall stay the foreclosure of such Lien or the sale of any portion of the collateral to satisfy such claim.
8.5. Maintenance of Existence, etc . Maintain and preserve, and (subject to Section 10.5 ) cause each Subsidiary to maintain and preserve, (a) its existence and good standing in the jurisdiction of its organization and (b) its qualification to do business and good standing in each jurisdiction where the nature of its business makes such qualification necessary (other than such jurisdictions in which the failure to be qualified or in good standing could not reasonably be expected to have a Material Adverse Effect).
8.6. Use of Proceeds . Use the proceeds of the Loan initially to fund the acquisition of Ridgestone Financial and Ridgestone Bank, in order to bridge the gap between the Merger and Bank Merger and the consummation of Preferred Stock Offering, as further provided and limited herein, and thereafter for general corporate purposes. In addition, all acquisitions must comply with all financial covenants herein on a pro-forma basis and Borrower must obtain all necessary regulatory approvals to comply with this provision.
8.7. Lender s Fees . Borrower agrees to pay to Lender upon Loan Closing: (a) a commitment fee in the amount of $300,000.00 , and (b) all of Lenders other fees and expenses including expenses incurred by Lender to date in connection with the transactions contemplated herein, such as Attorney Costs and other reasonable fees and expenses paid or payable to any other parties.
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8.8. Employee Benefit Plans .
(a) Maintain, and cause each other member of the Controlled Group to maintain, each Pension Plan in substantial compliance with all applicable requirements of law and regulations.
(b) Make, and cause each other member of the Controlled Group to make, on a timely basis, all required contributions to any Multiemployer Pension Plan.
(c) Not, and not permit any other member of the Controlled Group to (i) seek a waiver of the minimum funding standards of ERISA, (ii) terminate or withdraw from any Pension Plan or Multiemployer Pension Plan or (iii) take any other action with respect to any Pension Plan that would reasonably be expected to entitle the PBGC to terminate, impose liability in respect of, or cause a trustee to be appointed to administer, any Pension Plan, unless the actions or events described in clauses (i), (ii) and (iii) individually or in the aggregate would not have a Material Adverse Effect.
8.9. Environmental Matters . If any release or threatened release or other disposal of Hazardous Substances shall occur or shall have occurred on any real property or any other assets of Borrower or any Subsidiary, Borrower shall, or shall cause the applicable Subsidiary to, cause the prompt containment and removal of such Hazardous Substances and the remediation of such real property or other assets as necessary to comply with all Environmental Laws and to preserve the value of such real property or other assets. Without limiting the generality of the foregoing, Borrower shall, and shall cause each Subsidiary to, comply with any Federal or state judicial or administrative order requiring the performance at any real property of Borrower or any Subsidiary of activities in response to the release or threatened release of a Hazardous Substance. To the extent that the transportation of Hazardous Substances is permitted by this Agreement, Borrower shall, and shall cause its Subsidiaries to, dispose of such Hazardous Substances, or of any other wastes, only at licensed disposal facilities operating in compliance with Environmental Laws.
8.10. Further Assurances .
(a) Take, and cause any Subsidiary to take, such actions as are necessary or as Lender may reasonably request from time to time to ensure that the Obligations of Borrower under the Loan Documents are secured by a first priority perfected Lien in favor of Lender and to preserve the full benefits of the rights granted in this Agreement and the Pledge Agreement, including the execution and delivery of the Pledge Agreement, financing statements, continuation statements and other documents, the filing or recording of any of the foregoing and the delivery of the Pledged Stock.
(b) Borrower shall maintain the security interest created by the Pledge Agreement as a perfected security interest and shall defend such security interest against the claims and demands of all Persons whomsoever.
8.11. Changes in Locations, Name, etc. . Borrower shall not, except upon (thirty) 30 days prior written notice to Lender and delivery to Lender of:
(a) change its jurisdiction of organization or the location of its chief executive office; or
(b) change its name, identity or corporate structure.
8.12. Acquisitions; Changes in Control . Except for the Merger and the Bank Merger, Borrower shall not use proceeds from the Commitment to or otherwise make any mergers with or acquisitions of entities without prior written approval from Lender and any necessary regulatory agencies. In addition, all acquisitions must comply with all financial covenants herein on a pro-forma basis and Borrower must obtain all necessary regulatory approvals to comply with this provision. Borrower shall not consent to a change in Control without the Lenders prior consent.
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8.13. Intentionally Omitted .
8.14. This Agreement . Borrower covenants that it will, and, if necessary, will cause or enable Borrower and its Subsidiaries to, fully comply with each of the covenants and other agreements set forth in this Agreement.
SECTION 9. | ADDITIONAL FINANCIAL COVENANTS |
9.1. Regulatory Capital . Borrower shall cause each Depository Institution Subsidiary to maintain such capital as may be necessary to cause the Depository Institution Subsidiary to be classified as well capitalized in accordance with the rules and regulations of its primary federal regulator, as in effect from time to time and consistent with the financial information and reports contemplated in Section 8.1.2 , 8.1.3 and 8.1.4 hereof and to maintain the following ratios:
9.1.1. Total Capital to Risk-Weighted Assets . Total Capital to Risk-Weighted Assets equal to or greater than 11.50%.
9.1.2. Tier 1 Leverage Capital Ratio . Total Tier 1 Leverage Capital Ratio equal to or greater than 7.9%.
9.1.3. Non-performing Loans to Primary Capital . A maximum Non-performing Loans to Primary Capital ratio of 25.00%.
9.2. Quarterly Tests . The ratios set forth in this Section 9.1 shall be calculated quarterly beginning with the quarter ended December 31, 2016, shall be derived from the Call Report filed with Depository Institution Subsidiarys primary federal regulator and shall be consistent with the financial information and reports contemplated in Sections 8.1.2 , 8.1.3 and 8.1.4 of this Agreement.
9.3. Minimum Liquidity . Borrower shall maintain at all times minimum Liquidity of at least Five Million and 00/100ths Dollars ($5,000,000.00), measured quarterly beginning with the quarter ended December 31, 2016. Borrower shall provide to Lender such information with respect to the minimum Liquidity, including statements and other information evidencing the same, on a quarterly basis beginning December 31, 2016, as may be reasonably requested by Bank and in a form and substance as requested by the Bank
9.4. External Loan Reviews . Borrower shall provide Lender a copy of its external loan reviews on an as-completed basis or as otherwise requested by Lender.
SECTION 10. | NEGATIVE COVENANTS |
Until the expiration or termination of the Commitments and thereafter until all Obligations hereunder and under the other Loan Documents are paid in full, Borrower agrees that, unless at any time Lender shall otherwise expressly consent in writing, which consent shall not be unreasonably withheld, conditioned or delayed, it will:
10.1. Debt . Not create, incur, assume or suffer to exist any Debt without the prior written consent of Lender, except for obligations under this Agreement and the other Loan Documents, and obligations under the existing Trust Preferred Securities (TruPS), and will not, without Lenders prior
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consent, permit any Subsidiary to incur Debt other than in the ordinary course of business. For purposes of the prior sentence, any subordinated debt incurred by a Subsidiary shall not be considered to have been incurred in the ordinary course of business.
10.2. Restricted Payments . Except as otherwise provided herein, not, and not permit any Subsidiary to, (a) make any distribution to any holders of its Capital Securities, (b) purchase or redeem any of its Capital Securities, (c) pay any management fees or similar fees to any of its equity holders or any Affiliate thereof, (d) make any redemption, prepayment (whether mandatory or optional), defeasance, repurchase or any other payment in respect of any Debt or Subordinated Debt (except as may be permitted pursuant to Section 10.3 ) or (e) set aside funds for any of the foregoing. Notwithstanding the foregoing, any Subsidiary may pay dividends or make other distributions to Borrower.
10.3. Distributions . Not itself declare or pay any cash dividend or make (or otherwise become obligated to make) any other distribution in respect of its Capital Securities whether to common shareholders or otherwise, except that from and after the consummation of the Preferred Stock Offering and the reduction to the Revolving Loan Commitment to $5,000,000.00, dividends may be distributed to preferred shareholders under the Preferred Stock Offering as and when due and so long as no Event of Default exists.
10.4. Liens . Not, and not permit any Subsidiary to, create or permit to exist any Lien on any of its real or personal properties, assets or rights of whatsoever nature (whether now owned or hereafter acquired), except:
(a) Liens for taxes or other governmental charges not at the time delinquent or thereafter payable without penalty or being diligently contested in good faith by appropriate proceedings and, in each case, for which it maintains adequate reserves in accordance with GAAP and the execution or other enforcement of which is effectively stayed;
(b) Liens arising in the ordinary course of business (such as (i) Liens of carriers, warehousemen, mechanics and materialmen and other similar Liens imposed by law and (ii) Liens in the form of deposits or pledges incurred in connection with workers compensation, unemployment compensation and other types of social security (excluding Liens arising under ERISA) or in connection with surety bonds, bids, performance bonds and similar obligations) for sums not overdue or being diligently contested in good faith by appropriate proceedings and not involving any advances or borrowed money or the deferred purchase price of property or services and, in each case, for which it maintains adequate reserves in accordance with GAAP and the execution or other enforcement of which is effectively stayed;
(c) Liens described on Schedule 10.4 as of the Closing Date;
(d) (i) Liens arising in connection with Capital Leases (and attaching only to the property being leased), (ii) Liens existing on property at the time of the acquisition thereof by Borrower (and not created in contemplation of such acquisition) and (iii) Liens that constitute purchase money security interests on any property securing debt incurred for the purpose of financing all or any part of the cost of acquiring such property; provided , that any such Lien attaches to such property within twenty (20) days of the acquisition thereof and attaches solely to the property so acquired;
(e) attachments, appeal bonds, judgments and other similar Liens, for sums not exceeding $250,000 in the aggregate, arising in connection with court proceedings, provided , that the execution or other enforcement of such Liens is effectively stayed and the claims secured thereby are being actively contested in good faith and by appropriate proceedings;
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(f) easements, rights of way, restrictions, minor defects or irregularities in title and other similar Liens not interfering in any material respect with the ordinary conduct of the business of Borrower and its Subsidiaries; and
(g) Liens arising under the Loan Documents.
10.5. Mergers, Consolidations, Sales . Not, and not permit any Subsidiary to, (a) be a party to any merger or consolidation (except as provided in Section 8.12 hereof), (b) sell, transfer, dispose of, convey or lease any of its assets or Capital Securities (including the sale of Capital Securities of any Subsidiary), or (c) except in the ordinary course of business, sell or assign with or without recourse any receivables, except for (i) any such merger, consolidation, sale, transfer, conveyance, lease or assignment of or by any Wholly-Owned Subsidiary into Borrower or into any other domestic Wholly-Owned Subsidiary; and (ii) any such purchase or other acquisition by Borrower or any domestic Wholly-Owned Subsidiary of the assets or Capital Securities of any Wholly-Owned Subsidiary.
10.6. Modification of Organizational Documents . Not permit the charter, by-laws or other organizational documents of Borrower or any Subsidiary to be amended or modified in any way which could reasonably be expected to materially adversely affect the interests of Lender; not change, or allow Borrower or any Subsidiary to change its state of formation or its organizational form.
10.7. Transactions with Affiliates . Not, and not permit any Subsidiary to, enter into, or cause, suffer or permit to exist any transaction, arrangement or contract with any of its other Affiliates which is on terms which are less favorable than are obtainable from any Person which is not one of its Affiliates.
10.8. Unsafe and Unsound Practices . Borrower shall not, nor shall it cause, permit or allow any Subsidiary to, engage in any unsafe or unsound business practice that would reasonably be expected to have a material adverse effect on the financial condition, results of operations or business of Borrower and its Subsidiaries, taken as a whole.
10.9. Inconsistent Agreements . Not, and not permit any Subsidiary to, enter into any agreement containing any provision which would (a) be violated or breached by any borrowing by Borrower hereunder or by the performance by Borrower of any of its Obligations hereunder or under any other Loan Document, (b) prohibit Borrower from granting to Lender a Lien on the Collateral or (c) create or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary to (i) pay dividends or make other distributions to Borrower or any other Subsidiary, or (ii) pay any Debt owed to Borrower or any other Subsidiary.
10.10. Business Activities . Not, and not permit any Subsidiary to, engage in any line of business other than the businesses engaged in on the date hereof and businesses reasonably related thereto.
10.11. Investments . Except as is otherwise provided in Section 8.12, not, and not permit or allow any Subsidiary to:
(a) make any investment, other than investments made in the ordinary course of business and as permitted by applicable laws, rules, regulations and guidelines of the FRB, FDIC or other regulatory or governmental agency; or
(b) acquire the capital stock, assets or obligations of or any interest in another corporation, partnership, trust, limited liability company or any other entity except where such acquisition would not,
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when considered as of the date of such acquisition, have a Material Adverse Effect on the business, operations or condition, financial or otherwise, of Borrower and the Subsidiaries taken as a whole or where such acquisition would cause a change in Control.
10.12. Fiscal Year . Not change its Fiscal Year.
10.13. Cancellation of Debt . Not, and not permit any Subsidiary to, cancel any claim or Debt owing to it, except for reasonable consideration or in the ordinary course of business.
10.14. Principal / Interest Payments on Trust Preferred Securities (TruPS) . Not itself, nor shall it cause, permit or allow any Subsidiary to make any principal payments on Trust Preferred Securities (TruPS), without the prior written consent of Lender, though interest payments on the Trust Preferred Securities (TruPS) may be made as and when due so long as no Event of Default has occurred. There shall be no increase in the principal amount of Trust Preferred Securities (TruPS) from the amount outstanding on the date hereof.
SECTION 11. | EFFECTIVENESS; CONDITIONS OF LENDING, ETC. |
The obligation of Lender to make its Loan is subject to the following conditions precedent:
11.1. Initial Credit Extension . The obligation of Lender to make the Loan is, in addition to the conditions precedent specified in Section 11.2 , subject to the conditions precedent that Lender shall have received all of the following, each duly executed and dated the Closing Date (or such earlier date as shall be satisfactory to Lender), in form and substance satisfactory to Lender (and the date on which all such conditions precedent have been satisfied or waived in writing by Lender is called the Closing Date ):
11.1.1. The Loan Documents . The Loan Documents, including, without limitation, this Agreement, the Note and the Collateral Documents.
11.1.2. Pledged Securities . The actual certificates representing all of the securities constituting the Pledged Stock, together with irrevocable stock powers for each such certificate endorsed by Borrower in blank.
11.1.3. Authorization Documents . For each of Borrower and its Subsidiaries, such Persons (a) charter (or similar formation document), certified by the appropriate governmental authority issued within ten (10) Business Days of the Closing; (b) good standing certificates in its state of incorporation (or formation) and in each other state requested by Lender issued within ten (10) Business Days of the Closing; (c) bylaws (or similar governing document); (d) resolutions of its board of directors (or similar governing body) approving and authorizing such Persons execution, delivery and performance of the Loan Documents to which it is party and the transactions contemplated thereby; and (e) signature and incumbency certificates of its officers executing any of the Loan Documents (it being understood that Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein), all certified by its secretary or an assistant secretary (or similar officer) as being in full force and effect without modification.
11.1.4. Consents, etc . Certified copies of all documents evidencing any necessary corporate or partnership action, consents and governmental approvals (if any) required for the execution, delivery and performance by Borrower of the documents referred to in this Section 11 , including the following: (a) the approval of the Merger by the FRB; (b) the approval of the Bank Merger by the IDFPR and the WDFI; and (c) the approval of the Bank Merger by the FRB.
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11.1.5. Letter of Direction . A letter of direction containing funds flow information with respect to the proceeds of the Loan on the Closing Date.
11.1.6. Opinion of Counsel . An opinion of counsel of Borrower in substantially the form attached hereto as Exhibit C and otherwise satisfactory to Lender.
11.1.7. Insurance . Evidence of the existence of insurance required to be maintained pursuant to this Agreement, together with evidence that Lender has been named as an additional insured on all related insurance policies.
11.1.8. Payment of Fees . Evidence of payment by Borrower of all reasonable accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with all Attorney Costs of Lender to the extent invoiced prior to the Closing Date, plus such additional amounts of Attorney Costs as shall constitute Lenders reasonable estimate of Attorney Costs incurred or to be incurred by Lender through the closing proceedings ( provided , that such estimate shall not thereafter preclude final settling of accounts between Borrower and Lender).
11.1.9. Search Results; Lien Terminations . Certified copies of Uniform Commercial Code search reports dated a date reasonably near to the Closing Date, listing all effective financing statements which name Borrower and any Subsidiary (under their present names and any previous names) as debtors, together with (a) copies of such financing statements, with Uniform Commercial Code or other appropriate termination statements and documents effective to evidence the foregoing and (b) such other Uniform Commercial Code termination statements as Lender may reasonably request.
11.1.10. Closing Certificate, Consents and Permits . A certificate executed by an officer of Borrower on behalf of Borrower certifying (a) the matters set forth in Section 11.2.1 as of the Closing Date.
11.1.11. Other . Such other documents as Lender may reasonably request.
11.2. Conditions . The obligation of Lender to make each Loan is subject to the following further conditions precedent that:
11.2.1. Compliance with Warranties, No Default, etc . Both before and after giving effect to any borrowing, the following statements shall be true and correct:
(a) the representations and warranties of Borrower set forth in this Agreement and the other Loan Documents shall be true and correct in all respects with the same effect as if then made (except to the extent stated to relate to a specific earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); and
(b) no Default or Event of Default shall have then occurred and be continuing.
11.2.2. Confirmatory Certificate . If requested by Lender, Lender shall have received a certificate dated the date of such requested Loan and signed by a duly authorized representative of Borrower as to the matters set out in Section 11.2.1 (it being understood that each request by Borrower for the making of a Loan shall be deemed to constitute a representation and warranty by Borrower that the conditions precedent set forth in Section 11.2.1 will be satisfied at the time of the making of such Loan), together with such other documents as Lender may reasonably request in support thereof.
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SECTION 12. | EVENTS OF DEFAULT AND THEIR EFFECT |
12.1. Events of Default . Each of the following shall constitute an Event of Default under this Agreement:
12.1.1. Non-Payment of the Loan, etc . Default in the payment when due of the principal of the Loan; or default, and continuance thereof for five (5) days, in the payment when due of any interest, fee, or other amount payable by Borrower hereunder or under any other Loan Document or the failure to deliver the Pledged Stock to Lender within five (5) Business Days of the Closing Date.
12.1.2. Non-Payment of Other Debt . Any default beyond applicable notice and cure periods shall occur under the terms applicable to any Debt of Borrower or any Subsidiary (including undrawn committed or available amounts and amounts owing to all creditors under any combined or syndicated credit arrangement) and such default shall (a) consist of the failure to pay such Debt when due, whether by acceleration or otherwise, or (b) accelerate the maturity of such Debt or permit the holder or holders thereof, or any trustee or agent for such holder or holders, to cause such Debt to become due and payable (or require Borrower or any Subsidiary to purchase or redeem such Debt or post cash collateral in respect thereof) prior to its expressed maturity.
12.1.3. Other Material Obligations . Default in the payment when due, or in the performance or observance of, any material obligation of, or condition agreed to by, Borrower or any Subsidiary with respect to any material purchase or lease of goods or services where such default beyond any applicable notice and cure periods, singly or in the aggregate with all other such defaults, might reasonably be expected to have a Material Adverse Effect.
12.1.4. Bankruptcy, Insolvency, etc .
(a) Borrower or any Subsidiary becomes insolvent or is unable to pay its debts as they mature; or makes an assignment for the benefit of creditors or admits in writing its inability to pay its debts as they mature; or suspends transaction of its usual business; or if a trustee of any substantial part of the assets of Borrower or any Subsidiary is applied for or appointed, and if appointed in a proceeding brought against Borrower or any Subsidiary, Borrower or any Subsidiary by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment, or within 60 days after such appointment, such appointment is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect.
(b) Any proceedings involving Borrower or any Subsidiary are commenced by or against Borrower or the Subsidiary under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of the federal government or any state government and, if such proceedings are instituted against Borrower or any Subsidiary, Borrower or any Subsidiary by any action or failure to act indicates its approval of, consent to or acquiescence therein, or an order shall be entered approving the petition in such proceedings and within 60 days after the entry thereof such order is not vacated or stayed on appeal or otherwise, or shall not otherwise have ceased to continue in effect.
(c) Borrower applies for, consents to or acquiesces in the appointment of a trustee, receiver, conservator or liquidator for itself under Chapter 7 or Chapter 11 of the Bankruptcy Code (the Code Provisions ), or in the absence of such application, consent or acquiescence, a trustee, conservator, receiver or liquidator is appointed for Borrower under the Code Provisions, and is not discharged within 60 days, or any bankruptcy, reorganization, debt arrangement or other proceeding or any dissolution, liquidation, or conservatorship proceeding is instituted by or against Borrower under the Code Provisions, and if instituted against Borrower, is consented or acquiesced in by it or remains for 30 days undismissed, or if Borrower is enjoined, restrained or in any way prevented from conducting all or any material part of its business under the Code Provisions.
(d) Any Subsidiary applies for, consents to or acquiesces in the appointment of a receiver for itself, or in the absence of such application, consent or acquiescence, a receiver is appointed for the Subsidiary, and is not discharged within 60 days.
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12.1.5. Troubled Condition . Any Depository Institution Subsidiary is notified that it is considered an institution in troubled condition within the meaning of 12 U.S.C. Section 1831i and the regulations promulgated thereunder, or if a conservator or receiver is appointed for the Depository Institution Subsidiary.
12.1.6. Regulatory Enforcement . Except for such actions that may be in effect on or before the Closing Date, provided , that such action has been disclosed to Lender in writing, the FRB, the FDIC, the IDFPR, the WDFI or other governmental agency charged with the regulation of bank holding companies or depository institutions (a) issues to Borrower or any Depository Institution Subsidiary a consent order or similar regulatory order (in each case with respect to a material matter), the assessment of material civil monetary penalties, articles of agreement effecting a material restriction in the payment of dividends or the payment of indebtedness, a memorandum of understanding setting forth a material restriction or directive, a material capital directive, a material capital restoration plan, restrictions that prevent or as a practical matter materially impair the payment of dividends by the Depository Institution Subsidiary or the payments of any Debt by Borrower, restrictions that make the payment of the dividends by the Depository Institution Subsidiary or the payment of Debt by Borrower subject to prior regulatory approval, a notice or finding under Section 8(a) of the FDI Act, or any similar enforcement action, measure or proceeding; or (b) proposes or issues to any executive officer or director of Borrower or any Depository Institution Subsidiary, or initiates any action, suit or proceeding to obtain against, impose on or require from any such officer or director, a consent order or similar regulatory order, a removal order or suspension order or the assessment of civil monetary penalties.
12.1.7. Non-Compliance with Loan Documents . (a) Failure by Borrower to comply with or to perform any covenant set forth in Sections 8, 9 or 10 of this Agreement; or (b) failure by Borrower to comply with or perform any other provision of this Agreement or any other Loan Document (and not constituting an Event of Default under any other provision of this Section 12 ) and continuance of such failure described in this clause (b) for thirty (30) days.
12.1.8. Representations; Warranties . Any representation or warranty made by Borrower herein or any other Loan Document is breached or is false or misleading in any material respect, or any schedule, certificate, financial statement, report, notice or other writing furnished by Borrower to Lender in connection herewith is false or misleading in any material respect on the date as of which the facts therein set forth are stated or certified.
12.1.9. Pension Plans . (a) Any Person institutes steps to terminate a Pension Plan if as a result of such termination Borrower or any member of the Controlled Group could be required to make a contribution to such Pension Plan, or could incur a liability or obligation to such Pension Plan; (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under Section 302(f) of ERISA; (c) the Unfunded Liability exceeds twenty percent of the Total Plan Liability; or (d) there shall occur any withdrawal or partial withdrawal from a Multiemployer Pension Plan.
12.1.10. Judgments . Final judgments shall be rendered against Borrower or any Subsidiary that calls for the payment of money in excess of $500,000.00 or presents monetary liability in excess of $500,000.00 not covered by insurance, which judgment or process may reasonably be expected to have a Material Adverse Effect, and such liability is not paid, waived, stayed, discharged, settled or fully bonded within sixty (60) days after it is rendered, issued or levied.
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12.1.11. Orders . Any order or decree is entered by any court of competent jurisdiction directly or indirectly enjoining or prohibiting Lender or Borrower from performing any of their obligations under this Agreement or any of the other Loan Documents, and such order or decree is not vacated, and the proceedings out of which such order or decree arose are not dismissed, within sixty (60) days after the granting of such decree or order.
12.1.12. Invalidity of Collateral Documents, etc . (a) Any Collateral Document shall cease to be in full force and effect; (b) any Person shall contest in any manner the validity, binding nature or enforceability of any Collateral Document; (c) the execution by Borrower of any secondary or additional financing agreements or arrangements of any kind secured, in whole or in part, by all or any part of or interest in any Collateral; or (d) the Pledged Stock is attached, seized, subjected to a writ of distress warrant, or is levied upon or becomes subject to any lien, claim, security interest or other encumbrances of any kind, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors.
12.1.13. Invalidity of Subordination Provisions, etc . Any subordination provision in any document or instrument governing Subordinated Debt or senior debt shall cease to be in full force and effect, or Person shall contest in any manner the validity, binding nature or enforceability of any such provision.
12.1.14. Change of Control . A change of Control shall occur.
12.1.15. Material Adverse Effect . The occurrence of any event having a Material Adverse Effect.
12.1.16. Mandatory Payments . The failure to make the mandatory payments as required under Section 4.2.2 and Section 4.2.3 herein.
12.1.17. Consummation of Merger and the Bank Merger . Borrower fails to deliver proof satisfactory to Lender that the Merger (including a copy of the Articles of Merger certified by the Illinois Secretary of State) and the Bank Merger (including a copy of the Certificate of Merger issued by IDFPR and the WDFI) have been consummated in accordance with the terms and conditions of the Merger Agreement within ten (10) days of the Closing Date.
12.1.18. Delivery of Pledged Stock . The failure to deliver updated certificates representing the Pledged Stock, along with irrevocable stock powers for each such certificate endorsed by Borrower in blank, within ten (10) days of the Closing Date.
12.1.19. Consummation of Preferred Stock Offering . Borrower fails to deliver proof satisfactory to Lender that the Preferred Stock Offering has been consummated in accordance with the terms thereof within the maximum of one hundred eighty (180) days of the Closing Date.
12.2. Effect of Event of Default . (a) If any Event of Default described in Section 12.1.4 shall occur in respect of Borrower, the Commitment shall immediately terminate, and the Loan and all other Obligations hereunder shall become immediately due and payable, all without presentment, demand, protest or notice of any kind ( provided , however , that notwithstanding the foregoing, Hedging Obligations shall terminate only in accordance with the terms of the relevant Hedging Agreement). (b) If any other Event of Default shall occur and be continuing, Lender may declare the Commitment to be terminated in whole or in part and/or declare all or any part of the Loan and all other Obligations hereunder to be due and payable, whereupon the Commitment shall immediately terminate (or be reduced, as applicable) and/or the Loan and other Obligations hereunder shall become immediately due and payable (in whole or in part, as applicable), all without presentment, demand, protest or notice of any
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kind. Lender shall promptly advise Borrower of any such declaration, but failure to do so shall not impair the effect of such declaration. The date on which the Commitment shall immediately terminate as provided in clause (a) or (b) shall be the Termination Date . Nothing contained herein is intended to restrict the Lenders rights under any of the Loan Documents or at law or in equity, and the Lender may exercise all such rights and remedies as and when they are available, including all other rights and remedies for default provided by the UCC, as well as any other applicable law and this Agreement, INCLUDING, WITHOUT LIMITATION, THE RIGHT TO REPOSSESS, RENDER UNUSABLE AND/OR DISPOSE OF THE COLLATERAL WITHOUT JUDICIAL PROCESS. The rights and remedies specified herein are cumulative and are not exclusive of any rights or remedies which the Lender would otherwise have, and Borrower shall be liable for all costs of collection, including Lenders reasonable attorneys fees. The Lender may permit the Borrower to attempt to remedy any default without waiving its rights and remedies hereunder, and the Lender may waive any default without waiving any other subsequent or prior default by the Borrower. Furthermore, delay on the part of the Lender in exercising any right, power or privilege hereunder or at law shall not operate as a waiver thereof, nor shall any single or partial exercise of such right, power or privilege preclude other exercise thereof or the exercise of any other right, power or privilege. No waiver nor suspension shall be deemed to have occurred unless the Lender has expressly agreed in writing specifying such waiver or suspension
SECTION 13. | GENERAL |
13.1. Waiver; Amendments . No delay on the part of Lender in the exercise of any right, power or remedy shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right, power or remedy preclude other or further exercise thereof, or the exercise of any other right, power or remedy. No amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the other Loan Documents shall in any event be effective unless the same shall be in writing and acknowledged by Lender, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
13.2. Confirmations . Borrower and each holder of a Note agree from time to time, upon written request received by it from the other, to confirm to the other in writing the aggregate unpaid principal amount of the Loan then outstanding under such Note.
13.3. Notices . Except as otherwise provided in Section 2.2 , all notices hereunder shall be in writing (including facsimile transmission) and shall be sent to the applicable party at its address shown on Annex B hereto or at such other address as such party may, by written notice received by the other parties, have designated as its address for such purpose. Notices sent by facsimile transmission shall be deemed to have been given when sent; notices sent by mail shall be deemed to have been given three (3) Business Days after the date when sent by registered or certified mail, postage prepaid; and notices sent by hand delivery or overnight courier service shall be deemed to have been given when received. For purposes of Section 2.2 , Lender shall be entitled to rely on telephonic instructions from any person that Lender in good faith believes is an authorized officer or employee of Borrower, and Borrower shall hold Lender harmless from any loss, cost or expense resulting from any such reliance.
13.4. Computations . Where the character or amount of any asset or liability or item of income or expense is required to be determined, or any consolidation or other accounting computation is required to be made, for the purpose of this Agreement, such determination or calculation shall, to the extent applicable and except as otherwise specified in this Agreement, be made in accordance with GAAP, consistently applied; provided , that if Borrower notifies Lender that Borrower wishes to amend any covenant in Section 9 or Section 10 (or any related definition) to eliminate or to take into account the effect of any change in GAAP on the operation of such covenant (or if Lender notifies Borrower that
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Lender wishes to amend Section 9 or Section 10 (or any related definition) for such purpose), then Borrowers compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant (or related definition) is amended in a manner satisfactory to Borrower and Lender.
13.5. Costs, Expenses and Taxes .
(a) Borrower agrees to pay (a) herewith a commitment fee in the amount of $300,000.00 , and (b) on demand all reasonable out-of-pocket costs and expenses of Lender (including Attorney Costs and any Taxes) in connection with the preparation, execution, syndication, delivery and administration (including perfection and protection of any Collateral, and the costs of Intralink (or similar services), if applicable) of this Agreement, the other Loan Documents and all other documents provided for herein or delivered or to be delivered hereunder or in connection herewith (including any amendment, supplement or waiver to any Loan Document), whether or not the transactions contemplated hereby or thereby shall be consummated, and all reasonable out-of-pocket costs and expenses (including Attorney Costs and any Taxes) incurred by Lender after an Event of Default in connection with the collection of the Obligations or the enforcement of this Agreement, the other Loan Documents or any such other documents or during any workout, restructuring or negotiations in respect thereof. In addition, Borrower agrees to pay, and to save Lender harmless from all liability for, any fees of Borrowers auditors in connection with any reasonable exercise by Lender of its rights pursuant to this Agreement. All Obligations provided for in this Section 13.5 shall survive repayment of the Loan, cancellation of the Note and termination of this Agreement.
(b) Borrower agrees to pay, and to save Lender harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes which may be payable or determined to be payable with respect to any of the Collateral or in connection with any of the transactions contemplated by this Agreement.
(c) The agreements in this Section 13.5 shall survive repayment and termination of all commitments under this Agreement, any foreclosure under, or any modification, release or discharge of, any or all of the Collateral Documents and termination of any Loan Document.
13.6. Governing Law . This agreement and each note shall be a contract made under and governed by the internal laws of the State of Illinois applicable to contracts made and to be performed entirely within such state, without regard to conflict of laws principles.
13.7. Confidentiality . As required by federal law and Lenders policies and practices, Lender may need to obtain, verify, and record certain customer identification information and documentation in connection with opening or maintaining accounts, or establishing or continuing to provide services. Lender agrees to use commercially reasonable efforts (equivalent to the efforts Lender applies to maintain the confidentiality of its own confidential information) to maintain as confidential all information provided to it by Borrower and designated as confidential, except that Lender may disclose such information (a) to Persons employed or engaged by Lender in evaluating, approving, structuring or administering the Loan and the Commitment; (b) to any assignee or participant or potential assignee or participant that has agreed to comply with the covenant contained in this Section 13.7 (and any such assignee or participant or potential assignee or participant may disclose such information to Persons employed or engaged by them as described in clause (a) above); (c) as required or requested by any federal or state regulatory authority or examiner, or any insurance industry association, or as reasonably believed by Lender to be compelled by any court decree, subpoena or legal or administrative order or process; (d) as, on the advice of Lenders counsel, is required by law; (e) in connection with the exercise of any right or remedy under the Loan Documents or in connection with any litigation to which Lender is
34
a party; (f) to any nationally recognized rating agency that requires access to information about Lenders investment portfolio in connection with ratings issued with respect to Lender; (g) to any Affiliate of Lender or any other Person who may provide Bank Products to Borrower or its Subsidiaries; (h) to Lenders independent auditors and other professional advisors as to which such information has been identified as confidential; or (i) that ceases to be confidential through no fault of Lender. Notwithstanding the foregoing, Borrower consents to the publication by Lender of a tombstone or similar advertising material relating to the financing transactions contemplated by this Agreement, and Lender reserves the right to provide to industry trade organizations information necessary and customary for inclusion in league table measurements. If any provision of any confidentiality agreement, non-disclosure agreement or other similar agreement between Borrower and Lender conflicts with or contradicts this Section 13.7 with respect to the treatment of confidential information, this Section shall supersede all such prior or contemporaneous agreements and understandings between the parties.
13.8. Severability . Whenever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.
13.9. Nature of Remedies . All Obligations of Borrower and rights of Lender expressed herein or in any other Loan Document shall be in addition to and not in limitation of those provided by applicable law. No failure to exercise and no delay in exercising, on the part of Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.
13.10. Entire Agreement . This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the parties hereto and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof and any prior arrangements made with respect to the payment by Borrower of (or any indemnification for) any fees, costs or expenses payable to or incurred (or to be incurred) by or on behalf of Lender.
13.11. Counterparts . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts and each such counterpart shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement. Receipt of an executed signature page to this Agreement by facsimile or other electronic transmission shall constitute effective delivery thereof. Electronic records of executed Loan Documents maintained by Lender shall be deemed to be originals.
13.12. Successors and Assigns . This Agreement shall be binding upon Borrower, Lender and their respective successors and assigns, and shall inure to the benefit of Borrower, Lender and the successors and assigns of Lender. No other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Borrower may not assign or transfer any of its rights or Obligations under this Agreement without the prior written consent of Lender.
35
13.13. Assignments; Participations .
13.13.1. Assignments .
(a) Lender may at any time assign to one or more Persons (any such Person, an Assignee ) all or any portion of its Loan and Commitment, with the prior written consent of Borrower, which consent shall be required only for so long as no Event of Default exists (which consent shall not be unreasonably withheld or delayed and shall not be required for an assignment by Lender to an Affiliate of Lender). Borrower shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless Borrower has expressly objected to such assignment within three Business Days after notice thereof.
(b) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to an assignment agreement between Lender and the Assignee, shall have the rights and obligations of Lender hereunder and (ii) Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, Lender) pursuant to an effective assignment agreement, Borrower shall execute and deliver to the Assignee (and, as applicable, Lender) a Note in the principal amount of the Assignees pro rata share of the Revolving Loan Commitment (and, as applicable, a Note in the principal amount of the pro rata share of the Revolving Loan Commitment retained by Lender). Each such Note shall be dated the effective date of such assignment. Upon receipt by Lender of such Note, Lender shall return to Borrower any prior Note held by it.
(c) Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement or the Collateral Documents to secure obligations of Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided , that no such pledge or assignment of a security interest shall release Lender from any of its obligations hereunder or substitute any such pledgee or assignee for Lender as a party hereto.
13.13.2. Participations . Lender may at any time, without the consent of Borrower but with ten (10) days prior written notice to Borrower, sell to one or more Persons participating interests in its Loan, Commitment or other interests hereunder (any such Person, a Participant ). In the event of a sale by Lender of a participating interest to a Participant, (a) Lenders obligations hereunder shall remain unchanged for all purposes, (b) Borrower shall continue to deal solely and directly with Lender in connection with Lenders rights and obligations hereunder and (c) all amounts payable by Borrower shall be determined as if Lender had not sold such participation and shall be paid directly to Lender. Borrower agrees that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as Lender under this Agreement; provided , that such right of set-off shall be subject to the obligation of each Participant to share with Lender, and Lender agrees to share with each Participant, on a pro rata basis. Borrower also agrees that each Participant shall be entitled to the benefits of Section 5.5 or Section 6 as if it were Lender ( provided , that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Section 5.5 or Section 6 than would have been paid to Lender on such date if no participation had been sold and that each Participant complies with Section 5.5(c) as if it were a direct assignee).
13.14. Captions . Section captions used in this Agreement are for convenience only and shall not affect the construction of this Agreement.
13.15. Customer Identification - USA Patriot Act Notice . PrivateBank (for itself and not on behalf of any other party) hereby notifies Borrower that, pursuant to the requirements of the USA
36
Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the Patriot Act ), it is required to obtain, verify and record information that identifies Borrower, which information includes the name and address of Borrower and other information that will allow PrivateBank, as applicable, to identify Borrower in accordance with the Act.
13.16. Indemnification by Borrower . Borrower hereby releases Lender and each of the officers, directors, employees, affiliates and agents of Lender (each a Lender Party ) from any and all causes of action, claims or rights which Borrower may now or hereafter have for, or which may arise from, any loss or damage caused by or resulting from (a) any failure of a Lender Party to protect, enforce or collect in whole or in part any of the Collateral and (b) any other act or omission to act on the part of a Lender Party, its officers, agents or employees, except in each instance for willful misconduct or gross negligence, and except for any breach by the Lender Party of this Agreement or any other Loan Document. Borrower shall indemnify, defend and hold each Lender Party harmless from and against any and all losses, liabilities, obligations, penalties, claims, fines, demands, litigation, defenses, costs, judgments, suits, proceedings, actual damages, disbursements or expenses of any kind or nature whatsoever (including, without limitation, Attorney Cost) which may at any time be either directly or indirectly imposed upon, incurred by or asserted or awarded against Lender Party in connection with, arising from or relating to Lenders entering into or carrying out the terms of this Agreement or being the holder of any Note, other than any loss, liability, damage, suit, claim, expense, fees or costs arising solely by reason of Lender Partys willful misconduct or gross negligence.
13.17. Nonliability of Lender . The relationship between Borrower on the one hand and Lender on the other hand shall be solely that of borrower and lender. Lender has no fiduciary relationship with or duty to Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between Borrower, on the one hand, and Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. Lender undertakes no responsibility to review or inform Borrower of any matter in connection with any phase of Borrowers business or operations. Borrower agrees that Lender shall have no liability (whether sounding in tort, contract or otherwise) for losses suffered by Borrower in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. NO LENDER PARTY SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER PARTY HAVE ANY LIABILITY WITH RESPECT TO, AND BORROWER HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Borrower acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party. No joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among Borrower and Lender
13.18. Forum Selection and Consent to Jurisdiction . Any litigation based hereon, or arising out of, under, or in connection with this agreement or any other loan document, shall be brought and maintained exclusively in the courts of the State of Illinois or in the United States District Court for the Northern District of Illinois; provided , that nothing in this Agreement shall be deemed or operate to preclude Lender from bringing suit or taking other legal action in any other jurisdiction. Borrower hereby
37
expressly and irrevocably submits to the jurisdiction of the courts of the State of Illinois and of the United States District Court for the Northern District of Illinois for the purpose of any such litigation as set forth above. Borrower further irrevocably consents to the service of process by registered mail, postage prepaid, or by personal service within or without the State of Illinois. Borrower hereby irrevocably appoints and designates Alberto Paracchini, the President of Borrower, whose business address is 180 N. LaSalle Street, 3 rd Floor, Chicago, IL 60601 , or any other person having and maintaining a place of business in such State, whom Borrower may from time to time hereafter designate (having given five days written notice thereof to Lender) as Borrowers true and lawful attorney and duly authorized agent for acceptance of service of legal process. Borrower agrees that service of such process upon such person shall constitute personal service of such process upon Borrower. Borrower hereby expressly and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any such litigation brought in any such court referred to above and any claim that any such litigation has been brought in an inconvenient forum.
13.19. Waiver of Jury Trial . BORROWER AND LENDER HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT, ANY NOTE, ANY OTHER LOAN DOCUMENT AND ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY LENDING RELATIONSHIP EXISTING IN CONNECTION WITH ANY OF THE FOREGOING, AND AGREES THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
[Signature pages follow]
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The parties hereto have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the date first set forth above.
BYLINE BANCORP, INC. an Illinois corporation, as Borrower | ||
/s/ Alberto J. Paracchini |
||
By: | Alberto Paracchini | |
Title: | President and CEO | |
THE PRIVATEBANK AND TRUST COMPANY, as Lender | ||
/s/ Kevin Kehoe |
||
By: | Kevin Kehoe | |
Title: | Managing Director |
ANNEX A
COMMITMENT
Lender |
Revolving Loan Commitment
Amount |
|||
The PrivateBank and Trust Company |
$ | 30,000,000 | ||
|
|
|||
TOTALS |
$ | 30,000,000.00 | ||
|
|
Annex A to Loan Agreement
ANNEX B
ADDRESSES FOR NOTICES
BYLINE BANCORP, INC., as Borrower | ||
Alberto Paracchini President Byline Bancorp, Inc. 180 N. LaSalle Street, 3 rd Floor Chicago, IL 60601 |
Telephone: |
|
|
Facsimile: |
|
THE PRIVATEBANK AND TRUST COMPANY, as Lender | ||
Notices of Borrowing | ||
120 S. LaSalle St. Chicago, Illinois 60603 Attention: Kevin Kehoe, Managing Director Telephone: 312-564-1803 |
||
Facsimile: 312-564- | ||
All Other Notices | ||
120 S. LaSalle St. Chicago, Illinois 60603 Attention: Kevin Kehoe, Managing Director Telephone: 312-564-1803 |
||
Facsimile: 312-564- |
Annex B to Loan Agreement
SCHEDULE 7.7
LITIGATION AND CONTINGENT LIABILITIES
NONE
Schedule 7.7 to Loan Agreement
SCHEDULE 7.28
BORROWER INFORMATION
BORROWER (exact legal name) |
STATE OF
|
FEDERAL
EMPLOYER
|
CHIEF EXECUTIVE
|
ORGANIZATIONAL
|
||||
Byline Bancorp, Inc. | Illinois | 36-3012593 | Chicago, Illinois | 51637267 |
Schedule 7.27 to Loan Agreement
SCHEDULE 10.4
LIENS
NONE
Schedule 10.4 to Loan Agreement
EXHIBIT A
FORM OF REVOLVING NOTE
REVOLVING NOTE
$30,000,000.00 |
October 13, 2016 Chicago, Illinois |
THE UNDERSIGNED , Byline Bancorp, Inc. , an Illinois corporation (the Borrower), for value received, promises to pay to the order of The PrivateBank and Trust Company (the Lender) at its principal office in Chicago, Illinois, the aggregate unpaid amount of all Revolving Loans made to the undersigned by Lender pursuant to the Loan Agreement referred to below (as shown on the schedule attached hereto (and any continuation thereof) or in the records of Lender), such principal amount to be payable on the dates set forth in the Loan Agreement. Notwithstanding the above, upon the earlier to occur of April 13, 2017, or the consummation of the Preferred Stock Offering, the aggregate amount of the Revolving Loan Commitment shall be a maximum of Five Million and 00/100ths Dollars and any Revolving Outstandings in excess of that amount shall be paid off.
The Borrower further promises to pay interest on the unpaid principal amount of the Loan from the date of such Loan until such Loan is paid in full, payable at the rate(s) and at the time(s) set forth in the Loan Agreement. Payments of both principal plus interest are to be made in lawful money of the United States of America.
This Note evidences indebtedness incurred under, and is subject to the terms and provisions of, the Revolving Credit Agreement, dated as of October 13, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the Loan Agreement), between the Borrower and Lender, to which Loan Agreement reference is hereby made for a statement of the terms and provisions under which this Note may or must be paid prior to its due date or its due date accelerated. The remaining outstanding principal balance of this Note, together with all accrued and unpaid interest, shall be due and payable on the Revolving Loan Maturity Date, which is October 12, 2017. Terms not otherwise defined herein are used herein as defined in the Loan Agreement.
If any attorney is engaged by Lender to enforce or defend any provision of this Note or any of the other Loan Documents, or as a consequence of any Event of Default, with or without the filing of any legal action or proceeding, then Borrower shall pay to Lender immediately upon demand all attorneys fees and expenses, together with interest thereon from the date of such demand until paid at the rate of interest applicable to the principal balance owing hereunder as if such unpaid attorneys fees and expenses had been added to the principal.
No previous waiver and no failure or delay by Lender in acting with respect to the terms of this Note or any of the other Loan Documents shall constitute a waiver of any breach, default or failure of condition under this Note, the Loan Agreement or any of the other Loan Documents or the obligations secured thereby. A waiver of any term of this Note or any of the other Loan Documents or of any of the obligations secured thereby must be made in writing and shall be limited to the express written terms of such waiver. In the event of any inconsistencies between the terms of this Note and the terms of any other document related to the Loan evidenced by this Note, the terms of this Note shall prevail.
Except as otherwise provided in the Loan Agreement, Borrower expressly waives presentment, demand, notice of dishonor, notice of default or delinquency, notice of acceleration, notice of protest and nonpayment, notice of costs, expenses or losses and interest thereon, notice of late charges, and diligence in taking any action to collect any sums owing under this Note or in proceeding against any of the rights
Exhibit A to Loan Agreement
or interests in or to properties securing payment of this Note. In addition, Borrower expressly agrees that this Note and any payment coming due hereunder may be extended from time to time without in any way affecting the liability of any such party hereunder.
Time is of the essence with respect to every provision hereof. This Note shall be construed and enforced in accordance with the laws of the State of Illinois, except to the extent that federal laws preempt the laws of the State of Illinois, and all persons and entities in any manner obligated under this Note consent to the jurisdiction of any Federal or State court located in Chicago, Illinois having proper venue and also consent to service of process by any means authorized by Illinois or Federal law. Any reference contained herein to attorneys fees and expenses shall be deemed to be to reasonable fees and expenses and to include all reasonable fees and expenses of in-house or staff attorneys and the reasonable fees and expenses of any other experts or consultants.
All agreements between Borrower and Lender (including, without limitation, this Note and the Loan Agreement, and any other documents securing all or any part of the indebtedness evidenced hereby) are expressly limited so that in no event whatsoever shall the amount paid or agreed to be paid to Lender exceed the highest lawful rate of interest permissible under applicable law. If, from any circumstances whatsoever, fulfillment of any provision hereof, the Loan Agreement or any other documents securing all or any part of the indebtedness evidenced hereby at the time performance of such provisions shall be due, shall involve exceeding the limit of validity prescribed by law which a court of competent jurisdiction may deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall be reduced to the highest lawful rate of interest permissible under such applicable laws, and if, for any reason whatsoever, Lender shall ever receive as interest an amount which would be deemed unlawful under such applicable law, such interest shall be automatically applied to the payment of the principal of this Note (whether or not then due and payable) and not to the payment of interest or refunded to Borrower if such principal has been paid in full.
Any notice which either party hereto may be required or may desire to give hereunder shall be governed by the notice provisions of the Loan Agreement.
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT THAT IT MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION ARISING IN ANY WAY IN CONNECTION WITH THIS REVOLVING NOTE OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY OTHER STATEMENTS OR ACTIONS OF BORROWER OR LENDER. BORROWER ACKNOWLEDGES THAT IT HAS BEEN REPRESENTED IN THE SIGNING OF THIS NOTE AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL SELECTED OF ITS OWN FREE WILL, AND THAT IT HAS DISCUSSED THIS WAIVER WITH SUCH LEGAL COUNSEL. BORROWER FURTHER ACKNOWLEDGES THAT (i) IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF THIS WAIVER, (ii) THIS WAIVER HAS BEEN REVIEWED BY BORROWER AND BORROWERS COUNSEL AND IS A MATERIAL INDUCEMENT FOR LENDER TO ENTER INTO THE LOAN DOCUMENTS, AND (iii) THIS WAIVER SHALL BE EFFECTIVE AS TO EACH OF THE LOAN DOCUMENTS AS IF FULLY INCORPORATED THEREIN.
[THE REMAINDER OF THIS PAGE IS LEFT BLANK INTENTIONALLY]
Exhibit A to Loan Agreement
IN WITNESS WHEREOF , the undersigned has executed this Note or caused this Note to be executed by its duly authorized representative as of the date first above written.
Borrower: | ||
Byline Bancorp, Inc. , an Illinois corporation |
By: |
|
Name/ Title: |
|
Exhibit A to Loan Agreement
EXHIBIT B
FORM OF PLEDGE AGREEMENT
Exhibit B to Loan Agreement
EXHIBIT C
FORM OF OPINION OF BORROWERS COUNSEL
October 13, 2016
PrivateBank and Trust Company
120 S. LaSalle St.
Chicago, Illinois 60603
Attention: Managing Director
Re: | Loan to Byline Bancorp, Inc. |
Ladies and Gentlemen:
We have served as counsel to Byline Bancorp, Inc., an Illinois corporation (the Borrower ), a corporation incorporated under the laws of Illinois, in connection with the Revolving Loan described in that certain Revolving Credit Agreement, dated as of October 13, 2016 (the Loan Agreement ), by and between the Borrower and The PrivateBank and Trust Company (the Lender ). This opinion is being delivered to you pursuant to Section 11.1.6 of the Loan Agreement. Capitalized terms used herein and otherwise undefined shall have the meanings given them in the Loan Agreement.
In order to render the opinions expressed herein, we have examined the following (collectively, the Financing Documents ):
1. the executed Loan Agreement, the Collateral Documents and the other Loan Documents (as defined in the Loan Agreement); and
2. such other documents, instruments, writings and agreements as we deemed appropriate.
In our examination of the Financing Documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity of all copies submitted to us with the originals to be delivered and the due authorization, execution and delivery by each party to such documents (other than the Borrower).
Based on the foregoing and subject to the qualifications set forth in this letter, it is our opinion that:
1. Each of Borrower and its Subsidiaries is validly existing and in good standing under the laws of its jurisdiction of organization; and each of Borrower and its Subsidiaries is duly qualified to do business in each jurisdiction where, because of the nature of its activities or properties, such qualification is required, except for such jurisdictions where the failure to so qualify would not have a Material Adverse Effect.
2. Each of Borrower and its Subsidiaries (and all officers executing and delivering Financing Documents on their behalf) is duly authorized to execute and deliver each Financing Document to which it is a party; Borrower is duly authorized to borrow monies under the Financing Documents; and Borrower is duly authorized to perform its Obligations under each Financing Document to which it is a party.
Exhibit C to Loan Agreement
3. The execution, delivery and performance by each of Borrower and its Subsidiaries of each Financing Document to which it is a party, and the borrowings by Borrower thereunder, do not and will not (a) require any consent or approval of any governmental agency or authority (other than any consent or approval which has been obtained and is in full force and effect), (b) conflict with (i) any provision of law, (ii) the charter, by-laws or other organizational documents of Borrower or any Subsidiary or (iii) any agreement, indenture, instrument or other document, or any judgment, order or decree, which is binding upon Borrower or any Subsidiary or any of their properties or (c) require, or result in, the creation or imposition of any Lien on any asset of Borrower (other than Liens in favor of Lender created pursuant to the Collateral Documents).
4. Each of the Loan Agreement and each other Financing Document to which Borrower is a party is the legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with its terms, subject to bankruptcy, insolvency and similar laws affecting the enforceability of creditors rights generally and to general principles of equity.
5. Except as previously discussed or disclosed in due diligence prior to the Closing Date, neither Borrower nor any of its Subsidiaries, nor any of the officers or directors or any of them, to our knowledge, is now operating under any restrictions, agreements, memoranda , or commitments (other than restrict ions of general application) imposed by any governmental agency, nor, to our knowledge, are any such restrictions threatened or agreements, memoranda or commitments being sought by any governmental agency.
6. To our knowledge, except as may be disclosed in the schedules to the Loan Agreement, no litigation (including derivative actions), arbitration proceeding or governmental investigation or proceeding is, pending or, to our knowledge, threatened against either Borrower or its Subsidiaries which could reasonably be expected to have a Material Adverse Effect.
7. To our knowledge, Borrower intends to use the proceeds of the Loans for general corporate purposes and to provide funding for acquisitions subject to the limitations set forth in the Loan Agreement.
8. Neither Borrower nor its Subsidiaries is an investment company or a company controlled by an investment company or a subsidiary of an investment company, within the meaning of the Investment Company Act of 1940. Neither Borrower nor any Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock.
9. To our knowledge, each of Borrower and its Subsidiaries is in compliance in all material respects with the requirements of all laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
10. The terms of the Pledge and Security Agreement, assuming the possession of the Collateral by Lender, are legally sufficient to create a valid and perfected security interest in the Collateral.
Page 2 of Exhibit C to Loan Agreement
11. Except for such approvals as have already been obtained, no order, permission, consent or approval of any federal or state commission, board or regulatory authority or Governmental Agency is required in order to consummate the Bank Merger or the Merger or the Preferred Stock Offering.
Our opinions are subject to the following qualifications:
(a) Our opinions are subject to the effect of bankruptcy, insolvency, reorganization, arrangement, moratorium, fraudulent conveyance, or other similar laws now or hereafter in effect affecting creditors rights and remedies generally.
(b) The validity, binding effect and the enforceability of the Financing Documents and the availability of injunctive relief, specific performance, or other equitable remedies thereunder are subject to the discretion of the court before which any proceeding may be brought and to the general principles of equity (regardless of whether enforcement is considered in proceedings at law or in equity).
(c) The validity, binding effect, and the enforceability of the Financing Documents are subject to the effect of laws and judicial decisions which have imposed duties and standards of conduct (including without limitation, obligations of good faith, fair dealing and reasonableness) upon secured creditors.
(d) Whenever our opinion with respect to the existence or absence of facts is indicated to be based on our knowledge, we are referring to the actual knowledge of the attorneys who have represented Borrowers in connection with the transactions contemplated by the Financing Documents. Except as expressly set forth herein, we have not undertaken any independent investigation to determine the existence or absence of such facts (and we have not caused to be made any review of any court files or indices) and no inference as to our knowledge should be drawn from the fact that such representation has been undertaken by us. As to various questions of fact material to our opinion, we have relied upon representations and warranties of Borrower contained in the Loan Agreement and certificates of officers or other representatives of the Borrower.
In this opinion we have, with your permission, assumed the following:
(e) Each party to the Financing Documents (other than any Borrower) has satisfied those legal requirements that are applicable to it to the extent necessary to make the Financing Documents binding on and enforceable against it.
(f) Each document and instrument submitted to us for review is accurate and complete, each such document that is an original is authentic, each such document that is a copy conforms to an authentic original, and all signatures on each such document are genuine.
(g) Each certificate issued by a governmental office or agency and each document supplied to us, directly or indirectly, is accurate, complete and authentic and all official public records (including their proper indexing and filing) are accurate and complete.
(h) There has not been any mutual mistake of fact or misunderstanding, fraud, duress, or undue influence.
Our opinions are limited to the specific issues addressed and are limited in all respects to the laws and facts existing on the date hereof. By rendering our opinions, we do not undertake to advise you of any changes in such laws or facts which may occur after the date hereof.
Page 3 of Exhibit C to Loan Agreement
The law covered by the opinions expressed herein is limited to applicable federal law of the United States and the laws of the State of Illinois.
This opinion is furnished to you pursuant to the Financing Documents only for the purpose contemplated by the Financing Documents and is not to be used, circulated, quoted, or otherwise relied upon by any other person or entity or for any other purpose, except for its use in connection with any review of the loan by a regulatory agency having supervisory authority over any Lender for the purpose of confirming the existence of this opinion or in response to a court order. Notwithstanding the foregoing, at your request, we hereby consent to reliance hereon by any future assignee of your interest in the Loans under the Loan Agreement pursuant to an assignment that is made and consented to in accordance with the express provisions of Section 13.13 of the Loan Agreement, on the condition and understanding that (i) this opinion letter speaks only as of the date hereof, (ii) we have no responsibility or obligation to update this opinion letter, to consider its applicability or correctness to other than its addressee(s), or to take into account changes in law, facts or any other developments of which we may later become aware, and (iii) any such reliance by a future assignee must be actual and reasonable under the circumstances existing at the time of assignment, including any changes in law, facts or any other developments known to or reasonably knowable by the assignee at such time.
Very truly yours, |
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Page 4 of Exhibit C to Loan Agreement
EXHIBIT D
FORM OF NOTICE OF BORROWING
To: | The PrivateBank and Trust Company, as Lender |
Please refer to the Revolving Credit Agreement, dated as of October 13, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the Loan Agreement ), between Byline Bancorp, Inc., an Illinois corporation ( Borrower ), and The PrivateBank and Trust Company, as Lender. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement.
The undersigned hereby gives irrevocable notice, pursuant to Section 2.2 of the Loan Agreement, of a request hereby for a borrowing as follows:
(i) The requested borrowing date for the proposed borrowing (which is a Business Day) is , .
(ii) The aggregate amount of the proposed borrowing is $ .
(iii) The Interest Rate the Prime Rate, floating.
The undersigned hereby certifies that on the date hereof and on the date of borrowing set forth above, and immediately after giving effect to the borrowing requested hereby: (i) there exists and there shall exist no Default or Event of Default under the Loan Agreement; and (ii) each of the representations and warranties contained in the Loan Agreement and the other Loan Documents is true and correct as of the date hereof, except to the extent that such representation or warranty expressly relates to another date and except for changes therein expressly permitted or expressly contemplated by the Loan Agreement.
Borrower has caused this Notice of Borrowing to be executed and delivered by its officer thereunto duly authorized on , .
BYLINE BANCORP, INC., an Illinois corporation. |
By: |
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Title: |
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Exhibit D to Loan Agreement
EXHIBIT E
FORM OF COMPLIANCE CERTIFICATE
To: | The PrivateBank and Trust Company, as Lender |
Please refer to the Revolving Credit Agreement, dated as of October 13, 2016 (as amended, restated, supplemented or otherwise modified from time to time, the Loan Agreement ), between Byline Bancorp, Inc., an Illinois corporation ( Borrower ), and The PrivateBank and Trust Company, as Lender. Terms used but not otherwise defined herein are used herein as defined in the Loan Agreement.
A. Reports . Pursuant to Section 8.1.2 , Section 8.1.3 and Section 8.1.4 of the Loan Agreement, enclosed herewith are copies of the quarterly reports of Borrower as at , (the Computation Date ), which report fairly presents in all material respects the financial condition and results of operations of Borrower as of the Computation Date and have been prepared in accordance with GAAP consistently applied.
B. Financial Tests . Borrower hereby certifies and warrants to you that the following is a true and correct computation as at the Computation Date of the following ratios and/or financial restrictions contained in the Loan Agreement:
Borrower further certifies that no Default or Event of Default has occurred and is continuing [Or, if incorrect, provide detail regarding the Event of Default or and the steps being taken to cure it and the time within which such cure will occur.] . Additionally, Borrower further certifies that there have been no distributions to common shareholders.
Borrower has caused this Certificate to be executed and delivered by its duly authorized officer on , .
BYLINE BANCORP, INC. , an Illinois corporation |
By: |
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Title: |
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Exhibit E to Loan Agreement
Exhibit 10.2
WAIVER LETTER
June 7, 2017
THE PRIVATEBANK AND TRUST COMPANY
120 S. LaSalle St.
Chicago, Illinois 60603
Attention: Kevin Kehoe, Managing Director
Ladies and Gentlemen:
Reference is made to the Revolving Credit Agreement, dated October 13, 2016 (the Credit Agreement ), between Byline Bancorp, Inc., an Illinois corporation, as borrower ( Byline Illinois ) and The PrivateBank and Trust Company, as lender (the Lender ). Capitalized terms used but not defined in this letter shall have the meanings given to such terms in the Credit Agreement.
Byline Illinois proposes to enter into a reincorporation merger (the Merger ) pursuant to which it will reincorporate in the State of Delaware by merging with and into Byline Bancorp, Inc., a Delaware corporation and wholly owned subsidiary of Byline Illinois ( Byline Delaware , and following the Merger, the Company ), with common shareholders of Byline Illinois receiving one (1) share of common stock, par value $0.01 per share, (the Common Stock) of Byline Delaware for every five (5) shares of common stock, no par value, of Byline Illinois held by each holder, plus cash to be paid in lieu of any fractional shares. As part of the Merger, each share of Noncumulative Perpetual Preferred Stock, Series E, of Byline Illinois will be exchanged for one share of Noncumulative Perpetual Preferred Stock, Series A of Byline Delaware (the Series A Preferred Stock ), with substantially the same rights and privileges, and each share of 7.50% Fixed to Floating Noncumulative Perpetual Preferred Stock, Series F, of Byline Illinois, will be exchanged for one share of 7.50% Fixed to Floating Noncumulative Perpetual Preferred Stock, Series B, of Byline Delaware (the Series B Preferred Stock ), with substantially the same rights and privileges. Following the consummation of the Merger, the amended and restated certificate of incorporation and amended and restated bylaws of Byline Delaware will be the governing documents of the Company. Following the Merger, the Company intends to issue and sell shares of its Common Stock in an initial public offering (the IPO ), registered with the Securities and Exchange Commission. In connection with the IPO, subject to regulatory approval, the Company intends to repurchase all (or a portion of) the outstanding shares of Series A Preferred Stock for cash, based on the price to public per share of Common Stock in the IPO. The transactions described in and contemplated by this paragraph are referred to as the Transactions .
The Company also proposes to pay dividends on the Series B Preferred Stock, when and if declared by its board of directors, in accordance with the terms of the Series B Preferred Stock and, only if the IPO occurs, the Company may in the future elect to pay dividends to holders of its Common Stock (such dividends on the Series B Preferred Stock and the Common Stock, the Dividends ).
Pursuant to Sections 10 and 13.1 of the Credit Agreement, the Company hereby requests that the Lender consent to the Company (i) entering into the Transactions and (ii) making any Dividends payments, and the Company requests that the Lender waive the restrictions set forth in Section 10 of the Credit Agreement, including, but not limited to, Sections 10.2, 10.3, 10.5, 10.6 and 10.7, but only to the extent they impact the Transactions and Dividends payments provided above and not otherwise. In addition, following the consummation of the Merger, references in the Credit Agreement to the Borrower shall be deemed to refer to the Company .
Except for the waiver and consent set forth above, the text of the Credit Agreement shall remain unchanged and in full force and effect. This Waiver Letter may be executed in separate counterparts, each of when so executed shall constitute one and the same agreement.
(Signature page follows)
This letter shall be construed in accordance with and governed by the law of the State of Illinois.
Very truly yours, | ||||
BYLINE BANCORP, INC. | ||||
By: |
/s/ Alberto J. Paracchini |
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Name: | Alberto J. Paracchini | |||
Title: | President | |||
Acknowledged and Agreed as of | ||||
June 13, 2017: | ||||
THE PRIVATEBANK AND TRUST COMPANY | ||||
By: |
/s/ Kevin Kehoe |
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Name: | Kevin Kehoe | |||
Title: | Group Head, Correspondent Banking |
Exhibit 10.3
EXECUTION VERSION
Alberto J. Paracchini
Re: | Employment Terms |
Dear Alberto:
On behalf of the Board of Directors (the Board ) of Byline Bank, an Illinois chartered bank (the Company ), I am pleased to offer you employment with the Company on the terms set forth in this letter ( Agreement ).
1. Term . The term of this Agreement commences upon your written acceptance below and will expire on the third anniversary of your acceptance date; provided , the term will automatically renew on such date for one (1) year, and for one (1) year on each subsequent anniversary of such date thereafter, unless at any time not less than one hundred twenty (120) days prior to the end of such term either the Company or you notify the other in writing of its intention not to further extend the term; provided further , (a) the term of this Agreement shall terminate on any termination of your employment and (b) upon the occurrence of a Change in Control or a Special Change in Control (each as defined on the Attachment) the term of this Agreement shall renew for the period expiring on the second anniversary of such Change in Control or Special Change in Control, as the case may be, and which shall not automatically renew thereafter. The period under this Section 1, as may be so renewed, is referred to herein as the Term . Absent a written agreement by the parties to the contrary, upon the expiration of the Term, this Agreement (all rights and obligations herein) will terminate (except for those provisions that specifically survive) and your employment will continue thereafter at-will.
2. Position; Principal Place of Employment .
(a) You will be employed as President and Chief Executive Officer of the Company, reporting to the Board. Your principal place of employment will be at the Companys corporate offices designated from time to time by the Board. Your duties shall be as may be prescribed by the Companys by-laws and as may be assigned by the Board from time to time commensurate with your position. During your employment, you owe an undivided duty of loyalty to the Company and agree to devote your full business time and attention to the performance of your duties and responsibilities. You shall perform your duties under this Agreement professionally, in accordance with the applicable laws, rules and regulations and such standards, policies and procedures established by the Company and the banking industry from time to time. You will not work full-time for another employer, and all part-time employment, including any self-employment shall be disclosed to the Company not less frequently than on the anniversary of the last day of the Term. You may serve on charitable boards or committees at your discretion without consent of the Board and, in addition, on such corporate boards as are approved by the Board in its sole discretion, so long as such activities do not interfere materially with performance of your responsibilities hereunder. In addition, you are subject to the Companys Code of Ethics and all such other activities are subject to the principles thereunder not to engage in any activity that may, in the sole discretion of the Board, be determined to be a conflict of interest. You agree to serve without additional compensation as an officer and director of any of the Companys subsidiaries or of Byline Bancorp, Inc., an Illinois corporation (f/k/a Metropolitan Bank Group, Inc. and referred to in this Agreement as the Holding Company ).
(b) During the Term, the Board will annually nominate you for re-election as a member of the Board.
Alberto J. Paracchini
Page 2
3. Base Salary . You will be paid a base salary at an annual rate of $350,000 (the Base Salary ), subject to applicable withholdings and payable in accordance with the regular payroll practices of the Company. The amount of the Base Salary may be adjusted from time to time in accordance with the amounts of salary approved by the Board or a committee thereof (without limiting the applicability of Section 7(c) pursuant to a voluntary termination for Good Reason). In order to effectuate the purpose of the preceding sentence, the amount of the Base Salary shall be reviewed by such committee or Board at least every year during the term of this Agreement.
4. Annual Incentive . You will be eligible to participate in the Companys Executive Incentive Plan (the EIP ) as in effect from time to time. Under the EIP, you will have the opportunity to earn an annual cash bonus up to a maximum of 75% of your Base Salary, in accordance with the terms thereof, based upon your achievement of applicable performance objectives as determined in the sole discretion of the Board (or a committee thereof). Your annual bonus, to the extent earned under the EIP, will be paid not later than March 15 of the fiscal year following the fiscal year in which performed. You will not be entitled to a bonus for any particular year unless you are employed on the date such bonus is paid (unless otherwise provided herein or in the EIP).
5. Long-Term Incentive Program . You will be eligible to participate in the Byline Bancorp Equity Incentive Plan adopted by the Holding Company on such terms and conditions as are set forth in an award agreement to be executed by the parties contemporaneous with his Agreement.
6. Employee Benefits; Vacation; Expenses .
(a) You will be entitled to participate in all employee benefit plans that the Company has adopted or may adopt, maintain or contribute to for the benefit of its employees, subject to satisfying the applicable eligibility requirements. Unless otherwise provided in this Agreement, all benefits are subject to the terms and conditions of the plan or arrangement under which such benefits accrue, as may be amended or terminated at any time and from time to time in the sole discretion of the Company.
(b) You will be entitled to annual paid vacation in accordance with the Companys policy applicable to senior executives, but in no event less than four (4) weeks per calendar year (prorated for any partial calendar year of employment).
(c) You will be entitled to a benefit at Company expense that pays upon your death a lump sum cash amount equal to 200% of your Base Salary but not exceeding $750,000. The Company may provide this benefit, in its sole discretion, through its purchase of a life
Alberto J. Paracchini
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insurance policy, in which event you will fully cooperate with any physical examination and other underwriting requirements to obtain such life insurance. The Company will deduct any applicable tax withholdings from other compensation due you or from the proceeds of such benefit, as may apply.
(d) During the Term, the Company shall pay for the monthly dues (but not any capital assessments) of membership in one social club and one business club (e.g., the Economic Club of Chicago) selected at your reasonable discretion.
(e) Upon presentation of appropriate documentation, you will be reimbursed in accordance with the Companys expense reimbursement policy for all reasonable and necessary business expenses (including your cell phone expenses) incurred in connection with the performance of your duties hereunder.
(f) The Company shall reimburse you for reasonable professional fees (attorneys, accountants, tax advisers) incurred by you in the preparation, negotiation and execution of this Agreement (and other agreements referenced herein) in an amount not to exceed $25,000.00.
7. Termination; Special Change in Control . Your employment may be terminated by either party for any reason at any time pursuant to written notice to the other party, and will terminate automatically on your death; provided , you shall give the Company not less than 30 days prior written notice of any termination by you, with or without Good Reason (as defined on the Attachment hereto). Any payments made and benefits provided to you under this Agreement will be in lieu of any termination or severance payments or benefits for which you (or your estate in the event of your death) otherwise may be eligible under any of the plans, practices, policies or programs of the Company or its affiliates. If termination occurs at a time when the Company is deemed to be in troubled condition by the Federal Deposit Insurance Corporation (the FDIC ) and is subject to the FDICs golden parachute regulations under 12 C.F.R. Part 359, the payments referenced in this Section 7 shall be limited to an aggregate amount equal to the lesser of (i) 12 months of Base Salary, or (ii) the amount otherwise owed to you hereunder. Any payment made pursuant to this Section 7 which is subject to the FDICs golden parachute regulations shall be subject to a right of the Company (or its successor) to recoup such payment from you if the Company (or its successor) subsequently determines, in its reasonable discretion, that you have engaged in any of the activities or offenses set forth in 12 C.F.R. Section 359.4(a)(i) - (iv). After receipt of written notice from the Company that it has made a determination as provided for in this Section 7, you agree to reimburse the Company for the subject payment made pursuant to this Section 7 within 30 days after receipt of such written notice. Further, you agree to indemnify the Company for any costs incurred by the Company in recouping such amount in the event that you fail to reimburse such amount within 30 days of receiving the Company written notice under this Section 7.
(a) Death; Disability . In the event that your employment terminates due to your death or Disability (as defined on the Attachment), you will be entitled to: (i) any unpaid Base Salary, and any unused vacation, accrued through the date of termination; (ii) reimbursement of any unreimbursed expenses incurred through the date of termination in
Alberto J. Paracchini
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accordance with Section 6(e); and (iii) all other payments or benefits to which you may be entitled under the terms of any applicable employee benefit plans and programs in which you participated immediately prior to such termination (clauses (i), (ii) and (iii) collectively being the Accrued Amounts ). On such termination, you will also be entitled to (iv) any unpaid EIP bonus earned with respect to any fiscal year ending on or preceding the date of termination ( Unpaid EIP ); and (v) a pro rata portion of your EIP bonus for the fiscal year in which your termination occurs, payable at the time that EIP bonuses are paid to other senior executives for such year, in an amount equal to (x) the amount that you would have earned based upon actual performance had your employment continued through the end of the fiscal year multiplied by (y) a fraction the numerator of which is the number of days you were employed during the fiscal year and the denominator of which is 365 ( Pro Rata Bonus ). In the event of your death, your beneficiary will also be entitled to your death benefit under Section 6(c).
(b) Termination For Cause or Without Good Reason . If your employment should be terminated by the Company for Cause (as defined on the Attachment) or by you without Good Reason, you will be entitled to only the Accrued Amounts.
(c) Termination Without Cause or For Good Reason; Special Change in Control Success Payment .
(i) If your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time during the Term (and not upon the expiration of the Term) other than on or following the occurrence of a Change in Control or a Special Change in Control, the Company will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one and one-half (1.5) multiplied by (y) the sum of (I) your Base Salary plus (II) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in substantially equal installments in accordance with the Companys regular payroll cycle over a period of eighteen (18) months from your date of termination commencing on the first complete payroll payment date following the date that the Release (defined below) becomes effective; provided , that the Companys obligation to pay the amount in subclause (II) will immediately cease to the extent required to avoid adverse tax consequences to the Company. The amount payable under clause (C), above, will not be reduced or terminated due to compensation you may receive from any subsequent employment or self-employment.
(ii) If your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time, during the Term (and not upon the expiration of the Term), on or within two (2) years following the occurrence of a Change in Control (that is not a Special Change in Control), the Company (or its successor) will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one and one-half (1.5)
Alberto J. Paracchini
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multiplied by (y) the sum of (I) your Base Salary plus (II) the higher of the two immediately preceding completed fiscal years earned bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (III) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in a lump sum within fifteen (15) days after the Release becomes effective; provided , that the Company will not be obligated to pay the amount in subclause (III) to the extent required to avoid adverse tax consequences to the Company.
(iii) Upon the occurrence of a Special Change in Control (as defined on the Attachment) during the Term, upon which your employment does not terminate, you will receive from the Company or its successor (irrespective of whether your employment terminates or continues upon consummation of such Special Change in Control): (A) a lump sum cash amount equal to one and one-half (1.5) multiplied by the sum of (I) your Base Salary plus (II) the higher of the two immediately preceding completed fiscal years earned bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (B) a Pro Rata Bonus, but such Pro Rata Bonus will be determined based on achievement applicable performance goals under the EIP through the date of consummation of the Special Change in Control (with adjustments to the performance goals as the Board deems appropriate to account for any reduction of the performance period resulting from consummation of the Special Change in Control). The amount due under clause (A) shall be paid within fifteen (15) days after the Release becomes effective. The amount due under clause (B) will be paid when EIP bonuses for such period are paid to other executives of the Company. In the event that you become entitled to receive the payments under this subparagraph (iii), you shall not be entitled to any payments under subparagraph 7(c)(ii)(B) or (C) upon any termination of your employment thereunder.
(iv) Conditions . Any payments or benefits made or provided pursuant to Section 7(c)(i), (ii) or (iii), as the case may be, other than Accrued Amounts, are subject to your compliance (A) with the Agreement Protecting Company Interests (as provided at Section 8 hereof); (B) delivery to the Company of an executed general release of claims in a form substantially identical to the form of release attached hereto as Exhibit A ( Release ) within twenty-one (21) days of presentation thereof by the Company to you; and (C) if such payments are due in connection with a termination of your employment, delivery to the Company of a resignation from all offices, directorships and fiduciary positions with the Company, its affiliates and employee benefit plans. Anything in this Section 7(c) to the contrary notwithstanding, to the extent that any payment conditioned upon such effective Release is deferred compensation under Section 409A (defined below) and the period during which you have discretion to execute or revoke the Release straddles two calendar years, then the Company will make or commence, as may apply, such payments on the earliest practicable date in such second year after the Release becomes effective.
(v) Except as provided herein, you will not be obligated to mitigate amounts payable or arrangements made under the provisions of this Agreement and the obtaining of other employment shall in no event effect any reduction of the Companys obligations under this Agreement. Except as provided herein, the Companys obligation to make payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against you or others.
Alberto J. Paracchini
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(d) Initial Stock Option Award . The terms of the Initial Stock Option Award agreement shall govern the treatment of the Initial Stock Option upon a termination of your employment.
8. Agreement Protecting Company Interests . As a condition of the Company entering into this Agreement and your continuing employment hereunder, you will enter into the Companys and Holding Companys standard form of Agreement Protecting Company Interests, with a Restriction Period thereunder of eighteen (18) months. The Agreement Protecting Company Interests and the covenants thereunder will survive any expiration of this Agreement or termination of your employment.
9. Possible Reduction to Avoid Excise Tax on Golden Parachute Payments . In the event that any amounts payable pursuant to Section 7 hereof or other payments or benefits otherwise payable to you under this Agreement or under any other agreement, plan or program or otherwise payable to you by the Company or an affiliate thereof (a) constitute parachute payments within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended ( Code ), and (b) but for this Section 9 would be subject to the excise tax imposed by Section 4999 of the Code, then such amounts payable under this Agreement and under such other plans, programs and agreements shall be either (i) delivered in full, or (ii) delivered in such lesser amount that would result in no portion of such payments and benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts under clause (i) or clause (ii), taking into account the applicable federal, state and local income and employment taxes and the excise tax imposed by Section 4999 of the Code (and any equivalent state or local excise taxes), results in the receipt by you, on an after-tax basis, of the greatest amount of payments and benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Any reduction in payments or benefits required by this Section 9 shall occur in the following order: (1) any payment due under Section 7(c)(iii) upon the occurrence of a Special Change in Control; (2) any long-term cash incentive payments due to you upon the occurrence of the event triggering such parachute payments, (3) cash severance pay, (4) any Pro Rata Bonus, and (5) reduction of vesting acceleration of equity awards (in reverse order of the date of the grant). All determinations required to be made under this Section 9 shall be made by the Companys independent tax preparer or, if the Company in its sole discretion determines not to use such tax preparer, such other nationally or regionally recognized certified public accounting firm selected by the Company and reasonably acceptable to you (the Firm ). All fees and expenses of the Firm shall be borne by the Company.
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10. Standard Regulatory Provisions .
(a) If you are prohibited from participating in the conduct of the Companys affairs by a notice served under Section 8(e)(3) or 8(g)(l) of the Federal Deposit Insurance Act, (12 U. S.C. §1818(e)(3) or (g)(l)), the Companys obligations under this contract shall be suspended as of the date of such service, unless stayed by appropriate proceedings.
(b) If you are removed and/or permanently prohibited from participating in the conduct of the Companys affairs by an order issued under Section 8(e)(4) or 8(g)(l) of the Federal Deposit Insurance Act, (12 U.S.C. §1818(e)(4) or (g)(l)), all obligations of the Company under this Agreement shall terminate as of the effective date of such order.
(c) If the Company is in default (as defined in Section 3(x)(l) of the Federal Deposit Insurance Act, 12 U.S.C. §1813(x)(l)), all obligations of the Company under this Agreement shall terminate as of the date of default.
(d) All obligations under this Agreement may be terminated except to the extent determined that the continuation of the Agreement is necessary for the continued operation of the Company: (i) by the FDIC, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. §1823(c)); or (ii) by the FDIC at the time the FDIC approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined to be in an unsafe and unsound condition. All obligations of the Company under this Agreement shall terminate as of the effective date of any of the foregoing FDIC actions.
(e) Any payments made to you pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) and FDIC Regulation 12 CFR Part 359, regarding golden parachute payments and prohibited indemnification payments.
11. Arbitration . To the fullest extent permitted by law, all claims that you may have against Company (or any other released party under the Release), or which the Company may have against you, in any way related to the subject matter, interpretation, application, or alleged breach of this Agreement ( Arbitrable Claims ) shall be resolved by binding arbitration in Chicago, Illinois. The Arbitration will be held pursuant to the American Arbitration Associations Commercial Rules and Mediation Procedures (other than for large or complex disputes). The decision of the arbitrator shall be in writing and shall include a statement of the essential conclusions and findings upon which the decision is based. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. Either party may bring an action in a court situated in Cook County, Illinois to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. Notwithstanding the foregoing, either party may, in the event of an actual or threatened breach of this Agreement (including but not limited to the provisions of the Agreement to Protect Company Interests), seek a temporary restraining order or injunction in a court situated in Cook
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County, Illinois restraining such breach pending a determination on the merits by the arbitrator. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR ENFORCEABILITY OF THE AGREEMENT TO ARBITRATE.
12. Indemnification : Liability Insurance. The Company agrees to indemnify you and hold M&M harmless to the maximum extent permitted the Companys charter and by-laws (as in effect on the date hereof and without regard for any adverse amendment or repeal hereafter that is not applicable to members of the Board). During the Term and at all times thereafter during which you may be subject to a liability to be indemnified under the preceding sentence, the Company will cover you as an insured under any directors and officers liability insurance that insures its officers. This Section 12 will survive any termination or expiration of this Agreement or termination of your employment.
13. Your Representations . You represent and warrant that your entering into this Agreement and your employment with the Company will not be in breach of any agreement with any current or former employer and that you are not subject to any other restrictions on solicitation of clients or customers or competing against another entity. You understand that the Company has relied on this representation in entering into this Agreement.
14. Clawback . In addition to any compensation recovery (clawback) which may be required by law and regulation, you acknowledge and agree that any compensation paid or awarded to you in connection with your employment with the Company shall be subject to any clawback requirements as set forth in the Companys corporate governance guidelines or policies and to any similar or successor provisions as may be in effect from time to time; provided, that such requirements shall not be applied in a manner that discriminates against you unless otherwise required by law or regulation. This Section 14 will survive any termination or expiration of this Agreement or termination of your employment.
15. Code Section 409A . This Section 15 controls over anything in this Agreement to the contrary. It is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code and all regulations, guidance and other interpretive authority issued thereunder (collectively, Section 409A ) so as not to subject you to payment of any additional tax, penalty or interest imposed under Section 409A and this Agreement shall be interpreted accordingly. To the extent that the reimbursement of any expenses or the provision of any in-kind benefits under this Agreement is subject to Section 409A, (a) the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, during any one calendar year shall not affect the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (b) reimbursement of any such expense shall be made by no later than December 31 of the year following the calendar year in which such expense is incurred; and (c) your right to receive such reimbursements or in-kind benefits shall not be subject to liquidation or exchange for another benefit. To the extent that Section 409A(a)(2)(B)(i) applies and you are a specified employee on the date of your separation from service, then any payment treated as deferred compensation under Section 409A will be postponed until the first business day after the expiration of six (6) months from the date of your separation from service (or your death if earlier).
Alberto J. Paracchini
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16. General Provisions .
(a) Notices . All notices, consents, and other communications to be given under this Agreement shall be in writing and (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, or (iii) delivered by overnight express delivery service or same-day local courier service, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 16(a):
If to the Company:
Byline Bank
180 North LaSalle Street
Suite 300
Chicago, Illinois 60601
(or such address hereafter where the Company locates its corporate offices)
Attention: Director Human Resources
If to you: At the most recent address on the payroll files of the Company
(b) Entire Agreement; Amendments; No Waiver . This Agreement and the Agreement to Protect Company Interests supersedes all previous employment agreements, whether written or oral between you and the Company and constitutes the entire agreement and understanding between the Company and you concerning the subject matter hereof. If, and to the extent that, any other written or oral agreement between you and the Company is inconsistent with or contradictory to the terms of this Agreement or the Agreement to Protect Company Interests, the terms of this Agreement or the Agreement to Protect Company Interests, as applies, shall control. No modification, amendment, termination, or waiver of this Agreement shall be binding unless in writing and signed by you and a duly authorized officer of the Company. Failure of any party to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such terms, covenants, and conditions.
(c) Successors and Assigns . This Agreement is binding upon and shall inure to the benefit of you and your heirs, executors, assigns and administrators or your estate and property and the Company and its successors and permitted assigns. You may not assign or transfer to others your rights or obligation to perform your duties hereunder.
(d) Counterparts . This Agreement may be signed in counterparts each of which will be deemed an original, but all of which will constitute one and the same instrument.
[ Signature Page Follows This Page ]
Alberto J. Paracchini
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On behalf of the Board, I am excited to offer you continuing employment with the Company under this Agreement and look forward to a mutually rewarding relationship.
Very truly yours, | ||
BYLINE BANK | ||
By: |
/s/ Roberto Herencia |
|
Roberto Herencia | ||
Chairman of the Board of Directors | ||
Date: |
January 21, 2016 |
Agreed and Accepted: | ||
/s/ Alberto J. Paracchini |
||
Alberto J. Paracchini | ||
Date: |
January 21, 2016 |
Alberto J. Paracchini
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ATTACHMENT
Definitions
Cause shall mean (A) your willful and continued failure to perform substantially your duties (after written notice and a reasonable period to cure; (B) your willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of your duties and responsibilities; (C) your being charged with a crime involving moral turpitude dishonesty, fraud, theft or financial impropriety; (D) your willful violation of a material requirement of any code of ethics or standards of conduct of the Company or the Holding Company applicable to you (after written notice and a reasonable period to cure, if curable) or your violation of your fiduciary duty to the Company or the Holding Company; or (E) a breach of the Agreement Protecting Company Interests; provided , that no act or failure to act by you shall be considered willful if such act or omission was conducted in good faith and with a reasonable belief that the action or omission was in the best interests of the Company or the Holding Company, as applies. Any such termination for Cause shall be predicated by notice to you together with a copy of a resolution, duly adopted by the Board (after a reasonable opportunity for you, together with your counsel, to be heard before the Board), describing the particulars of such for Cause termination.
Change in Control shall mean the first to occur, that is not a Special Change in Control, of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both (x) the total voting power of the then outstanding shares of capital stock of the Holding Company entitled to vote generally in the election of directors (the Voting Stock ) and (y) the fair market value of the outstanding shares of capital stock of the Holding Company ( Economic Stock );
(B) Consummation of a reorganization, merger or consolidation, the sale or other disposition of all or substantially all of the assets of the Holding Company (in each such case, a Business Combination ), unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or
Alberto J. Paracchini
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substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company; or
(C) The stockholders of the Holding Company approve a plan of complete liquidation or dissolution of the Holding Company.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A), (B), and (C) and to determine whether, and the exact date on which, a Change in Control has been deemed to have occurred thereunder.
Disability shall have the meaning defined under Treasury Regulation Section 1.409A-3(i)(4).
Good Reason means the occurrence of any of the following without your written consent: (A) any material reduction in your Base Salary; (B) any material adverse change by the Company in your title, position, authority or reporting relationships with the Company; (C) the Companys requirement that you relocate your principal place of employment to a location in excess of thirty-five (35) miles from your principal work location on the date of the Agreement; or (D) the failure to nominate you to, or your removal from the Board. Provided , Good Reason shall not exist unless and until you provide the Company with written notice of the acts alleged to constitute Good Reason within ninety (90) days of the initial occurrence of such event, and the Company fails to cure such acts within thirty (30) days of receipt of such notice. You must terminate your employment within 120 days following the initial occurrence of such event for the termination to be on account of Good Reason.
Special Change in Control shall mean the first to occur of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both the total Voting Stock and the Economic Stock; or
(B) A Business Combination of the Holding Company, unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case
Alberto J. Paracchini
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including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company;
and, in the case of either event under subparagraph (A) or (B):
(1) the beneficial owners of at least 25% of the Voting Stock and the Economic Stock, in the aggregate, held by the beneficial owners holding all of the Voting Stock and the Economic Stock on the date of this Agreement receive in such transaction either cash or securities that are publicly traded on a securities exchange (and not restricted for more than 30 days other than pursuant to applicable law or regulation); or
(2) such transaction satisfies subparagraph (A) or (B) by substituting 70% each place where 50% appears.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A) and (B) and to determine whether, and the exact date on which, a Special Change in Control has been deemed to have occurred thereunder.
EXHIBIT A
GENERAL RELEASE
1. In accordance with Section 7(c)(iv) of the employment agreement entered into by and between Byline Bank (the Company ) and Alberto J. Paracchini ( Executive ) dated 1/21/2016 ( Employment Agreement ), Executives employment with the Company and all affiliates and subsidiaries terminated on , 20 ( Separation Date ). As a condition of entitlement to, and in consideration for, the separation benefits described in Section 9(b) of the Employment Agreement, Executive, on behalf of himself, his spouse, family, agents, attorneys, heirs, executors, administrators, and anyone else who has or obtains any legal rights or claims through Executive, hereby waives and releases any and all claims and causes of action that Executive has or may have as of the day Executive signs this General Release, whether known or unknown, against the Company, Byline Bancorp, Inc. and any of their other affiliated, related or associated companies, subsidiaries, divisions, parents, predecessors, successors, current and former officers, members of their boards of directors, and all managers, employees, shareholders, agents, attorneys, representatives, insurance companies, insurers, and assigns of such named companies and entities (collectively, the Released Parties ), arising from any reason or cause, including but not limited to Executives employment and Executives separation from employment. The claims Executive is releasing include, but are not limited to, any and all allegations that the Company or the other Released Parties:
(a) have discriminated or retaliated against Executive in violation of Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866 (42 U.S.C. section 1981), the Equal Pay Act of 1963, the Age Discrimination in Employment Act (ADEA), the Americans with Disabilities Act (ADA), the Rehabilitation Act of 1973, the Older Workers Benefit Protection Act (OWBPA), the Illinois Human Rights Act, and any and all other applicable federal, state and local fair employment practices and discrimination laws, or on the basis of race, color, sex (including sexual harassment), national origin, ancestry, disability, religion, sexual orientation, marital status, parental status, veteran status, source of income, entitlement to benefits, union activities, or any other status protected by federal, state or local law; or
(b) have violated any other employment-related laws including but not limited to the Family and Medical Leave Act (FMLA), the Employee Retirement Income Security Act (ERISA), the Worker Adjustment and Retraining Notification Act (WARN Act), or any federal, state or local laws or statutes whether employment related or not; or
(c) have violated personnel policies, procedures, handbooks, any covenant of good faith and fair dealing, or any express or implied contract of any kind; or
(d) have violated 31 U.S.C. §§ 3730(h)(l) and (2) of the False Claims Act and similar state or local statutes; or
(e) have violated public policy or statutory or common law, including claims for: personal injury; invasion of privacy; retaliatory discharge; negligent hiring, retention, or supervision; defamation; intentional or negligent infliction of emotional distress and/or mental anguish; intentional interference with contract or prospective economic advantage; negligence; detrimental reliance; loss of consortium to Executive or any member of Executives family; and/or promissory estoppel; or
(f) are in any way obligated for any reason to pay Executive damages, expenses, litigation costs (including attorneys fees), back pay, front pay, disability or other benefits, compensatory damages, punitive damages, and/or interest.
ADDITIONALLY, THIS AGREEMENT SPECIFICALLY WAIVES ALL OF EXECUTIVES RIGHTS AND POTENTIAL CLAIMS ARISING UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967 (29 U.S.C. § 621 et seq.), AS AMENDED, AND THE OLDER WORKERS BENEFIT PROTECTION ACT, AS AMENDED. In connection with this age discrimination waiver, Executive acknowledges and agrees to the following:
(i) Executive is not waiving any rights or claims under the Age Discrimination in Employment Act of 1967, as amended, that may arise after this Agreement is executed, or any rights or claims to test the knowing and voluntary nature of this Agreement under the Older Workers Benefit Protection Act, as amended.
(ii) Executive acknowledges that this Agreement provides Executive consideration that is in addition to anything of value to which Executive is already entitled.
(iii) Executive acknowledges that by this Agreement, Executive was encouraged and advised in writing to consult counsel by the Company prior to signing this Agreement and has done so.
(iv) Executive further understands that Executive was given 21 days to consider this Agreement.
(v) Executive further understands that he may revoke this Agreement at any time within seven days after he signs it, and that this Agreement shall not become effective or enforceable until the 7-day revocation period has expired. If Executive desires to revoke this Agreement during the 7 days after signing it, he shall do so by sending written notice of same to the attention of [Name] Director of Human Resources, Byline Bank, 180 North LaSalle Street, Suite 300, Chicago, Illinois 60601, certified mail, return receipt requested, within that 7-day period. This General Release shall become effective, and the Companys obligations under Section 7(c) of the Employment Agreement binding, on the day following expiration of such revocation period provided that this Agreement is not revoked.
(vi) If Executive signs this Agreement prior to the end of the 21-day time period, Executive certifies that, in accordance with 29 CFR §1625.22(e)(6), Executive knowingly and voluntarily decided to sign the Agreement after considering it less than 21 days and his decision to do so was not induced by the Released Parties through fraud, misrepresentation, or a threat to withdraw or alter the offer prior to the expiration of the 21-day time period.
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(vii) Executive has carefully read and fully understands all of the provisions and effects of this Agreement and he knowingly and voluntarily entered into all of the terms set forth in this Agreement.
(viii) Executive knowingly and voluntarily intends to be legally bound by all of the terms set forth in this Agreement.
(ix) Executive relied solely and completely upon his own judgment or the advice of his attorney(s) in entering into this Agreement.
(x) Executive is, through this Agreement, releasing the Released Parties from any and all claims Executive may have against the Released Parties, relating to his employment and separation, including claims arising under the Age Discrimination in Employment Act of 1967 (29 U.S.C. § 621, et seq.).
2. Exclusions from General Release . Excluded from the general release in Section 1 are (a) any claims or rights that cannot be waived by law, (b) any claims that arise after the date this General Release is executed, (c) Executives right to file a workers compensation claim, and (d) Executives rights to indemnification and coverage under any applicable directors and officers liability insurance in accordance with Section 12 of the Employment Agreement. Also excluded from the General Release is Executives right to file a charge with an administrative agency or participate in any agency investigation. Executive is, however, waiving his right to recover any money in connection with such a charge or investigation. Except for any claims or rights that cannot be waived by law, Executive also is waiving his right to recover money in connection with a charge or legal action filed by any other individual or by the Equal Employment Opportunity Commission (EEOC) or any other federal, state or local agency. Finally, Executive acknowledges by his acceptance of the consideration provided under this Agreement, that Executive has previously been paid for all wages due, including any amounts for any vested wages, benefits or other incentive compensation payable through the date of termination of Executives employment.
3. Confidentiality . Executive shall keep all of the terms of this General Release confidential, including but not limited to the fact and amount(s) of the payments and benefits referred to herein, except as required by law and except that Executive may disclose such information to his immediate family members, attorneys, and tax advisors, provided that if such person is not bound by professional rules of conduct to maintain the confidentiality of such information Executive shall first secure the persons agreement to not disclose such information to others, and on the condition that any disclosure by any of those persons not required by law shall be deemed a breach of this General Release as if Executive personally made such disclosure. For its part the Company will keep the terms of this Agreement confidential except that it may disclose same to those with a need to know or who are reasonably necessary to execute the Agreement or comply with its terms or for other legitimate business purposes.
4. Restrictive Covenants Affirmed . Executive acknowledges and reaffirms that she is bound by certain restrictive covenants pursuant to the Agreement Protecting Company Interests entered into pursuant to Section 8 of the Employment Agreement, the terms of which are incorporated by reference herein.
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5. Company Property . To the extent that Executive has not already done so as of the date of this General Release, prior to commencement of any payments due hereunder, Executive shall return to the Company all Company property in his possession or control.
6. Section 409A . The intent of the parties is that payments and benefits under this General Release either comply with Section 409A of the Internal Revenue Code of 1986, as amended ( Section 409A ), or be exempt from the application of Section 409A and, accordingly, to the maximum extent permitted, this General Release shall be interpreted to be in compliance therewith. To the extent that any provision hereof is modified in order to comply with Section 409A, such modification shall be made in good faith and shall, to the maximum extent reasonably possible, maintain the original intent and economic benefit to the undersigned and the Company of the applicable provision without violating the provisions of Section 409A.
7. Miscellaneous . All payments to be made or benefits to be provided to Executive in accordance with this General Release shall be made net of all applicable income and employment taxes required to be withheld from such payments. This General Release shall be governed by and construed in accordance with the laws of the State of Illinois without regard to its conflicts of law principles.
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IN WITNESS WHEREOF, this General Release has been executed by Executive:
|
||
, 20 |
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Exhibit 10.4
EXECUTION VERSION
Timothy Hadro
Re: | Employment Terms |
Dear Timothy:
On behalf of the Board of Directors (the Board ) of Byline Bank, an Illinois chartered bank (the Company ), I am pleased to offer you employment with the Company on the terms set forth in this letter ( Agreement ).
1. Term . The term of this Agreement commences upon your written acceptance below and will expire on the third anniversary of your acceptance date; provided , the term will automatically renew on such date for one (1) year, and for one (1) year on each subsequent anniversary of such date thereafter, unless at any time not less than one hundred twenty (120) days prior to the end of such term either the Company or you notify the other in writing of its intention not to further extend the term; provided further , (a) the term of this Agreement shall terminate on any termination of your employment and (b) upon the occurrence of a Change in Control or Special Change in Control (each as defined on the Attachment) the term of this Agreement shall renew for period expiring on the first anniversary of such Change in Control or Special Change in Control, as the case may be, and which shall not automatically renew thereafter. The period under this Section 1, as may be so renewed, is referred to herein as the Term . Absent a written agreement by the parties to the contrary, upon the expiration of the Term, this Agreement (all rights and obligations herein) will terminate (except for those provisions that specifically survive) and your employment will continue thereafter at-will.
2. Position; Principal Place of Employment .
(a) You will be employed as Executive Vice President, Head of Special Assets Group of the Company, reporting to the Chief Executive Officer. Your principal place of employment will be at the Companys corporate offices designated from time to time by the Board. Your duties shall be as may be prescribed by the Companys by-laws and as may be assigned by the Chief Executive Officer from time to time commensurate with your position. During your employment, you owe an undivided duty of loyalty to the Company and agree to devote your full business time and attention to the performance of your duties and responsibilities. You shall perform your duties under this Agreement professionally, in accordance with the applicable laws, rules and regulations and such standards, policies and procedures established by the Company and the banking industry from time to time. You will not work full-time for another employer, and all part-time employment, including any self-employment shall be disclosed to the Company not less frequently than on the anniversary of the last day of the Term. In addition, you are subject to the Companys Code of Ethics and all such other activities are subject to the principles thereunder not to engage in any activity that may, in the sole discretion of the Board, be determined to be a conflict of interest. You agree to serve without additional compensation as an officer and director of any of the Companys subsidiaries.
3. Base Salary . You will be paid a base salary at an annual rate of $260,000 (the Base Salary ), subject to applicable withholdings and payable in accordance with the regular payroll practices of the Company.
Timothy Hadro
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4. Annual Incentive . You will be eligible to participate in the Companys Executive Incentive Plan (the EIP ). Under the EIP, you will have the opportunity to earn a target annual cash bonus of 50% of your Base Salary based upon your achievement of applicable target-level performance objectives as determined in the sole discretion of the Board (or a committee thereof). Your annual bonus, to the extent earned under the EIP, will be paid not later than March 15 of the fiscal year following the fiscal year in which performed. You will not be entitled to a bonus for any particular year unless you are employed on the date such bonus is paid (unless otherwise provided herein or in the EIP).
5. Long-Term Incentive Program . You will be eligible to participate in the Metropolitan Bank Group Equity Incentive Plan adopted by Byline Bancorp, Inc., an Illinois corporation (f/k/a Metropolitan Bank Group, Inc. and referred to in this Agreement as the Holding Company ) on such terms and conditions as are set forth in the form of stock option agreement provided to you with this Agreement.
6. Employee Benefits; Vacation; Expenses .
(a) You will be entitled to participate in all employee benefit plans that the Company has adopted or may adopt, maintain or contribute to for the benefit of its employees, subject to satisfying the applicable eligibility requirements. Unless otherwise provided in this Agreement, all benefits are subject to the terms and conditions of the plan or arrangement under which such benefits accrue, as may be amended or terminated at any time and from time to time in the sole discretion of the Company.
(b) You will be entitled to annual paid vacation in accordance with the Companys policy applicable to senior executives, but in no event less than four (4) weeks per calendar year (prorated for any partial calendar year of employment).
(c) You will be entitled to a benefit at Company expense that pays upon your death a lump sum cash amount equal to 200% of your Base Salary but not exceeding $750,000. The Company may provide this benefit, in its sole discretion, through its purchase of a life insurance policy, in which event you will fully cooperate with any physical examination and other underwriting requirements to obtain such life insurance. The Company will deduct any applicable tax withholdings from other compensation due you or from the proceeds of such benefit, as may apply.
(d) Upon presentation of appropriate documentation, you will be reimbursed in accordance with the Companys expense reimbursement policy for all reasonable and necessary business expenses incurred in connection with the performance of your duties hereunder.
7. Termination; Special Change in Control . Your employment may be terminated by either party for any reason at any time pursuant to written notice to the other party, and will terminate automatically on your death; provided , you shall give the Company not less than 30 days prior written notice of any termination by you, with or without Good Reason (as defined on the Attachment hereto). Any payments made and benefits provided to you under this Agreement will be in lieu of any termination or severance payments or benefits for which you (or your estate in the event of your death) otherwise may be eligible under any of the plans, practices, policies or programs of the Company or its affiliates. If termination occurs at a time when the Company is deemed to be in troubled condition by the FDIC and is subject to the FDICs golden parachute regulations under 12 C.F.R. Part 359, the payments referenced in this Paragraph 7 shall be limited to an aggregate amount equal to the lesser of (i) 12 months of Base Salary, or (ii) the amount otherwise owed to you hereunder. Any payment made pursuant to this Paragraph 7 which is subject to the FDICs golden parachute regulations shall be subject to a right of the Company (or its successor) to recoup such payment from Executive if the Company (or its successor) subsequently determines, in its reasonable discretion, that Executive has engaged in any of the activities
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or offenses set forth in 12 C.F.R. Section 359.4(a)(i) - (iv). After receipt of written notice from the Company that it has made a determination as provided for in this Section, Executive agrees to reimburse the Company for the subject payment made pursuant to this Paragraph 7 within 30 days after receipt of such written notice. Further, Executive agrees to indemnify the Company for any costs incurred by the Company in recouping such amount in the event that Executive fails to reimburse such amount within 30 days of receiving the Companys written notice under this Section.
(a) Death; Disability . In the event that your employment terminates due to your death or Disability (as defined on the Attachment), you will be entitled to: (i) any unpaid Base Salary, and any unused vacation, accrued through the date of termination; (ii) reimbursement of any unreimbursed expenses incurred through the date of termination in accordance with Section 6(d); and (iii) all other payments or benefits to which you may be entitled under the terms of any applicable employee benefit plans and programs in which you participated immediately prior to such termination (clauses (i), (ii) and (iii) collectively being the Accrued Amounts ). On such termination, you will also be entitled to (iv) any unpaid EIP bonus earned with respect to any fiscal year ending on or preceding the date of termination ( Unpaid EIP ); and (v) a pro rata portion of your EIP bonus for the fiscal year in which your termination occurs, payable at the time that EIP bonuses are paid to other senior executives for such year, in an amount equal to (x) the amount that you would have earned based upon actual performance had your employment continued through the end of the fiscal year multiplied by (y) a fraction the numerator of which is the number of days you were employed during the fiscal year and the denominator of which is 365 ( Pro Rata Bonus ). In the event of your death, your beneficiary will also be entitled to your death benefit under Section 6(c).
(b) Termination For Cause or Without Good Reason. If your employment should be terminated by the Company for Cause (as defined on the Attachment) or by you without Good Reason, you will be entitled to only the Accrued Amounts.
(c) Termination Without Cause or For Good Reason; Special Change in Control Success Payment .
(i) If your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time during the Term (and not upon the expiration of the Term) other than on or following the occurrence of a Change in Control or a Special Change in Control, the Company will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one (1) multiplied by (y) the sum of (I) your Base Salary plus (II) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in substantially equal installments in accordance with the Companys regular payroll cycle over a period of twelve (12) months from your date of termination commencing on the first complete payroll payment date following the date that the Release (defined below) becomes effective; provided , that the Companys obligation to pay the amount in subclause (II) will immediately cease to the extent required to avoid adverse tax consequences to the Company. The amount payable under clause (C), above, will not be reduced or terminated due to compensation you may receive from any subsequent employment or self-employment.
(ii) If your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time, during the Term (and not upon the expiration of the Term), on or within one (1) year following the occurrence of a Change in
Timothy Hadro
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Control (that is not a Special Change in Control), the Company (or its successor) will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one (1) multiplied by (y) the sum of (I) your Base Salary plus (II) the higher of the two immediately preceding completed fiscal years earned bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (III) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in a lump sum within fifteen (15) days after the Release becomes effective; provided , that the Company will not be obligated to pay the amount in subclause (III) to the extent required to avoid adverse tax consequences to the Company.
(iii) Upon the occurrence of a Special Change in Control (as defined on the Attachment) during the Term, upon which your employment does not terminate, you will receive from the Company or its successor (irrespective of whether your employment terminates or continues upon consummation of such Special Change in Control): (A) a lump sum cash amount equal to one (1) multiplied by the sum of (I) your Base Salary plus (II) the higher of the two immediately preceding completed fiscal years earned bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (B) a Pro Rata Bonus, but such Pro Rata Bonus will be determined based on achievement applicable performance goals under the EIP through the date of consummation of the Special Change in Control (with adjustments to the performance goals as the Board deems appropriate to account for any reduction of the performance period resulting from consummation of the Special Change in Control). The amount due under clause (A) shall be paid within fifteen (15) days after the Release becomes effective. The amount due under clause (B) will be paid when EIP bonuses for such period are paid to other executives of the Company. In the event that you become entitled to receive the payments under this subparagraph (iii), you shall not be entitled to any payments under subparagraph 7(c)(ii)(B) or (C) upon any termination of your employment thereunder.
(iv) Conditions . Any payments or benefits made or provided pursuant to Section 7(c)(i), (ii) or (iii), as the case may be, other than Accrued Amounts, are subject to your (A) compliance with the Agreement Protecting Company Interests (as provided at Section 8 hereof); (B) delivery to the Company of an executed general release of claims in a form satisfactory to the Company ( Release ) within twenty-one (21) days of presentation thereof by the Company to you; and (C) if such payments are due in connection with a termination of your employment, delivery to the Company of a resignation from all offices, directorships and fiduciary positions with the Company, its affiliates and employee benefit plans. Anything in this Section 7(c) to the contrary notwithstanding, to the extent that any payment conditioned upon such effective Release is deferred compensation under Section 409A (defined below) and the period during which you have discretion to execute or revoke the Release straddles two calendar years, then the Company will make or commence, as may apply, such payments on the earliest practicable date in such second year after the Release becomes effective.
8. Agreement Protecting Company Interests . As a condition of the Company entering into this Agreement and your continuing employment hereunder, you will enter into the Companys and Holding Companys standard form of Agreement Protecting Company Interests, with a Restriction Period thereunder of twelve (12) months. The Agreement Protecting Company Interests and the covenants thereunder will survive any expiration of this Agreement or termination of your employment.
Timothy Hadro
Page 5
9. Reduction to Avoid Excise Tax on Golden Parachute Payments . If the payments and benefits provided for in this Agreement or under any other agreement, plan or program or otherwise payable to you constitute parachute payments within the meaning of Section 280G of the Internal Revenue Code ( Code ) and would be subject to the excise tax imposed by Section 4999 of the Code, then such payments and benefits shall be reduced to the extent necessary to assure that the payments and benefits provided to you under this Agreement will be limited to the amount of payments and benefits that can be provided without triggering a parachute payment under Section 280G. To the extent that reduction of any payments and benefits is required by this Section 9 such that no portion of such payments and benefits will be subject to the excise tax imposed by Section 4999, the payments and benefits shall be reduced in the following order: (i) any payment due under Section 7(c)(iii) upon the occurrence of a Special Change in Control; (ii) any long-term cash incentive payments due to you upon the occurrence of the event triggering such parachute payments, (iii) cash severance pay, (iv) any Pro Rata Bonus, and (v) the value of any stock options and any other equity awards that may hereafter be granted to you.
10. Standard Regulatory Provisions .
(a) If Employee is prohibited from participating in the conduct of the Companys affairs by a notice served under Section 8 (e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, (12 U. S.C. §1818(e)(3) or (g)(1)), the Companys obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings.
(b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Companys affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, (12 U.S.C. §1818(e)(4) or (g)(1)), all obligations of the Company under this contract shall terminate as of the effective date of the order.
(c) If the Company is in default (as defined in (12 U.S.C. §1813(x)(1)) of the Federal Deposit Insurance Act), all obligations of the Company under this contract shall terminate as of the date of default.
(d) All obligations under this Agreement may be terminated except to the extent determined that the continuation of the Agreement is necessary for the continued operation of Employer: (i) by the Federal Deposit Insurance Corporation (the FDIC), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the FDIC at the time the FDIC approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined to be in an unsafe and unsound condition. All obligations of the Company under this contract shall terminate as of the effective date of any of the foregoing.
(e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) and FDIC Regulation 12 CFR Part 359, regarding Golden Parachute and Indemnification Payments.
11. Arbitration . To the fullest extent permitted by law, all claims that you may have against Company (or any other released party under the Release), or which the Company may have against you, in any way related to the subject matter, interpretation, application, or alleged breach of this Agreement ( Arbitrable Claims ) shall be resolved by binding arbitration in Chicago, Illinois. The Arbitration will be held pursuant to the American Arbitration Associations Commercial Rules and Mediation Procedures (other than for large or complex disputes). The decision of the arbitrator shall be in writing and shall include a statement of the essential conclusions and findings upon which the decision is based. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable
Timothy Hadro
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Claims. Either party may bring an action in a court situated in Cook County, Illinois to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. Notwithstanding the foregoing, either party may, in the event of an actual or threatened breach of this Agreement (including but not limited to the provisions of the Agreement to Protect Company Interests), seek a temporary restraining order or injunction in a court situated in Cook County, Illinois restraining such breach pending a determination on the merits by the arbitrator. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR ENFORCEABILITY OF THE AGREEMENT TO ARBITRATE.
12. Indemnification; Liability Insurance . The Company agrees to indemnify you and hold you harmless to the extent permitted the Companys charter and by-laws. During the Term and at all times thereafter during which you may be subject to a liability to be indemnified under the preceding sentence, the Company will cover you as an insured under any directors and officers liability insurance that insures its officers. This Section 12 will survive any termination or expiration of this Agreement or termination of your employment.
13. Your Representations . You represent and warrant that your entering into this Agreement and your employment with the Company will not be in breach of any agreement with any current or former employer and that you are not subject to any other restrictions on solicitation of clients or customers or competing against another entity. You understand that the Company has relied on this representation in entering into this Agreement.
14. Clawback . In addition to any compensation recovery (clawback) which may be required by law and regulation, you acknowledge and agree that any compensation paid or awarded to you in connection with your employment with the Company shall be subject to any clawback requirements as set forth in the Companys corporate governance guidelines or policies and to any similar or successor provisions as may be in effect from time to time. This Section 14 will survive any termination or expiration of this Agreement or termination of your employment.
15. Code Section 409A . This Section 15 controls over anything in this Agreement to the contrary. It is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code and all regulations, guidance and other interpretive authority issued thereunder (collectively, Section 409A ) so as not to subject you to payment of any additional tax, penalty or interest imposed under Section 409A and this Agreement shall be interpreted accordingly. To the extent that the reimbursement of any expenses or the provision of any in-kind benefits under this Agreement is subject to Section 409A, (a) the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, during any one calendar year shall not affect the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (b) reimbursement of any such expense shall be made by no later than December 31 of the year following the calendar year in which such expense is incurred; and (c) your right to receive such reimbursements or in-kind benefits shall not be subject to liquidation or exchange for another benefit. To the extent that Section 409A(a)(2)(B)(i) applies and you are a specified employee on the date of your separation from service, then any payment treated as deferred compensation under Section 409A will be postponed until the first business day after the expiration of six (6) months from the date of your separation from service (or your death if earlier).
Timothy Hadro
Page 7
16. General Provisions .
(a) Notices . All notices, consents, and other communications to be given under this Agreement shall be in writing and (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, or (iii) delivered by overnight express delivery service or same-day local courier service, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 16(a):
If to the Company:
Byline Bank
180 N. LaSalle
Chicago, Illinois 60601
(or such address hereafter where the Company locates its corporate offices)
Attention: Director Human Resources
If to you: At the most recent address on the payroll files of the Company
(b) Entire Agreement; Amendments; No Waiver . This Agreement and the Agreement to Protect Company Interests supersedes all previous employment agreements, whether written or oral between you and the Company and constitutes the entire agreement and understanding between the Company and you concerning the subject matter hereof. If, and to the extent that, any other written or oral agreement between you and the Company is inconsistent with or contradictory to the terms of this Agreement or the Agreement to Protect Company Interests, the terms of this Agreement or the Agreement to Protect Company Interests, as applies, shall control. No modification, amendment, termination, or waiver of this Agreement shall be binding unless in writing and signed by you and a duly authorized officer of the Company. Failure of the any party to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such terms, covenants, and conditions.
(c) Successors and Assigns . This Agreement is binding upon and shall inure to the benefit of you and your heirs, executors, assigns and administrators or your estate and property and the Company and its successors and permitted assigns. You may not assign or transfer to others your rights or obligation to perform your duties hereunder.
(d) Counterparts . This Agreement may be signed in counterparts each of which will be deemed an original, but all of which will constitute one and the same instrument.
[Signature Page Follows This Page]
Timothy Hadro
Page 8
On behalf of the Board, I am excited to offer you continuing employment with the Company under this Agreement and look forward to a mutually rewarding relationship.
Very truly yours, | ||
BYLINE BANK | ||
By: |
/s/ Roberto Herencia |
|
Roberto Herencia Chairman of the Board of Directors |
Date: |
March 4, 2015 |
Agreed and Accepted: |
||
/s/ Timothy Hadro |
||
Timothy Hadro |
Date: |
March 3, 2015 |
Timothy Hadro
Page 9
ATTACHMENT
Definitions
Cause shall mean (A) your willful and continued failure to perform substantially your duties; (B) your willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of your duties and responsibilities; (C) your commission of a crime involving moral turpitude dishonesty, fraud, theft or financial impropriety; (D) your willful violation of a material requirement of any code of ethics or standards of conduct of the Company applicable to you or your fiduciary duty to the Company; or (E) a breach of the Agreement Protecting Company Interests; provided , that no act or failure to act by you shall be considered willful if such act or omission was conducted in good faith and with a reasonable belief that the action or omission was in the best interests of the Company, as applies.
Change in Control shall mean the first to occur, that is not a Special Change in Control, of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both (x) the total voting power of the then outstanding shares of capital stock of the Holding Company entitled to vote generally in the election of directors (the Voting Stock ) and (y) the fair market value of the outstanding shares of capital stock of the Holding Company ( Economic Stock );
(B) Consummation of a reorganization, merger or consolidation, the sale or other disposition of all or substantially all of the assets of the Holding Company (in each such case, a Business Combination ), unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company; or
(C) The stockholders of the Holding Company approve a plan of complete liquidation or dissolution of the Holding Company.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A), (B), and (C) and to determine whether, and the exact date on which, a Change in Control has been deemed to have occurred thereunder.
Disability shall have the meaning defined under Treasury Regulation Section 1.409A-3(i)(4).
Timothy Hadro
Page 10
Good Reason means the occurrence of any of the following without your written consent: (A) any material reduction in your Base Salary, (B) the Companys requirement that you relocate your principal place of employment to a location in excess of fifty (50) miles from your principal work location on the date of the Agreement or (C) you are required to report to any other employee than the Chief Executive Officer. Provided , Good Reason shall not exist unless and until you provide the Company with written notice of the acts alleged to constitute Good Reason within ninety (90) days of the initial occurrence of such event, and the Company fails to cure such acts within thirty (30) days of receipt of such notice. You must terminate your employment within 120 days following the initial occurrence of such event for the termination to be on account of Good Reason.
Special Change in Control shall mean the first to occur of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both the total Voting Stock and the Economic Stock; or
(B) A Business Combination of the Holding Company, unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company;
and, in the case of either event under subparagraph (A) or (B):
(1) the beneficial owners of at least 25% of the Voting Stock and the Economic Stock, in the aggregate, held by the beneficial owners holding all of the Voting Stock and the Economic Stock on the date of this Agreement receive in such transaction either cash or securities that are publicly traded on a securities exchange (and not restricted for more than 30 days other than pursuant to applicable law or regulation); or
(2) such transaction satisfies subparagraph (A) or (B) by substituting 70% each place where 50% appears.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A) and (B) and to determine whether, and the exact date on which, a Special Change in Control has been deemed to have occurred thereunder.
Exhibit 10.5
BYLINE BANK
180 North LaSalle Street
Chicago, Illinois 60601
Execution Version
Mr. Bruce W. Lammers
1000 Silver Mist Ct.
Brookfield, WI 53005
Re: | Employment Terms |
Dear Bruce:
Reference is made to that certain (i) Employment Agreement between Ridgestone Financial Services, Inc., a Wisconsin corporation ( Ridgestone ), and you dated as of January 1, 2012 and amended as of May 16, 2014 (and amended thereafter respecting your 2015 Performance Bonus and Stock Bonus Calculation) ( Ridgestone Employment Agreement ) and (ii) Employment Agreement Cancellation Agreement between Ridgestone and you, dated of even date herewith (the Cancellation Agreement ).
On behalf of the Board of Directors (the Board) of Byline Bank, an Illinois chartered bank (the Company ), I am pleased to offer you employment with the Company on the terms set forth in this letter ( Agreement ). Pursuant to the Cancellation Agreement, the Ridgestone Employment Agreement will be terminated immediately prior to the Effective Time (as such term is defined in that certain Agreement and Plan of Merger by and between Ridgestone and Byline Bancorp, Inc., dated of even date herewith (the Merger Agreement )), and thereupon will be superseded by this Agreement and will have no further force or effect thereafter.
1. Term . You acknowledge and agree that you are executing and delivering this Agreement on the date set forth beneath your signature below in accordance with Section 6.8 of the Merger Agreement and that the Term (defined below) of this Agreement will become effective at the Effective Time; provided , that, if the Merger Agreement is terminated in accordance with its terms or the Effective Time shall not have occurred by December 31, 2016, this Agreement shall then automatically terminate and thereafter be null and void ab initio without any further action of the parties. The term of this Agreement commences on the Effective Time and will expire on December 31, 2019; provided , the term will automatically renew on such date for one (1) year, and for one (1) year on each subsequent anniversary of such date thereafter, unless at any time not less than one hundred twenty (120) days prior to the end of such term either the Company or you notify the other in writing of its intention not to further extend the term; provided , further , (a) the term of this Agreement shall terminate on any termination of your employment and (b) upon the occurrence of a Change in Control (as defined on the Attachment), the term of this Agreement shall renew for a period expiring on the first anniversary of such Change in Control and which shall not automatically renew thereafter. The period under this Section 1, as may be so renewed, is referred to herein as the Term . Absent a written agreement by the parties to the contrary, upon the expiration of the Term, this Agreement (all rights and obligations herein) will terminate (except for those provisions that specifically survive) and your employment will continue thereafter at-will.
Mr. Bruce W. Lammers
Page 2
2. Position; Principal Place of Employment .
(a) During the Term, you will be employed as Executive Vice President of the Company and President of the Small Business Capital Unit ( SBC Unit ) of the Company, reporting to the Chief Executive Officer of the Company. Your principal place of employment will be at the offices for the SBC Unit as designated from time to time by the Board, which offices shall initially be located in Brookfield, WI and in Schaumburg, IL (such presence at each respective locale as the needs of the business require in your reasonable judgment), and periodically at the Companys corporate office; provided that you shall be involved with any decisions to change such locations. Your duties shall be as may be prescribed by the Companys by-laws and as may be assigned by the Chief Executive Officer from time to time commensurate with your position, including overall responsibility for the business results and financial performance of the SBC Unit. It is the intent of the parties that those duties shall be consistent with your duties respecting the management and responsibility for the governmental guaranteed business lending business of Ridgestone recently in effect prior to the date hereof, including the day to day operating authority over the SBC Unit, subject to Company policies, risk management and the direction of the Chief Executive Officer. During your employment, you owe an undivided duty of loyalty to the Company and agree to devote your full business time and attention to the performance of your duties and responsibilities. You shall perform your duties under this Agreement professionally, in accordance with the applicable laws, rules and regulations and such standards, policies and procedures established by the Company and the banking industry from time to time. You will not work full-time for another employer, and all part-time employment, including any self-employment shall be disclosed to the Company not less frequently than on the anniversary of the last day of the Term. In addition, you are subject to the Companys Code of Ethics and all such other activities are subject to the principles thereunder not to engage in any activity that may, in the sole discretion of the Board, be determined to be a conflict of interest. You agree to serve without additional compensation as an officer and director of any of the Companys subsidiaries.
3. Base Salary . During the Term you will be paid a base salary at an annual rate of $450,000 (the Base Salary ), subject to applicable withholdings and payable in accordance with the regular payroll practices of the Company. The amount of the Base Salary may be increased, but not decreased, from time to time in accordance with the amounts of salary approved by the Board or a committee thereof (without limiting the applicability of Section 7(c) pursuant to a voluntary termination for Good Reason). In order to effectuate the purpose of the preceding sentence, the amount of the Base Salary shall be reviewed by such committee or Board at least every year during the term of this Agreement.
4. Annual Incentive .
(a) During the Term, you will be eligible to participate in the Companys Executive Incentive Plan (the EIP ). Under the EIP, you will have the opportunity to earn an annual cash bonus based upon your achievement of applicable performance objectives as follows:
Performance Achievement Level |
Cash Bonus Amount as a % of Base Salary | |||
Not Less Than Threshold |
12.5 | % | ||
Not Less Than Target and Less Than Maximum |
25.0 | % | ||
Not Less Than Maximum |
37.5 | % | ||
If there shall be more than one performance objective for a fiscal year, the bonus amount eligible to be earned for each above achievement level will be divided equally by the number of such objectives and each performance objective will be separately measured, weighted equally, and may be earned accordingly unless the Chief Executive Officer determines otherwise in establishing the applicable performance objectives (with Board or committee approval).
|
Mr. Bruce W. Lammers
Page 3
To the extent earned, your annual cash bonus will be paid to you in a cash lump sum not later than March 15 of the fiscal year following the fiscal year in which performed. You will not be entitled to a bonus for any particular year unless you are employed on the date such bonus is paid (unless otherwise provided herein or in the EIP).
(b) For the portion of the 2016 fiscal year following commencement of the Term, (i) the performance objectives shall be substantially similar to those set forth in the Ridgestone Employment Agreement for 2016, with appropriate adjustments to reflect the impact of the Ridgestone acquisition by the Company and that the SBC Unit is no longer a free-standing entity, as determined by the Chief Executive Officer and approved by the Board, in consultation with you, and (ii) the annual cash bonus, to the extent earned based on achievement of such performance objectives, shall be prorated based on the portion of your annual Base Salary paid during the fiscal year. For the avoidance of doubt, such fiscal year 2016 adjustments will be intended to reflect on a pro forma basis the measurement of your actual performance after the Ridgestone acquisition against such performance objectives above on a basis equivalent to results that would have been attained based on your actual performance for the 2016 fiscal year (after the Ridgestone acquisition) as if the Ridgestone acquisition had not occurred.
(c) For the 2017 fiscal year, the performance objectives shall be as follows, equally weighted: (i) net income, (ii) return on allocated equity, (iii) non-accrual loans/total loans and (iv) classified assets ratio, and in such respective amounts as shall be determined in the sole discretion of the Chief Executive Officer and approved by the Board (or a committee thereof), after consultation with you, not later than December 31, 2016.
(d) Thereafter, your performance objectives shall be as determined annually in the sole discretion of the Chief Executive Officer and approved by the Board (or a committee thereof), after consultation with you.
5. Long-Term Incentive Program . On the Effective Time, or as soon thereafter as is practicable, you will be granted a stock option to purchase 912,000 shares of Stock (the Option ) under the Byline Bancorp Equity Incentive Plan (the Plan ), having an exercise price per share equal to the Fair Market Value of one share of Stock on the date of grant (Fair Market Value and Stock having the meanings defined under the Plan), a 10-year exercise term, and shall be eligible for vesting in three installments (at target) for the 2017, 2018 and 2019 fiscal years, respectively, based on your achievement of applicable performance objectives for each such fiscal year as set forth below and your continuous employment through December 31 of the respective fiscal year for such installment of the Option to so vest:
Mr. Bruce W. Lammers
Page 4
The performance objectives for the 2017 fiscal year shall be as follows, equally weighted: (a) net income, (b) return on allocated equity, (c) non-accrual loans/total loans and (d) classified assets ratio, and in such respective amounts as shall be determined in the sole discretion of the Chief Executive Officer and approved by the Board (or a committee thereof), after consultation with you, not later than December 31, 2016. Thereafter, your performance objectives shall be determined annually in the sole discretion of the Chief Executive Officer and approved by the Board (or a Committee thereof). The other terms and conditions of the Option shall be set forth in the form of stock option agreement provided to you with this Agreement. Any portion of the Option eligible to vest with respect to a fiscal year that does not so vest shall be forfeited (except as otherwise set forth in the stock option agreement).
6. Employee Benefits; Vacation; Expenses . During the Term:
(a) You will be entitled to participate in all employee benefit plans that the Company has adopted or may adopt, maintain or contribute to for the benefit of its employees, subject to satisfying the applicable eligibility requirements. Unless otherwise provided in this Agreement, all benefits are subject to the terms and conditions of the plan or arrangement under which such benefits accrue, as may be amended or terminated at any time and from time to time in the sole discretion of the Company.
(b) You will be entitled to annual paid vacation in accordance with the Companys policy applicable to senior executives, but in no event less than four (4) weeks per calendar year (prorated for any partial calendar year of employment).
(c) The Company will pay you a cash allowance in the amount of $3,027.00, to be paid in quarterly amounts of $756.75 on the last day of each fiscal quarter ending during the Term (prorated for any partial quarter) to assist you with your premium costs respecting a term life insurance contract owned by you. The Company will deduct all applicable tax withholdings from such payments. At least annually, you will furnish evidence to the Company that such contract is in force and not expiring during the twelve months following the date that you furnish such evidence.
(d) The Company will pay you a cash allowance in the amount of $5,090.00, to be paid in quarterly installments of $1,272.50 on the last day of each fiscal quarter ending during the Term (prorated for any partial quarter) to assist you with your premium costs respecting an enhanced long-term disability insurance contract owned by you. The Company will deduct all applicable tax withholdings from such payments. At least annually, you will furnish evidence to the Company that such contract is in force and not expiring during the twelve months following the date that you furnish such evidence.
Mr. Bruce W. Lammers
Page 5
(e) The Company will pay you a cash allowance of $1,000 per month to assist you respecting an automobile owned or leased by you for use on Company business. The Company will reimburse you for the reasonable cost of required insurance, maintenance and fuel with respect to such automobile. For such purposes, you will at all times maintain adequate liability insurance coverage on you and the Company as insureds respecting such automobile and your use thereof. The Company will deduct any applicable tax withholdings from such payments and reimbursements. At least annually, you will furnish evidence to the Company that such insurance coverage is in force.
(f) Upon presentation of appropriate documentation, you will be reimbursed in accordance with the Companys expense reimbursement policy for all reasonable and necessary business expenses incurred in connection with the performance of your duties hereunder.
7. Termination . During the Term, your employment may be terminated by either party for any reason at any time pursuant to written notice to the other party, and will terminate automatically on your death; provided , you shall give the Company not less than 30 days prior written notice of any termination by you, with or without Good Reason (as defined on the Attachment hereto). Any payments made and benefits provided to you under this Agreement will be in lieu of any termination or severance payments or benefits for which you (or your estate in the event of your death) otherwise may be eligible under any of the plans, practices, policies or programs of the Company or its affiliates. If termination occurs at a time when the Company is deemed to be in troubled condition by the Federal Deposit Insurance Corporation (the FDIC ) and is subject to the FDICs golden parachute regulations under 12 C.F.R. Part 359, the payments referenced in this Section 7 shall be limited to an aggregate amount equal to the lesser of (i) 12 months of Base Salary, or (ii) the amount otherwise owed to you hereunder. Any payment made pursuant to this Section 7 which is subject to the FDICs golden parachute regulations shall be subject to a right of the Company (or its successor) to recoup such payment from you if the Company (or its successor) subsequently determines, in its reasonable discretion, that you have engaged in any of the activities or offenses set forth in 12 C.F.R. Section 359.4(a)(i) - (iv). After receipt of written notice from the Company that it has made a determination as provided for in this Section 7, you agree to reimburse the Company for the subject payment made pursuant to this Section 7 within 30 days after receipt of such written notice. Further, you agree to indemnify the Company for any costs incurred by the Company in recouping such amount in the event that you fail to reimburse such amount within 30 days of receiving the Company written notice under this Section 7.
(a) Death; Disability . In the event that your employment terminates during the Term due to your death or Disability (as defined on the Attachment), you (or your beneficiaries, if applicable) will be entitled to: (i) any unpaid Base Salary, and any unused vacation, accrued through the date of termination; (ii) reimbursement of any unreimbursed expenses incurred through the date of termination in accordance with Section 6(f); and (iii) all other payments or benefits to which you may be entitled under the terms of any applicable employee benefit plans and programs in which you participated immediately prior to such termination (clauses (i), (ii) and (iii) collectively being the Accrued Amounts ). On such termination, you will also be entitled to (iv) any unpaid EIP bonus earned with respect to any fiscal year ending on or preceding the date of termination ( Unpaid EIP ); and (v) a pro rata portion of your EIP bonus for the fiscal year in which your termination occurs, payable at the time that EIP bonuses are paid to other senior executives for such year, in an amount equal to (x) the amount that you would have earned based upon actual performance had your employment continued through the end of the fiscal year multiplied by (y) a fraction the numerator of which is the number of days you were employed during the fiscal year and the denominator of which is 365 ( Pro Rata Bonus ).
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(b) Termination For Cause or Without Good Reason . If your employment should be terminated during the Term by the Company for Cause (as defined on the Attachment) or by you without Good Reason at any time, you will be entitled to only the Accrued Amounts. If your employment terminates for any reason, other than your death or Disability or following a Change in Control, at any time on or prior to the first anniversary of the date hereof, you will be entitled to only the Accrued Amounts.
(c) Termination Without Cause or For Good Reason .
(i) If your employment is terminated during the Term by the Company without Cause (and not due to Disability) or by you for Good Reason at any time after the first anniversary of the date hereof and during the Term (and not upon or following the expiration of the Term), other than on or following the occurrence of a Change in Control, the Company will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one (1) multiplied by (y) the sum of (I) your Base Salary plus (II) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in substantially equal installments in accordance with the Companys regular payroll cycle over a period of twelve (12) months from your date of termination commencing on the first complete payroll payment date following the date that the Release (defined below) becomes effective; provided , that the Companys obligation to pay the amount in subclause (II) will immediately cease to the extent required to avoid adverse tax consequences to the Company. The amount payable under clause (C), above, will not be reduced or terminated due to compensation you may receive from any subsequent employment or self-employment.
(ii) In the event of a Change in Control that occurs during the Term, and if your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time on or prior to the first anniversary of such Change in Control, the Company (or its successor) will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one (1) multiplied by (y) the sum of (I) your Base Salary plus (II) the product of two (2) multiplied by the higher of the two immediately preceding completed fiscal years earned cash bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (III) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in a lump sum within fifteen (15) days after the Release becomes effective; provided , that the Company will not be obligated to pay the amount in subclause (III) to the extent required to avoid adverse tax consequences to the Company.
(iii) Conditions . Any payments or benefits made or provided pursuant to Section 7(c)(i) or (ii), as the case may be, other than Accrued Amounts, are subject to your (A)
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compliance with the provisions of Section 8; (B) delivery to the Company of an executed general release of claims in a form satisfactory to the Company ( Release ) within twenty-one (21) days of presentation thereof by the Company to you (unless a longer period is required by law); and (C) if such payments are due in connection with a termination of your employment, delivery to the Company of a resignation from all offices, directorships and fiduciary positions with the Company, its affiliates and employee benefit plans. Anything in this Section 7(c) to the contrary notwithstanding, to the extent that any payment conditioned upon such effective Release is deferred compensation under Section 409A (defined below) and the period during which you have discretion to execute or revoke the Release straddles two calendar years, then the Company will make or commence, as may apply, such payments on the earliest practicable date in such second year after the Release becomes effective.
(d) Acknowledgement and Agreement of No Good Reason Event . You acknowledge and agree that no event of Good Reason shall have occurred under the Ridgestone Employment Agreement or this Agreement as a result of the occurrence of the Effective Time or changes in the terms and conditions of your employment occurring thereupon, it being agreed that the Change in Control Amount (as defined in the Cancellation Agreement) to be paid to you at Effective Time pursuant to the Cancellation Agreement will be paid partially in consideration of such acknowledgement and agreement (and, in accordance with Section 3(d) of the Ridgestone Employment Agreement, such Change in Control Amount shall also be in lieu of your entitlement to a Transition Bonus). You further agree that, should you attempt to claim or enforce a right of Good Reason for any such event, you will refund to the Company the full amount of the Change in Control Amount within seven (7) days thereafter.
8. Covenants . As a condition of the Company entering into this Agreement and your employment hereunder, you hereby agree to the following covenants effective the Effective Time:
(a) Non-Use of Companys Property . All notes, reports, plans, published memoranda or other documents (in tangible or electronic form) created, developed, generated or acquired by you, or to which you otherwise had access to, during the course of employment with the Company, concerning or related to the Companys business, whether containing or relating to Confidential Information (as defined below) or not, and all tangible personal property of the Company entrusted to you or in your direct or indirect possession or control, are solely the property of the Company, and will be promptly delivered to the Company and not thereafter used by you upon termination of your employment for any reason or no reason.
(b) Non-Disclosure of Companys Confidential Information .
(i) Confidential Information . For purposes of this Agreement, Confidential Information shall mean any and all trade secrets and other confidential, proprietary and/or nonpublic information of the Company, whether in tangible or electronic form, that you create, develop, generate or acquire, or to which you otherwise have access to, during the course of employment with the Company and that the Company designates or treats as confidential through its policies, practices or procedures. Confidential Information shall include, but is not limited to, financial information and data; business and marketing plans, practices and strategies; proprietary computer programs and other methods of operation, techniques, systems and processes; intellectual property and other research and development; statistical data and analyses; information concerning the Companys planned or pending investment products, acquisitions or divestitures; personnel information, including the identity of officers and employees of the
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Company, their responsibilities, competence, abilities and compensation; financial, accounting and similar records of the Company and/or any fund or account managed by the Company; current and prospective customer lists and information on customers and prospective customers and their officers and other employees; customer financial statements, investment objectives, the nature of their investment portfolios and contractual agreements with the Company, and other personal customer information; and other information received by the Company from third parties in confidence or pursuant to a duty of confidentiality. Notwithstanding the foregoing, Confidential Information shall not include information which is in or hereafter enters the public domain through no fault of you and without breach of any duty of confidentiality; information known to you prior to first receipt of or access to such information in the course of employment; or information rightfully received by you outside the scope of employment from a third party who does not owe the Company a duty of confidentiality with respect to such information.
(ii) Disclosure or Use . You acknowledge and understand that the Company has spent extensive time, effort and resources developing Confidential Information and that, solely as a result of your employment with the Company, you had and will continue to have access to such Confidential Information. You further acknowledge and understand that the Company has taken reasonable measures to protect and maintain the secrecy of its Confidential Information. Accordingly, during the term of your employment and thereafter, you agree not to use or disclose any Confidential Information except in furtherance of your duties for the Company in the ordinary course of business and to otherwise comply with all policies of the Company relating to the use and disclosure of Confidential Information. Upon termination of your employment with the Company for any reason or no reason, you shall not, directly or indirectly, disclose, publish, communicate or use on his or her behalf or anothers behalf, any Confidential Information.
(iii) The above provisions of this Section 8(b) shall not prevent or limit you from complying with any applicable law or with the directive of any court or administrative body or agency having the legal authority to compel testimony from or the production of documents by you; provided , further , that you shall, unless prohibited by law, (A) promptly notify the Company of any such intended disclosure prior to such disclosure, (B) at the written request of the Company, diligently contest such disclosure at the expense of the Company, and (C) at the written request of the Company, seek to obtain, at the expense of the Company, such confidential treatment as may be available under applicable laws for any information so disclosed.
(c) Non-Competition and Non-Solicitation . The parties hereto have jointly reviewed the operations of Ridgestone and Ridgestone Bank, and the Small Business Capital Unit of the Company and have agreed that the primary business of Ridgestone and Ridgestone Bank was, and of the Small Business Capital Unit of the Company is, originating and servicing loans under the business lending programs maintained by the U.S. Small Business Administration and the U.S. Department of Agriculture (collectively, the Lending Business ). The parties hereto have further agreed that, because of the unique nature of the Lending Business, the substantial investment by the Company in its acquisition of Ridgestone, and that the Company regularly will hereafter participate in the Lending Business on a national scale and, therefore, that the service area of the Lending Business is the United States of America (the Restrictive Area ). Therefore, as an essential ingredient of and in consideration of this Agreement and your employment with the Company, you shall not, during your employment with the Company and for a period of twelve (12) months immediately following the termination of your employment for any reason (the Restrictive Period ), whether such termination occurs during the Term or thereafter, directly or indirectly do any of the following (all of which are collectively referred to in this Section 8(c) as the Restrictive Covenant ):
(i) Engage or invest in, own, manage, operate, finance, control, participate in the ownership, management, operation or control of, be employed by, associated with or in any manner connected with, serve as a director, officer or consultant to, lend your name or any similar name to, lend your credit to or render services or advice to, in each case in the capacity that you provided services to the Company (or previously to Ridgestone or Ridgestone Bank), any person, firm, partnership, corporation or trust that owns, operates or is in the process of forming a Financial Institution (defined below) with an office located, or to be located at an address identified in a filing with any regulatory authority, within the Restrictive Area where such Financial Institution engages in, or is preparing to engage in, the Lending Business; provided , however , that the ownership by you of shares of the capital stock of any Financial Institution, which shares are listed on a securities exchange or quoted on the National Association of Securities Dealers Automated Quotation System and which do not represent more than one percent (1%) of the institutions outstanding capital stock, shall not violate any terms of this Agreement;
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(ii) Either for you or any Financial Institution: (A) induce or attempt to induce any employee of the Company, who is involved with the Lending Business, with whom you had significant contact to leave the employ of the Company; (B) in any way interfere with the relationship between the Company and any employee of the Company, who is involved with the Lending Business, with whom you had significant contact; or (C)·induce or attempt to induce any customer, supplier, licensee or business relation of the Company, who is involved with the Lending Business, with whom you had significant contact to cease doing business with the Company or in any way interfere with the relationship between the Company and its customers, suppliers, licensees or business relations with whom you had significant contact;
(iii) Either for you or any Financial Institution, solicit the business of any person or entity known to you to be a customer of the Company, where you had significant contact with such person or entity, with respect to products, activities or services that compete in whole or in part with the Lending Business of the Company; or
(iv) Serve as the agent, broker or representative of, or otherwise assist, any person or entity in obtaining services or products associated with the Lending Business from any Financial Institution within the Restrictive Area, with respect to products, activities or services that you devoted time to on behalf of the Company and that compete in whole or in part with the Lending Business of the Company.
(v) For the avoidance of doubt, nothing in this Agreement shall prevent you from accepting employment with, or providing services to, a Financial Institution that engages in the Lending Business so long as you do not participate in the Lending Business during the Restrictive Period.
(vi) For purposes of this Agreement, Financial Institution shall mean any person, firm, partnership, corporation, trust or other entity that owns or operates, a bank, savings and loan association, credit union or similar financial institution.
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(d) Assignment of Inventions . You will promptly communicate and disclose in writing to the Company all inventions and developments including software, whether patentable or not, as well as patents and patent applications (hereinafter collectively called Inventions ), made, conceived, developed, or purchased by you, or under which you acquire the right to grant licenses or to become licensed, alone or jointly with others, which have arisen or may arise out of your employment, or relate to any matters pertaining to, or useful in connection therewith, the business or affairs of the Company, Byline Bancorp (the Holding Company ) or any of their subsidiaries. Included herein as if developed during the employment period is any specialized equipment and software developed for use in the business of the Company. All of your right, title and interest in, to, and under all such Inventions, licenses, and right to grant licenses shall be the sole property of the Company. As to all such Inventions, you will, upon request of the Company execute all documents which the Company deems necessary or proper to enable it to establish title to such Inventions or other rights, and to enable it to file and prosecute applications for letters patent of the United States and any foreign country; and do all things (including the giving of evidence in suits and other proceedings) which the Company deems necessary or proper to obtain, maintain, or assert patents for any and all such Inventions or to assert its rights in any Inventions not patented.
(e) Non-Disparagement of Company . You acknowledge and understand that the Companys good name and its goodwill are extremely valuable and the result of the expenditure of substantial time, effort and resources by the Company. The Company acknowledges and understands that your good name and goodwill are extremely valuable and the result of the expenditure of substantial time, effort and resources by you. Therefore, during the period of your employment with the Company and thereafter, without interruption, for the period ending twelve (12) months after the last day of your employment with the Company, the parties hereto agree not to make, or cause to be made, any statement or disclosure that disparages the other party, or any director, officer or employee of the Company, or assist any other person, business or entity to do so; provided , the obligations of the Company under this Section 8(e) shall apply only to the Company via public statement and each of their directors and officers.
(f) Remedies for Breach . You acknowledge and agree that you have reviewed the provisions of this Agreement with legal counsel, or have been given adequate opportunity to seek such counsel, and you acknowledge that the covenants contained in Section 8(c) are reasonable with respect to their duration, geographical area and scope. You further acknowledge that the restrictions contained in this Section 8 are reasonable and necessary for the protection of the legitimate business interests of the Company, that they create no undue hardships, that any violation of these restrictions would cause substantial injury to the Company and such interests, and that such restrictions were a material inducement to the Company to enter into this Agreement. In the event of any violation or threatened violation of these restrictions, the Company, in addition to and not in limitation of, any other rights, remedies or damages available to the Company under this Agreement or otherwise at law or in equity, shall be entitled to preliminary and permanent injunctive relief to prevent or restrain any such violation by you and any and all persons directly or indirectly acting for or with him, as the case may be. If you violate the Restrictive Covenant and the Company brings legal action for injunctive or other relief, the Company shall not, as a result of the time involved in obtaining such relief, be deprived of the benefit of the full period of the Restrictive Covenant. Accordingly, the Restrictive Covenant shall be deemed to have the duration specified herein computed from the date the relief is granted but reduced by the time between the period when the Restrictive Period began to run and the date of the first violation of the Restrictive Covenant by you. Notwithstanding anything contained in this Agreement to the contrary, in the event that your employment is terminated without Cause or you resign for Good Reason and the Company reasonably determines in good faith that you have violated any provision of Section 8, then the Company shall be entitled to discontinue any payments or benefits that would otherwise be provided to you under Section 7(a) or Section 7(c) and you shall forfeit your rights to the same.
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(g) Blue Pencil Provision . In the event that any provision, or part thereof, shall be declared by a court (or arbitrator, as may apply) to exceed the maximum time period or scope that the court deems to be enforceable, then the parties hereto expressly authorize the court to modify such provision, or part thereof, so that it may be enforced to the fullest extent permitted by law.
(h) Prevailing Party Attorney s Fees . You agree that, if you breach or threaten to breach any of the covenants in this Section 8 and the Company initiates any legal action against you to enforce such covenants and/or to secure damages as a result of any breach of such covenants, the prevailing party shall be entitled to payment and reimbursement from the other for their reasonable attorneys fees and litigation costs incurred in connection with that action.
(i) Survival . The restrictions set forth in this Section 8 of this Agreement shall survive the termination of this Agreement and the termination of Executives employment with the Company for any reason or no reason.
9. Possible Reduction to Avoid Excise Tax on Golden Parachute Payments . In the event that any amounts payable pursuant to Section 7 hereof or other payments or benefits otherwise payable to you under this Agreement or under any other agreement, plan or program or otherwise payable to you by the Company or an affiliate thereof (a) constitute parachute payments within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended ( Code ), and (b) but for this Section 9 would be subject to the excise tax imposed by Section 4999 of the Code, then such amounts payable under this Agreement and under such other plans, programs and agreements shall be either (i) delivered in full, or (ii) delivered in such lesser amount that would result in no portion of such payments and benefits being subject to excise tax under Section 4999 of the Code, whichever of the foregoing amounts under clause (i) or clause (ii), taking into account the applicable federal, state and local income and employment taxes and the excise tax imposed by Section 4999 of the Code (and any equivalent state or local excise taxes), results in the receipt by you, on an after-tax basis, of the greatest amount of payments and benefits, notwithstanding that all or some portion of such benefits may be taxable under Section 4999 of the Code. Any reduction in payments or benefits required by this Section 9 shall occur in the following order: (1) any payment due under Section 7(c)(iii) upon the occurrence of a Special Change in Control; (2) any long-term cash incentive payments due to you upon the occurrence of the event triggering such parachute payments, (3) cash severance pay, (4) any Pro Rata Bonus, and (5) reduction of vesting acceleration of equity awards (in reverse order of the date of the grant). All determinations required to be made under this Section 9 shall be made by the Companys independent tax preparer or, if the Company in its sole discretion determines not to use such tax preparer, such other nationally or regionally recognized certified public accounting firm selected by the Company and reasonably acceptable to you (the Firm ). All fees and expenses of the Firm shall be borne by the Company.
10. Standard Regulatory Provisions .
(a) If you are prohibited from participating in the conduct of the Companys affairs by a notice served under Section 8(e)(3) or 8(g)(l) of the Federal Deposit Insurance Act, (12 U.S.C. § 1818(e)(3) or (g)(1)), the Companys obligations under this contract shall be suspended as of the date of such service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Company shall: (i) pay to you all of the compensation withheld while the contract obligations were suspended, and (ii) reinstate any of the obligations, which were suspended.
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(b) If you are removed and/or permanently prohibited from participating in the conduct of the Companys affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, (12 U.S.C. § 1818(e)(4) or (g)(l)), all obligations of the Company under this Agreement shall terminate as of the effective date of such order.
(c) If the Company is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. § 1813(x)(1)), all obligations of the Company under this Agreement shall terminate as of the date of default.
(d) All obligations under this Agreement may be terminated except to the extent determined that the continuation of the Agreement is necessary for the continued operation of the Company: (i) by the FDIC, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. § 1823(c)); or (ii) by the FDIC at the time the FDIC approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined to be in an unsafe and unsound condition. All obligations of the Company under this Agreement shall terminate as of the effective date of any of the foregoing FDIC actions.
(e) Any payments made to you pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. § 1828(k) and FDIC Regulation 12 CFR Part 359, regarding golden parachute payments and prohibited indemnification payments.
11. Arbitration . To the fullest extent permitted by law, all claims that you may have against the Company (or any other released party under the Release), or which the Company may have against you, in any way related to the subject matter, interpretation, application, or alleged breach of this Agreement ( Arbitrable Claims ) shall be resolved by binding arbitration in Chicago, Illinois. The Arbitration will be held pursuant to the American Arbitration Associations Commercial Rules and Mediation Procedures (other than for large or complex disputes). The decision of the arbitrator shall be in writing and shall include a statement of the essential conclusions and findings upon which the decision is based. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. Either party may bring an action in a court situated in Cook County, Illinois to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. Notwithstanding the foregoing, either party may, in the event of an actual or threatened breach of this Agreement (including but not limited to the provisions of the Agreement to Protect Company Interests), seek a temporary restraining order or injunction in a court situated in Cook County, Illinois restraining such breach pending a determination on the merits by the arbitrator. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR ENFORCEABILITY OF THE AGREEMENT TO ARBITRATE.
12. Indemnification; Liability Insurance . Commencing at the Effective Time, the Company agrees to indemnify you and hold you harmless to the extent permitted under the Companys charter and by-laws. During the Term and at all times thereafter during which you may be subject to a liability to be indemnified under the preceding sentence, the Company will cover you as an insured under any directors and officers liability insurance that insures its officers. This Section 12 will survive any termination or expiration of this Agreement or termination of your employment.
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13. Your Representations . You represent and warrant that your entering into this Agreement and your employment with the Company will not be in breach of any agreement with any current or former employer and that you are not subject to any other restrictions on solicitation of clients or customers or competing against another entity. You understand that the Company has relied on this representation in entering into this Agreement.
14. Clawback . In addition to any compensation recovery (clawback) which may be required by law and regulation, you acknowledge and agree that any compensation paid or awarded to you in connection with your employment with the Company shall be subject to any clawback requirements as set forth in the Companys corporate governance guidelines or policies and to any similar or successor provisions as may be in effect from time to time. This Section 14 will survive any termination or expiration of this Agreement or termination of your employment.
15. Code Section 409A . This Section 15 controls over anything in this Agreement to the contrary. It is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code and all regulations, guidance and other interpretive authority issued thereunder (collectively, Section 409A ) so as not to subject you to payment of any additional tax, penalty or interest imposed under Section 409A and this Agreement shall be interpreted accordingly. To the extent that the reimbursement of any expenses or the provision of any in-kind benefits under this Agreement is subject to Section 409A, (a) the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, during any one calendar year shall not affect the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (b) reimbursement of any such expense shall be made by no later than December 31 of the year following the calendar year in which such expense is incurred; and (c) your right to receive such reimbursements or in-kind benefits shall not be subject to liquidation or exchange for another benefit. To the extent that Section 409A(a)(2)(B)(i) applies and you are a specified employee on the date of your separation from service, then any payment treated as deferred compensation under Section 409A will be postponed until the first business day after the expiration of six (6) months from the date of your separation from service (or your death if earlier).
16. General Provisions .
(a) Notices . All notices, consents, and other communications to be given under this Agreement shall be in writing and (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, or (iii) delivered by overnight express delivery service or same-day local courier service, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 16(a):
If to the Company:
Byline Bank
180 N. LaSalle
Chicago, Illinois 60601
(or such address hereafter where the Company locates its corporate offices)
Attention: Director Human Resources
If to you: At the most recent address on the payroll files of the Company
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(b) Entire Agreement; Amendments; No Waiver . This Agreement supersedes all previous employment agreements, whether written or oral between you and the Company including, without limitation, the Ridgestone Employment Agreement (as of the Effective Time), and constitutes the entire agreement and understanding between the Company and you concerning the subject matter hereof. If, and to the extent that, any other written or oral agreement between you and the Company is inconsistent with or contradictory to the terms of this Agreement, the terms of this Agreement shall control. No modification, amendment, termination, or waiver of this Agreement shall be binding unless in writing and signed by you and a duly authorized officer of the Company. Failure of party to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such terms, covenants, and conditions.
(c) Successors and Assigns . This Agreement is binding upon and shall inure to the benefit of you and your heirs, executors, assigns and administrators or your estate and property and the Company and its successors and permitted assigns. You may not assign or transfer to others your rights or obligation to perform your duties hereunder.
(d) Counterparts . This Agreement may be signed in counterparts each of which will be deemed an original, but all of which will constitute one and the same instrument.
[Signature Page Follows This Page]
On behalf of the Board, I am excited to offer you employment with the Company under this Agreement and look forward to a mutually rewarding relationship.
Very truly yours, | ||
BYLINE BANK | ||
By: |
/s/ Alberto Paracchini |
|
Alberto Paracchini | ||
Chief Executive Officer | ||
Date: |
6/9/2016 |
Agreed and Accepted: | ||
/s/ Bruce W. Lammers |
||
Bruce W. Lammers | ||
Date: |
6/9/2016 |
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ATTACHMENT
Definitions
Cause shall mean (A) your willful and continued failure to perform substantially your duties (after written notice and a reasonable period to cure); (B) your willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of your duties and responsibilities; (C) your being charged with a crime involving moral turpitude, dishonesty, fraud, theft or financial impropriety; (D) your wilful violation of a material requirement of any code of ethics or standards of conduct of the Company or the Holding Company applicable to you (after written notice and a reasonable period to cure, if curable) or your violation of your fiduciary duty to the Company; or (E) a breach of any provision of Section 8 of this Agreement; provided , that no act or failure to act by you shall be considered willful if such act or omission was conducted in good faith and with a reasonable belief that the action or omission was in the best interests of the Company. Any such termination for Cause shall be predicated by notice to you describing the particulars of such for Cause termination.
Change in Control shall mean the first to occur of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both (x) the total voting power of the then outstanding shares of capital stock of the Holding Company entitled to vote generally in the election of directors (the Voting Stock ) and (y) the fair market value of the outstanding shares of capital stock of the Holding Company ( Economic Stock );
(B) Consummation of a reorganization, merger or consolidation, the sale or other disposition of all or substantially all of the assets of the Holding Company (in each such case, a Business Combination ), unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company; or
(C) The stockholders of the Holding Company approve a plan of complete liquidation or dissolution of the Holding Company.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A), (B), and (C) and to determine whether, and the exact date on which, a Change in Control has been deemed to have occurred thereunder.
Mr. Bruce W. Lammers
Page 17
Disability shall have the meaning defined under Treasury Regulation Section 1.409A-3(i)(4).
Good Reason means the occurrence of any of the following without your written consent: (A) any material reduction in your Base Salary; (B) any material adverse change by the Company in your title, position, duties, authority or reporting relationships with the Company; or (C) the Companys requirement that you relocate your principal place of employment to a location in excess of thirty-five (35) miles from the Brookfield, WI location of the SBC Unit or twenty-five (25) miles from the Schaumburg, IL location of the SBC Unit. Provided , Good Reason shall not exist unless and until you provide the Company with written notice of the acts alleged to constitute Good Reason within ninety (90) days of the initial occurrence of such event, and the Company fails to cure such acts within thirty (30) days of receipt of such notice. You must terminate your employment within 120 days following the initial occurrence of such event for the termination to be on account of Good Reason.
Exhibit 10.6
EXECUTION VERSION
Donald J. Meyer
1135 S. Delano Court, Apt. 325E
Chicago, IL 60605
Re: | Employment Terms |
Dear Donald:
On behalf of the Board of Directors (the Board ) of Byline Bank, an Illinois chartered bank (the Company ), I am pleased to offer you employment with the Company on the terms set forth in this letter ( Agreement ).
1. Term . The term of this Agreement commences upon your written acceptance below and will expire on the third anniversary of your acceptance date; provided , the term will automatically renew on such date for one (1) year, and for one (1) year on each subsequent anniversary of such date thereafter, unless at any time not less than one hundred twenty (120) days prior to the end of such term either the Company or you notify the other in writing of its intention not to further extend the term; provided further , (a) the term of this Agreement shall terminate on any termination of your employment and (b) upon the occurrence of a Change in Control or Special Change in Control (each as defined on the Attachment) the term of this Agreement shall renew for period expiring on the first anniversary of such Change in Control or Special Change in Control, as the case may be, and which shall not automatically renew thereafter. The period under this Section 1, as may be so renewed, is referred to herein as the Term . Absent a written agreement by the parties to the contrary, upon the expiration of the Term, this Agreement (all rights and obligations herein) will terminate (except for those provisions that specifically survive) and your employment will continue thereafter at-will.
2. Position; Principal Place of Employment .
(a) You will be employed as Executive Vice President, Head of Commercial Banking of the Company, reporting to the Chief Executive Officer. Your principal place of employment will be at the Companys corporate offices designated from time to time by the Board. Your duties shall be as may be prescribed by the Companys by-laws and as may be assigned by the Chief Executive Officer from time to time commensurate with your position. During your employment, you owe an undivided duty of loyalty to the Company and agree to devote your full business time and attention to the performance of your duties and responsibilities. You shall perform your duties under this Agreement professionally, in accordance with the applicable laws, rules and regulations and such standards, policies and procedures established by the Company and the banking industry from time to time. You will not work full-time for another employer, and all part-time employment, including any self-employment shall be disclosed to the Company not less frequently than on the anniversary of the last day of the Term. In addition, you are subject to the Companys Code of Ethics and all such other activities are subject to the principles thereunder not to engage in any activity that may, in the sole discretion of the Board, be determined to be a conflict of interest. You agree to serve without additional compensation as an officer and director of any of the Companys subsidiaries.
Donald J. Meyer
Page 2
3. Base Salary . You will be paid a base salary at an annual rate of $260,000 (the Base Salary ), subject to applicable withholdings and payable in accordance with the regular payroll practices of the Company.
4. Annual Incentive . You will be eligible to participate in the Companys Executive Incentive Plan (the EIP ). Under the EIP, you will have the opportunity to earn a target annual cash bonus of 50% of your Base Salary based upon your achievement of applicable target-level performance objectives as determined in the sole discretion of the Board (or a committee thereof). Your annual bonus, to the extent earned under the EIP, will be paid not later than March 15 of the fiscal year following the fiscal year in which performed. You will not be entitled to a bonus for any particular year unless you are employed on the date such bonus is paid (unless otherwise provided herein or in the EIP).
5. Long-Term Incentive Program . You will be eligible to participate in the Metropolitan Bank Group Equity Incentive Plan adopted by Byline Bancorp, Inc., an Illinois corporation (f/k/a Metropolitan Bank Group, Inc. and referred to in this Agreement as the Holding Company ) on such terms and conditions as are set forth in the form of stock option agreement provided to you with this Agreement.
6. Employee Benefits; Vacation; Expenses .
(a) You will be entitled to participate in all employee benefit plans that the Company has adopted or may adopt, maintain or contribute to for the benefit of its employees, subject to satisfying the applicable eligibility requirements. Unless otherwise provided in this Agreement, all benefits are subject to the terms and conditions of the plan or arrangement under which such benefits accrue, as may be amended or terminated at any time and from time to time in the sole discretion of the Company.
(b) You will be entitled to annual paid vacation in accordance with the Companys policy applicable to senior executives, but in no event less than four (4) weeks per calendar year (prorated for any partial calendar year of employment).
(c) You will be entitled to a benefit at Company expense that pays upon your death a lump sum cash amount equal to 200% of your Base Salary but not exceeding $750,000. The Company may provide this benefit, in its sole discretion, through its purchase of a life insurance policy, in which event you will fully cooperate with any physical examination and other underwriting requirements to obtain such life insurance. The Company will deduct any applicable tax withholdings from other compensation due you or from the proceeds of such benefit, as may apply.
(d) Upon presentation of appropriate documentation, you will be reimbursed in accordance with the Companys expense reimbursement policy for all reasonable and necessary business expenses incurred in connection with the performance of your duties hereunder.
7. Termination; Special Change in Control . Your employment may be terminated by either party for any reason at any time pursuant to written notice to the other party, and will terminate automatically on your death; provided , you shall give the Company not less than 30 days prior written notice of any termination by you, with or without Good Reason (as defined on the Attachment hereto). Any payments made and benefits provided to you under this Agreement will be in lieu of any termination or severance payments or benefits for which you (or your estate in the event of your death) otherwise may be eligible under any of the plans, practices, policies or programs of the Company or its affiliates. If termination occurs at a time when the Company is deemed to be in troubled condition by the FDIC and is subject to the FDICs golden parachute regulations under 12 C.F.R. Part 359, the payments referenced in this Paragraph 7 shall be limited to an aggregate amount equal to the lesser of (i) 12 months of Base
Donald J. Meyer
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Salary, or (ii) the amount otherwise owed to you hereunder. Any payment made pursuant to this Paragraph 7 which is subject to the FDICs golden parachute regulations shall be subject to a right of the Company (or its successor) to recoup such payment from Executive if the Company (or its successor) subsequently determines, in its reasonable discretion, that Executive has engaged in any of the activities or offenses set forth in 12 C.F.R. Section 359.4(a)(i) - (iv). After receipt of written notice from the Company that it has made a determination as provided for in this Section, Executive agrees to reimburse the Company for the subject payment made pursuant to this Paragraph 7 within 30 days after receipt of such written notice. Further, Executive agrees to indemnify the Company for any costs incurred by the Company in recouping such amount in the event that Executive fails to reimburse such amount within 30 days of receiving the Companys written notice under this Section.
(a) Death; Disability . In the event that your employment terminates due to your death or Disability (as defined on the Attachment), you will be entitled to: (i) any unpaid Base Salary, and any unused vacation, accrued through the date of termination; (ii) reimbursement of any unreimbursed expenses incurred through the date of termination in accordance with Section 6(d); and (iii) all other payments or benefits to which you may be entitled under the terms of any applicable employee benefit plans and programs in which you participated immediately prior to such termination (clauses (i), (ii) and (iii) collectively being the Accrued Amounts ). On such termination, you will also be entitled to (iv) any unpaid EIP bonus earned with respect to any fiscal year ending on or preceding the date of termination ( Unpaid EIP ); and (v) a pro rata portion of your EIP bonus for the fiscal year in which your termination occurs, payable at the time that EIP bonuses are paid to other senior executives for such year, in an amount equal to (x) the amount that you would have earned based upon actual performance had your employment continued through the end of the fiscal year multiplied by (y) a fraction the numerator of which is the number of days you were employed during the fiscal year and the denominator of which is 365 ( Pro Rata Bonus ). In the event of your death, your beneficiary will also be entitled to your death benefit under Section 6(c).
(b) Termination For Cause or Without Good Reason. If your employment should be terminated by the Company for Cause (as defined on the Attachment) or by you without Good Reason, you will be entitled to only the Accrued Amounts.
(c) Termination Without Cause or For Good Reason; Special Change in Control Success Payment .
(i) If your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time during the Term (and not upon the expiration of the Term) other than on or following the occurrence of a Change in Control or a Special Change in Control, the Company will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one (1) multiplied by (y) the sum of (I) your Base Salary plus (II) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in substantially equal installments in accordance with the Companys regular payroll cycle over a period of twelve (12) months from your date of termination commencing on the first complete payroll payment date following the date that the Release (defined below) becomes effective; provided , that the Companys obligation to pay the amount in subclause (II) will immediately cease to the extent required to avoid adverse tax consequences to the Company. The amount payable under clause (C), above, will not be reduced or terminated due to compensation you may receive from any subsequent employment or self-employment.
Donald J. Meyer
Page 4
(ii) If your employment is terminated by the Company without Cause (and not due to Disability) or by you for Good Reason at any time, during the Term (and not upon the expiration of the Term), on or within one (1) year following the occurrence of a Change in Control (that is not a Special Change in Control), the Company (or its successor) will pay or provide you: (A) the Accrued Amounts and any Unpaid EIP; (B) a Pro Rata Bonus; and (C) a cash amount equal to the product of (x) one (1) multiplied by (y) the sum of (I) your Base Salary plus (II) the higher of the two immediately preceding completed fiscal years earned bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (III) the excess of the applicable COBRA premium for health, dental and vision care benefits on the date of termination (provided that you elect COBRA continuation coverage) over the amount of health, dental and vision care premiums charged to active employees of the Company for like coverage on the date of termination, which amount under this clause (C) will be payable in a lump sum within fifteen (15) days after the Release becomes effective; provided , that the Company will not be obligated to pay the amount in subclause (III) to the extent required to avoid adverse tax consequences to the Company.
(iii) Upon the occurrence of a Special Change in Control (as defined on the Attachment) during the Term, upon which your employment does not terminate, you will receive from the Company or its successor (irrespective of whether your employment terminates or continues upon consummation of such Special Change in Control): (A) a lump sum cash amount equal to one (1) multiplied by the sum of (I) your Base Salary plus (II) the higher of the two immediately preceding completed fiscal years earned bonuses (irrespective of whether the later of the preceding years bonus had yet been paid) plus (B) a Pro Rata Bonus, but such Pro Rata Bonus will be determined based on achievement applicable performance goals under the EIP through the date of consummation of the Special Change in Control (with adjustments to the performance goals as the Board deems appropriate to account for any reduction of the performance period resulting from consummation of the Special Change in Control). The amount due under clause (A) shall be paid within fifteen (15) days after the Release becomes effective. The amount due under clause (B) will be paid when EIP bonuses for such period are paid to other executives of the Company. In the event that you become entitled to receive the payments under this subparagraph (iii), you shall not be entitled to any payments under subparagraph 7(c)(ii)(B) or (C) upon any termination of your employment thereunder.
(iv) Conditions . Any payments or benefits made or provided pursuant to Section 7(c)(i), (ii) or (iii), as the case may be, other than Accrued Amounts, are subject to your (A) compliance with the Agreement Protecting Company Interests (as provided at Section 8 hereof); (B) delivery to the Company of an executed general release of claims in a form satisfactory to the Company ( Release ) within twenty-one (21) days of presentation thereof by the Company to you; and (C) if such payments are due in connection with a termination of your employment, delivery to the Company of a resignation from all offices, directorships and fiduciary positions with the Company, its affiliates and employee benefit plans. Anything in this Section 7(c) to the contrary notwithstanding, to the extent that any payment conditioned upon such effective Release is deferred compensation under Section 409A (defined below) and the period during which you have discretion to execute or revoke the Release straddles two calendar years, then the Company will make or commence, as may apply, such payments on the earliest practicable date in such second year after the Release becomes effective.
8. Agreement Protecting Company Interests . As a condition of the Company entering into this Agreement and your continuing employment hereunder, you will enter into the Companys and Holding Companys standard form of Agreement Protecting Company Interests, with a Restriction Period thereunder of twelve (12) months. The Agreement Protecting Company Interests and the covenants thereunder will survive any expiration of this Agreement or termination of your employment.
Donald J. Meyer
Page 5
9. Reduction to Avoid Excise Tax on Golden Parachute Payments . If the payments and benefits provided for in this Agreement or under any other agreement, plan or program or otherwise payable to you constitute parachute payments within the meaning of Section 280G of the Internal Revenue Code ( Code ) and would be subject to the excise tax imposed by Section 4999 of the Code, then such payments and benefits shall be reduced to the extent necessary to assure that the payments and benefits provided to you under this Agreement will be limited to the amount of payments and benefits that can be provided without triggering a parachute payment under Section 280G. To the extent that reduction of any payments and benefits is required by this Section 9 such that no portion of such payments and benefits will be subject to the excise tax imposed by Section 4999, the payments and benefits shall be reduced in the following order: (i) any payment due under Section 7(c)(iii) upon the occurrence of a Special Change in Control; (ii) any long-term cash incentive payments due to you upon the occurrence of the event triggering such parachute payments, (iii) cash severance pay, (iv) any Pro Rata Bonus, and (v) the value of any stock options and any other equity awards that may hereafter be granted to you.
10. Standard Regulatory Provisions .
(a) If Employee is prohibited from participating in the conduct of the Companys affairs by a notice served under Section 8 (e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, (12 U. S.C. §1818(e)(3) or (g)(1)), Companys obligations under this contract shall be suspended as of the date of service , unless stayed by appropriate proceedings.
(b) If the Employee is removed and/or permanently prohibited from participating in the conduct of the Companys affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, (12 U.S.C. §1818(e)(4) or (g)(1)), all obligations of the Company under this contract shall terminate as of the effective date of the order.
(c) If the Company is in default (as defined in (12 U.S.C. §1813(x)(1)) of the Federal Deposit Insurance Act), all obligations of the Company under this contract shall terminate as of the date of default.
(d) All obligations under this Agreement may be terminated except to the extent determined that the continuation of the Agreement is necessary for the continued operation of Employer: (i) by the Federal Deposit Insurance Corporation (the FDIC), at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Company under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the FDIC at the time the FDIC approves a supervisory merger to resolve problems related to operation of the Company or when the Company is determined to be in an unsafe and unsound condition. All obligations of the Company under this contract shall terminate as of the effective date of any of the foregoing.
(e) Any payments made to the Employee pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. §1828(k) and FDIC Regulation 12 CFR Part 359, regarding Golden Parachute and Indemnification Payments.
11. Arbitration . To the fullest extent permitted by law, all claims that you may have against Company (or any other released party under the Release), or which the Company may have against you, in any way related to the subject matter, interpretation, application, or alleged breach of this Agreement ( Arbitrable Claims ) shall be resolved by binding arbitration in Chicago, Illinois. The Arbitration will be held pursuant to the American Arbitration Associations Commercial Rules and Mediation Procedures
Donald J. Meyer
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(other than for large or complex disputes). The decision of the arbitrator shall be in writing and shall include a statement of the essential conclusions and findings upon which the decision is based. Arbitration shall be final and binding upon the parties and shall be the exclusive remedy for all Arbitrable Claims. Either party may bring an action in a court situated in Cook County, Illinois to compel arbitration under this Agreement and to enforce an arbitration award. Otherwise, neither party shall initiate or prosecute any lawsuit or administrative action in any way related to any Arbitrable Claim. Notwithstanding the foregoing, either party may, in the event of an actual or threatened breach of this Agreement (including but not limited to the provisions of the Agreement to Protect Company Interests), seek a temporary restraining order or injunction in a court situated in Cook County, Illinois restraining such breach pending a determination on the merits by the arbitrator. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JURY IN REGARD TO ARBITRABLE CLAIMS, INCLUDING WITHOUT LIMITATION ANY RIGHT TO TRIAL BY JURY AS TO THE MAKING, EXISTENCE, VALIDITY, OR ENFORCEABILITY OF THE AGREEMENT TO ARBITRATE.
12. Indemnification; Liability Insurance . The Company agrees to indemnify you and hold you harmless to the extent permitted the Companys charter and by-laws. During the Term and at all times thereafter during which you may be subject to a liability to be indemnified under the preceding sentence, the Company will cover you as an insured under any directors and officers liability insurance that insures its officers. This Section 12 will survive any termination or expiration of this Agreement or termination of your employment.
13. Your Representations . You represent and warrant that your entering into this Agreement and your employment with the Company will not be in breach of any agreement with any current or former employer and that you are not subject to any other restrictions on solicitation of clients or customers or competing against another entity. You understand that the Company has relied on this representation in entering into this Agreement.
14. Clawback . In addition to any compensation recovery (clawback) which may be required by law and regulation, you acknowledge and agree that any compensation paid or awarded to you in connection with your employment with the Company shall be subject to any clawback requirements as set forth in the Companys corporate governance guidelines or policies and to any similar or successor provisions as may be in effect from time to time. This Section 14 will survive any termination or expiration of this Agreement or termination of your employment.
15. Code Section 409A . This Section 15 controls over anything in this Agreement to the contrary. It is intended that any amounts payable under this Agreement shall either be exempt from or comply with Section 409A of the Code and all regulations, guidance and other interpretive authority issued thereunder (collectively, Section 409A ) so as not to subject you to payment of any additional tax, penalty or interest imposed under Section 409A and this Agreement shall be interpreted accordingly. To the extent that the reimbursement of any expenses or the provision of any in-kind benefits under this Agreement is subject to Section 409A, (a) the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, during any one calendar year shall not affect the amount of such expenses eligible for reimbursement, or in-kind benefits to be provided, in any other calendar year; (b) reimbursement of any such expense shall be made by no later than December 31 of the year following the calendar year in which such expense is incurred; and (c) your right to receive such reimbursements or in-kind benefits shall not be subject to liquidation or exchange for another benefit. To the extent that Section 409A(a)(2)(B)(i) applies and you are a specified employee on the date of your separation from service, then any payment treated as deferred compensation under Section 409A will be postponed until the first business day after the expiration of six (6) months from the date of your separation from service (or your death if earlier).
Donald J. Meyer
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16. General Provisions .
(a) Notices . All notices, consents, and other communications to be given under this Agreement shall be in writing and (i) personally delivered, (ii) mailed by registered or certified mail, postage prepaid with return receipt requested, or (iii) delivered by overnight express delivery service or same-day local courier service, to the address set forth below, or to such other address as may be designated by the parties from time to time in accordance with this Section 16(a):
If to the Company:
Byline Bank
180 N. LaSalle
Chicago, Illinois 60601
(or such address hereafter where the Company locates its corporate offices)
Attention: Director Human Resources
If to you: At the most recent address on the payroll files of the Company
(b) Entire Agreement; Amendments; No Waiver . This Agreement and the Agreement to Protect Company Interests supersedes all previous employment agreements, whether written or oral between you and the Company and constitutes the entire agreement and understanding between the Company and you concerning the subject matter hereof. If, and to the extent that, any other written or oral agreement between you and the Company is inconsistent with or contradictory to the terms of this Agreement or the Agreement to Protect Company Interests, the terms of this Agreement or the Agreement to Protect Company Interests, as applies, shall control. No modification, amendment, termination, or waiver of this Agreement shall be binding unless in writing and signed by you and a duly authorized officer of the Company. Failure of the any party to insist upon strict compliance with any of the terms, covenants, or conditions hereof shall not be deemed a waiver of such terms, covenants, and conditions.
(c) Successors and Assigns . This Agreement is binding upon and shall inure to the benefit of you and your heirs, executors, assigns and administrators or your estate and property and the Company and its successors and permitted assigns. You may not assign or transfer to others your rights or obligation to perform your duties hereunder.
(d) Counterparts . This Agreement may be signed in counterparts each of which will be deemed an original, but all of which will constitute one and the same instrument.
[Signature Page Follows This Page]
Donald J. Meyer
Page 8
On behalf of the Board, I am excited to offer you continuing employment with the Company under this Agreement and look forward to a mutually rewarding relationship.
Very truly yours, | ||
BYLINE BANK | ||
By: |
/s/ Roberto Herencia |
|
Roberto Herencia | ||
Chairman of the Board of Directors | ||
Date: |
March 4, 2015 |
Agreed and Accepted: | ||
/s/ Donald J. Meyer |
||
Donald J. Meyer | ||
Date: |
March 2, 2015 |
Donald Meyer
Page 9
ATTACHMENT
Definitions
Cause shall mean (A) your willful and continued failure to perform substantially your duties; (B) your willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of your duties and responsibilities; (C) your commission of a crime involving moral turpitude dishonesty, fraud, theft or financial impropriety; (D) your willful violation of a material requirement of any code of ethics or standards of conduct of the Company applicable to you or your fiduciary duty to the Company; or (E) a breach of the Agreement Protecting Company Interests; provided , that no act or failure to act by you shall be considered willful if such act or omission was conducted in good faith and with a reasonable belief that the action or omission was in the best interests of the Company, as applies.
Change in Control shall mean the first to occur, that is not a Special Change in Control, of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both (x) the total voting power of the then outstanding shares of capital stock of the Holding Company entitled to vote generally in the election of directors (the Voting Stock ) and (y) the fair market value of the outstanding shares of capital stock of the Holding Company ( Economic Stock );
(B) Consummation of a reorganization, merger or consolidation, the sale or other disposition of all or substantially all of the assets of the Holding Company (in each such case, a Business Combination ), unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company; or
(C) The stockholders of the Holding Company approve a plan of complete liquidation or dissolution of the Holding Company.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A), (B), and (C) and to determine whether, and the exact date on which, a Change in Control has been deemed to have occurred thereunder.
Disability shall have the meaning defined under Treasury Regulation Section 1.409A-3(i)(4).
Donald Meyer
Page 10
Good Reason means the occurrence of any of the following without your written consent: (A) any material reduction in your Base Salary, (B) the Companys requirement that you relocate your principal place of employment to a location in excess of fifty (50) miles from your principal work location on the date of the Agreement or (C) you are required to report to any other employee than the Chief Executive Officer. Provided , Good Reason shall not exist unless and until you provide the Company with written notice of the acts alleged to constitute Good Reason within ninety (90) days of the initial occurrence of such event, and the Company fails to cure such acts within thirty (30) days of receipt of such notice. You must terminate your employment within 120 days following the initial occurrence of such event for the termination to be on account of Good Reason.
Special Change in Control shall mean the first to occur of:
(A) Any person (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than (i) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary, or (ii) a corporation owned directly or indirectly by the stockholders of the Holding Company in substantially the same proportions as their ownership of stock of the Holding Company, is or becomes the beneficial owner (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Holding Company representing more than 50% of both the total Voting Stock and the Economic Stock; or
(B) A Business Combination of the Holding Company, unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Holding Company or all or substantially all of the Holding Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Holding Company;
and, in the case of either event under subparagraph (A) or (B):
(1) the beneficial owners of at least 25% of the Voting Stock and the Economic Stock, in the aggregate, held by the beneficial owners holding all of the Voting Stock and the Economic Stock on the date of this Agreement receive in such transaction either cash or securities that are publicly traded on a securities exchange (and not restricted for more than 30 days other than pursuant to applicable law or regulation); or
(2) such transaction satisfies subparagraph (A) or (B) by substituting 70% each place where 50% appears.
The Holding Company Board has final authority to construe and interpret the provisions of the foregoing paragraphs (A) and (B) and to determine whether, and the exact date on which, a Special Change in Control has been deemed to have occurred thereunder.
Exhibit 10.7
BYLINE BANCORP EQUITY INCENTIVE PLAN
1. Establishment; Purpose of Plan; Effective Date .
(a) Establishment . Byline Bancorp, Inc. (formerly known as Metropolitan Bank Group, Inc.), an Illinois corporation (the Company ), hereby establishes the Byline Bancorp Equity Incentive Plan (the Plan ).
(b) Purpose . The purpose of the Plan is (i) to promote the long term financial interests and growth of the Company and other Group Companies by attracting, motivating and retaining key management and other personnel having the judgment, experience and ability to contribute significantly to the long-term success of the Groups businesses, in a manner aligned with the interests of the Companys stockholders. This Plan is intended to be a compensatory benefit plan within the meaning of such term under Rule 701 of the U.S. Securities Act of 1933, as amended (the Securities Act ) and all stock options granted under the Plan and the issuance of any Shares upon the exercise of stock options are intended to qualify for an exemption from the registration requirements under the Securities Act and applicable state securities laws. In the event that any provision of the Plan would cause any stock options granted under the Plan to not qualify for such an exemption, the Plan shall be deemed automatically amended to the extent necessary to cause all stock options granted under the Plan to qualify for the such exemption.
(c) Effective Date . The Plan shall be effective immediately upon its adoption by the Board of Directors of the Company on , 2014. The Plan shall expire on the tenth (10th) anniversary of such date, subject to earlier termination by the Board pursuant to Section 9 ; provided , that the terms of Grants made before such expiration date shall extend beyond such expiration date in accordance with the terms of the applicable Grant Agreement.
2. Definitions .
As used in the Plan, the following capitalized terms shall be defined as follows:
(a) Bank means Byline Bank (formerly known as North Community Bank), a subsidiary of the Company.
(b) Board means the board of directors of the Company (or any committee thereof, including the Compensation Committee, delegated the authority to act in place of the Board pursuant to the terms of this Plan).
(c) Cashless Exercise has the meaning set forth in Section 5 .
(d) Change in Control shall mean the first to occur, that is not a Special Change in Control, of:
(i) Any person (for all purposes under the Plan, as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the 1934 Act )), other than (1) a trustee or other fiduciary holding securities under an employee benefit plan of the Bank or a subsidiary, or (2) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as
their ownership of stock of the Company, is or becomes the beneficial owner (for all purposes under the Plan, as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of securities of the Company representing more than 50% of both (x) the total voting power of the then outstanding shares of capital stock of the Company entitled to vote generally in the election of directors (the Voting Stock ) and (y) the fair market value of the outstanding shares of capital stock of the Company ( Economic Stock );
(ii) Consummation of a reorganization, merger or consolidation, the sale or other disposition of all or substantially all of the assets of the Company (in each such case, a Business Combination ), unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Company; or
(iii) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company.
The Board shall have the final authority to construe and interpret the provisions of the foregoing paragraphs (i), (ii), and (iii) and to determine whether, and the exact date on which, a Change in Control has been deemed to have occurred thereunder.
(e) Code means the United States Internal Revenue Code of 1986, as amended.
(f) Committee means the Compensation Committee of the Board (or the Board if no such committee is then constituted or as otherwise determined by the Board).
(g) Eligible Person means an individual, including an officer, in the regular employment of a Group Company, or a non-employee member of the Board, consultant or other person having a service relationship with a Group Company, who, in the opinion of the Committee, is or is expected to have involvement in the management, growth or protection of some part or all of the business of the Group.
(h) Fair Market Value means the fair market value of one (1) Share on any given date, as determined in good faith by the Board by a reasonable and consistent application of a valuation method set forth in Section 409A of the Code and the regulations thereunder.
(i) Grant means a Stock Option award made to a Participant pursuant to the Plan and described in Section 5 .
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(j) Grant Agreement means an agreement between the Company and a Participant that sets forth the terms, conditions and limitations applicable to a Grant.
(k) Group Company means the Company and any subsidiary of the Company from time to time, and Group means all Group Companies, collectively.
(l) Other Relevant Agreement shall mean any of the following types of arrangements entered into whether on, before or after the date of Grant between a Group Company and the relevant Participant: (i) contract of employment; (ii) consultancy agreement; service agreement; or (iv) any other agreement or offer letter for the provision of services by the Participant to a Group Company.
(m) Participant means an Eligible Person to whom one or more Grants have been made and remain outstanding.
(n) Special Change in Control shall mean the first to occur of:
(i) Any person, other than (1) a trustee or other fiduciary holding securities under an employee benefit plan of the Bank or a subsidiary, or (2) a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing more than 50% of both the total Voting Stock and the Economic Stock; or
(ii) A Business Combination of the Company, unless all or substantially all of the individuals and entities who were the beneficial owners, respectively, of both the Voting Stock and the Economic Stock immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of either (x) the total voting power represented by the voting securities entitled to vote generally in the election of directors of the corporation resulting from the Business Combination or (y) the total fair market value represented by all the voting and nonvoting equity securities of the corporation resulting from the Business Combination (in each such case including, without limitation, an entity which as a result of the Business Combination owns the Company or all or substantially all of the Companys assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to the Business Combination, of the Voting Stock and Economic Stock (combined) of the Company;
and, in the case of either event under the foregoing subparagraphs (i) or (ii):
(A) the beneficial owners of at least 25% of the Voting Stock and the Economic Stock, in the aggregate, held by the beneficial owners holding all of the Voting Stock and the Economic Stock on June 28, 2013 receive in such transaction either cash or securities that are publicly traded on a securities exchange (and not restricted for more than 30 days other than pursuant to applicable law or regulation); or
(B) such transaction satisfies subparagraph (i) or (ii) by substituting 70% each place where 50% appears.
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The Board shall have final authority to construe and interpret the provisions of the foregoing paragraphs (i) and (ii), together with subparagraphs (A) and (B), and to determine whether, and the exact date on which, a Special Change in Control has been deemed to have occurred thereunder.
(o) Stock means the common stock, no par value, of the Company and Share means one (1) share of Stock.
(p) Stock Option has the meaning set forth in Section 5 .
3. Administration of Plan .
(a) The Plan shall be administered by the Committee. The Committee may adopt its own rules of procedure, and action of a majority of the members of the Committee taken at a meeting, or action taken without a meeting by unanimous written consent, shall constitute action by the Committee. The Committee shall have the power and authority to administer, construe and interpret the Plan, to make rules for carrying it out and to make changes in such rules. Any such interpretations, rules, and administration shall be consistent with the basic purposes of the Plan.
(b) The Board may delegate to the Committee, or such other committee of the Board as it may in its discretion and in accordance with applicable laws select, any of its duties and authorities hereunder. The Committee may further delegate to the Chief Executive Officer and to other senior officers (if any) of any Group Company its duties under the Plan, subject to applicable laws and such conditions and limitations as the Committee shall prescribe, except that only the Committee may designate and make Grants to Participants.
(c) The Committee may employ counsel, consultants, accountants, appraisers, brokers or other persons. The Committee, the Company, and the directors/managers of the Company shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Participants, the Company and all other interested persons. No member of the Committee, nor employee or representative of the Company shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Grants, and all such members of the Committee, employees and representatives shall be fully protected and indemnified to the greatest extent permitted by applicable laws by the Company with respect to any such action, determination or interpretation.
4. Eligibility . The Committee may from time to time make Grants under the Plan to such Eligible Persons, or other persons having a relationship with any Group Company, and in such form and having such terms, conditions and limitations as the Committee may determine in its sole discretion. The terms, conditions and limitations of each Grant under the Plan shall be set forth in a Grant Agreement, in a form approved by the Committee, consistent, however, with the terms of the Plan.
5. Stock Option Grants . From time to time, the Committee will determine the terms and amounts of Grants for Participants. Such Grants shall be in the form of Stock Options. Stock Options are options to purchase Shares for a specified exercise price, exercisable over a
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specified option term not to exceed ten (10) years from the date of Grant, and subject to vesting and other terms, restrictions and conditions as the Committee shall determine in its sole discretion at the time of Grant and set forth in a Grant Agreement to be entered into with the Participant grantee. Such terms may include the right to receive dividend equivalent payments on vested Stock Options. The exercise price per Share of a Stock Option shall in no event be less than the Fair Market Value on the date the Stock Option is granted (subject to later adjustment pursuant to Section 7 ). Payment of the Stock Option exercise price shall be made in one or a combination of a the following methods: (i) in cash; (ii) in Shares (any such Shares valued at Fair Market Value on the date of exercise) that the Participant has held for such period of time as may be required to preserve fixed accounting treatment under U.S. generally accepted accounting principles applied by the Company; (iii) if at the time of exercise a Cashless Exercise is not available, through the withholding of Shares (any such Shares valued at Fair Market Value on the date of exercise) otherwise issuable upon the exercise of the Stock Option in a manner that is compliant with applicable laws, or (iv) via Cashless Exercise. In each case, such exercise shall conform with the terms of the Plan, the Grant Agreement and applicable laws.
A Cashless Exercise is an exercise of a Stock Option by delivery of a properly executed notice together with irrevocable instructions to a cooperating broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Stock Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System); provided , a Cashless Exercise shall only be available during such time when (w) Grants under the Plan are subject to an effective registration under applicable securities laws, (x) Shares issuable upon exercise are not subject to any underwriters or other lock-up restriction, (y) Shares are listed for public trading on a United States stock exchange, and (z) the Committee has entered into or otherwise approved a Cashless Exercise program with a cooperating broker.
6. Limitations and Conditions .
(a) The maximum number of Shares available for Grants under this Plan shall be 12,380,613 Shares and shall consist of authorized but unissued or reacquired Shares or any combination thereof. Shares related to Grants that are forfeited, terminated, canceled, expire unexercised, or are repurchased by the Company shall immediately become available for new Grants. Shares withheld to satisfy payment of the Stock Option exercise price or tax withholding obligations shall not be available for new Grants.
(b) Nothing contained herein shall affect the right of the relevant Group Company to terminate any Participants employment or other service relationship at any time or for any reason.
(c) Except as otherwise provided in the Participants Grant Agreement, no benefit under the Plan (including any Grant or any Share received or receivable in connection with any Grant) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so shall be void and the Participants Grant shall thereupon automatically be forfeited without any action by the Company. No such benefit shall, prior to receipt thereof by the Participant, be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the Participant.
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(d) Participants shall not be, and shall not have any of the rights or privileges of, stockholders of the Company in respect of any Shares to be issued to on exercise of a Stock Option unless and until (i) such Shares have been issued by the Company in accordance with the terms of the Participants Grant Agreement and (ii) such Participants have been entered into the register of the Company as the holders of such Shares.
(e) No election as to benefits or exercise of any Grant may be made during a Participants lifetime by anyone other than the Participant except by a legal representative appointed for or by the Participant.
(f) Absent express provisions to the contrary, any Grant under this Plan shall not be deemed compensation for purposes of computing benefits or contributions under any retirement or severance plan of the relevant Group Company and shall not affect any benefits under any other benefit plan of any kind now or subsequently in effect under which the availability or amount of benefits is related to level of compensation. This Plan is not a pension plan or welfare plan under the Employee Retirement Income Security Act of 1974, as amended.
(g) A Grant under this Plan does not form part of the Participants entitlement (if any) to remuneration, payment or receipt of any other benefits pursuant to any Other Relevant Agreement he or she may have with a Group Company nor does the existence of any Other Relevant Agreement between any individual and a Group Company give such individual any right or entitlement to have any Grant under this Plan nor any expectation to such Grant. The rights and obligations of a Participant under the terms of his or her Other Relevant Agreement (if any) with a Group Company shall not be affected by any Grant hereunder. The rights granted to a Participant (who is also a party to any Other Relevant Agreement) upon a Grant hereunder shall not afford such Participant any rights or additional rights to compensation or damages in consequence of the loss or termination of his or her office or employment with or his or her provision of services to a Group Company for any reason whatsoever.
(h) A Participant shall not be entitled to any compensation or damages for any loss or potential loss which he or she may suffer by reason of being or becoming unable to exercise a Stock Option under the Plan in consequence of the loss or termination of his or her Other Relevant Agreement with a Group Company for any reason (including, without limitation, any breach of contract).
(i) Unless the Committee determines otherwise, no benefit or promise under the Plan shall be secured by any specific assets of any Group Company thereof, nor shall any assets of any Group Company be designated as attributable or allocated to the satisfaction of the Companys obligations under the Plan.
7. Adjustments . In the event of any share split, spin-off, share combination, reclassification, change of the legal form, recapitalization, liquidation, dissolution, reorganization, merger, Change in Control, Special Change in Control, payment of a nonrecurring cash or stock dividend, or other similar transaction or occurrence which affects the equity securities of the Company or the value thereof, the Committee shall (i) adjust the number and kind of Shares subject to the Plan and available for or covered by Grants, (ii) adjust the exercise prices related to outstanding Grants, and/or (iii) take such other action (including, without limitation, providing for
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payment of a cash amount to holders of outstanding Grants and adjusting performance targets), in each case as it deems reasonably necessary to address, on an equitable basis and subject to applicable laws, the effect of the applicable corporate event on the Plan and any outstanding Grants (including taking into account any potential tax consequences under Section 409A of the Code). Any such adjustment made or action taken by the Committee in accordance with the preceding sentence shall be final and binding upon holders of Stock Options and upon the Company.
8. Change in Control; Special Change in Control . In the event of a Change in Control or Special Change in Control: (a) if determined by the Committee in the applicable Grant Agreement or otherwise determined by the Committee in its sole discretion, any outstanding Grants then held by Participants which are unexercisable or otherwise unvested may automatically be deemed exercisable or otherwise vested, as of immediately prior to such Change in Control or Special Change in Control, as the case may be, and (b) the Committee may, to the extent determined by the Committee to be permitted under Section 409A of the Code, but shall not be obligated to: (i) cancel such Grants for Fair Market Value which, for these purposes shall equal, on a per Share basis, the per Share consideration to be paid in the Change in Control or Special Change in Control transaction, as the case may be, to holders of the same number of Shares subject to such Grant (or, if no consideration is paid in any such transaction, the Fair Market Value of the Shares) and which shall equal, on a per Share basis, the excess, if any, of the preceding amount, over the exercise price per Share of such Stock Options (and for the avoidance of doubt, any Stock Options having an exercise price equal to or greater than the per Share consideration to be paid in the Change in Control may be cancelled without payment in respect thereof); (ii) provide for the issuance of substitute awards that will preserve in no less favorable a manner the otherwise applicable terms of any affected Grants previously granted hereunder, as determined by the Committee in its sole discretion; or (iii) provide that for a period of at least ten (10) business days prior to the Change in Control, any Stock Options shall be exercisable as to all Shares subject thereto in accordance with Section 5 and that upon the occurrence of such Change in Control or Special Change in Control, such Stock Options shall terminate and be of no further force and effect.
9. Amendment and Termination .
(a) The Committee shall have the authority to make such amendments to any terms and conditions applicable to outstanding Grants as are consistent with this Plan, provided that no such action shall modify any Grant in a manner that is disadvantageous in more than a de minimis manner to a Participant with respect to any outstanding Grants, other than to correct any good faith typographical error or omission, without either (x) the Participants consent or (y) the consent of the holders of a majority of the Shares received or receivable under all then- outstanding Grants which are modified in the same or similar manner, except in each case as such modification is provided for or contemplated in the terms of the Grant or this Plan (including, without limitation, Sections 7 , 8 and 9(c) ) or as may be determined by the Committee to be necessary to comply with applicable laws.
(b) The Board may amend, suspend or terminate the Plan, except that no such action, other than an action under Section 7 , 8 and 9(c) , may be taken which would, without stockholder approval, increase the aggregate number of Shares available for Grants under the Plan, decrease
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the price of outstanding Grants, change the requirements relating to the Committee, or extend the term of the Plan. However, no such action shall be materially disadvantageous to a Participant with respect to any outstanding Grants, without either (x) the Participants consent or (y) the consent of the holders of a majority of the Shares received or receivable under all then- outstanding Grants which are modified in the same or similar manner, except as otherwise contemplated in the terms of the Grant or the Plan (including, without limitation, Sections 7 , 8 and 9(c) ) or as may be determined by the Committee to be necessary to comply with applicable laws.
(c) Notwithstanding any provision to the contrary in this Plan, the Committee may, in its sole discretion, amend the terms of the Plan or Grants thereunder with respect to such Participants in order to conform such terms with the requirements of local law or to obtain more favorable tax or other treatment for a Participant or the Group Companies.
(d) This Plan is intended to comply with Section 409A of the Code and will be interpreted in a manner intended to comply with Section 409A of the Code. Anything herein to the contrary notwithstanding, (i) if at the time of the Participants termination of employment with any Group employer the Participant is a specified employee as defined in Section 409A of the Code, and the deferral of the commencement of any payments or benefits otherwise payable hereunder as a result of such termination of service is necessary in order to prevent the imposition of any accelerated or additional tax under Section 409A of the Code, then the Company will defer the commencement of the payment of any such payments or benefits hereunder (without any reduction in such payments or benefits ultimately paid or provided to the Participant) until the date that is six (6) months and one (1) day following the Participants termination of employment with all Group Companies (or the earliest date permitted under Section 409A of the Code), if such payment or benefit is payable upon a termination of employment and (ii) if any other payments of money or other benefits due to the Participant hereunder would cause the application of an accelerated or additional tax under Section 409A of the Code, such payments or other benefits shall be deferred, if deferral will make such payment or other benefits compliant under Section 409A of the Code, or otherwise such payment or other benefits shall be restructured, to the extent possible, in a manner, reasonably determined by the Board in consultation with the Participant, that does not cause such an accelerated or additional tax or result in an additional cost to the Company (without any reduction in such payments or benefits ultimately paid or provided to the Participant). Any payment of any Award that is payable in installments shall be deemed a separate payment for purposes of Section 409A of the Code.
10. Governing Law . This Plan shall be governed by and construed in accordance with the laws of the State of Illinois (without regard for its choice of laws rules).
11. Taxes .
(a) The Company (or other Group Company) shall have the right to deduct from any payment made under the Plan any federal, state or local income or other taxes required by applicable laws to be withheld with respect to such payment.
(b) Each Grant Agreement shall include a condition that the Participant irrevocably agree to: (a) pay to the Company, or any other Group Company the amount of any applicable federal, state and local tax liability; or (b) enter into arrangements to the satisfaction of the Company, or any other Group Company (including, but not limited to, the Participants employing Group Company) for payment of any such tax liability.
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(c) Each Participant shall cooperate with the Company, and all other Group Companies, as required, to enable it to complete all administrative formalities and reporting requirements as may be required under any applicable tax, employment, payroll or social security laws in respect of any Grant, acquisition or transfer of any Shares or Stock Options, being given the right to acquire any Shares or Stock Options, or any other transaction or event relating to the Shares and Stock Options, in each case in a timely manner.
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Exhibit 10.8
BYLINE BANCORP EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
This Stock Option Agreement ( Agreement ) is entered into by and between Byline Bancorp, Inc., an Illinois corporation (hereinafter referred to as the Company ), and the individual whose name is set forth on the signature page hereof, who is an employee of a Group Company, hereinafter referred to as the Participant . Capitalized terms not defined herein shall have the meaning set forth in the Byline Bancorp Equity Incentive Plan (the Plan ).
WHEREAS, the Company wishes to carry out the Plan, the terms of which are hereby incorporated by reference and made a part of this Agreement; and
WHEREAS, the Committee has determined it to be in the best interests of the Company and its stockholders to grant the Stock Option provided for herein to the Participant as an incentive for increased efforts during his or her employment with a Group Company, and has advised the Company thereof and instructed the undersigned officers to issue said Stock Option.
NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows:
1. Definitions . Whenever the following terms are used in this Agreement, they shall have the meaning specified below unless the context clearly indicates to the contrary:
(a) Agreement to Protect Company Interests has the meaning set forth in Section 2(e) .
(b) Cause shall have the meaning of such term as may be defined in any employment agreement in effect at the time of termination of employment between the Participant and the Company or Group Company, or, if there is no such employment agreement, Cause shall mean, the Participants (i) willful and continued failure to perform substantially the Participants duties; (ii) willfully engaging in illegal conduct, an act of dishonesty or gross misconduct related to the performance of the Participants duties and responsibilities; (iii) commission of a crime involving moral turpitude dishonesty, fraud, theft or financial impropriety; (iv) willful violation of a material requirement of any code of ethics or standards of conduct of the Bank or the Company applicable to the Participant or the Participants fiduciary duty to the Bank or the Company; or (v) a breach of the Agreement Protecting Company Interests under the Participants employment agreement (as may apply); provided, that no act or failure to act by the Participant shall be considered willful if such act or omission was conducted in good faith and with a reasonable belief that the action or omission was in the best interests of the Group.
(c) Disability shall have the meaning defined under Treasury Regulation Section 1.409A-3(i)(4).
(d) Good Reason shall have the meaning of such term as may be defined in any employment agreement in effect at the time of termination of employment between the Participant and the Company or Group Company. For all purposes hereunder, if the Participant is not a party to an employment agreement or any such employment agreement does not include a provision for a voluntary termination of employment for Good Reason (or similar such conditions), any reference in this Agreement to Good Reason shall be disregarded.
(e) Grant Date means the date on the signature page hereof opposite the term Grant Date.
(f) Performance Option shall mean the right and option to purchase, on the terms and conditions set forth herein, all or any part of an aggregate of the number of Shares set forth on the signature page hereof opposite the term Performance Option I and Performance Option II, respectively, and sometimes collectively referred to herein as the Performance Option .
(g) Retirement means the Participants voluntary termination of employment, following not less than six (6) months prior notice of such termination to the Company, occurring at or after the Participant had attained age 67. A Participant shall not be considered Retired if there exist grounds for an involuntary termination for Cause at the time of such voluntary termination which the Company.
(h) Stock Option shall mean the aggregate of the Time Option and the Performance Option granted under Section 2(a) .
(i) Time Option shall mean the right and option to purchase, on the terms and conditions set forth herein, all or any part of an aggregate of the number of Shares set forth on the signature page hereof opposite the term Time Option.
2. Grant of Stock Options .
(a) For good and valuable consideration, on and as of the Grant Date, the Company irrevocably grants to the Participant the following Stock Options: (i) the Time Option and (ii) Performance Option I and (iii) Performance Option II, in each case on the terms and conditions set forth in this Agreement.
(b) Subject to Section 2(d) , the exercise price per Share covered by the Stock Option (the Exercise Price ) shall be as set forth on the signature page hereof.
(c) Nothing in this Agreement or in the Plan shall confer upon the Participant any right to continue in the employ of any Group Company or shall interfere with or restrict in any way the rights of the Group Companies, which are hereby expressly reserved, to terminate the employment of the Participant at any time for any reason whatsoever, with or without cause, and the Participant hereby acknowledges and agrees that neither a Group Company nor any other person has made any representations or promises whatsoever to the Participant concerning the Participants employment or continued employment by a Group Company.
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(d) The Stock Option shall be subject to the adjustment provisions of Section 7 of the Plan, provided , however , that in the event of the payment of an extraordinary cash dividend by the Company to its stockholders, then: first , the Exercise Prices of the Stock Option shall be equitably reduced with respect to the amount of the dividend paid, but only to the extent the Committee determines it to be permitted under applicable tax laws; and second , if such reduction cannot be fully effected due to such tax laws and it will not have adverse tax consequences to the Participant or the Company, the Committee shall make such provision as it deems appropriate, in the Committees sole discretion, as to any further actions to be taken with respect to the Stock Option.
(e) As a condition of, and in connection with, the grant of the Stock Option hereunder, the Participant shall enter into an Agreement to Protect Company Interests, which shall provide for a Restriction Period (as defined thereunder) of such duration as is set forth on the signature page hereof opposite the term Restriction Period, in the form attached hereto as Exhibit A , ( Agreement to Protect Company Interests ).
3. Vesting .
(a) Time Vesting; Performance Vesting . The Stock Option shall vest and become exercisable pursuant to the following terms:
(i) Time Option . The Time Option shall become vested and exercisable with respect to 20% of the Shares subject to such Time Option on the each of the first five (5) anniversaries of the date on the signature page hereof opposite the term Vesting Commencement Date, provided that the Participant is employed by a Group Company on the applicable vesting date for such portion of the Time Option to so vest (except as provided below).
(ii) Performance Option . Performance Option I and Performance Option II shall be subject to achievement of the respective performance goals set forth in Attachment I hereto, as determined in the sole discretion of the Board. Upon the achievement of the applicable performance goal or goals, such of Performance Option I and Performance Option II shall be treated as a Time Option thereafter with credit for time vesting commencing on the date set forth in Section 3(a) for the Time Option.
(b) Change in Control . Section 3(a) to the contrary notwithstanding, upon the occurrence of a Change in Control (that is not a Special Change in Control), no portion of the Time Option or of the Performance Option shall become vested if the Participant is employed by a Group Company immediately following the Change in Control. Vesting or forfeiture of Performance Option I or Performance Option II after the occurrence of a Change in Control in connection with the satisfaction of the respective performance goals shall be governed by the provisions of Attachment I . Upon the involuntary termination of the Participants employment without Cause or voluntary termination for Good Reason, occurring on or within twelve (12) months after the occurrence of such Change in Control, (i) the unvested portion of the Time Option shall become immediately vested and exercisable as to 100% of the Shares subject to such Time Option immediately prior to a Change in Control (but only to the extent such Time
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Option has not otherwise previously terminated or become exercisable) and (ii) Performance Option I and Performance Option II shall become 100% time vested but otherwise remain subject to satisfaction of the respective performance goals in accordance with the provisions of Attachment I , and shall be exercisable only upon satisfaction of the respective performance goals (or shall be forfeited if not satisfied within the time provided therefor in Attachment I ). For the avoidance of doubt, no portion of the Stock Option shall become vested or exercisable upon the occurrence of a Change in Control in such case in which the Participants employment is not involuntary terminated without Cause or voluntarily terminated for Good Reason, except as may be determined otherwise by the Committee (in its sole discretion) pursuant to Section 8 of the Plan at the time (or prior to the occurrence) of such Change in Control.
(c) Special Change in Control . Section 3(a) and Section 3(b) to the contrary notwithstanding, upon the occurrence of a Special Change in Control, the Time Option shall become exercisable as to 100% of the Shares subject to such Time Option immediately prior to such Special Change in Control if the Participant is then employed by a Group Company (but only to the extent such Time Option has not otherwise previously terminated or become exercisable). Vesting or forfeiture of Performance Option I or Performance Option II on the occurrence of a Special Change in Control, during the Participants employment with a Group Company, in connection with the satisfaction of the respective performance goals shall be governed by the provisions of Attachment I .
(d) Death; Disability; Retirement . In the event that the Participants employment terminates due to the Participants death, Disability or Retirement, (i) the Time Option will become 100% vested and exercisable and (ii) Performance Option I and Performance Option II will become 100% time vested and thereafter exercisable upon satisfying the respective performance goals, or shall be forfeited if not becoming satisfied, in accordance with the terms of Attachment I .
(e) Termination Without Cause; For Good Reason . In the event that the Participants employment is involuntarily terminated without Cause or voluntarily terminated for Good Reason, and such termination occurs during the 182 days preceding the anniversary of the Vesting Commencement Date that immediately follows such employment termination, (i) the Time Option will vest as to such pro rata portion of the Time Option that otherwise would have vested had the Participants employment not terminated until such anniversary date (such pro rata portion being the fraction the numerator of which is the number of days that the Participant was employed from the last preceding vesting date through the termination date and the denominator of which is 365) and (ii) Performance Option I and Performance Option II will vest as to such pro rata portion of each such Performance Option and thereafter become exercisable to the extent that the respective performance goals thereafter become satisfied (if not previously satisfied), or shall be forfeited if not thereafter becoming satisfied, in accordance with the terms of Attachment I (such pro rata portion being the fraction the numerator of which is the number of days that the Participant was employed from the Vesting Commencement Date through the termination date and the denominator of which is 1,826). Such pro rata portion shall be measured for each portion of the Performance Option subject to each such respective performance goal (e.g., a time vested pro rata portion of 8-1/3% of the total Stock Option may become vested upon satisfaction of the performance goal by the Performance Option I Measurement Date in accordance with Section 1(a) of Attachment I ). Any portion of the Time
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Option that does not vest pursuant to clause (i) shall be forfeited and canceled on the day of such termination. Any portion of the Performance Option that does not vest pursuant to clause (ii) shall be forfeited and canceled on the last day for which the applicable performance goal may be satisfied in accordance with the provisions of Attachment I . For purposes of this Section 3(e) , upon a termination occurring under this Section 3(e) at a time when the Participant was eligible to Retire (and for which purpose will be deemed to have given the Company the required prior notice), such termination under this Section 3(e) will be treated as a termination due to Retirement. For the avoidance of doubt, upon a termination under this Section 3(e) , to the extent that any of the applicable performance goals had been satisfied in accordance with Attachment I prior to such termination, as provided in Section 3(a)(ii) such portion of the Performance Option respecting such satisfied performance goal (or goals) shall be treated as a Time Option for purposes of determining the vested portion of the Stock Option at the time of such termination under this Section 3(e) .
(f) Other Terminations . Except as otherwise provided in Sections 3(b) (following a Change in Control), 3(d) or 3(e) , the portion of the Stock Option that is not then vested shall be forfeited and canceled immediately upon a termination of the Participants employment. For the avoidance of doubt, upon a termination under this Section 3(f) (other than by the Company for Cause, below), to the extent that any of the applicable performance goals had been satisfied in accordance with Attachment I prior to such termination, as provided in Section 3(a)(ii) such portion of the Performance Option respecting such satisfied performance goal (or goals) shall be treated as a Time Option for purposes of determining the vested portion of the Stock Option at the time of such termination under this Section 3(f) . Anything herein to the contrary notwithstanding upon any termination of the Participants employment for Cause or breach by the Participant of the Agreement to Protect Company Interests occurring at any time, 100% of the Stock Option shall be immediately forfeited and canceled, and any Shares issued pursuant to the exercise of the Stock Option shall be subject to the repurchase provisions under Section 3(a)(i) of Attachment II hereto.
4. Expiration of Stock Option . The Participant may not exercise the Stock Option to any extent after the first to occur of the following events:
(a) The tenth anniversary of the Grant Date;
(b) The second anniversary of the date of the Participants termination of employment (i) due to the Participants death, (ii) due to the Participants Disability or (iii) involuntarily by the Company without Cause or voluntarily by the Participant for Good Reason during the 182 days preceding the anniversary of the Vesting Commencement Date that immediately follows such employment termination;
(c) 90 days following the date of the Participants termination of employment with all Group Companies for any reason (other than as provided in Section 4(b) or 4(d) );
(d) Immediately upon the date of the Participants termination of employment by a Group Company for Cause or upon the date of the Participants breach of the Agreement to Protect Company Interests; or
(e) If the Committee so determines pursuant to Section 8 or Section 9 of the Plan.
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For the purposes of this Section 4 , if a Participants employment with the Group is involuntarily terminated without Cause by the Company, voluntarily terminated by the Participant for Good Reason (if applicable), or terminates due to the Participants death or Disability, the Participant (or legal representative in the event of the Participants death) shall have 30 days within which to exercise such portion of the Performance Option that vests following such termination (if later than the expiration date set forth in Section 4(b) and before the expiration date set forth in Section 4(a) ), such 30 days commencing on the date that the Company notifies the Participant as to such portion of the Performance Option then becoming vested.
5. Exercise Of Stock Option .
(a) Person Eligible to Exercise . During the lifetime of the Participant, only the Participant may exercise a Stock Option or any portion thereof. After the death of the Participant, any exercisable portion of a Stock Option may, prior to the time when a Stock Option becomes unexercisable under Section 4 , be exercised by the Participants personal representative or by any person empowered to do so under the Participants will or under the then applicable laws of descent and distribution.
(b) Partial Exercise . Any exercisable portion of a Stock Option or the entire Stock Option, if then wholly exercisable, may be exercised at any time prior to the time when the Stock Option or portion thereof becomes unexercisable under Section 4 ; provided , however , that any partial exercise shall be for whole Shares only.
(c) Manner of Exercise . A Stock Option, or any exercisable portion thereof, may only be exercised by delivering to the General Counsel of the Company all of the following prior to the time when the Stock Option or such portion becomes unexercisable under Section 4 :
(i) Notice in writing signed by the Participant or the other person then entitled to exercise the Stock Option or portion thereof, stating that the Stock Option or portion thereof is thereby exercised, such notice complying with all applicable rules established by the Committee;
(ii) By payment via one or a combination of the following methods: (A) Full payment (in cash or by check or by a combination thereof) for the Shares with respect to which such Stock Option or portion thereof is exercised, (B) tendering Shares, then owned by the Participant for not less than six (6) months, having an aggregate Fair Market Value equal to such portion of the exercise price intended for payment therewith, (C) a Cashless Exercise if so permitted by the Committee, (D) during such period in which a Cashless Exercise is not permitted, the Participants written election to have the number of Shares that would otherwise be issued to the Participant pursuant to such exercise reduced by a number of Shares having an aggregate Fair Market Value equal to such portion of the exercise price intended for payment therewith, or (E) any other method as may be permitted in the sole discretion of the Committee;
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(iii) Full payment (in cash (including via Cashless Exercise if then permitted), by check, directing the Company (or other Group Company) to withhold cash compensation otherwise then payable to the Participant, or by a combination thereof) to satisfy the minimum withholding tax obligation with respect to which such Stock Option or portion thereof is exercised; provided , that if such exercise occurs following an involuntary termination of the Participants employment without Cause, during such period in which a Cashless Exercise is not permitted, the Participants written election to have the number of Shares that would otherwise be issued to the Participant pursuant to such exercise reduced by a number of Shares having an aggregate Fair Market Value equal to not more than the minimum withholding tax obligation intended for payment therewith;
(iv) Satisfaction of all of the requirements under Section 4(d) ; and
(v) In the event the Stock Option or portion thereof shall be exercised pursuant to Section 4(a) by any person or persons other than the Participant, appropriate proof of the authority of such person or persons to exercise the Stock Option.
Without limiting the generality of the foregoing, the Committee may require an opinion of counsel acceptable to it to the effect that any subsequent transfer of shares acquired on exercise of a Stock Option does not violate the Securities Act, or the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such Shares are listed, and any applicable Federal or state laws. With respect thereto, the Committee may issue stop-transfer orders covering such shares. Any certificates evidencing Shares issued on exercise of this Stock Option shall bear legend (as may apply) stating:
The shares of stock represented by this certificate have not been registered under the U.S. Securities Act of 1933 ( Act ) and may not be transferred, sold or otherwise disposed of in the absence of an effective registration statement with respect to the shares evidenced by this certificate, filed and made effective under the Act, or an opinion of counsel satisfactory to Byline Bancorp, Inc. to the effect that registration under the Act is not required.
The shares of stock represented by this certificate are subject to certain restrictions on transfer contained in an option agreement, a copy of which will be furnished upon request by the issuer.
(d) Conditions to Issuance of Stock Certificates . The Shares deliverable upon the exercise of a Stock Option, or any portion thereof, may be either (x) previously authorized but unissued shares or (y) issued shares which have then been reacquired by the Company. Such Shares shall be fully paid and nonassessable. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased (if certified, or if not certified, register the issuance of such shares on its books and records) upon the exercise of a Stock Option or portion thereof prior to fulfillment of all of the following conditions:
(i) The obtaining of approval or other clearance from any state or federal governmental agency which the Committee shall, in its reasonable and good faith discretion, determine to be necessary or advisable;
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(ii) The provisions of Attachment II , shall apply to the Shares and in connection therewith the Participant shall provide the representations, warranties and covenants set forth on Exhibit B attached hereto; and
(iii) The lapse of such reasonable period of time following the exercise of the Stock Option as the Committee may from time to time establish for reasons of administrative convenience or as may otherwise be required by applicable law.
(e) Rights as Stockholder . The holder of a Stock Option shall not be, nor have any of the rights or privileges of, a stockholder of the Company in respect of any Shares purchasable upon the exercise of the Stock Option or any portion thereof unless and until certificates representing such Shares shall have been issued by the Company to such holder.
6. Miscellaneous .
(a) Administration . The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee shall be final and binding upon the Participant, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or the Stock Option. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement.
(b) Stock Option Not Transferable . Neither the Stock Option nor any interest or right therein or part thereof shall be subject to or otherwise encumbered by the debts, contracts or engagements of the Participant or his successors in interest nor shall the Stock Option be subject to disposition by the Participant by transfer, alienation, anticipation, pledge, encumbrance, assignment or any other means whether such disposition be voluntary or involuntary or by operation of law by judgment, levy, attachment, garnishment or any other legal or equitable proceedings (including bankruptcy), and any attempted such disposition thereof shall be null and void and of no effect and the Participants Stock Option shall thereupon automatically be forfeited without any action by the Company; provided , however, that this Section 6(b) shall not prevent transfers by will or by the applicable laws of descent and distribution.
(c) Notices . Any notice to be given under the terms of this Agreement to the Company shall be addressed to the Company in care of its General Counsel, and any notice to be given to the Participant shall be at the address given beneath the Participants signature hereto. By a notice given pursuant to this Section 6(c) , either party may hereafter designate a different address for notices to be given to such party thereafter. Any notice, which is required to be given to the Participant, shall, if the Participant is then deceased, be given to the Participants personal
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representative if such representative has previously informed the Company of his status and address by written notice under this Section 6(c) . Any notice shall have been deemed duly given when (i) delivered in person, (ii) three (3) business days after deposit (first class, postage prepaid) in the United States mails, or (iii) one (1) business day after deposit from within the United States with a national overnight delivery service (such as FedEx or UPS) (with fees prepaid).
(d) Titles; Pronouns . Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. The masculine pronoun shall include the feminine and neuter, and the singular the plural, where the context so indicates.
(e) Applicability of Plan and Participants Agreement . The Stock Option and the Shares issued to the Participant upon exercise of the Stock Option shall be subject to all of the terms and provisions of the Plan and the Participants Agreement.
(f) Entire Agreement; Amendment . Subject to Section 9 of the Plan, this Agreement may be amended only by a writing executed by the parties hereto, which specifically states that it is amending this Agreement. This Agreement constitutes the entire agreement among the parties with respect to any agreements regarding any equity-based incentive awards and supersedes all prior and contemporaneous agreements (including any change in control, executive retention, employment or other agreements regarding the vesting of any equity-based awards, or payment of cash or Shares in respect of any equity-based awards upon a termination of employment), discussions, understandings and negotiations, whether written or oral, with respect to any of the foregoing.
(g) Governing Law . The laws of the State of Illinois shall govern the interpretation, validity and performance of the terms of this Agreement (without regard for its conflicts of laws rules).
(h) Arbitration . Subject to Section 6(a) , in the event of any controversy among the parties hereto arising out of, or relating to, this Agreement which cannot be settled amicably by the parties, such controversy shall be finally, exclusively and conclusively settled by mandatory arbitration conducted expeditiously in accordance with the American Arbitration Association rules, by a single independent arbitrator. Such arbitration process shall take place within the City of Chicago, Illinois. The decision of the arbitrator shall be final and binding upon all parties hereto and shall be rendered pursuant to a written decision, which contains a detailed recital of the arbitrators reasoning. Judgment upon the award rendered may be entered in any court having jurisdiction thereof. Each party shall bear one-half of the arbitrators fees and its own legal fees and expenses.
(i) Reduction to Avoid Excise Tax on Golden Parachute Payments . If the payments and benefits provided for in this Agreement, together with payments or benefits under any other agreement, plan or program or otherwise payable to the Participant, constitute parachute payments within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended ( Code ), and would be subject to the excise tax imposed by Section 4999 of the Code, then the payments and benefits under this Agreement shall be reduced to the extent
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necessary to avoid triggering a parachute payment under Section 280G and an excise tax liability of the Participant under Section 4999; provided that, in the event of any inconsistency between this Section 6(i) and any other agreement or plan to which the Participant is a party or a participant that specifically addresses Section 280G of the Code (including an employment agreement between the Participant and the Company or Group Company), such other agreement or plan, as the case may be, shall control over this Agreement (and supersede this Section 6(i) to the extent thereof).
[Signatures follow on next page]
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IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto.
BYLINE BANCORP, INC. |
By: |
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Its: |
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PARTICIPANT: |
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[Signature] |
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[Print Name] |
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[Address]
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Stock Option Grants : |
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Time Option: | Shares | |
Performance Option I: | Shares | |
Performance Option II: | Shares | |
Exercise Price per Share: | $ . | |
Grant Date: | , 201 | |
Restriction Period | months | |
Vesting Commencement Date: | Grant Date |
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ATTACHMENT I
Performance Goals
1. Performance Option I Performance Goals : The Performance Option I performance goal will be satisfied (in whole or in part) if Byline Bank (a wholly-owned subsidiary of the Company; the Bank ) achieves on the earliest date of (x) the date that Performance Option II is achieved (if achieved), (y) the occurrence of a Special Change in Control or (z) June 28, 2018 (such of clauses (x), (y) and (z) being the Performance Option I Measurement Date ):
(a) As to 33-1/3% of Performance Option I (8-1/3% of the total Stock Option), Adversely Classified Assets of not more than 35% of each of the Banks Tier 1 Capital and Allowance for Loan and Lease Losses, as of the last day of the fiscal quarter ending on or immediately preceding the Performance Option I Measurement Date;
(b) As to another 33-1/3% of Performance Option I (8-1/3% of the total Stock Option), a Return on Average Assets of not less than 0.75%, calculated over the four (4) complete fiscal quarters preceding the Performance Option Measurement Date; and
(c) As to the last 33-1/3% of Performance Option I (8-1/3% of the total Stock Option), that a Memorandum of Understanding (MOU) or a Consent Order is not then outstanding.
For the avoidance of doubt, each of the above goals under subparagraphs (a), (b) and (c), above, shall be measured for achievement (or failure to achieve, as the case may be) independent of each other such goal. The Performance Option I tranche under each of subparagraphs (a), (b) and (c), above,, above, shall be forfeited and cancelled, respectively, if the applicable performance goal is not achieved on the Performance Option I Measurement Date.
2. Performance Option II Performance Goal :
(a) The Performance Option II performance goal will be satisfied on the first date, if any, that each Investor achieves an Internal Rate of Return of 12%. Performance Option II shall be forfeited and cancelled if such 12% Internal Rate of Return has not been achieved by the Liquidity Date.
3. For purposes of this Agreement:
(a) Each of the terms Adversely Classified Assets , Tier 1 Capital , Allowance for Loan and Lease Losses , Return on Average Assets , Memorandum of Understanding and Consent Order shall have the respective meanings applied by the FDIC or other applicable regulator of the Bank.
(b) Internal Rate of Return means, with respect to each Investor, the cumulative internal rate of return, as of a particular measurement date, calculated in accordance with generally accepted financial practice which rate shall be the discount rate at which (i) the net present value of the Investor Cash Received by each Investor on or before such date, minus
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(ii) the net present value of the Investor Cash Invested of such Investor on or before such date, equals zero. For the avoidance of doubt, for the purposes of the calculation, (x) all amounts shall be calculated prior to the application of any U.S. or foreign federal, state or local taxation and (y) the rates of return shall be per annum rates and all amounts shall be calculated on an annually compounded basis, and on the basis of a three hundred and sixty five (365)-day year. In the case of a Public Offering, the Internal Rate of Return shall be measured based on the 30-trading day average of the closing stock price for Shares, on the stock exchange where listed, at any time after expiration of any underwriters lock-up applicable to such Public Offering.
(c) Investor and collectively the Investors means the holders of the Companys Stock as of June 28, 2013 (including pursuant to a form of Amended and Restated Subscription Agreement dated effective as of March 22, 2013 and other holders of Stock acquired prior to such date and remaining as Stockholders on June 28, 2013) and their successors and any persons first acquiring Stock pursuant to any subsequent investment of Investor Cash Invested.
(d) Investor Cash Invested means, with respect to each Investor, as of a given measurement date (which measurement date shall be June 28, 2013 for the initial investment and the actual date with respect to any subsequent investment), the sum of all cash contributed or invested in the Company by such Investor with respect to its respective Stock. For Investors who were Stockholders prior to June 28, 2013 (i.e., legacy stockholders), the Investor Cash Invested shall, on a per Share basis, be deemed to be equal to $2.2354. In the event of any subsequent investment, each Investor (including any person becoming an Investor at such time) shall be deemed to have invested its pro rata portion of such investment for purposes of measuring the Internal Rate of Return of all Investors (irrespective of the actual proportions of investment by Investors, including those Investors that do not participate in such subsequent investment). For purposes of the Performance Option II performance goal, an Investors holding of shares of preferred stock (or warrants or securities other than Stock) shall be disregarded. All such cash contributed or invested in the Company shall be denominated in U.S. dollars.
(e) Investor Cash Received means, with respect to each Investor, as of a given measurement date, without duplication, all cash payments and the Fair Market Value of all Publicly Traded Securities (other than of the Company) received by such Investor, whether by Change in Control, Special Change in Control or otherwise, on or before such date with respect to or arising out of or related to such Investors ownership of Stock.
(f) Liquidity Date means the earliest of (i) the occurrence of a Special Change in Control, (ii) following a Public Offering and the expiration of any underwriters lock-ups, the first date that Investors are not subject to any legal restriction on the Investors ability to dispose of Stock in consideration of the receipt of cash or Publicly Traded Securities (other than of the Company) via sale or otherwise or pursuant to a pledge of Stock, whether or not actually disposed of, and in either case of clause (i) or (ii), after such disposition the Investors are holding, or are unrestricted in their ability to reduce their holding of Stock to, Stock representing not more than 25% of the Investors largest holding of Stock at any time or (iii) June 28, 2019.
For purposes of the occurrence of a Liquidity Date under clause (iii), as of such date, the Company shall determine the fair market value of Shares (in a manner consistent with
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Section 409A of the Code and the regulations thereunder), but such valuation (x) shall be determined without regard for any discounts for lack of marketability, minority status or any other discount (i.e., as if all of the outstanding Stock and any outstanding preferred shares were sold to a third-party in a single arms length transaction in which each of the Investors (and Participants holding Options) and the purchaser are deemed fully informed and under no compulsion to sell or purchase), (y) shall be determined by an independent qualified nationally-recognized valuation appraiser (including a financial services valuation firm) and (z) shall treat all Participants outstanding Options as deemed vested and exercised in such transaction. For the avoidance of doubt, the value of Stock shall be subject to accrued and unpaid dividend and liquidation preferences of any outstanding preferred shares. The determination of such appraiser shall be final and binding on the Company and the Participant.
(g) Publicly Traded Securities means any equity securities (i) which are registered under the U.S. Securities Act of 1933 and which are publicly traded and listed on (x) the New York Stock Exchange or other U.S. national securities exchange or the Nasdaq National Market System (or their respective successors) and (ii) are of a person with a pro forma market capitalization (after giving effect to the transaction in which equity securities are being issued) of greater than $100,000,000.
(h) Public Offering means an offering and sale of Stock to the public at any time hereafter pursuant to an effective registration or an effective listing or qualification on a securities market in accordance with applicable laws and other requirements.
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ATTACHMENT II
Participant Terms of Share Ownership
The Participant (and any assignee or successor of Participant), upon the exercise of the Stock Option, and the Shares issued under this Agreement with respect thereto shall be subject to the terms of this Attachment II . For all purposes under this Attachment II , references to Shares exclusively mean the Shares issued pursuant to the Stock Option Agreement of which this Attachment II is a part.
1. Definitions . Terms used in this Attachment II and as listed below shall be defined as follows. Capitalized terms used but not defined in this Attachment II shall have the meaning as defined in the Plan or elsewhere in this Agreement. Section references below are to the applicable section of this Attachment II unless the context clearly provides otherwise.
Call Events shall mean, collectively, Section 3(a) Call Events and Section 3(b) Call Events.
Call Notice shall have the meaning set forth in Section 3(c) hereof.
Call Period shall have the meaning set forth in Section 3(c) hereof.
Call Price shall mean the amount to be paid in respect of the Shares and Stock Options to be purchased by the Company pursuant to Section 3 .
Drag-Along Purchaser shall have the meaning set forth in Section 4(a) hereof.
Drag-Along Sale shall have the meaning set forth in Section 4(a) hereof.
Drag-Along Transfer shall have the meaning set forth in Section 4(a) hereof.
Drag Transaction shall have the meaning set forth in Section 4(a) hereof.
Estate/Gift Transfer shall have the meaning set forth in Section 2(a)(ii) hereof and an Estate/Gift Transferee shall mean a Transferee of an Estate/Gift Transfer.
Good Reason (if applicable) shall have the meaning set forth in the Stock Option Agreement.
Other Stockholders shall have the meaning set forth in Section 4(a) .
Participants Estate shall mean the conservators, guardians, executors, administrators, testamentary trustees, legatees, or beneficiaries of the Participant.
Permitted Transferee means a Transferee of a Permitted Transfer pursuant to Section 2(a) .
Transfer has the meaning set forth in Section 2(a) and a Transferee means a transferee of a Transfer.
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2. Transferability of Shares .
(a) Transfer Restricted; Permitted Transfers . The Participant agrees and acknowledges that he will not, directly or indirectly, sell, transfer, assign, pledge, encumber, hypothecate or similarly dispose of, either voluntarily or involuntarily, or enter into any contract, option or other arrangement or understanding with respect to the sale, transfer, assignment, pledge, encumbrance, hypothecation or similar disposition of any Shares beneficially owned or controlled or held by a person or any interest in any Shares beneficially owned or controlled or held by a person (any of the foregoing acts being referred to herein as a Transfer ) any Shares held by the Participant or a Permitted Transferee at any time, except as otherwise provided for in this Section 2 . The Participant may Transfer Shares pursuant to one of the following exceptions (any such exception being a Permitted Transfer ):
(i) Transfers permitted by Sections 3 or 4 ;
(ii) a Transfer (x) upon the death of the Participant to the Participants Estate, (y) during the Participants lifetime, to the Participants spouse or descendants or to a trust established for the benefit of thereof or the Participant or (z) in the case of a trust established pursuant to the immediately preceding clause (y), then a Transfer by such trust to the Participant as grantor or to a beneficiary of such Trust (any Transfer under this Section 2(a)(ii) being an Estate/Gift Transfer ). For all purposes under this Agreement, in the case of an Estate/Gift Transfer, any reference to a Participant shall be deemed to refer also to the Participants Estate/Gift Transferee unless the circumstances clearly indicate such reference to the Participant is in his capacity solely as an officer, director or employee of a Group Company.
(iii) Transfers approved by the Committee in writing (such approval being in the sole discretion of the Committee); or
(iv) Transfers to the Company (subject to applicable laws) or its designee.
During all periods of time following any such Permitted Transfer (and subject to Sections 2(b) and 2(d) ), any reference to a Participant shall also refer to such Permitted Transferee).
(b) Estate/Gift Transferee Joinder .
(i) Prior to any Estate/Gift Transfer to a Participants trust, the Participant shall provide the Company with a copy of the instruments creating the Participants trust and with the identity of the trustee and the beneficiaries of the Participants trust. Thereafter, Participant or the trustee shall notify the Company as soon as practicable prior to any change in the identity of any trustee or beneficiary of the Participants trust.
(ii) Prior to any Estate/Gift Transfer, the applicable Transferee shall agree to be bound by the terms of this Agreement and any other relevant agreement as determined by the Company and shall execute and deliver a duly executed joinder hereto
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in a form approved by the Company. No person shall be registered as a holder of any Management Shares unless such person has executed and delivered to the Company a joinder agreeing to be bound by this Agreement unless otherwise determined by the Committee.
(c) Termination . Notwithstanding anything to the contrary herein, Section 2(a) shall terminate and be of no further force or effect upon the occurrence of a Special Change in Control.
(d) Legal Compliance . Notwithstanding anything to the contrary herein, no Transfer of any Shares shall be made unless such Transfer complies with all applicable laws, and if so requested by the Company, the Participant shall have provided an opinion of counsel reasonably acceptable to the Company that all applicable laws have been complied with; provided that no such opinion shall be required to be provided to the Company in the case of a Permitted Transfer pursuant to Section 2(a)(i) . Notwithstanding anything to the contrary herein, without the consent of the Company no Transfer of any Shares shall be made if such Transfer would give rise to any obligation on the part of the Company to make filings to qualify such Shares for distribution in any jurisdiction where such Shares are not already so qualified or to comply with continuous disclosure requirements in any jurisdiction where the Company is not already subject to such requirements.
(e) Impermissible Transfers Void . Any Transfer of any Management Shares in violation hereof shall be void ab initio and of no effect. The Company shall not give effect to any such Transfer or record such Transfer in its register of members, or treat any purported transferee of such Management Shares as the owner thereof for any purpose.
3. The Companys Option to Purchase Participant Shares and Stock Options; Participant Conditional Put .
(a) Termination for Cause . If the Participants employment with all Group Companies is terminated by that Group Company for Cause or if the Participant at any time breaches any restrictive covenant applicable under an employment agreement or Agreement Protecting Company Interests or other similar agreement (any such agreements of the Participant collectively referred to as an Agreement Protecting Company Interests ) entered into by the Participant and a Group Company in connection with the Participants employment or grant of Stock Option, then:
(i) The Company shall have the option to purchase all or any portion of the Shares then held by the Participant ( Company Call ) at a per Share purchase price equal to the lesser of (i) the applicable price per Share paid by such Participant for such Shares and (ii) the Fair Market Value of such Shares on the date of exercise of the Company Call; and
(ii) All outstanding and unexercised Stock Options (whether or not vested) shall automatically be forfeited and canceled without any payment to the Participant in respect thereof.
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In the event of a termination of the Participants employment pursuant to Section 3(b) hereof and the Participant thereafter breaches any restrictive covenant applicable under an Agreement Protecting Company Interests, this Section 2(a) shall apply and the Participant shall repay to the Company within fifteen (15) days after demand therefor the excess of the amount paid to the Participant (or Permitted Transferees) pursuant to Section 3(b) over the amount set forth in Section 3(a)(i) together with interest at the prime rate as then in effect (as reported in The Wall Street Journal Online) plus 400 basis points (compounded quarterly from the date of such breach) and the Participant shall forfeit any amount as yet unpaid to him under Section 3(b) .
(b) Termination for Any Reason Other than For Cause . If the Participants employment with all Group Companies terminates for any reason, other than by a Group Company for Cause (in which case Section 3(a) shall apply), then:
(i) The Company shall have a Company Call on the Shares then held by the Participant at a per Share purchase price equal to Fair Market Value on date of exercise of the Company Call; and
(ii) Unvested Stock Options and vested Stock Options expiring unexercised in accordance with the Agreement shall automatically be terminated without any payment to the Participant in respect thereof.
(c) Call Procedure . The Company shall have a period (the Call Period ) from the date of the Participants date of termination of employment until the later of (i) 180 days following such termination date and (ii) 240 days following the last date that the Participant acquired Shares pursuant to the exercise of any portion of the Participants Stock Option, within which the Company may elect to exercise its rights under the Company Call. The Company shall exercise the Company Call by giving one or more notices in writing to the Participant of such election pursuant to this Section 3 ( Call Notice ). The completion of the Transfer pursuant to a Call Notice shall take place at the principal office of the Company no later than 60 days (or such longer period as may be required to comply with applicable law) after the giving the Call Notice. The applicable Share purchase price under Section 3(a) or Section 3(b) shall be paid by delivery to the Participant in cash subject to the receipt by the Company of duly executed instruments of Transfer and the share certificates relative to the Shares being Transferred to the Company and documents cancelling the Stock Options so terminated that are required by the Company, duly endorsed or executed by the applicable Participant or any duly authorized representative (along with evidence of such authorization, if applicable). In addition, the Company may pay the purchase price for any Shares so purchased by offsetting any bona fide debts agreed by the Participant as then owing to the Company.
(d) Adjustment of Call Price . In determining the applicable repurchase price of the Shares as provided for in this Section 3 , appropriate adjustments shall be made for any dividends paid on the Shares, subdivision, consolidation, recapitalizations, or any other adjustment in the number of outstanding Shares issued to Participants in order to maintain, as nearly as practicable, the intended operation of the provisions of Section 3 .
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(e) Participant Conditional Put . At the request, in writing, of a Participant, the Company may (but shall not be obligated), in the sole discretion of the Committee, agree to repurchase all or a portion of the Shares then held by the Participant, provided that the Participant held such Shares for a period of not less than six (6) months, with consideration of the following conditions:
(i) Any determination by the Committee (and the reasons, if any, therefor) to repurchase or to decline to repurchase Shares from a Participant shall have no bearing on a determination to repurchase or to decline to repurchase Shares from another Participant (or the same Participant at later time);
(ii) The Committee shall consider any such request only after the seventh (7th) anniversary of the date of grant of the Stock Option respecting the Shares subject to such request and while the Participant is then employed by a Group Company; and
(iii) Confirmation from the Companys auditors that such repurchase will not cause any adverse accounting consequence to the Company.
To request such repurchase by the Company, the Participant shall give the Company written notice setting forth such Participants desire to sell Shares to the Company and the number of Shares to be sold.
Any such repurchase by the Company shall be on such terms and conditions as the Committee may determine in its sole discretion, including the number of Shares to be repurchased, any discount from Fair Market Value that the Committee deems appropriate, payment terms and the timing for closing such repurchase. If the Company determines to repurchase Participants Shares pursuant to this Section 3(e) , the Company shall make an offer by notice to the Participant, including all terms applicable thereto. The Participant shall have thirty (30) days within which to accept such offer by notice to the Company after which, if not so accepted, such offer shall lapse.
(f) Rights to Negotiate Call Price . Subject to applicable laws, nothing in this Attachment II shall be deemed to restrict or prohibit the Company, either itself or by nominating another person, from purchasing, or otherwise acquiring for value Shares or Stock Options from the Participant, at any time, upon such terms and conditions, and for such price, as may be mutually agreed upon in writing between the Company and the Participant, whether or not at the time of such purchase, or acquisition circumstances exist which specifically grant the Company the right to purchase, Shares or any Stock Options under the other provisions of this Attachment II ; provided , that no such purchase, or other acquisition shall be consummated, and no agreement with respect to any such purchase, or other acquisition shall be entered into, without the prior approval of the Board.
(g) Termination of this Section 3 . This Section 3 shall terminate and be of no further force or effect upon the occurrence of the earlier of (i) a Special Change in Control and (ii) the consummation of a Public Offering, except that (1) this Section 3 shall remain in full force and effect with respect to any Call Event that occurs prior to such Special Change in
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Control or consummation of a Public Offering and (2) any payment obligation of the Company that has arisen prior to the expiration of this Section 3 shall remain in full force and effect until satisfied in accordance with the applicable provisions of this Section 3 .
4. Drag Along Obligations .
(a) Drag-Along Sale . If the Company or its stockholders holding a majority of the Shares other than Participants ( Other Stockholders ) (the Company or Other Stockholders being the Drag-Along Transferor ) propose to Transfer, directly or indirectly (whether through a sale of Shares, merger or otherwise), any Shares (the Drag-Along Sale and such person or persons to whom such shares would be Transferred, the Drag-Along Purchaser ), then if requested by the Company, the Participant shall be required to sell a number of Shares (including Shares underlying exercisable Stock Options) equal to the fraction, expressed as a percentage, determined by dividing the number of Shares to be purchased from the Company or its Other Stockholders in the proposed sale by the total number of Shares owned directly or indirectly by the Company or such Other Stockholders ( Drag-Along Percentage ), (such transaction, a Drag Transaction ).
(b) Terms of Drag Transaction . Shares held by the Participant included in a Drag Transaction will be included in any agreements with the Drag-Along Purchaser relating thereto on the same terms and subject to the same conditions applicable to the Shares which the Drag-Along Transferor proposes to sell in the Drag Transaction. Such terms and conditions shall include: (i) the pro rata reduction of the number of Shares to be sold by the Drag-Along Transferor and the Participant to be included in the Drag Transaction if required by the Drag-Along Purchaser; (ii) the sale price; (iii) the pro rata payment of fees, commissions, and expenses based on the number of Shares Transferred as part of the Drag-Along Transaction; (iv) the provision of information as requested by the Board, and reasonable and customary representations and warranties as to matters regarding the Participant ownership of shares, and in the Participants capacity as an employee of a Group Company, such representations and warranties (including without limitation, representations and warranties with respect to the Group Companies and their business) as may be requested by the Drag-Along Purchaser, and (v) the provision of requisite indemnification on a several but not joint basis; provided , that any indemnification provided by the Participant shall, with respect to each indemnification claim made against the sellers, be paid by the sellers pro rata in proportion with the total number of Shares to be sold by all sellers; provided , further , that no Participant shall be required to indemnify any person for an amount, in the aggregate, in excess of the net cash proceeds received by such Participant in such Drag-Along Sale.
(c) Consideration . Anything to the contrary notwithstanding respecting the foregoing, if the consideration payable for the Shares Transferred pursuant to the Drag-Along Sale is securities and the acquisition of such securities by a Participant would reasonably be expected to be prohibited under applicable laws relating to securities, such Participant shall be entitled to receive an amount in cash equal to the fair market value, as determined reasonably and in good faith by the Board, of any such securities such Participant would otherwise be entitled to receive.
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(d) Assistance and Cooperation . The Participant shall assist and cooperate with the Board and the Company and the Other Stockholders in doing all things necessary, proper or advisable to consummate, in the most expeditious manner possible, any Transfer pursuant to this Section 4 , including without limitation, in his capacity as the Participant and, to the extent applicable, a director of the Company and/or any Group Company: (i) use reasonable efforts to maximize the Drag-Along Sale proceeds and (ii) vote for or consent to, if required, and in any event raise no objections against and otherwise cooperate in order to effect, such Drag-Along Sale or the process pursuant to which such Drag-Along Sale is arranged.
(e) Termination . This Section 4 shall terminate and be of no further force or effect upon the occurrence of the earlier of apply following either (i) the consummation of a Public Offering or (ii) a Special Change in Control, except that any obligations of the parties hereto that have arisen prior to or in connection with such Public Offering or Special Change in Control shall remain in full force and effect until satisfied in accordance with the applicable provisions hereof.
(f) Whole Shares Only . Anything in this Agreement to the contrary notwithstanding , only full Shares are transferable pursuant to Section 4 . Where a number of Shares as determined pursuant to the terms of this Section 4 contains a fraction of a Share, such number shall be reduced to the nearest number of whole Shares.
5. Public Offering .
(a) Participant Required Consent to Approve Public Offering . If at any time the Board approves a Public Offering, the Participant shall vote for and consent to (to the extent they have any voting or consent right) and raise no objections against such Public Offering and the Participant shall take all reasonable actions in connection with the consummation of such Public Offering, in each case only if requested by the Board and consistent with current market practice at the time of such Public Offering (including, without limitation, those actions described in Section 5(c) below).
(b) Assistance . Subject to the terms and conditions of this Section 5 , the Participant shall assist and cooperate with the Company in doing all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, any Public Offering. Participant, if he is an employee of a Group Company on the date of the Public Offering, shall, in his capacity as an employee of such Group Company, provide such representations and warranties as may be reasonably requested by the underwriters, in addition to any representations and warranties provided by him in his capacity as a Stockholder; provided , that such representations and warranties shall be (i) reasonable and customary and (ii) consistent with current market practice at the time of the Public Offering.
(c) Underwriters Lock-Up, Etc. Prior to a Public Offering, if requested by the Company, Participant shall enter into an agreement with the Company with respect to various matters regarding such Public Offering and the rights and obligations of the parties thereto in connection with such Public Offering, including customary lock-ups and provisions designed to result in an orderly disposition of Public Offering securities, in each case as determined by the Board in good faith. Participant shall execute such other reasonable customary agreements
21
(including, without limitation and if applicable, a registration rights agreement) as the Company may reasonably request in connection with the provision of this Section 5 ; provided , that other holders of Shares who are members of management are subject to similar agreements.
(d) Termination . This Section 5 will terminate and be of no further force or effect on the occurrence of a Special Change in Control.
6. Further Undertakings; Voting; Proxy; Custody of Shares .
(a) Voting . To the extent that the Participant shall at any time be entitled to vote with respect to the Shares owned by him, the Participant shall undertake to vote or, as the case may be, to be voted, his Shares (i) on the occasion of any general meeting of the stockholders of the Company held (by way of a meeting or passed by written resolutions) for the purpose of approving the issuance and/or purchase (and authorization of the Board to purchase, as the case may be) by the Company or a person nominated by the Company of Shares, if and to the extent such an issuance and/or purchase is made in accordance with, or for the purpose of, this Agreement, (ii) in general in favor of any resolutions of the stockholders of the Company proposed at any general meeting of the stockholders of the Company which may be necessary to give effect to the provisions or intents of this Agreement, waiving any convening notice to any such general meeting of stockholders, (iii) as directed by holders of a majority of the Shares held by the Other Stockholders, including in connection with the election of the members of the Board (to the extent that the Participant has a right to vote on such matters), (iv) to approve each and any Change in Control or Special Change in Control transaction approved by the Other Stockholders, (v) on any other matter as may be directed by the Other Stockholders holding a majority of the votes of the Other Stockholders, and (vi) in the event of any ambiguity or conflict arising between the terms of this Agreement and those of the articles of incorporation of the Company, vote in favor of any resolutions proposed at any general meeting of the stockholders of the Company held for the purpose of amending the articles of incorporation to eliminate any such ambiguity or conflict.
(b) THE PARTICIPANT HEREBY GRANTS TO THE COMPANY AN IRREVOCABLE PROXY TO VOTE ALL SHARES NOW OR HEREAFTER OWNED OR CONTROLLED BY THE PARTICIPANT AT ANY ANNUAL OR SPECIAL MEETING OF THE STOCKHOLDERS OF THE COMPANY, OR BY WRITTEN CONSENT IN LIEU OF SUCH A MEETING, IN ACCORDANCE WITH THE AGREEMENTS CONTAINED IN THIS AGREEMENT. IN ADDITION, THE PARTICIPANT, TO THE EXTENT LEGALLY PERMITTED, HEREBY GRANTS AN IRREVOCABLE POWER OF ATTORNEY IN FAVOR OF THE COMPANY, TO ENABLE THE COMPANY TO EXECUTE, ACKNOWLEDGE, VERIFY, SWEAR TO, DELIVER, RECORD AND FILE, IN HIS NAME, ALL INSTRUMENTS, DOCUMENTS AND CERTIFICATES WHICH MAY BE (I) NECESSARY TO EFFECT ANY MANDATORY TRANSFERS OR EXCHANGES OF THE MANAGEMENT SHARES IF SUCH MANDATORY TRANSFERS OR EXCHANGES ARE REQUIRED PURSUANT TO THIS AGREEMENT OR THE ARTICLES ( RELEVANT PROVISIONS ) OR (II) DETERMINED BY THE COMPANY TO BE NECESSARY OR APPROPRIATE IN CONNECTION WITH THE RELEVANT PROVISIONS. THE PARTICIPANT ACKNOWLEDGES AND AGREES THAT THE PROXY GRANTED PURSUANT TO THIS SECTION 6(b) IS COUPLED WITH AN INTEREST AND SHALL
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SURVIVE THE DEATH, DISABILITY, INCAPACITY, DISSOLUTION, BANKRUPTCY, INSOLVENCY OR TERMINATION OF THE PARTICIPANT AND THE TRANSFER OF ALL OR ANY PORTION OF THE PARTICIPANT SHARES AND SHALL EXTEND TO THE PARTICIPANTS HEIRS, SUCCESSORS, ASSIGNS, AND PERSONAL REPRESENTATIVES. IF THE PARTICIPANT IS NOT LEGALLY ABLE TO PROVIDE SUCH IRREVOCABLE POWER OF ATTORNEY, THE PARTICIPANT SHALL, IMMEDIATELY FOLLOWING THE WRITTEN REQUEST OF THE COMPANY EXECUTE A POWER OF ATTORNEY IN A FORM ACCEPTABLE TO THE COMPANY.
(c) Custody agreement . Notwithstanding any provision to the contrary in this Agreement, the Participant acknowledges that in order to facilitate any Transfers contemplated by this Agreement, so long as this Agreement remains in effect, all certificates or other documents evidencing the Shares shall be held by the Company for the benefit of the Participant unless determined otherwise by the Compensation Committee of the Board (or, if no such committee is constituted, the Board) in its sole discretion.
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EXHIBIT A
[Agreement to Protect Company Interests]
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EXHIBIT B 3
PARTICIPANT REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties and covenants are being entered into in connection with the issuance of Shares upon the undersigned Participants exercise of the Stock Option under a Stock Option Agreement ( Agreement ) between the Participant and Byline Bancorp, Inc. (the Company ).
1. The Participant represents and warrants that:
(a) the Participant has the capacity to execute, deliver and perform his obligations under this Agreement and the transactions contemplated hereby; and
(b) The execution, delivery and performance by the Participant of this Participant Representations, Warranties and Covenants and the consummation by the Participant of the transactions contemplated hereby will not, with or without the giving of notice or lapse of time, or both (i) violate any provision of law, statute, rule or regulation to which the Participant is subject, (ii) violate any order, judgment or decree applicable to the Participant, or (iii) conflict with, or result in a breach or default under, any term or condition of any agreement or other instrument to which the Participant is a party or by which the Participant is bound.
2. The Participant understands and acknowledges that the Shares have not been registered under the U.S. Securities Act of 1933, or the securities laws of any state of the United States or any other jurisdiction, and therefore cannot be resold, pledged, assigned or otherwise disposed of unless and until the securities are registered or an exemption from registration becomes available. The Participant represents and warrants that:
(a) the residence of the Participant set forth on the signature page hereto is the true and correct residence of the Participant;
(b) the Shares are being acquired by the Participant for his own account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of any applicable laws, and the Participant has no present intention of selling, granting any participation in, or otherwise distributing the Shares in violation of any applicable laws; and
(c) the Participant understands that the Shares are being issued to the Participant in reliance on specific exemptions from the registration requirements of applicable laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgements and understandings of Participant set forth herein in order to determine the applicability of such exemptions.
3. The Participant acknowledges that any certificate issued respecting Shares issued upon the Participants exercise of the Stock Option are subject to the terms of Attachment II of the Agreement and the following legend:
The shares of stock represented by this certificate have not been registered under the Securities Act of 1933 and may not be transferred,
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This document to be entered into upon the exercise of the Option, as a condition of issuance of Shares. |
sold or otherwise disposed of in the absence of an effective registration statement with respect to the shares evidenced by this certificate, filed and made effective under the Securities Act of 1933, or an opinion of counsel satisfactory to Byline Bancorp, Inc. to the effect that registration under the Securities Act of 1933 is not required.
The shares of stock represented by this certificate are subject to certain restrictions on transfer contained in an option agreement, a copy of which will be furnished upon request by the issuer.
4. This Participant Representations, Warranties and Covenants has been duly and validly executed and delivered by the Participant, and this Participant Representations, Warranties and Covenants constitutes a legal and binding obligation of the Participant, enforceable against the Participant in accordance with the terms of the Agreement, except as enforceability may be limited by bankruptcy or any other laws affecting the enforcement of creditors rights in general and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).
IN WITNESS WHEREOF, the undersigned has executed this Participant Representations, Warranties and Covenants as of the date written below.
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Print Participants Name: |
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Participants Signature: |
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Exhibit 10.9
BYLINE BANCORP, INC.
2017 OMNIBUS INCENTIVE COMPENSATION PLAN
Table of Contents
Page | ||||||||
ARTICLE I GENERAL |
1 | |||||||
1.1 |
Purpose |
1 | ||||||
1.2 |
Definitions of Certain Terms |
1 | ||||||
1.3 |
Administration |
6 | ||||||
1.4 |
Persons Eligible for Awards |
9 | ||||||
1.5 |
Types of Awards Under Plan |
9 | ||||||
1.6 |
Shares of Common Stock Available for Awards |
9 | ||||||
1.7 |
Individual Limitations |
10 | ||||||
ARTICLE II AWARDS UNDER THE PLAN |
11 | |||||||
2.1 |
Agreements Evidencing Awards |
11 | ||||||
2.2 |
No Rights as a Stockholder |
11 | ||||||
2.3 |
Options |
11 | ||||||
2.4 |
Stock Appreciation Rights |
13 | ||||||
2.5 |
Restricted Shares |
14 | ||||||
2.6 |
Restricted Stock Units |
15 | ||||||
2.7 |
Dividend Equivalent Rights |
15 | ||||||
2.8 |
Other Stock-Based or Cash-Based Awards |
15 | ||||||
2.9 |
Repayment If Conditions Not Met |
18 | ||||||
ARTICLE III MISCELLANEOUS |
18 | |||||||
3.1 |
Amendment of the Plan |
18 | ||||||
3.2 |
Tax Withholding |
19 | ||||||
3.3 |
Required Consents and Legends |
19 | ||||||
3.4 |
Right of Offset |
20 | ||||||
3.5 |
Nonassignability; No Hedging |
20 | ||||||
3.6 |
Change in Control |
21 | ||||||
3.7 |
No Continued Employment or Engagement; Right of Discharge Reserved |
22 | ||||||
3.8 |
Nature of Payments |
22 | ||||||
3.9 |
Non-Uniform Determinations |
23 | ||||||
3.10 |
Other Payments or Awards |
23 | ||||||
3.11 |
Plan Headings |
23 | ||||||
3.12 |
Termination of Plan |
23 | ||||||
3.13 |
Clawback/Recapture Policy |
23 | ||||||
3.14 |
FDIC Limits on Golden Parachute Payments |
24 | ||||||
3.15 |
Section 409A |
24 | ||||||
3.16 |
Section 162(m) |
25 | ||||||
3.17 |
Governing Law |
25 | ||||||
3.18 |
Disputes; Choice of Forum |
26 | ||||||
3.19 |
Waiver of Jury Trial |
26 | ||||||
3.20 |
Waiver of Claims |
27 | ||||||
3.21 |
Severability; Entire Agreement |
27 | ||||||
3.22 |
No Liability With Respect to Tax Qualification or Adverse Tax Treatment |
27 | ||||||
3.23 |
No Third-Party Beneficiaries |
27 | ||||||
3.24 |
Successors and Assigns of the Company |
27 | ||||||
3.25 |
Date of Adoption and Approval of Stockholders |
28 |
BYLINE BANCORP, INC.
2017 OMNIBUS INCENTIVE COMPENSATION PLAN
ARTICLE I
GENERAL
1.1 Purpose
The purpose of the Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan (as amended from time to time, the Plan ) is to help the Company (as hereinafter defined): (1) attract, retain and motivate officers, key employees (including prospective employees), Non-Employee Directors and consultants; (2) align the interests of such persons with Bylines stockholders; and (3) promote ownership of Bylines equity.
1.2 Definitions of Certain Terms
For purposes of this Plan, the following terms have the meanings set forth below:
1.2.1 Award means an award made pursuant to the Plan.
1.2.2 Award Agreement means the written document by which each Award is evidenced, and which may, but need not be (as determined by the Committee) executed or acknowledged by a Grantee as a condition to receiving an Award or the benefits under an Award, and which sets forth the terms and provisions applicable to Awards granted under the Plan to such Grantee. Any reference herein to an agreement in writing will be deemed to include an electronic writing to the extent permitted by applicable law.
1.2.3 Board means the Board of Directors of Byline.
1.2.4 Business Combination has the meaning provided in the definition of Change in Control.
1.2.5 Byline means Byline Bancorp, Inc., a Delaware corporation.
1.2.6 Cause means (a) with respect to a Grantee employed pursuant to a written employment agreement which agreement includes a definition of Cause, Cause as defined in that agreement or (b) with respect to any other Grantee (other than a Non-Employee Director), the occurrence of any of the following: (i) such Grantees conviction of, or plea of guilty or no contest to, any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof or under the laws of any other jurisdiction, (ii) such Grantees attempted commission of, or participation in, a fraud or theft against the Company or any client of the Company, (iii) such Grantees engagement in gross misconduct that causes financial or reputation harm to the Company, (iv) such Grantees repeated failure to substantially perform his or her duties and responsibilities to the Company (other than failure resulting from incapacity due to mental or physical illness or injury or from any permitted leave required by law), (v) such Grantees material violation of any contract or agreement between the Grantee and the Company or any written Company policy, (vi) such Grantees habitual abuse of narcotics or (vii) such Grantees disqualification or bar by any governmental or self-regulatory authority from
serving in the capacity required by his or her job description or such Grantees loss of any governmental or self-regulatory license that is reasonably necessary for such Grantee to perform his or her duties or responsibilities, in each case as an Employee, or a Consultant, as applicable, of the Company.
1.2.7 Certificate means a stock certificate (or other appropriate document or evidence of ownership) representing Shares.
1.2.8 Change in Control means, except in connection with any initial public offering of the Common Stock or except as expressly defined in an Award Agreement, the occurrence of any of the following events after the completion of the initial public offering of the Company:
(a) during any period of not more than 36 months, individuals who constitute the Board as of the beginning of the period (the Incumbent Directors ) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the beginning of such period, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of Byline in which such person is named as a nominee for director, without written objection to such nomination) will be an Incumbent Director; provided , however , that no individual initially elected or nominated as a director of Byline as a result of an actual or publicly threatened election contest with respect to directors or as a result of any other actual or publicly threatened solicitation of proxies by or on behalf of any person other than the Board will be deemed to be an Incumbent Director;
(b) any person (as such term is defined in Section 3(a)(9) of the Exchange Act and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), is or becomes a beneficial owner (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of Byline representing 50% or more of the combined voting power of Bylines then-outstanding securities eligible to vote for the election of the Board ( Company Voting Securities ); provided , however , that the event described in this paragraph (b) will not be deemed to be a Change in Control by virtue of the ownership, or acquisition, of Company Voting Securities: (A) by the Company, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (c) of this definition or (E) by MBG Investors I, LP ( MBG Investors ) or any of its direct or indirect Subsidiaries;
(c) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving Byline that requires the approval of Bylines stockholders, whether for such transaction or the issuance of securities in the transaction (a Business Combination ), excluding such a Business Combination with MBG Investors or any of its direct or indirect Subsidiaries, unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the entity resulting from such Business Combination (the Surviving Entity ), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of at least 95% of the voting power, is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting
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Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than MBG Investors or any employee benefit plan (or related trust) sponsored or maintained by the Surviving Entity or the parent), is or becomes the beneficial owner, directly or indirectly, of 50% or more of the total voting power of the outstanding voting securities eligible to elect directors of the parent (or, if there is no parent, the Surviving Entity) and (C) at least 50% of the members of the board of directors of the parent (or, if there is no parent, the Surviving Entity) following the consummation of the Business Combination were Incumbent Directors at the time of the Boards approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) of this paragraph (c) will be deemed to be a Non-Qualifying Transaction ); or
(d) the consummation of a sale of all or substantially all of Bylines assets (other than to MBG Investors or any of its direct or indirect Subsidiaries or an affiliate of Byline); or
(e) Bylines stockholders approve a plan of complete liquidation or dissolution of Byline.
Notwithstanding the foregoing, a Change in Control will not be deemed to occur solely because any person acquires beneficial ownership of more than 50% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided that if after such acquisition by the Company such person (other than MBG Investors or any of its direct or indirect Subsidiaries) becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control will then occur.
1.2.9 Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto, and the applicable rulings and regulations thereunder.
1.2.10 Committee means the committee appointed by the Board to administer the Plan pursuant to Section 1.3.1, and, to the extent the Board determines it is appropriate for the compensation realized from Awards under the Plan to be considered performance-based compensation under Section 162(m) of the Code, shall be a committee or subcommittee of the Board composed of two or more members, each of whom is an outside director within the meaning of Section 162(m) of the Code and which, to the extent the Board determines it is appropriate for Awards under the Plan to qualify for the exemption available under Rule 16b-3(d)(1) or Rule 16b-3(e) promulgated under the Exchange Act, shall be a committee or subcommittee of the Board composed of two or more members, each of whom is a non-employee director within the meaning of Rule 16b-3. Unless otherwise determined by the Board, the Committee shall be the Compensation Committee of the Board. Nothing in the Plan shall be construed to require the Committee or the Board to grant Awards that satisfy the requirements of Section 162(m).
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1.2.11 Common Stock means the common stock of Byline, par value $0.01 per share, and any other securities or property issued in exchange therefor or in lieu thereof pursuant to Section 1.6.3 .
1.2.12 Company means Byline and any Subsidiary, and any successor entity thereto.
1.2.13 Company Voting Securities has the meaning provided in the definition of Change in Control.
1.2.14 Consent has the meaning set forth in Section 3.3.2 .
1.2.15 Consultant means any individual (other than a non-employee Director), corporation, partnership, limited liability company or other entity that provides bona fide consulting or advisory services to the Company.
1.2.16 Designated Person has the meaning set forth in Section 1.3.4 .
1.2.17 Director means a member of the Board.
1.2.18 Effective Date has the meaning set forth in Section 3.25 .
1.2.19 Employee means a regular, active employee and/or a prospective employee of the Company, but not including a Non-Employee Director.
1.2.20 Employment means a Grantees (other than a Non-Employee Director) performance of services for the Company, as determined by the Committee. The terms employ and employed will have their correlative meanings. The Committee in its sole discretion may determine (a) whether and when a Grantees leave of absence results in a termination of Employment, (b) whether and when a change in a Grantees association with the Company results in a termination of Employment and (c) the impact, if any, of any such leave of absence or change in association on outstanding Awards. Unless expressly provided otherwise, any references in the Plan or any Award Agreement to a Grantees Employment being terminated will include both voluntary and involuntary terminations.
1.2.21 Exchange Act means the Securities Exchange Act of 1934, as amended from time to time, or any successor thereto, and the applicable rules and regulations thereunder.
1.2.22 Fair Market Value means, with respect to a Share, the closing price reported for the Common Stock on the applicable date as reported on the New York Stock Exchange or, if not so reported, as determined in accordance with a valuation methodology approved by the Committee, unless determined as otherwise specified herein. For purposes of the grant of any Award, the applicable date will be the trading day on which the Award is granted or, if the date the Award is granted is not a trading day, the trading day immediately prior to the date the Award is granted. For purposes of the exercise of any Award, the applicable date is the date a notice of exercise is received by the Company or, if such date is not a trading day, the trading day immediately following the date a notice of exercise is received by the Company.
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1.2.23 Good Reason means (a) with respect to a Grantee employed pursuant to a written employment agreement which agreement includes a definition of Good Reason, Good Reason as defined in that agreement or (b) with respect to any other Grantee (other than a Non-Employee Director), the occurrence of any of the following in the absence of the Grantees written consent: (i) any material and adverse change in the Grantees position or authority with the Company as in effect immediately before a Change in Control, other than an isolated and insubstantial action not taken in bad faith and which is remedied by the Company within 30 days after receipt of notice thereof given by the Grantee; (ii) the transfer of the Grantees primary work site to a new primary work site that is more than 50 miles from the Grantees primary work site in effect immediately before a Change in Control; or (iii) a diminution of the Grantees base salary in effect immediately before a Change in Control by more than 10%, unless such diminution applies to all similarly situated employees. If the Grantee does not deliver to the Company a written notice of termination within 60 days after the Grantee has knowledge that an event constituting Good Reason has occurred, the event will no longer constitute Good Reason. In addition, the Grantee must give the Company 30 days to cure the event constituting Good Reason.
1.2.24 Grantee means an Employee, Non-Employee Director or Consultant who receives an Award.
1.2.25 Incentive Stock Option means a stock option to purchase Shares that is intended to be an incentive stock option within the meaning of Sections 421 and 422 of the Code, as now constituted or subsequently amended, or pursuant to a successor provision of the Code, and which is designated as an Incentive Stock Option in the applicable Award Agreement.
1.2.26 Incumbent Directors has the meaning provided in the definition of Change in Control.
1.2.27 Non-Employee Director means non-employee Directors and non-employee directors of Bylines Subsidiaries.
1.2.28 Non-Qualifying Transaction has the meaning provided in the definition of Change in Control.
1.2.29 Other Stock-Based or Cash-Based Awards has the meaning set forth in Section 2.8.1 .
1.2.30 Performance-Based Awards means certain Other Stock-Based or Cash-Based Awards granted pursuant to Section 2.8.2 .
1.2.31 Performance Criteria has the meaning set forth in Section 2.8.2 .
1.2.32 Performance Goals means the performance goals established by the Committee in connection with the grant of Awards, which may or may not be based on Performance Criteria.
1.2.33 Plan has the meaning set forth in Section 1.1 .
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1.2.34 Plan Action has the meaning set forth in Section 3.3.1 .
1.2.35 Section 409A means Section 409A of the Code, including any amendments or successor provisions to that section, and any regulations and other administrative guidance thereunder, in each case as they may be from time to time amended or interpreted through further administrative guidance.
1.2.36 Securities Act means the Securities Act of 1933, as amended from time to time, or any successor thereto, and the applicable rules and regulations thereunder.
1.2.37 Share Limit has the meaning set forth in Section 1.6.1 .
1.2.38 Shares means shares of Common Stock.
1.2.39 Subsidiary means any corporation, partnership, limited liability company or other legal entity in which Byline, directly or indirectly, owns stock or other equity interests possessing 25% or more of the total combined voting power of all classes of the then-outstanding stock or other equity interests.
1.2.40 Surviving Entity has the meaning provided in the definition of Change in Control.
1.2.41 Ten Percent Stockholder means a person owning stock possessing more than 10% of the total combined voting power of all classes of stock of Byline and of any Subsidiary or parent corporation of Byline.
1.2.42 Treasury Regulations means the regulations promulgated under the Code by the United States Treasury Department, as amended.
1.3 Administration
1.3.1 The Committee will administer the Plan. In particular, the Committee will have the authority in its sole discretion to:
(a) exercise all of the powers granted to it under the Plan;
(b) construe, interpret and implement the Plan and all Award Agreements;
(c) prescribe, amend and rescind rules and regulations relating to the Plan, including rules governing the Committees own operations;
(d) make all determinations necessary or advisable in administering the Plan;
(e) correct any defect, supply any omission and reconcile any inconsistency in the Plan;
(f) amend the Plan to reflect changes in applicable law;
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(g) grant, or recommend to the Board for approval to grant, Awards and determine who will receive Awards, when such Awards will be granted and the terms of such Awards, including setting forth provisions with regard to the effect of a termination of Employment or directorship on such Awards and conditioning the vesting of, or the lapsing of any applicable vesting restrictions or other vesting conditions on, Awards upon the attainment of Performance Goals and/or upon continued service;
(h) amend any outstanding Award Agreement in any respect including, without limitation, to
(1) accelerate the time or times at which the Award becomes vested, unrestricted or may be exercised, subject to Section 3.15 (and, in connection with such acceleration, the Committee may provide that any Shares acquired pursuant to such Award will be restricted shares, which are subject to vesting, transfer, forfeiture or repayment provisions similar to those in the Grantees underlying Award),
(2) accelerate the time or times at which Shares are delivered under the Award (and, without limitation on the Committees rights, in connection with such acceleration, the Committee may provide that any Shares delivered pursuant to such Award will be restricted shares, which are subject to vesting, transfer, forfeiture or repayment provisions similar to those in the Grantees underlying Award),
(3) waive or amend any goals, restrictions, vesting provisions or conditions set forth in such Award Agreement, or impose new goals, restrictions, vesting provisions and conditions or
(4) reflect a change in the Grantees circumstances (e.g., a change to part-time employment status or a change in position, duties or responsibilities); and
(i) determine at any time whether, to what extent and under what circumstances and method or methods, subject to Section 3.15 ,
(1) Awards may be
(A) settled in cash, Shares, other securities, other Awards or other property (in which event, the Committee may specify what other effects such settlement will have on the Grantees Award, including the effect on any repayment provisions under the Plan or Award Agreement),
(B) exercised or
(C) canceled, forfeited or suspended,
(2) Shares, other securities, other Awards or other property and other amounts payable with respect to an Award may be deferred either automatically or at the election of the Grantee thereof or of the Committee,
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(3) to the extent permitted under applicable law, loans (whether or not secured by Common Stock) may be extended by the Company with respect to any Awards,
(4) Awards may be settled by Byline, any of its Subsidiaries or affiliates or any of their designees and
(5) the exercise price for any stock option (other than an Incentive Stock Option, unless the Committee determines that such a stock option will no longer constitute an Incentive Stock Option) or stock appreciation right may be reset, subject to Sections 2.3.6 and 2.4.5 .
1.3.2 Actions of the Committee may be taken by the vote of a majority of its members present at a meeting (which may be held telephonically). Any action may be taken by a written instrument signed by a majority of the Committee members, and action so taken will be as fully effective as if it had been taken by a vote at a meeting. The determination of the Committee on all matters relating to the Plan or any Award Agreement will be final, binding and conclusive. The Committee may allocate among its members and delegate to any person who is not a member of the Committee, or to any administrative group within the Company, any of its powers, responsibilities or duties. In delegating its authority, the Committee will consider the extent to which any delegation may cause Awards to fail to be deductible under Section 162(m) of the Code or to fail to meet the requirements of Rule 16(b)-3(d)(1) or Rule 16(b)-3(e) under the Exchange Act. Except as specifically provided to the contrary, references to the Committee include any administrative group, individual or individuals to whom the Committee has delegated its duties and powers.
1.3.3 Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, grant Awards or administer the Plan. In any such case, the Board will have all of the authority and responsibility granted to the Committee herein.
1.3.4 No member of the Committee or any person to whom the Committee delegates its powers, responsibilities or duties in writing, including by resolution (each such person, a Designated Person ), will have any liability to any person (including any Grantee) for any action taken or omitted to be taken or any determination made with respect to the Plan or any Award, except as expressly provided by statute. Each Designated Person will be indemnified and held harmless by the Company against and from:
(a) any loss, cost, liability or expense (including attorneys fees) that may be imposed upon or incurred by such Designated Person in connection with or resulting from any action, suit or proceeding to which such Designated Person may be a party or in which such Designated Person may be involved by reason of any action taken or omitted to be taken under the Plan or any Award Agreement, in each case, in good faith and
(b) any and all amounts paid by such Designated Person, with the Companys approval, in settlement thereof, or paid by such Designated Person in satisfaction of any judgment in any such action, suit or proceeding against such Designated Person, provided that the Company will have the right, at its own expense, to assume and defend any such action, suit or proceeding and, once the Company gives notice of its intent to assume the defense, the Company will have sole control over such defense with counsel of the Companys choice.
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The foregoing right of indemnification will not be available to a Designated Person to the extent that a court of competent jurisdiction in a final judgment or other final adjudication, in either case, not subject to further appeal, determines that the acts or omissions of such Designated Person giving rise to the indemnification claim resulted from such Designated Persons bad faith, fraud or willful misconduct. The foregoing right of indemnification will not be exclusive of any other rights of indemnification to which Designated Persons may be entitled under Bylines Amended and Restated Bylaws, pursuant to any individual indemnification agreements between such Designated Person and the Company, as a matter of law, or otherwise, or any other power that the Company may have to indemnify such persons or hold them harmless.
1.4 Persons Eligible for Awards
Awards under the Plan may be made to Employees, Non-Employee Directors and Consultants.
1.5 Types of Awards Under the Plan
Awards may be made under the Plan in the form of cash-based or stock-based Awards. Stock-based Awards may be in the form of any of the following, in each case in respect of Common Stock:
(a) stock options,
(b) stock appreciation rights,
(c) restricted shares,
(d) restricted stock units,
(e) dividend equivalent rights and
(f) other equity-based or equity-related Awards (as further described in Section 2.8 ), that the Committee determines to be consistent with the purposes of the Plan and the interests of the Company.
1.6 Shares of Common Stock Available for Awards
1.6.1 Common Stock Subject to the Plan . Subject to the other provisions of this Section 1.6 , the total number of Shares that may be granted under the Plan will be 1,550,000 (the Share Limit ). Shares of Common Stock subject to awards that are assumed, converted or substituted under the Plan as a result of the Companys acquisition of another company (including by way of merger, combination or similar transaction) will not count against the number of shares that may be granted under the Plan. Available shares under a stockholder approved plan of an acquired company (as appropriately adjusted to reflect the transaction) may
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be used for Awards under the Plan and do not reduce the maximum number of shares available for grant under the Plan, subject to applicable stock exchange requirements. With respect to Awards of stock-settled share appreciation rights, the Share Limit will be reduced by the full number of Shares underlying the exercised portion of such Award (rather than only the Shares actually delivered upon exercise).
1.6.2 Replacement of Shares . Shares subject to an Award that is forfeited (including any restricted shares repurchased by the Company at the same price paid by the Grantee so that such Shares are returned to the Company), expires or is settled for cash (in whole or in part), to the extent of such forfeiture, expiration or cash settlement will be available for future grants of Awards under the Plan and will be added back in the same number of Shares as were deducted in respect of the grant of such Award. The payment of dividend equivalent rights in cash in conjunction with any outstanding Awards will not be counted against the Shares available for issuance under the Plan. Shares tendered by a Grantee or withheld by the Company in payment of the exercise price of a stock option, to satisfy any tax withholding obligation with respect to an Award, or covered by a stock appreciation right (to the extent that it is settled in Shares) will not again be available for Awards.
1.6.3 Adjustments . The Committee will:
(a) adjust the number of Shares authorized pursuant to Section 1.6.1 ,
(b) adjust the individual Grantee limitations set forth in Sections 1.7 , 2.3.1 and 2.4.1 ,
(c) adjust the number of Shares set forth in Section 2.3.2 that can be issued through Incentive Stock Options and
(d) adjust the terms of any outstanding Awards (including, without limitation, the number of Shares covered by each outstanding Award, the type of property or securities to which the Award relates and the exercise or strike price of any Award),
in such manner as it deems appropriate (including, without limitation, by payment of cash) to prevent the enlargement or dilution of rights, as a result of any increase or decrease in the number of issued Shares (or issuance of shares of stock other than Shares) resulting from a recapitalization, stock split, reverse stock split, stock dividend, spinoff, split up, combination, reclassification or exchange of Shares, merger, consolidation, rights offering, separation, reorganization or liquidation or any other change in the corporate structure or Shares, including any extraordinary dividend or extraordinary distribution; provided that no such adjustment may be made if or to the extent that it would cause an outstanding Award to cease to be exempt from, or to fail to comply with, Section 409A of the Code.
1.7 Individual Limitations
The maximum number of Shares with respect to which Awards (other than stock options and stock appreciation rights) may be granted during any fiscal year to any Grantee who is an
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Employee will be [●] 1 (or, in the event of a Cash-Based Award, the equivalent cash value thereof on the first day of the performance period to which such Award relates, as determined by the Committee) (as adjusted pursuant to the provisions of Section 1.6.3 ). The grant limit under the preceding sentence will (i) apply to an Award other than a stock option or stock appreciation right only if the Award is intended to be performance-based compensation as that term is used in Section 162(m) of the Code and (ii) be adjusted upward or downward, as applicable, on a pro rata basis for each full or partial fiscal year in the applicable performance period. Aggregate Awards to any one Non-Employee Director in respect of any fiscal year, solely with respect to his or her service as a Director, may not exceed $2,000,000 based on the aggregate value of cash Awards and Fair Market Value of stock-based Awards, in each case, determined as of the date of grant.
ARTICLE II
AWARDS UNDER THE PLAN
2.1 Agreements Evidencing Awards
Each Award granted under the Plan will be evidenced by an Award Agreement that will contain such provisions and conditions as the Committee deems appropriate. Unless otherwise provided herein, the Committee may grant Awards in tandem with or, subject to Section 3.15 , in substitution for or satisfaction of any other Award or Awards granted under the Plan or any award granted under any other plan of the Company. By accepting an Award pursuant to the Plan, a Grantee thereby agrees that the Award will be subject to all of the terms and provisions of the Plan and the applicable Award Agreement.
2.2 No Rights as a Stockholder
No Grantee (or other person having rights pursuant to an Award) will have any of the rights of a stockholder of Byline with respect to Shares subject to an Award until the delivery of such Shares. Except as otherwise provided in Section 1.6.3 , no adjustments will be made for dividends, distributions or other rights (whether ordinary or extraordinary, and whether in cash, Common Stock, other securities or other property) for which the record date is before the date the Certificates for the Shares are delivered, or in the event the Committee elects to use another system, such as book entries by the transfer agent, before the date in which such system evidences the Grantees ownership of such Shares.
2.3 Options
2.3.1 Grant . Stock options may be granted to eligible recipients in such number and at such times during the term of the Plan as the Committee may determine; provided , however , that the maximum number of Shares as to which stock options may be granted under the Plan to any one individual in any fiscal year may not exceed 200,000 Shares (as adjusted pursuant to the provisions of Section 1.6.3 ).
1 | Note : To be determined by dividing approximately $3,500,000 by the IPO share price. |
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2.3.2 Incentive Stock Options . At the time of grant, the Committee will determine:
(a) whether all or any part of a stock option granted to an eligible Employee will be an Incentive Stock Option and
(b) the number of Shares subject to such Incentive Stock Option; provided , however , that
(1) the aggregate Fair Market Value (determined as of the time the option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by an eligible Employee during any fiscal year (under all such plans of Byline and of any Subsidiary or parent corporation of Byline) may not exceed $100,000 and
(2) no Incentive Stock Option (other than an Incentive Stock Option that may be assumed or issued by the Company in connection with a transaction to which Section 424(a) of the Code applies) may be granted to a person who is not eligible to receive an Incentive Stock Option under the Code.
The form of any stock option which is entirely or in part an Incentive Stock Option will clearly indicate that such stock option is an Incentive Stock Option or, if applicable, the number of Shares subject to the Incentive Stock Option. No more than 1,550,000 Shares (as adjusted pursuant to the provisions of Section 1.6.3 ) that can be delivered under the Plan may be issued through Incentive Stock Options.
2.3.3 Exercise Price . The exercise price per share with respect to each stock option will be determined by the Committee but, except as otherwise permitted by Section 1.6.3 , may never be less than the Fair Market Value of a share of Common Stock (or, in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, 110% of the Fair Market Value). Unless otherwise noted in the Award Agreement, the Fair Market Value of the Common Stock will be its Fair Market Value on the date of grant of the Award of stock options.
2.3.4 Term of Stock Option . In no event will any stock option be exercisable after the expiration of 10 years (or, in the case of an Incentive Stock Option granted to a Ten Percent Stockholder, 5 years) from the date on which the stock option is granted.
2.3.5 Vesting and Exercise of Stock Option and Payment for Shares . A stock option may v est and be exercised at such time or times and subject to such terms and conditions as will be determined by the Committee at the time the stock option is granted and set forth in the Award Agreement. Subject to any limitations in the applicable Award Agreement, any Shares not acquired pursuant to the exercise of a stock option on the applicable vesting date may be acquired thereafter at any time before the final expiration of the stock option.
To exercise a stock option, the Grantee must give written notice to the Company specifying the number of Shares to be acquired and accompanied by payment of the full purchase price therefor in cash or by certified or official bank check or in another form as determined by the Company, which may include:
(a) personal check,
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(b) Shares, based on the Fair Market Value as of the exercise date,
(c) any other form of consideration approved by the Company and permitted by applicable law and
(d) any combination of the foregoing.
The Committee may also make arrangements for the cashless exercise of a stock option. Any person exercising a stock option will make such representations and agreements and furnish such information as the Committee may, in its sole discretion, deem necessary or desirable to effect or assure compliance by the Company on terms acceptable to the Company with the provisions of the Securities Act, the Exchange Act and any other applicable legal requirements. The Committee may, in its sole discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer notices to agents and registrars. If a Grantee so requests, Shares acquired pursuant to the exercise of a stock option may be issued in the name of the Grantee and another jointly with the right of survivorship.
2.3.6 Repricing . Except as otherwise permitted by Section 1.6.3 , reducing the exercise price of stock options issued and outstanding under the Plan, including through amendment, cancellation in exchange for the grant of a substitute Award or repurchase for cash or other consideration (in each case that has the effect of reducing the exercise price), will require approval of Bylines stockholders.
2.4 Stock Appreciation Rights
2.4.1 Grant . Stock appreciation rights may be granted to eligible recipients in such number and at such times during the term of the Plan as the Committee may determine; provided , however , that the maximum number of Shares as to which stock appreciation rights may be granted under the Plan to any one individual in any fiscal year may not exceed 200,000 Shares (as adjusted pursuant to the provisions of Section 1.6.3 ).
2.4.2 Exercise Price . The exercise price per share with respect to each stock appreciation right will be determined by the Committee but, except as otherwise permitted by Section 1.6.3 , may never be less than the Fair Market Value of the Common Stock. Unless otherwise noted in the Award Agreement, the Fair Market Value of the Common Stock will be its Fair Market Value on the date of grant of the Award of stock appreciation rights.
2.4.3 Term of Stock Appreciation Right . In no event will any stock appreciation right be exercisable after the expiration of 10 years from the date on which the stock appreciation right is granted.
2.4.4 Vesting and Exercise of Stock Appreciation Right and Delivery of Shares . Each stock appreciation right may vest and be exercised in such installments as may be determined in the Award Agreement at the time the stock appreciation right is granted. Subject to any limitations in the applicable Award Agreement, any stock appreciation rights not exercised on the applicable vesting date may be exercised thereafter at any time before the final expiration of the stock appreciation right.
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To exercise a stock appreciation right, the Grantee must give written notice to the Company specifying the number of stock appreciation rights to be exercised. Upon exercise of stock appreciation rights, Shares, cash or other securities or property, or a combination thereof, as specified by the Committee, equal in value to:
(a) the excess of:
(1) the Fair Market Value of the Common Stock on the date of exercise over
(2) the exercise price of such stock appreciation right
multiplied by
(b) the number of stock appreciation rights exercised, will be delivered to the Grantee.
Any person exercising a stock appreciation right will make such representations and agreements and furnish such information as the Committee may, in its sole discretion, deem necessary or desirable to effect or assure compliance by the Company on terms acceptable to the Company with the provisions of the Securities Act, the Exchange Act and any other applicable legal requirements. If a Grantee so requests, Shares purchased may be issued in the name of the Grantee and another jointly with the right of survivorship.
2.4.5 Repricing . Except as otherwise permitted by Section 1.6.3 , reducing the exercise price of stock appreciation rights issued and outstanding under the Plan, including through amendment, cancellation in exchange for the grant of a substitute Award or repurchase for cash or other consideration (in each case that has the effect of reducing the exercise price), will require approval of Bylines stockholders.
2.5 Restricted Shares
2.5.1 Grants . The Committee may grant or offer for sale restricted shares in such amounts and subject to such terms and conditions as the Committee may determine. Upon the delivery of such shares, the Grantee will have the rights of a stockholder with respect to the restricted shares, subject to any other restrictions and conditions as the Committee may include in the applicable Award Agreement. Each Grantee of an Award of restricted shares will be issued a Certificate in respect of such shares, unless the Committee elects to use another system, such as book entries by the transfer agent, as evidencing ownership of such shares. In the event that a Certificate is issued in respect of restricted shares, such Certificate may be registered in the name of the Grantee, and will, in addition to such legends required by applicable securities laws, bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award, but will be held by the Company or its designated agent until the time the restrictions lapse.
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2.5.2 Right to Vote and Receive Dividends on Restricted Shares . Each Grantee of an Award of restricted shares will, during the period of restriction, be the beneficial and record owner of such restricted shares and will have full voting rights with respect thereto. Unless the Committee determines otherwise in an Award Agreement, during the period of restriction, all ordinary cash dividends or other ordinary distributions paid upon any restricted share will be retained by the Company and will be paid to the relevant Grantee (without interest) when the Award of restricted shares vests and will revert back to the Company if for any reason the restricted share upon which such dividends or other distributions were paid reverts back to the Company (any extraordinary dividends or other extraordinary distributions will be treated in accordance with Section 1.6.3 .
2.6 Restricted Stock Units
The Committee may grant Awards of restricted stock units in such amounts and subject to such terms and conditions as the Committee may determine. A Grantee of a restricted stock unit will have only the rights of a general unsecured creditor of Byline, until delivery of Shares, cash or other securities or property is made as specified in the applicable Award Agreement. On the delivery date specified in the Award Agreement, the Grantee of each restricted stock unit not previously forfeited or terminated will receive one share of Common Stock, cash or other securities or property equal in value to a share of Common Stock or a combination thereof, as specified by the Committee. Unless otherwise specified in an Award Agreement, in the event that a Non-Employee Director Grantee is removed or terminated as a Director, or otherwise ceases to be a Director, then, subject to and in accordance with the terms of this Plan, each vested restricted stock unit then held by such Non-Employee Director Grantee as of the date of such cessation of services will be settled as of such date.
2.7 Dividend Equivalent Rights
The Committee may include in the Award Agreement with respect to any Award a dividend equivalent right entitling the Grantee to receive amounts equal to all or any portion of the regular cash dividends that would be paid on the Shares covered by such Award if such Shares had been delivered pursuant to such Award. The grantee of a dividend equivalent right will have only the rights of a general unsecured creditor of Byline until payment of such amounts is made as specified in the applicable Award Agreement. In the event such a provision is included in an Award Agreement, the Committee will determine whether such payments will be made in cash, in Shares or in another form, whether they will be conditioned upon the exercise of the Award to which they relate (subject to compliance with Section 409A of the Code), the time or times at which they will be made, and such other terms and conditions as the Committee will deem appropriate. No dividends may be paid to Grantees under this Plan unless and until an Award vests. Such prohibition on the payment of dividends on unvested awards is applicable to all types of Awards granted under this Plan.
2.8 Other Stock-Based or Cash-Based Awards
2.8.1 Grant . The Committee may grant other types of equity-based, equity-related or cash-based Awards (including retainers and meeting based fees and the grant or offer for sale of unrestricted Shares, performance share awards, performance units settled in cash) ( Other
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Stock-Based or Cash-Based Awards ) in such amounts and subject to such terms and conditions as the Committee may determine. The terms and conditions set forth by the Committee in the applicable Award Agreement may relate to the achievement of Performance Goals, as determined by the Committee at the time of grant. Such Awards may entail the transfer of actual Shares to Award recipients and may include Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.
2.8.2 Performance-Based Awards . Notwithstanding anything to the contrary herein, Other Stock-Based or Cash-Based Awards may, at the discretion of the Committee, be granted to Grantees in a manner which is intended to be deductible by the Company under Section 162(m) of the Code. In such event, the Committee will follow the following procedures to the extent required to comply with Section 162(m) of the Code (taking into account any transition relief available thereunder):
(a) Individual Limitations . The maximum number of Shares with respect to which Other Stock-Based or Cash-Based Awards may be granted under the Plan during any fiscal year to any Grantee who is an Employee will be [●] 2 (or, in the event of a Cash-Based Award, the equivalent cash value thereof on the first day of the performance period to which such Award relates, as determined by the Committee) (as adjusted pursuant to the provisions of Section 1.6.3 ). The grant limit under the preceding sentence will apply to an Award only if the Award is intended to be performance-based compensation as that term is used in Section 162(m) of the Code.
(b) Establishment of the Performance Period, Performance Goals and Formula . A Grantees Performance-Based Award will be determined based on the attainment of written objective Performance Goals approved by the Committee for a performance period established by the Committee (i) while the outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the Performance Goal relates or, if the performance period is less than one year, the number of days which is equal to 25% of the relevant performance period. At the same time as the Performance Goals are established, the Committee will prescribe a formula to determine the amount of the Performance-Based Award that may be payable based upon the level of attainment of the Performance Goals during the performance period.
(c) Performance Criteria . The Performance Goals will be based on one or more of the following business criteria (either separately or in combination) with regard to Byline (or a Subsidiary, division, other operational unit or administrative department of Byline) ( Performance Criteria ): (1) return measures (including, but not limited to, total shareholder return; return on equity; return on tangible common equity; return on tier 1 common equity; return on assets or net assets; return on risk-weighted assets; and return on capital (including return on total capital or return on invested capital)); (2) revenues (including, but not limited to, total revenue; gross revenue; net revenue; revenue growth; and net sales); (3) income/earnings measures (including, but not limited to, earnings per share; earnings or loss (including earnings
2 |
Note : To be determined by dividing approximately $3,500,000 by the IPO share price. |
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before or after interest, taxes, depreciation and amortization); gross income; net income after cost of capital; net interest income; non-interest income; fee income; net interest margin; operating income (before or after taxes); pre- or after-tax income or loss; pre- or after-tax operating income; net earnings; net income or loss; operating margin; gross margin; and adjusted net income); (4) expense measures (including, but not limited to, expenses; operating efficiencies; non-interest expense and operating/efficiency ratios; and improvement in or attainment of expense levels or working capital levels (including cash and accounts receivable)); (5) balance sheet/risk management measures (including, but not limited to, loans; deposits; assets; tangible equity; charge-offs; net charge-offs; non-performing assets or loans; risk-weighted assets; classified assets; criticized assets; allowance for loans and lease losses; loan loss reserves; asset quality levels; year-end cash; investments; interest-sensitivity gap levels; regulatory compliance; satisfactory internal or external audits; financial ratings; shareholders equity; tier 1 capital; and liquidity); (6) cash flow measures (including, but not limited to, cash flow or cash flow per share (before or after dividends); and cash flow return on investment); (7) share price measures (including, but not limited to, share price; appreciation in and/or maintenance of share price; and market capitalization); (8) strategic objectives (including, but not limited to, market share; debt reduction; operating efficiencies; customer satisfaction; customer or household growth; employee satisfaction; research and development achievements; branding; mergers and acquisitions; succession management; people development; management retention; expense reduction initiatives; reductions in costs; risk management; regulatory compliance and achievements; and recruiting and maintaining personnel); and (9) other measures (including, but not limited to, financial ratios (including those measuring liquidity, activity, profitability or leverage); cost of capital or assets under management; and financing and other capital raising transactions).
Except as otherwise expressly provided, all financial terms are used as defined under Generally Accepted Accounting Principles (GAAP) or such other objective principles, as may be designated by the Committee. To the extent financial terms are defined under GAAP, all determinations will be made in accordance with GAAP, as applied by the Company in the preparation of its periodic reports to stockholders.
Any Performance Goals may be measured in absolute terms or relative to historic performance or the performance of other companies or an index.
To the extent permitted under Section 162(m) of the Code (including, without limitation, compliance with any requirements for stockholder approval), for each fiscal year of Byline, the Committee may (i) designate additional business criteria on which the Performance Goals may be based or (ii) provide for objectively determinable adjustments, modifications or amendments to any of the Performance Criteria described above, as the Committee may deem appropriate (including, but not limited to, for one or more of the items of gain, loss, profit or expense: (A) determined to be extraordinary or unusual in nature or infrequent in occurrence, (B) related to the disposal of a segment of a business, (C) related to a change in accounting principle under GAAP, (D) related to discontinued operations that do not qualify as a segment of business under GAAP or (E) attributable to the business operations of any entity acquired by the Company during the fiscal year).
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(d) Certification of Performance . Following the completion of each performance period, the Committee will have the sole discretion to determine whether the applicable Performance Goals have been met with respect to a given Grantee and, if they have, will so certify in writing and ascertain the amount of the applicable Performance-Based Award. No Performance-Based Awards will be paid for such performance period until such certification is made by the Committee. The amount of the Performance-Based Award actually paid to a given Grantee may be less (but not more) than the amount determined by the applicable Performance Goal formula, at the discretion of the Committee. The amount of the Performance-Based Award determined by the Committee for a performance period will be paid to the Grantee at such time as determined by the Committee in its sole discretion after the end of such performance period.
2.9 Repayment If Conditions Not Met
If the Committee determines that all terms and conditions of the Plan and a Grantees Award Agreement were not satisfied, and that the failure to satisfy such terms and conditions is material, then the Grantee will be obligated to pay the Company immediately upon demand therefor, (a) with respect to a stock option and a stock appreciation right, an amount equal to the excess of the Fair Market Value (determined at the time of exercise) of the Shares that were delivered in respect of such exercised stock option or stock appreciation right, as applicable, over the exercise price paid therefor, (b) with respect to restricted shares, an amount equal to the Fair Market Value (determined at the time such shares became vested) of such restricted shares and (c) with respect to restricted stock units, an amount equal to the Fair Market Value (determined at the time of delivery) of the Shares delivered with respect to the applicable delivery date, in each case with respect to clauses (a), (b) and (c) of this Section 2.9 , without reduction for any amount applied to satisfy withholding tax or other obligations in respect of such Award.
ARTICLE III
MISCELLANEOUS
3.1 Amendment of the Plan
3.1.1 Unless otherwise provided in the Plan or in an Award Agreement, the Board may at any time and from time to time suspend, discontinue, revise or amend the Plan in any respect whatsoever but, subject to Sections 1.3 , 1.6.3 and 3.7 , no such amendment may materially adversely impair the rights of the Grantee of any Award without the Grantees consent. Subject to Sections 1.3 , 1.6.3 and 3.7 , an Award Agreement may not be amended to materially adversely impair the rights of a Grantee without the Grantees consent.
3.1.2 Unless otherwise determined by the Board, stockholder approval of any suspension, discontinuance, revision or amendment will be obtained only to the extent necessary to comply with any applicable laws, regulations or rules of a securities exchange or self-regulatory agency; provided , however , if and to the extent the Board determines that it is appropriate for Awards granted under the Plan to constitute performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code (taking into account any transition relief available to the Company under the Code), no amendment that would require stockholder
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approval in order for amounts paid pursuant to the Plan to constitute performance-based compensation within the meaning of Section 162(m)(4)(C) of the Code will be effective without the approval of Bylines stockholders as required by Section 162(m) of the Code and, if and to the extent the Board determines it is appropriate for the Plan to comply with the provisions of Section 422 of the Code, no amendment that would require stockholder approval under Section 422 of the Code will be effective without the approval of Bylines stockholders.
3.2 Tax Withholding
Grantees will be solely responsible for any applicable taxes (including, without limitation, income and excise taxes) and penalties, and any interest that accrues thereon, that they incur in connection with the receipt, vesting or exercise of any Award. As a condition to the delivery of any Shares, cash or other securities or property pursuant to any Award or the lifting or lapse of restrictions on any Award, or in connection with any other event that gives rise to a federal or other governmental tax withholding obligation on the part of the Company relating to an Award (including, without limitation, the Federal Insurance Contributions Act (FICA) tax),
(a) the Company may deduct or withhold (or cause to be deducted or withheld) from any payment or distribution to a Grantee whether or not pursuant to the Plan (including Shares otherwise deliverable),
(b) the Committee will be entitled to require that the Grantee remit cash to the Company (through payroll deduction or otherwise) or
(c) the Company may enter into any other suitable arrangements to withhold, in each case in an amount sufficient in the opinion of the Company to satisfy such withholding obligation.
3.3 Required Consents and Legends
3.3.1 If the Committee at any time determines that any Consent (as hereinafter defined) is necessary or desirable as a condition of, or in connection with, the granting of any Award, the delivery of Shares or the delivery of any cash, securities or other property under the Plan, or the taking of any other action thereunder (each such action a Plan Action ), then, subject to Section 3.15 such Plan Action will not be taken, in whole or in part, unless and until such Consent will have been effected or obtained to the full satisfaction of the Committee. The Committee may direct that any Certificate evidencing Shares delivered pursuant to the Plan will bear a legend setting forth such restrictions on transferability as the Committee may determine to be necessary or desirable, and may advise the transfer agent to place a stop transfer order against any legended shares.
3.3.2 The term Consent as used in this Article III with respect to any Plan Action includes:
(a) any and all listings, registrations or qualifications in respect thereof upon any securities exchange or under any federal, state, or local law, or law, rule or regulation of a jurisdiction outside the United States,
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(b) any and all written agreements and representations by the Grantee with respect to the disposition of Shares, or with respect to any other matter, which the Committee may deem necessary or desirable to comply with the terms of any such listing, registration or qualification or to obtain an exemption from the requirement that any such listing, qualification or registration be made,
(c) any and all other consents, clearances and approvals in respect of a Plan Action by any governmental or other regulatory body or any stock exchange or self-regulatory agency,
(d) any and all consents by the Grantee to:
(i) the Companys supplying to any third party recordkeeper of the Plan such personal information as the Committee deems advisable to administer the Plan,
(ii) the Companys deducting amounts from the Grantees wages, or another arrangement satisfactory to the Committee, to reimburse the Company for advances made on the Grantees behalf to satisfy certain withholding and other tax obligations in connection with an Award and
(iii) the Companys imposing sales and transfer procedures and restrictions and hedging restrictions on Shares delivered under the Plan and
(e) any and all consents or authorizations required to comply with, or required to be obtained under, applicable local law or otherwise required by the Committee. Nothing herein will require the Company to list, register or qualify the Shares on any securities exchange.
3.4 Right of Offset
The Company will have the right to offset against its obligation to deliver Shares (or other property or cash) under the Plan or any Award Agreement any outstanding amounts (including, without limitation, travel and entertainment or advance account balances, loans, repayment obligations under any Awards, or amounts repayable to the Company pursuant to tax equalization, housing, automobile or other programs) that the Grantee then owes to the Company and any amounts the Committee otherwise deems appropriate pursuant to any tax equalization policy or agreement. Notwithstanding the foregoing, if an Award provides for the deferral of compensation within the meaning of Section 409A of the Code, the Committee will have no right to offset against its obligation to deliver Shares (or other property or cash) under the Plan or any Award Agreement if such offset could subject the Grantee to the additional tax imposed under Section 409A of the Code in respect of an outstanding Award.
3.5 Nonassignability; No Hedging
Unless otherwise provided in an Award Agreement, no Award (or any rights and obligations thereunder) granted to any person under the Plan may be sold, exchanged, transferred, assigned, pledged, hypothecated or otherwise disposed of or hedged, in any manner (including through the use of any cash-settled instrument), whether voluntarily or involuntarily and whether by operation of law or otherwise, other than by will or by the laws of descent and distribution, and
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all such Awards (and any rights thereunder) will be exercisable during the life of the Grantee only by the Grantee or the Grantees legal representative. Notwithstanding the foregoing, the Committee may permit, under such terms and conditions that it deems appropriate in its sole discretion, a Grantee to transfer any Award to any person or entity that the Committee so determines. Any sale, exchange, transfer, assignment, pledge, hypothecation, or other disposition in violation of the provisions of this Section 3.5 will be null and void and any Award which is hedged in any manner will immediately be forfeited. All of the terms and conditions of the Plan and the Award Agreements will be binding upon any permitted successors and assigns.
3.6 Change in Control
3.6.1 Unless the Committee determines otherwise or as otherwise provided in the applicable Award Agreement, (i) in the case of a Grantee other than a Non-Employee Director, if a Grantees Employment is terminated by the Company or any successor entity thereto without Cause, or the Grantee resigns his or her Employment for Good Reason, in either case, on or within two (2) years after a Change in Control, (A) each Award granted to such Grantee prior to such Change in Control will become fully vested (including the lapsing of all restrictions and conditions) and, as applicable, exercisable and (B) any Shares deliverable pursuant to restricted stock units will be delivered promptly (but no later than 15 days) following such Grantees termination of Employment and (ii) in the case of a Non-Employee Director Grantee, each Award will become fully vested (including the lapsing of all restrictions and conditions) and, as applicable, exercisable upon a Change in Control, and any Shares deliverable pursuant to restricted stock units will be delivered promptly (but no later than 15 days) following such Change in Control. As of the Change in Control date, any outstanding Performance-Based Awards shall be deemed earned at the greater of the target level and the actual performance level at the date of the Change in Control with respect to all open performance periods and will cease to be subject to any further performance conditions but will continue to be subject to time-based vesting following the Change in Control in accordance with the original performance period.
3.6.2 Notwithstanding the foregoing, in the event of a Change in Control, a Grantees Award will be treated, to the extent determined by the Committee to be permitted under Section 409A, in accordance with one or more of the following methods as determined by the Committee in its sole discretion: (i) settle such Awards for an amount of cash or securities equal to their value, where in the case of stock options and stock appreciation rights, the value of such awards, if any, will be equal to their in-the-money spread value (if any), as determined in the sole discretion of the Committee; (ii) provide for the assumption of or the issuance of substitute awards that will substantially preserve the otherwise applicable terms of any affected Awards previously granted under the Plan, as determined by the Committee in its sole discretion; (iii) modify the terms of such awards to add events, conditions or circumstances (including termination of Employment or directorship within a specified period after a Change in Control) upon which the vesting of such Awards or lapse of restrictions thereon will accelerate; (iv) deem any performance conditions satisfied at target, maximum or actual performance through closing or provide for the performance conditions to continue (as is or as adjusted by the Committee) after closing or (v) provide that for a period of at least 20 days prior to the Change in Control, any stock options or stock appreciation rights that would not otherwise become exercisable prior to the Change in Control will be exercisable as to all Shares subject thereto (but any such exercise will be contingent upon and subject to the occurrence of the Change in Control and if
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the Change in Control does not take place within a specified period after giving such notice for any reason whatsoever, the exercise will be null and void) and that any stock options or stock appreciation rights not exercised prior to the consummation of the Change in Control will terminate and be of no further force and effect as of the consummation of the Change in Control. In the event that the consideration paid in the Change in Control includes contingent value rights, earnout or indemnity payments or similar payments, then the Committee will determine if Awards settled under clause (i) above are (a) valued at closing taking into account such contingent consideration (with the value determined by the Committee in its sole discretion) or (b) entitled to a share of such contingent consideration. For the avoidance of doubt, in the event of a Change in Control where all stock options and stock appreciation rights are settled for an amount (as determined in the sole discretion of the Committee) of cash or securities, the Committee may, in its sole discretion, terminate any stock option or stock appreciation right for which the exercise price is equal to or exceeds the per share value of the consideration to be paid in the Change in Control transaction without payment of consideration therefor. Similar actions to those specified in this Section 3.6.2 may be taken in the event of a merger or other corporate reorganization that does not constitute a Change in Control.
3.7 No Continued Employment or Engagement; Right of Discharge Reserved
Neither the adoption of the Plan nor the grant of any Award (or any provision in the Plan or Award Agreement) will (1) confer upon any Grantee any right to continued Employment, or other engagement, with the Company, or to remain in the service of Byline or any of its Subsidiaries as a Non-Employee Director, (2) interfere in any way with or affect the right of the Company to terminate, or alter the terms and conditions of, a Grantees Employment, service as a Non-Employee Director or other engagement at any time, or (3) create any obligation on behalf of the Board to nominate any Non-Employee Director for re-election to the Board by Bylines stockholders.
3.8 Nature of Payments
3.8.1 Any and all grants of Awards and deliveries of Common Stock, cash, securities or other property under the Plan will be in consideration of services performed or to be performed for the Company by the Grantee. Awards under the Plan may, in the discretion of the Committee, be made in substitution in whole or in part for cash or other compensation otherwise payable to a Grantee. Only whole Shares will be delivered under the Plan. Awards will, to the extent reasonably practicable, be aggregated in order to eliminate any fractional shares. Fractional shares may, in the discretion of the Committee, be forfeited or be settled in cash or otherwise as the Committee may determine.
3.8.2 All such grants and deliveries of Shares, cash, securities or other property under the Plan will constitute a special discretionary incentive payment to the Grantee, will not entitle the Grantee to the grant of any future Awards and will not be required to be taken into account in computing the amount of salary or compensation of the Grantee for the purpose of determining any contributions to or any benefits under any pension, retirement, profit-sharing, bonus, life insurance, severance or other benefit plan of the Company or under any agreement with the Grantee, unless the Company specifically provides otherwise.
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3.9 Non-Uniform Determinations
3.9.1 The Committees determinations under the Plan and Award Agreements need not be uniform and any such determinations may be made by it selectively among persons who receive, or are eligible to receive, Awards under the Plan (whether or not such persons are similarly situated). Without limiting the generality of the foregoing, the Committee will be entitled, among other things, to make non-uniform and selective determinations under Award Agreements, and to enter into non-uniform and selective Award Agreements, as to (a) the persons to receive Awards, (b) the terms and provisions of Awards and (c) whether a Grantees Employment or directorship has been terminated for purposes of the Plan.
3.9.2 To the extent the Committee deems it necessary, appropriate or desirable to comply with foreign law or practices and to further the purposes of the Plan, the Committee may, in its sole discretion and without amending the Plan, (a) establish special rules applicable to Awards to Grantees who are foreign nationals, are employed outside the United States or both and grant Awards (or amend existing Awards) in accordance with those rules and (b) cause Byline to enter into an agreement with any local Subsidiary pursuant to which such Subsidiary will reimburse the Company for the cost of such equity incentives.
3.10 | Other Payments or Awards |
Nothing contained in the Plan will be deemed in any way to limit or restrict the Company from making any award or payment to any person under any other plan, arrangement or understanding, whether now existing or hereafter in effect.
3.11 | Plan Headings |
The headings in the Plan are for the purpose of convenience only and are not intended to define or limit the construction of the provisions hereof.
3.12 | Termination of Plan |
The Board reserves the right to terminate the Plan at any time; provided , however , that in any case, the Plan will terminate on the day before the tenth anniversary of the Effective Date, and provided further , that all Awards made under the Plan before its termination will remain in effect until such Awards have been satisfied or terminated in accordance with the terms and provisions of the Plan and the applicable Award Agreements.
3.13 | Clawback/Recapture Policy |
Awards under the Plan will be subject to any clawback or recapture policy that the Company may adopt from time to time to the extent provided in such policy and, in accordance with such policy, may be subject to the requirement that the Awards be repaid to the Company after they have been distributed to the Grantee.
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3.14 | FDIC Limits on Golden Parachute Payments |
Notwithstanding anything to the contrary, the Company will not be required to make any payment or grant any Award under the Plan or any Award Agreement that would otherwise be a prohibited golden parachute payment within the meaning of Section 18(k) of the Federal Deposit Insurance Act.
3.15 | Section 409A |
3.15.1 All Awards made under the Plan that are intended to be deferred compensation subject to Section 409A will be interpreted, administered and construed to comply with Section 409A, and all Awards made under the Plan that are intended to be exempt from Section 409A will be interpreted, administered and construed to comply with and preserve such exemption. The Board and the Committee will have full authority to give effect to the intent of the foregoing sentence. To the extent necessary to give effect to this intent, in the case of any conflict or potential inconsistency between the Plan and a provision of any Award or Award Agreement with respect to an Award, the Plan will govern.
3.15.2 Without limiting the generality of Section 3.15.1 , with respect to any Award made under the Plan that is intended to be deferred compensation subject to Section 409A:
(a) any payment due upon a Grantees termination of Employment or ceasing to provide services to the Company will be paid only upon such Grantees separation from service from the Company within the meaning of Section 409A;
(b) any payment due upon a Change in Control of the Company will be paid only if such Change in Control constitutes a change in ownership or change in effective control within the meaning of Section 409A, and in the event that such Change in Control does not constitute a change in the ownership or change in the effective control within the meaning of Section 409A, such Award will vest upon the Change in Control and any payment will be delayed until the first compliant date under Section 409A;
(c) any payment to be made with respect to such Award in connection with the Grantees separation from service from the Company within the meaning of Section 409A (and any other payment that would be subject to the limitations in Section 409A(a)(2)(B) of the Code) will be delayed until six months after the Grantees separation from service (or earlier death) in accordance with the requirements of Section 409A;
(d) if any payment to be made with respect to such Award would occur at a time when the tax deduction with respect to such payment would be limited or eliminated by Section 162(m) of the Code, such payment may be deferred by the Company under the circumstances described in Section 409A until the earliest date that the Company reasonably anticipates that the deduction or payment will not be limited or eliminated;
(e) to the extent necessary to comply with Section 409A, any other securities, other Awards or other property that the Company may deliver in lieu of Shares in respect of an Award will not have the effect of deferring delivery or payment beyond the date on which such delivery or payment would occur with respect to the Shares that would otherwise have been deliverable (unless the Committee elects a later date for this purpose in accordance with the requirements of Section 409A);
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(f) with respect to any required Consent described in Section 3.3 or the applicable Award Agreement, if such Consent has not been effected or obtained as of the latest date provided by such Award Agreement for payment in respect of such Award and further delay of payment is not permitted in accordance with the requirements of Section 409A, such Award or portion thereof, as applicable, will be forfeited and terminate notwithstanding any prior earning or vesting;
(g) if the Award includes a series of installment payments (within the meaning of Section 1.409A-2(b)(2)(iii) of the Treasury Regulations), the Grantees right to the series of installment payments will be treated as a right to a series of separate payments and not as a right to a single payment;
(h) if the Award includes dividend equivalents (within the meaning of Section 1.409A-3(e) of the Treasury Regulations), the Grantees right to the dividend equivalents will be treated separately from the right to other amounts under the Award; and
(i) for purposes of determining whether the Grantee has experienced a separation from service from the Company within the meaning of Section 409A, subsidiary will mean a corporation or other entity in a chain of corporations or other entities in which each corporation or other entity, starting with Byline, has a controlling interest in another corporation or other entity in the chain, ending with such corporation or other entity. For purposes of the preceding sentence, the term controlling interest has the same meaning as provided in Section 1.414(c)-2(b)(2)(i) of the Treasury Regulations, provided that the language at least 20 percent is used instead of at least 80 percent each place it appears in Section 1.414(c)-2(b)(2)(i) of the Treasury Regulations.
3.16 | Section 162(m) |
The provisions of the Plan with respect to Section 162(m) of the Code will only be applicable to the extent necessary to comply with Section 162(m) of the Code. The Plan is intended to constitute a plan described in Treasury Regulation Section 1.162-27(f)(1), pursuant to which the deduction limits under Section 162(m) of the Code do not apply during the applicable reliance period. The reliance period will end on the earliest to occur of the following: (i) the first material modification of the Plan after the Company becomes a publicly held corporation; (ii) the first meeting of Byline shareholders at which members of the Board are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of an equity security of Byline under Section 12 of the Exchange Act; or (iii) such other date required by Section 162(m) of the Code.
3.17 | Governing Law |
THE PLAN AND ALL AWARDS MADE AND ACTIONS TAKEN THEREUNDER WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS, WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS.
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3.18 | Disputes; Choice of Forum |
3.18.1 The Company and each Grantee, as a condition to such Grantees participation in the Plan, hereby irrevocably submit to the exclusive jurisdiction of any state or federal court located in the Cook County, Illinois, over any suit, action or proceeding arising out of or relating to or concerning the Plan or, to the extent not otherwise specified in any individual agreement between the Company and the Grantee, any aspect of the Grantees Employment or continuation of service with the Company or the termination of that Employment or service. The Company and each Grantee, as a condition to such Grantees participation in the Plan, acknowledge that the forum designated by this Section 3.18.1 has a reasonable relation to the Plan and to the relationship between such Grantee and the Company. Notwithstanding the foregoing, nothing herein will preclude the Company from bringing any action or proceeding in any other court for the purpose of enforcing the provisions of this Section 3.18.1 .
3.18.2 The agreement by the Company and each Grantee as to forum is independent of the law that may be applied in the action, and the Company and each Grantee, as a condition to such Grantees participation in the Plan, (i) agree to such forum even if the forum may under applicable law choose to apply non-forum law, (ii) hereby waive, to the fullest extent permitted by applicable law, any objection which the Company or such Grantee now or hereafter may have to personal jurisdiction or to the laying of venue of any such suit, action or proceeding in any court referred to in Section 3.18.1 , (iii) undertake not to commence any action arising out of or relating to or concerning the Plan in any forum other than the forum described in this Section 3.18 and (iv) agree that, to the fullest extent permitted by applicable law, a final and non-appealable judgment in any such suit, action or proceeding in any such court will be conclusive and binding upon the Company and each Grantee.
3.18.3 Each Grantee, as a condition to such Grantees participation in the Plan, hereby irrevocably appoints the General Counsel, or, to the extent there is no individual serving in that role, the Corporate Development Officer, of the Company as such Grantees agent for service of process in connection with any action, suit or proceeding arising out of or relating to or concerning the Plan, who will promptly advise such Grantee of any such service of process.
3.18.4 Each Grantee, as a condition to such Grantees participation in the Plan, agrees to keep confidential the existence of, and any information concerning, a dispute, controversy or claim described in Section 3.20 , except that a Grantee may disclose information concerning such dispute, controversy or claim to the court that is considering such dispute, controversy or claim or to such Grantees legal counsel (provided that such counsel agrees not to disclose any such information other than as necessary to the prosecution or defense of the dispute, controversy or claim).
3.19 | Waiver of Jury Trial |
EACH GRANTEE WAIVES ANY RIGHT IT MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED ON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THE PLAN.
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3.20 | Waiver of Claims |
Each Grantee of an Award recognizes and agrees that before being selected by the Committee to receive an Award the Grantee has no right to any benefits under the Plan. Accordingly, in consideration of the Grantees receipt of any Award hereunder, the Grantee expressly waives any right to contest the amount of any Award, the terms of any Award Agreement, any determination, action or omission hereunder or under any Award Agreement by the Committee, the Company or the Board, or any amendment to the Plan or any Award Agreement (other than an amendment to the Plan or an Award Agreement to which his or her consent is expressly required by the express terms of an Award Agreement). Nothing contained in the Plan, and no action taken pursuant to its provisions, will create or be construed to create a trust of any kind or a fiduciary relationship between the Company and any Grantee. The Plan is not intended to be subject to the Employee Retirement Income Security Act of 1974 (ERISA), as amended.
3.21 | Severability; Entire Agreement |
If any of the provisions of the Plan or any Award Agreement is finally held to be invalid, illegal or unenforceable (whether in whole or in part), such provision will be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability and the remaining provisions will not be affected thereby; provided that if any of such provisions is finally held to be invalid, illegal, or unenforceable because it exceeds the maximum scope determined to be acceptable to permit such provision to be enforceable, such provision will be deemed to be modified to the minimum extent necessary to modify such scope in order to make such provision enforceable hereunder. The Plan and any Award Agreements contain the entire agreement of the parties with respect to the subject matter thereof and supersede all prior agreements, promises, covenants, arrangements, communications, representations and warranties between them, whether written or oral with respect to the subject matter thereof.
3.22 | No Liability With Respect to Tax Qualification or Adverse Tax Treatment |
Notwithstanding anything to the contrary contained herein, in no event will the Company be liable to a Grantee on account of an Awards failure to (a) qualify for favorable United States or foreign tax treatment or (b) avoid adverse tax treatment under United States or foreign law, including, without limitation, Section 409A.
3.23 | No Third-Party Beneficiaries |
Except as expressly provided in an Award Agreement, neither the Plan nor any Award Agreement will confer on any person other than the Company and the Grantee of any Award any rights or remedies thereunder. The exculpation and indemnification provisions of Section 1.3.4 will inure to the benefit of a Designated Persons estate and beneficiaries and legatees.
3.24 | Successors and Assigns of the Company |
The terms of the Plan will be binding upon and inure to the benefit of the Company and any successor entity, including as contemplated by Section 3.6 .
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3.25 | Date of Adoption and Approval of Stockholders |
The Plan was adopted by the Board on June 6, 2017 and was approved by Bylines stockholder on June 14, 2017 (the Effective Date ).
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Exhibit 10.10
BYLINE BANCORP, INC.
2017 OMNIBUS INCENTIVE COMPENSATION PLAN
FORM OF
IPO RESTRICTED SHARE AWARD AGREEMENT
This Restricted Share Award Agreement (this Award Agreement ) evidences an award of restricted shares (the Restricted Shares ) by Byline Bancorp, Inc., a Delaware corporation ( Byline ), under the Byline Bancorp, Inc. 2017 Omnibus Incentive Compensation Plan (as amended, supplemented or modified, from time to time, the Plan ). Capitalized terms used but not defined in this Award Agreement have the meanings given to them in the Plan.
Name of Grantee: | (the Grantee ). | |||||
Grant Date: | (the Grant Date ). | |||||
Number of Restricted Shares: |
. | |||||
Vesting Date: |
The Restricted Shares will vest in their entirety on the third anniversary of the Grant Date.
The Restricted Shares will only vest if the Grantee is, and has been, continuously employed by the Company from the Grant Date through the Vesting Date, and any unvested Restricted Shares will be forfeited upon any termination of Employment.
Notwithstanding the foregoing and any provision in the Plan: |
|||||
A. | Upon a termination of Employment due to death or Disability, the Restricted Shares will immediately vest as of the date of such termination; and | |||||
B. | Upon a Change in Control, the Restricted Shares will immediately vest as of the date of such Change in Control. | |||||
Non-Transferability of the Restricted Shares: | Prior to vesting, the Restricted Shares may not be sold, exchanged, transferred, assigned, pledged, hypothecated, fractionalized, hedged or otherwise disposed of (including through the use of any cash-settled instrument) in any manner other than by will or by the laws of descent and distribution, and any attempt to sell, exchange, transfer, assign, pledge, hypothecate, fractionalize, hedge or otherwise dispose of the Shares delivered in respect of the Restricted Shares in violation of this Award Agreement shall be void and of no effect and Byline shall have the right to disregard the same on its books and records and advise the registrar and transfer agent of the Shares to place a stop order against the transfer of such Shares. |
Privileges of Share Ownership: | Subject to the Non-Transferability of the Restricted Shares, effective upon the Grant Date, the Grantee will have all rights of a shareholder of Byline with respect to the Restricted Shares, including voting rights and the right to receive all dividends at the times and in the manner paid to shareholders generally. Notwithstanding the foregoing, all ordinary cash dividends or other ordinary distributions paid upon any Restricted Share will be retained by the Company and will be paid to the Grantee (without interest) when the Restricted Shares vest and will revert back to Byline if the Restricted Share upon which such dividends or other distributions were paid reverts back to Byline. | |||||
Issuance and Delivery | Unless otherwise determined by the Committee, delivery of the Restricted Shares will be by book-entry credit to an account maintained by the registrar and transfer agent of the Shares with the applicable restrictions on transferability imposed on such Restricted Shares by this Award Agreement. Upon the vesting of the Restricted Shares in accordance with this Award Agreement, Byline will instruct the transfer agent to electronically transfer the Grantees Shares to a brokerage or other account on the Grantees behalf (or make such other arrangements for the delivery of the Shares as Byline reasonably determines). | |||||
Section 83(b) Election: | The Grantee hereby acknowledges that the Grantee has been informed that, with respect to the grant of the Restricted Shares, if the Grantee is filing a U.S. federal income tax return for the year in which the grant of Restricted Shares occurs, the Grantee may file an election (the Election ) with the U.S. Internal Revenue Service, within 30 days of the Grant Date, electing pursuant to Section 83(b) of the Code to be taxed currently on the Fair Market Value of the Restricted Shares on the Grant Date. This will result in recognition of taxable income to the Grantee on the Grant Date, equal to the Fair Market Value of the Restricted Shares on such date. Absent an Election, taxable income will be measured and recognized by the Grantee at the time the Restricted Shares vest. The Grantee is hereby encouraged to seek the advice of the Grantees own tax consultants in connection with the Restricted Shares and the advisability of filing the Election. THE GRANTEE UNDERSTANDS THAT ANY TAXES PAID AS A RESULT OF THE FILING OF THE ELECTION MIGHT NOT BE RECOVERED IF THE RESTRICTED SHARES ARE FORFEITED TO BYLINE. THE GRANTEE ACKNOWLEDGES THAT IT IS THE GRANTEES SOLE RESPONSIBILITY AND NOT THE COMPANYS TO TIMELY FILE THE ELECTION, EVEN IF THE GRANTEE REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON THE GRANTEES BEHALF. THE GRANTEE MUST NOTIFY THE COMPANY WITHIN 10 BUSINESS DAYS OF FILING ANY ELECTION. For purposes of this Award Agreement, business day means any day on which the New York Stock Exchange is open for regular session trading. | |||||
All Other Terms: | As set forth in the Plan. |
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The Plan is incorporated herein by reference. Except as otherwise set forth in the Award Agreement, the Award Agreement and the Plan constitute the entire agreement and understanding of the parties with respect to the Restricted Shares. Except as expressly provided herein, in the event that any provision of the Award Agreement is inconsistent with the Plan, the terms of the Plan will control. Except as expressly provided herein, in the event that any provision of this Award Agreement is inconsistent with any employment agreement between the Grantee and Byline ( Employment Agreement ), the terms of the Employment Agreement will control. By accepting this Award, the Grantee agrees to be subject to the terms and conditions of the Plan.
This Award Agreement may be executed in counterparts, which together will constitute one and the same original.
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IN WITNESS WHEREOF , the parties have caused this Award Agreement to be duly executed and effective as of the Grant Date.
BYLINE BANCORP, INC. | ||||
By: |
|
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Name: | ||||
Title: | ||||
[NAME OF GRANTEE] | ||||
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Exhibit 10.11
B YLINE B ANCORP , I NC .
E MPLOYEE S TOCK P URCHASE P LAN
Byline Bancorp, Inc.
Employee Stock Purchase Plan
TABLE OF CONTENTS
Page |
||||
Article I- Purpose | 1 | |||
1.01. |
Purpose | 1 | ||
Article II- Definitions | 2 | |||
2.01. |
Base Pay | 2 | ||
2.02. |
Committee | 2 | ||
2.03. |
Eligible Employee | 2 | ||
2.04. |
Enrollment Period | 2 | ||
2.05. |
Offering Commencement Date | 2 | ||
2.06. |
Offering | 2 | ||
2.07. |
Offering End Date | 2 | ||
2.08. |
Participant | 3 | ||
2.09. |
Plan | 3 | ||
2.10. |
Purchase Date | 3 | ||
2.11. |
Subscription | 3 | ||
2.12. |
Subsidiary | 3 | ||
Article III- Eligibility and Participation | 4 | |||
3.01. |
Initial Eligibility | 4 | ||
3.02. |
Leave of Absence | 4 | ||
3.03. |
Restrictions on Participation | 4 | ||
3.04. |
Commencement of Participation | 5 | ||
3.05. |
Participation After Rehire | 5 | ||
3.06. |
Transfers | 5 | ||
Article IV- Offerings | 6 | |||
4.01. |
Offerings | 6 | ||
4.02. |
Purchase Price | 6 | ||
Article V- Payroll Deductions/Contributions | 7 | |||
5.01. |
Amount of Deduction/Contribution | 7 | ||
5.02. |
Participants Account | 7 | ||
5.03. |
Changes in Payroll Deductions/Contributions | 7 | ||
Article VI- Exercise of Option | 8 | |||
6.01. |
Automatic Exercise | 8 | ||
6.02. |
Withdrawal From Offering | 8 | ||
6.03. |
Delivery of Stock | 8 | ||
6.04. |
Mandatory Retention or Sale of Stock | 8 |
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Article VII- Withdrawal | 9 | |||
7.01. |
Effect on Subsequent Participation | 9 | ||
7.02. |
Termination of Employment | 9 | ||
Article VIII- Stock | 10 | |||
8.01. |
Maximum Shares | 10 | ||
8.02. |
Participants Interest in Option Stock | 10 | ||
8.03. |
Registration of Stock | 10 | ||
8.04. |
Dividends | 10 | ||
Article IX- Administration | 11 | |||
9.01. |
Appointment of Committee | 11 | ||
9.02. |
Authority of Committee | 11 | ||
9.03. |
Rules Governing the Administration of the Committee | 11 | ||
Article X- Miscellaneous | 12 | |||
10.01. |
Transferability | 12 | ||
10.02. |
Use of Funds | 12 | ||
10.03. |
Adjustment Upon Changes in Capitalization | 12 | ||
10.04. |
Mergers, Liquidations, and Other Company Transactions | 12 | ||
10.05. |
Amendment and Termination | 13 | ||
10.06. |
Compliance with Legal and Exchange Requirements | 13 | ||
10.07. |
Withholding of Taxes | 13 | ||
10.08. |
Effective Date | 13 | ||
10.09. |
No Employment Rights | 13 | ||
10.10. |
Effect of Plan | 14 | ||
10.11. |
Governing Law | 14 |
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Byline Bancorp, Inc.
Employee Stock Purchase Plan
ARTICLE I-PURPOSE
1.01. Purpose
The Byline Bancorp, Inc. Employee Stock Purchase Plan is intended to provide a method whereby certain employees of Byline Bancorp, Inc. (the Company) and its participating subsidiary corporations will have an opportunity to acquire a proprietary interest in the Company through the purchase of shares of the Common Stock of the Company (Stock). It is the intention of the Company to have the Plan qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986, as amended (the Code). The provisions of the Plan shall be construed so as to extend and limit participation in Offerings a manner consistent with the requirements of Code Section 423. Participating Subsidiaries as of the Effective Date are all subsidiaries organized in the United States.
The Plan is being adopted by the Company in anticipation of the initial public offering of the Companys Common Stock, and is subject to approval of the Companys shareholders and the successful completion of the initial public offering. In the event that a new corporation is formed to serve as the issuer of Common Stock pursuant to the initial public offering, this Plan may be adopted by such corporation, with the consent of its shareholders, and such corporation shall be considered the Company for all purposes of the Plan.
ARTICLE II- DEFINITIONS
2.01. Base Pay
Base Pay shall mean regular straight-time earnings and overtime, including vacation pay, paid time off and other payments in lieu of such compensation, except as otherwise determined by the Committee. In the case of an employee who is compensated wholly or partially on the basis of commissions, Base Pay shall also include commission payments.
2.02. Committee
Committee shall mean the individuals appointed by the Company to administer the Plan as described in Article IX.
2.03. Eligible Employee
Eligible Employee means any employee of the Company or a participating Subsidiary whose customary term of employment is for more than 20 hours per week, as determined in accordance with Code Section 423(b)(4)(B).
2.04. Enrollment Period
Enrollment Period shall mean with respect to any Offering, the period designated by the Committee prior to such Offering during which Eligible Employees may authorize payroll deductions through a Subscription.
2.05. Offering Commencement Date
Offering Commencement Date shall mean and, unless determined otherwise by the Committee, January 1 and July 1 of each year commencing with the first such date that occurs after the Effective Date. Each Eligible Employee who is a Participant as of an Offering Commencement Date for an Offering shall be deemed to be granted an option to participate in the Plan for that Offering in accordance with the terms hereof.
2.06. Offering
Offering shall mean the offering of the Companys Stock. Only Eligible Employees of participating Subsidiaries shall participate in Offerings.
2.07. Offering End Date
Offering End Date shall mean, with respect to each Offering, the last day of the sixth month of such Offering. The Committee may establish a different length for individual offerings, provided that the Offering End Date for any Offering may not be more than five years after the Offering Commencement Date, or twenty-seven months if the purchase price with respect to such Offering is based on the lower of the closing price of the Stock on the Offering Commencement Date or the Purchase Date pursuant to Section 4.02(ii).
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2.08. Participant
Participant shall mean an Eligible Employee who has elected to participate in an Offering by entering a Subscription during the Enrollment Period for such Offering.
2.09. Plan
Plan shall mean the Byline Bancorp Inc. Employee Stock Purchase Plan, as amended from time to time.
2.10. Purchase Date
Purchase Date shall mean with respect to any Offering, the Offering End Date; provided, that with respect to any Offering the Committee may provide for more frequent Purchase Dates prior to the Offering End Date, and provided further, that if any such day is not a business day on which trading occurs, the Purchase Date shall be the nearest prior business date on which shares of Stock are traded.
2.11. Subscription
Subscription shall mean an Eligible Employees authorization for payroll deductions made in the form and manner specified by the Committee (which may include enrollment by submitting forms, by voice response, internet access or other electronic means). Unless withdrawn earlier in accordance with Section 6.02 or otherwise in accordance with the Plan, each Subscription shall be in effect for the duration of an Offering.
2.12. Subsidiary
Subsidiary shall mean any present or future corporation that would be a subsidiary corporation of the Company as that term is defined in Section 424 of the Code. A participating Subsidiary means any corporation that is a Subsidiary on the Effective Date. The Committee shall have the authority to determine whether corporations that become Subsidiaries after the Effective Date shall participate.
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ARTICLE III-ELIGIBILITY AND PARTICIPATION
3.01. Initial Eligibility
Any individual who is an Eligible Employee shall be eligible to participate in the Offering if he is employed on the Offering Commencement Date. The Committee may establish rules requiring an Eligible Employee to have completed a minimum period of service (not to exceed two years) to participate in an Offering, or permitting a person who becomes an Eligible Employee (or who completes the applicable period of service) during an Offering to participate in the Offering.
3.02. Leave of Absence
For purposes of participation in the Plan, and except as otherwise determined by the Committee, a Participant on a leave of absence shall be deemed to be an employee for a period of up to 90 days or, if longer, during the period the Participants right to reemployment is guaranteed by statute or contract. If the leave of absence is paid, deductions or contributions authorized under any Subscription in effect at the time the leave began will continue. If the leave of absence is unpaid, no deductions or contributions will be permitted during the leave. If such a Participant returns to active status within 90 days or the guaranteed reemployment period, as applicable, payroll deductions or contributions under the Subscription in effect at the time the leave began will automatically begin again upon the Participants return to active status. If the Participant does not return to active status within 90 days or the guaranteed reemployment period, as applicable, the Participant shall be treated as having terminated employment for all purposes of the Plan. If such individual later returns to active employment as an Eligible Employee, such individual will be treated as a new employee and will be eligible to participate in Offerings commencing after his or her reemployment date by filing a Subscription during the applicable Enrollment Period for such Offering.
3.03. Restrictions on Participation
Notwithstanding any provisions of the Plan to the contrary, no Eligible Employee shall be granted an option to participate in any Offering under the Plan:
(a) | if, immediately after the grant, such Eligible Employee would own stock, and/or hold outstanding options to purchase stock, possessing 5% or more of the total combined voting power or value of all classes of stock of the Company (for purposes of this paragraph, the rules of Section 424(d) of the Code shall apply in determining stock ownership of any Eligible Employee); |
(b) | which permits the Eligible Employees right to purchase stock under all employee stock purchase plans of the Company to accrue at a rate which exceeds $25,000 in fair market value of the stock (determined at the time such option is granted) for each calendar year in which such option is outstanding; or |
(c) | unless the Committee provides that the purchase price with respect to such Offering is based on the lower of the closing price of the Stock on the Offering Commencement Date or the Purchase Date pursuant to Section 4.02(ii), which permits a Participant to purchase more than a number of shares of Stock determined by the Committee at the commencement of the Offering. |
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3.04. Commencement of Participation
An Eligible Employee may become a Participant in any Offering by entering a Subscription during the Enrollment Period for such Offering. Payroll deductions for such Offering shall commence on the applicable Offering Commencement Date and shall end on the applicable Offering End Date unless withdrawn by the Participant or sooner terminated in accordance with Article VII. Only one Subscription may be in effect with respect to any Participant at any one time.
3.05. Participation After Rehire
An Eligible Employees Subscription will automatically terminate on his or her termination of employment with the Company and all Subsidiaries. If the Eligible Employee terminates employment with a Subscription in effect with respect to an Offering and is rehired prior to the Offering End Date for that Offering, the Subscription will not be reinstated and the Eligible Employee will not be allowed to again make payroll deductions under such Offering. The Eligible Employee may elect to participate in Offerings commencing after his or her reemployment date by entering a Subscription during the applicable Enrollment Period for such Offering.
3.06. Transfers
If an Eligible Employee transfers from a participating to a non-participating Subsidiary, the Eligible Employees Subscription to any current Offering shall terminate, and such Eligible Employee shall be treated as having withdrawn his subscription. A Participant whose participation in an Offering ends due to this Section 3.06 will be treated as having incurred a Termination of Employment to allow for the application of Section 7.02.
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ARTICLE IV-OFFERINGS
4.01. Offerings
The Plan will be implemented by Offerings beginning on the first January 1 or July 1 that occurs after the Effective Date and, unless determined otherwise by the Committee, on each January 1 or July 1 that occurs thereafter. Without limiting the generality of the foregoing, the Committee may establish an Offering prior to the first January 1 or July 1 that occurs after the Effective Date, which may have a period of less than six months.
Participants may subscribe to any Offering for which they are eligible by entering a Subscription during the Enrollment Period for such Offering in such manner as the Committee may prescribe (which may include enrollment by submitting forms, by voice response, internet access or other electronic means).
A Subscription that is in effect on an Offering End Date will automatically be deemed to be a Subscription for the Offering that commences immediately following such Offering End Date, provided that the Participant is still an Eligible Employee and has not withdrawn the Subscription, unless otherwise determined by the Committee. If a Participant purchases shares that cause the Participant to reach the limitation set forth in Section 3.03(b) or Section 3.03(c), the Participants Subscription will automatically be suspended for the duration of the calendar year and will resume at the beginning of the next calendar year, provided that the Participant is still an Eligible Employee and has not withdrawn the Subscription, unless otherwise determined by the Committee. Under the foregoing automatic enrollment provisions, payroll deductions or contributions will continue at the level in effect immediately prior to the new Offering Commencement Date, unless changed in advance by the Participant in accordance with Section 5.03.
4.02. Purchase Price
The purchase price per share of Stock under each Offering shall be 85% of the closing price of the Stock on the Purchase Date. Notwithstanding the foregoing, the Committee may determine with respect to any Offering either that (i) the purchase price shall be a different percentage, which shall not be less than 85%, of the closing price of the Stock on the Purchase Date, or (ii) the purchase price shall be a percentage (which shall not be less than 85%) of the lower of the closing price of the Stock on the Offering Commencement Date or the Purchase Date. If the Stock is not traded on the principal securities exchange on which the Stock is admitted to trade on any of the aforesaid dates for which closing prices of the stock are to be determined, then reference shall be made to the next preceding date on which the Stock was so traded. Such determination shall be made and communicated to Eligible Employees during the Enrollment Period for such Offering.
Such purchase price may only be paid with accumulated payroll deductions in accordance with Article V.
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ARTICLE V-PAYROLL DEDUCTIONS/CONTRIBUTIONS
5.01. Amount of Deduction/Contribution
An Eligible Employees Subscription shall authorize payroll deductions at a rate, in whole percentages, of no less than 1% and no more than 15% of Base Pay or such other percentage as the Committee may authorize on each payday that the Subscription is in effect.
5.02. Participants Account
All payroll deductions made with respect to a Participant shall be credited to his or her account under the Plan. A Participant may not make any separate cash payment into such accounts. No interest will accrue or be paid on any amount withheld from a Participants pay under the Plan or credited to the Participants account. Except as otherwise provided in this Section 5.02, Section 6.01 or Section 8.01, or as provided upon termination of the Plan, all amounts in a Participants account will be used to purchase Stock and no cash refunds shall be made from such account. Any amounts remaining in a Participants account with respect to an Offering due to the limitations of Section 3.03 shall be returned to the Participant without interest and will not be used to purchase shares with respect to any other Offering under the Plan.
5.03. Changes in Payroll Deductions/Contributions
During an Offering, a Participant may change his or her level of payroll deduction or contribution with respect to such Offering within the limits described in Section 5.01 in accordance with procedures established by the Committee (including, without limitation, rules relating to the frequency of such changes or prohibiting changes under certain circumstances); provided, however, if the Participant reduces his or her payroll deductions or contributions to zero, it shall be deemed to be a withdrawal of the Subscription and the Participant may not thereafter participate in such Offering but must wait until the next Offering to resubscribe to the Plan. Any increases or decreases in the level of payroll deductions or contributions shall be effective as soon as administratively practicable thereafter.
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ARTICLE VI-EXERCISE OF OPTION
6.01. Automatic Exercise
A Participants option for the purchase of Stock with respect to any Offering will be automatically exercised on each Purchase Date for the Offering. The option will be exercised by using the accumulated payroll deductions or contributions in the Participants account as of each such Purchase Date to purchase the number of full and (to the extent permitted by the Committee) partial shares of Stock that may be purchased at the purchase price on such date, determined in accordance with Section 4.02 (but not in excess of the limitation set forth in Sections 3.03(b) or 3.03(c)). Any accumulated payroll deductions or contributions remaining in the Participants account following the purchase that could not be used to purchase shares of Stock in accordance with the foregoing provisions shall be refunded to the Participant as soon as practicable, or retained in the Participants account and used for the purchase of Stock in the next Offering, as determined by the Committee.
6.02. Withdrawal From Offering
A Participant may withdraw his or her Subscription at any time (but not retroactively) during an Offering. If the Participant withdraws his or her Subscription with respect to any Offering, the accumulated payroll deductions or contributions in the Participants account at the time the Subscription is withdrawn will be used to purchase shares of Stock at the next Purchase Date for the Offering to which the Subscription related, in accordance with Section 6.01, or refunded to the Participant, as determined by the Committee.
6.03. Delivery of Stock
Stock purchased under the Plan will be held in an account in the Participants name in uncertificated form until such shares are transferred to the Participant in accordance with Section 7.02 or other procedures established by the Committee. The Committee may change such accounts and the manner in which such shares are registered and held from time to time, and may establish reasonable fees for the registration and custody of shares and sell shares in a Participants account to pay such fees.
6.04. Mandatory Retention or Sale of Stock
To facilitate compliance with applicable law, the Committee may require Participants to: (a) retain any Stock purchased under the Plan during an Offering with a designated broker or agent for a designated period of time (and may restrict dispositions during that period) and/or may establish other procedures to restrict transfer of such Stock or (b) sell shares of Stock immediately upon purchase or within a specified period following a Participants termination of employment.
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ARTICLE VII-WITHDRAWAL
7.01. Effect on Subsequent Participation
A Participants election to withdraw from any Offering will not have any effect upon the Participants eligibility to participate in any succeeding Offering or in any similar plan which may hereafter be adopted by the Company.
7.02. Termination of Employment
Upon termination of the Participants employment with the Company for any reason, any Subscription then in effect will be deemed to have been withdrawn and any payroll deductions or contributions credited to the Participants account will be used to purchase Stock on the next Purchase Date for the Offering with respect to which such deductions relate in accordance with Section 6.01, or refunded to the Participant, as determined by the Committee. After termination of employment, any shares of Stock purchased under the Plan that have not otherwise been certificated, sold or transferred will continue to be held in the Participants Plan account. The Company, in its sole discretion, shall determine whether a Participant has terminated employment for purposes of the Plan, and such determinations shall be final and binding on all parties.
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ARTICLE VIII-STOCK
8.01. Maximum Shares
The maximum number of shares of Stock which may be issued under the Plan, subject to adjustment upon changes in the Companys capitalization as provided in Section 10.03, shall be 200,000 shares. If the total number of shares for which options are exercised on any Purchase Date in accordance with Article IV exceeds the maximum number of shares for the applicable Offering, the Committee shall make a pro rata allocation of the shares available for delivery and distribution in as nearly a uniform manner as shall be practicable and as it shall determine to be equitable, and the balance of payroll deductions or contributions credited to the account of each Participant under the Plan shall be returned to him or her as promptly as possible. Shares of Stock to be purchased under the Plan may constitute newly issued shares, treasury shares, or shares purchased by the Company on the open market or from any other source.
8.02. Participants Interest in Option Stock
The Participant will have no interest in Stock covered by an option under the Plan until such option has been exercised.
8.03. Registration of Stock
Stock to be delivered to a Participant under the Plan will be registered in the name of the Participant or, if the Participant so directs in accordance with procedures established by the Committee, in the names of the Participant and one such other person as may be designated by the Participant, as joint tenants with rights of survivorship, to the extent permitted by applicable law.
8.04. Dividends
Dividends on Stock purchased under the Plan that is held in a Participants account shall be credited to the Participants account and reinvested in Stock, except to the extent otherwise provided by the Committee. Unless the Participant has requested otherwise, dividend reinvestment will occur regardless of whether the Participant is currently participating in an Offering. At the Participants request, dividends will be paid directly to the Participant in cash.
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ARTICLE IX-ADMINISTRATION
9.01. Appointment of Committee
The Board of Directors of the Company (the Board) shall appoint a Committee to administer the Plan. No member of the Committee who is not an Eligible Employee shall be eligible to purchase Stock under the Plan. Unless otherwise determined by the Board, the Companys Compensation Committee shall serve as the Committee.
9.02. Authority of Committee
Subject to the express provisions of the Plan, the Committee shall have plenary authority in its discretion to interpret and construe any and all provisions of the Plan, to adopt rules and regulations for administering the Plan , and to make all other determinations deemed necessary or advisable for administering the Plan. Such rules and regulations may alter any provision of the Plan that is ministerial or administrative in nature without a formal amendment. The Committee shall also have the authority to determine whether the employees of Subsidiaries of the Company organized or acquired after the Effective Date shall be eligible for participation in the Plan. To the extent permitted under applicable law, the Committee may delegate its power, authority and responsibilities under the Plan to one or more officers of the Company at any time, in its sole discretion. In this regard and to the extent permitted under applicable law, the Committee hereby delegates its power, authority and responsibilities under the Plan to the Companys senior officer responsible for human resources. Decisions of the Committee and, where applicable, its delegate, shall be final and binding upon all Participants. Neither the Committee nor any delegate of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder.
9.03. Rules Governing the Administration of the Committee
The Board may from time to time appoint members of the Committee in substitution for or in addition to members previously appointed and may fill vacancies, however caused, in the Committee. The Committee may select one of its members as its Chairman and shall hold its meetings at such times and places as it shall deem advisable and may hold telephonic meetings. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by a majority of its members. The Committee may correct any defect or omission or reconcile any inconsistency in the Plan, in the manner and to the extent it shall deem desirable. Any decision or determination reduced to writing and signed by a majority of the members of the Committee shall be as fully effective as if it had been made by a majority vote at a meeting duly called and held. The Committee may appoint a secretary and shall make such rules and regulations for the conduct of its business as it shall deem advisable.
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ARTICLE X-MISCELLANEOUS
10.01. Transferability
Neither payroll deductions credited to a Participants account nor any rights with regard to the exercise of an option or to receive Stock under the Plan may be assigned, transferred, pledged, or otherwise disposed of in any way by the Participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge or other disposition shall be without effect. During a Participant s lifetime, options held by such Participant shall be exercisable only by that Participant.
10.02. Use of Funds
All payroll deductions received or held by the Company under this Plan may be used by the Company for any corporate purpose and the Company shall not be obligated to segregate such payroll deductions.
10.03. Adjustment Upon Changes in Capitalization
In the event of a stock split, stock dividend, reverse stock split, extraordinary cash dividend, recapitalization, reorganization, reclassification or combination of shares, merger, consolidation, distribution, split-up, spin-off, exchange of shares, sale of assets or similar corporate transaction or event, the Committee, in the manner it deems equitable, shall adjust (a) the number and class of shares or other securities that are reserved for issuance under the Plan, (b) the number and class of shares or other securities that are subject to outstanding options, and (c) the appropriate market value and other price determinations applicable to options (including the purchase price). The Committee shall make all determinations under this Section 10.03, and all such determinations shall be conclusive and binding.
10.04. Mergers, Liquidations, and Other Company Transactions
(a) | Liquidation or Dissolution . In the event of the proposed liquidation or dissolution of the Company, the Offering then in progress shall terminate immediately prior to the consummation of such proposed liquidation or dissolution, unless otherwise provided by the Committee in its sole discretion, and all outstanding options to purchase Stock shall automatically terminate and the amounts of all payroll deductions and contributions will be refunded without interest to the Participants as soon as reasonably practicable. |
(b) | Sale or Merger . In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger or consolidation of the Company with or into another entity, then in the sole discretion of the Committee: (a) each option shall be assumed, or an equivalent option shall be substituted, by the successor corporation or parent or subsidiary of such successor corporation; or (b) a new Purchase Date shall be established by the Committee on or before the date of consummation of such merger, consolidation or sale, and all outstanding options to purchase Stock shall be automatically exercised on such new date. |
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10.05. Amendment and Termination
The Committee shall have complete power and authority to terminate or amend the Plan; provided, however, that any amendment that would (i) increase the maximum number of shares which may be issued under any Offering (except pursuant to Section 10.03); or (ii) amend the requirements as to the class of employees eligible to participate in the Plan shall require action by the Board and approval of the shareholders.
Unless otherwise determined by the Committee, the termination date of the Plan shall be deemed to be a Purchase Date, and all options then outstanding under the Plan shall be exercised.
10.06. Compliance with Legal and Exchange Requirements
The Company shall not be under any obligation to issue Stock upon the exercise of any option unless and until the Company has determined that: (a) it has taken all actions required to register the shares of Stock under the U.S. Securities Act of 1933, or to perfect an exemption from the registration requirements thereof; (b) any applicable listing requirement of any stock exchange on which the Stock is listed has been satisfied; and (c) all other applicable provisions of U.S. federal, state and local laws have been satisfied.
10.07. Withholding of Taxes
In the event that the Company is required to withhold any applicable taxes in respect of any compensation or other income realized by a Participant under the Plan, the Company may deduct from any benefits of any kind otherwise due to such Participant, including without limitation the proceeds of any sale of shares of Stock for the account of the Participant, the aggregate amount of such applicable taxes required to be withheld or, if such payments are insufficient to satisfy such applicable taxes, the Participant will be required to pay to the Company, or make other arrangement satisfactory to the Company regarding payment to the Company of, the aggregate amount of any such taxes.
10.08. Effective Date
This Plan shall be effective as of the later if the date on which the Companys initial public offering becomes effective, or the date on which it is approved by the shareholders of the Company. If the Effective Date does not occur within twelve months after the date on which the Plan is adopted, the Plan shall be null and void.
10.09. No Employment Rights
The Plan does not, directly or indirectly, create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company, and it shall not be deemed to interfere in any way with the Companys right to terminate, or otherwise modify, an employees employment at any time. Any rights or benefits provided under this Plan shall not be considered part of normal or expected compensation for purposes of calculating any severance, resignation, redundancy, end of service payments, bonuses, long service awards, pension, retirement or similar payments, except to the extent explicitly provided in the plan or policy document governing such benefits.
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10.10. Effect of Plan
The provisions of the Plan shall, in accordance with its terms, be binding upon, and inure to the benefit of, all successors of each employee participating in the Plan, including, without limitation, such employees estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such employee.
10.11. Governing Law
The law of the State of Illinois will govern all matters relating to this Plan except to the extent it is superseded by the laws of the United States.
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IN WITNESS WHEREOF, the Company has caused this instrument to be executed on the 14th day of June, 2017.
BYLINE BANCORP, INC. |
By: |
|
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Exhibit 21.1
Subsidiaries of Byline Bancorp, Inc.
(as of March 31, 2017)
Subsidiary |
Jurisdiction of Incorporation/Organization/Charter |
|
Metropolitan Statutory Trust 1 | Connecticut | |
RidgeStone Capital Trust I | Delaware | |
Byline Bank | Illinois | |
Subsidiaries of Byline Bank: |
||
Lily Pond LLC (Series LLC) |
Illinois | |
Lily Pond R Series, LLC |
Illinois | |
Lily Pond V Series, LLC |
Illinois | |
Lily Pond C Series, LLC |
Illinois | |
Lily Pond T Series, LLC |
Illinois | |
BFG CORPORATION d/b/a Byline Financial Group |
Illinois |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the use in this Registration Statement on Form S-1 of Byline Bancorp, Inc. of our report dated April 7, 2017, except for the effects of the re-incorporation and share exchange discussed in Note 26 Subsequent Events to the consolidated financial statements, as to which the date is June 19, 2017, relating to the consolidated financial statements of Byline Bancorp, Inc. and Subsidiaries, and to the reference to our firm under the heading Experts in the Prospectus, which is part of this Registration Statement.
/s/ Moss Adams LLP
Portland, Oregon
June 19, 2017
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITOR
We consent to the use in this Registration Statement of Byline Bancorp, Inc., on Amendment No. 1 to Form S-1 of our report dated March 27, 2017 on the consolidated financial statements of Ridgestone Financial Services, Inc. as of and for the period ended October 14, 2016 and as of and for the year ended December 31, 2015, and to the reference to us under the heading Experts in the prospectus.
Crowe Horwath LLP
Oak Brook, Illinois
June 19, 2017