BYLINE BANCORP, INC. (BY) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion and analysis of our financial condition and results of operations and should be read in conjunction with our financial statements and notes thereto included in Item 8 of this report. In addition to historical information, this discussion contains forward‑looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections entitled "Special Note Regarding Forward‑Looking Statements" and "Risk Factors". Byline assumes no obligation to update any of these forward‑looking statements.

Management’s discussion focuses on 2024 results compared to 2023. For a discussion of 2023 results compared to 2022, refer to Part I, Item 7 of our 2023 Annual Report filed on Form 10-K, which was filed with the SEC on March 4, 2024.

Executive Summary

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

We reported consolidated net income of $120.8 million for the year ended December 31, 2024, compared to net income of $107.9 million for the year ended December 31, 2023, an increase of $12.9 million, or 11.9%. The increase in net income was attributable to a $17.4 million increase in net interest income, a $4.6 million decrease in provision for credit losses, and a $2.5 million increase in non-interest income, offset by a $9.2 million increase in non-interest expense, and a $2.5 million increase in provision for income taxes. The increase in net interest income was primarily due to increases in interest and dividend income due to growth in the loan and lease portfolio, offset by increases in deposit interest expense due to growth in the deposit base. The decrease in provision for credit losses was mainly attributable to lower non-performing loans and leases, as well as the absence in 2024 of a day one provision expense such as was recognized in 2023 as a result of the Inland Bancorp acquisition in accordance with applicable acquisition accounting guidance. The increase in non-interest income was primarily due to increased swap fee activity and increases in net gains on sales of loans due to higher premiums received, offset by lower net loan servicing income. The increase in non-interest expense was mainly due to increased salaries and employee benefit expenses, due to higher salaries and incentives, partially offset by lower data processing expenses due to merger-related data processing expenses incurred during 2023. The increase in provision for income taxes was mostly driven by an increase in net income before provision for income taxes during the year.

Dividends declared on common shares were $15.9 million and $14.6 million for the years ended December 31, 2024 and 2023, respectively. Dividends paid on common shares were $15.8 million and $14.6 million for the years ended December 31, 2024 and 2023, respectively. For the years ended December 31, 2024 and 2023, net income available to common stockholders was $120.8 million, or $2.78 per basic and $2.75 per diluted common share, and $107.9 million, or $2.69 per basic and $2.67 per diluted common share, respectively. Our results of operations for the years ended December 31, 2024 and 2023, produced an annual return on average assets of 1.31% and 1.34% and a return on average stockholders’ equity of 11.61% and 12.50%, respectively.

Since our recapitalization in June 2013, our branch network has been reduced from 88 to 46, including 23 branches added through acquisition. During 2024, we consolidated two branches, and during 2023 we added 10 branches as a result of our acquisition of Inland and closed two of those branches.

Critical accounting policies and estimates

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

These critical accounting policies and estimates include (i) determination of the allowance for credit losses, (ii) the valuation of intangible assets such as goodwill, and assessment of impairment, (iii) fair value estimates, and (iv) the determination and assessment of impairment for other intangible assets.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of our audited consolidated financial statements contained in Item 8 of this report.

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Allowance for credit losses

The allowance for credit losses ("ACL") represents management’s estimate of current expected credit losses over the life of a financial asset carried at amortized cost at an appropriate level based upon management’s evaluation of the adequacy of collectively and individually evaluated loss reserves.

The ACL is maintained at a level that management believes is appropriate to provide for current expected credit losses as of the dates of the Consolidated Statements of Financial Condition, and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. We increase our ACL by recording provisions for current expected credit losses against our income and decrease by charge‑offs, net of recoveries.

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

For each portfolio, management estimates expected credit losses over the life of each loan and lease utilizing lifetime or cumulative loss rate methodology. The lifetime loss rates are estimated by analyzing a combination of internal and external data related to historical performance of each loan and lease pool over a complete economic cycle. Loss rates are based on historical averages for each loan and lease pool, adjusted to reflect the impact of a forward-looking forecast of certain macroeconomic variables, primarily unemployment rates, which management considers to be both reasonable and supportable. Various economic scenarios are considered and weighted to arrive at the forecast that most reflects management’s expectation of future conditions. After a one-year forecast period, a one-year reversion period adjusts loss experience to the historical average on a straight-line basis.

Management also considers qualitative risk factor adjustments that are intended to capture internal and external trends not reflected in historical loss history. Each risk factor is assigned an allowance level based on management’s judgment as to the expected impact of each risk factor on each loan and lease portfolio and is monitored quarterly. All loans and leases of $500,000 or greater with an internal risk rating of substandard or below, or on nonaccrual status, are individually evaluated for impairment on a quarterly basis.

The Company also maintains an allowance for credit losses on off-balance sheet credit exposures for unfunded loan commitments. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life based on management’s consideration of past events, current conditions, and reasonable and supportable economic forecasts. Management tracks the level and trends in unused commitments and takes into consideration the same factors as those considered for purposes of the allowance for credit losses on outstanding loans.

Goodwill

For acquisitions, we are required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value. These determinations often involve estimates based on third party valuations, such as appraisals or other valuations based on discounted cash flow analyses or other valuation techniques that may consider estimates such as attrition, growth rates, or other relevant assumptions. Goodwill is not amortized but is evaluated for impairment on an annual basis or more frequently should events warrant. We have selected November 30 as the date to perform the annual goodwill impairment test.

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 first apply a qualitative approach in which we consider if any recent events or circumstances indicate it is more likely than not that the fair value of the reporting unit is less than its carrying amount. These events and circumstances include our performance, the condition of the related industry in which Byline Bank operates and general economic environment. If we determine it is more likely than not that impairment exists, we will consider the quantitative approach. Using a quantitative approach, we compare the reporting unit’s fair value to its carrying value. If the carrying value of the reporting unit is determined to be higher than its fair value, we would measure and recognize an impairment loss. An impairment loss would not exceed the total amount of goodwill allocated to the reporting unit.

Other intangible assets

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

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Fair value of financial instruments

A portion of the Company’s assets and liabilities are carried at fair value on the Consolidated Statements of Financial Condition, with changes in fair value recorded either through earnings or other comprehensive income in accordance with applicable accounting principles. These include the Company’s available-for-sale debt securities, equity securities, derivatives, and servicing assets.

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

The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. Assets acquired, liabilities assumed, and consideration exchanged are recorded at their respective acquisition date fair values. 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 and the use of models are necessary to estimate fair value. Significant assumptions used in models, which include assumptions for interest rates, discount rates, prepayments, and credit losses, are independently verified against observable market data when possible. When changes in market conditions reduce the availability of quoted prices or observable data, the estimate of fair value becomes more subjective and requires a higher degree of management judgment.

Refer to Note 17 of the notes to our audited consolidated financial statements contained in Item 8 of this report for a complete discussion of our use of fair value and the related measurement practices.

Selected Financial Data.

The following table summarizes certain selected historical consolidated financial data of Byline as of or for the fiscal years ended December 31, 2024, 2023, and 2022, and is derived from our audited financial statements. You should read this information in conjunction with our consolidated financial statements and related notes included in Item 8 of this report. Management uses the non-GAAP financial measures set forth herein in its analysis of our performance and believes that these non-GAAP financial measures provide useful information to management and investors; however, you should not view these disclosures as a substitute for results determined in accordance with GAAP financial measures.

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(1)
Represents a non-GAAP financial measure. See "GAAP Reconciliation and Management Explanation of non-GAAP Financial Measures" for a reconciliation of non-GAAP measures to the most directly comparable GAAP financial measure.

(2)
Calculation excludes impairment charges on assets held for sale and ROU assets and merger-related expenses.

(3)
Calculations exclude incremental income tax benefit related to impairment charges and merger-related expenses

(4)
Represents loans and leases, net of acquisition accounting adjustments, unearned deferred fees and costs and initial indirect costs.

(5)
Represents non-interest expense less amortization of intangible assets divided by net interest income and non-interest income.

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GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

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"Adjusted net income" and "adjusted diluted earnings per share" exclude certain significant items, which include impairment charges on assets held for sale and right-of use asset ("ROU") and merger-related expenses adjusted for applicable income tax. Management believes the significant items are not indicative of or useful to measure our operating performance on an ongoing basis.

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"Net interest income, fully taxable-equivalent" and "net interest margin, fully taxable-equivalent" are adjusted to reflect tax-exempt interest income on an equivalent before-tax basis using tax rates effective as of the end of the period. Management believes the metric provides useful comparable information to investors and that these measures may be useful for peer comparison.

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"Total revenue" is the combination of net interest income and non-interest income. Management believes the metric is an important measure of the Company's operating performance on an ongoing basis.

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"Adjusted non-interest expense" is non-interest expense excluding certain significant items, which include impairment charges on assets held for sale and ROU asset and merger-related expenses.

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

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"Adjusted non-interest expense to average assets" is adjusted non-interest expense divided by average assets. Management believes the metric is an important measure of our operating performance on an ongoing basis.

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

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"Adjusted return on average assets" is adjusted net income divided by average assets. Management believes the metric is an important measure of our operating performance on an ongoing basis.

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

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"Pre‑tax pre‑provision net income" is pre‑tax income plus the provision for credit losses. Management believes this metric demonstrates income excluding the tax provision or benefit and the provision for credit losses and enables investors and others to assess our ability to generate capital to cover credit losses through a credit cycle.

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"Adjusted pre-tax pre-provision net income" is pre-tax pre-provision net income excluding certain significant items, which include impairment charges on assets held for sale and ROU asset and merger-related expenses. Management believes the metric is an important measure of our operating performance on an ongoing basis.

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"Pre‑tax pre‑provision return on average assets" is pre-tax income plus the provision for credit losses, divided by average assets. Management believes this ratio demonstrates profitability excluding the tax provision or benefit and excludes the provision for credit losses.

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"Adjusted pre-tax pre-provision return on average assets" excludes certain significant items, which include impairment charges on assets held for sale and ROU asset, and merger-related expenses.

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

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

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

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"Tangible common stockholders' equity to tangible assets" is calculated as tangible common equity divided by tangible assets, which is total assets reduced by goodwill and other intangible assets. Management believes this metric is important

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to investors and analysts interested in relative changes in the ratio of total stockholders’ equity to total assets, each exclusive of changes in intangible assets.

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

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"Adjusted tangible net income available to common stockholders" is tangible net income available to common stockholders excluding certain significant items. Management believes the metric is an important measure of our operating performance on an ongoing basis.

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

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

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

The following reconciliation tables provide a more detailed analysis of the non‑GAAP financial measures discussed herein:

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Results of Operations

Net interest income

Net interest income, representing interest income less interest expense, is a significant contributor to our revenues and earnings. We generate interest income from interest and dividends on interest-earning assets, which include loans, leases and investment securities we own. We incur interest expense from interest paid on interest-bearing liabilities, which include interest-bearing deposits, subordinated notes, 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 net interest income divided by average interest-earning assets. Because non-interest-bearing sources of funds, such as non-interest-bearing deposits and stockholders’ equity, also fund interest-earning assets, net interest margin includes the benefit of these non-interest-bearing sources.

We also recognize income from the accretable discounts associated with the purchase of interest-earning assets. Because of our recapitalization and acquisitions, we derive a portion of our interest income from the accretable discounts on purchased credit deteriorated and acquired non-credit-deteriorated loans. The accretion is generally recognized over the life of the loan. As of December 31, 2024, purchased credit deteriorated loans accounted for under ASC Topic 326 represented 1.8% of our total loan portfolio, compared to 3.4% at December 31, 2023.

Changes in the market interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and non-interest-bearing liabilities, are 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 purchased credit deteriorated and acquired non-credit-deteriorated loans, which will also affect our net interest spread, net interest margin and net interest income.

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

(1)
Loan and lease balances are net of deferred origination fees and costs and initial direct costs. Fees included in loan and lease interest income were $8.1 million, $9.8 million, and $12.1 million for the years ended December 31, 2024, 2023, and 2022, respectively. Non-accrual loans and leases are included in total loan and lease balances. Interest income on non-accruing loans is reflected in the period that it is collected, to the extent it is not applied to principal. Non-accrual loans are included in the average balances.

(2)
Interest income and rates include the effects of a tax equivalent adjustment to adjust tax-exempt investment income on tax-exempt investment securities to a fully taxable basis, assuming a federal income tax rate of 21%.

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

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

(5)
Average balances are average daily balances.

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Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following 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 are a summary of the increases and decreases in interest income and interest expense resulting from changes in average balances (volume) and changes in average interest rates (dollars in thousands):

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

(2) Interest income and rates include the effects of a tax equivalent adjustment to adjust tax-exempt investment income on tax-exempt investment securities to a fully taxable basis, assuming a federal income tax rate of 21%.

Net interest income for the year ended December 31, 2024 was $348.0 million, an increase of $17.4 million, or 5.3% compared to 2023. The increase in interest income of $86.5 million was principally a result of increased average balances due to portfolio growth and higher yields. The average balance of interest-earning assets was $8.8 billion for the year ended December 31, 2024, an increase of $1.1 billion, or 14.3%, compared to 2023, primarily due to growth in our loan and lease portfolios. Interest expense increased by $69.0 million for the year ended December 31, 2024 compared to 2023, mostly due to higher average deposit balances, a shift in deposit mix, and higher average rates paid on time deposits and money market accounts. Average total interest-bearing deposits increased $1.1 billion, or 25.7% year over year.

Interest expense on borrowings for the year ended December 31, 2024 was $25.5 million compared to $27.4 million for the year ended December 31, 2023, a decrease of $1.9 million, or 6.9%. This decrease was driven mainly by a decrease in rates paid on other borrowings and lower average balances of such borrowings.

The net interest margin for the year ended December 31, 2024 was 3.97%, a decrease of 34 basis points compared to 4.31% for the year ended December 31, 2023. The average yield on interest-earning assets increased 20 basis points to 6.46% for the year ended December 31, 2024 compared to 6.26% for the year ended December 31, 2023, while the average rate paid on interest-bearing liabilities increased by 59 basis points to 3.54% from 2.95%, resulting in a decrease in the interest rate spread of 39 basis points.

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Net loan accretion income was $13.5 million for the year ended December 31, 2024 compared to $16.7 million for the year ended December 31, 2023, a decrease of $3.2 million. Total net loan accretion on acquired loans contributed 15 basis points to the net interest margin for the year ended December 31, 2024 compared to 22 basis points for the year ended December 31, 2023. Assuming no additional acquisitions, we expect loan accretion income to decline as acquired loans mature. Projected accretion income as of December 31, 2024 is summarized as follows:

Provision for credit losses

The provision for credit losses reflects the amount required to maintain the ACL at an appropriate level based upon management’s evaluation of collectively and individually evaluated loss reserves. The provision for credit losses represents a charge to earnings necessary to establish an allowance for credit losses that, in management’s evaluation, is appropriate to provide coverage for current expected credit losses in the loan and lease portfolio. The ACL is increased by the provision for credit losses and is decreased by charge-offs, net of recoveries on prior charge-offs.

Provision for credit losses for the year ended December 31, 2024 was $27.0 million compared to $31.7 million for the year ended December 31, 2023, a decrease of $4.6 million. The decrease in provision was driven by lower non-performing and substandard loans, particularly those originated in the commercial real estate loan portfolio, and improvement of purchased credit deteriorated and other acquired loans due to their continued resolution. For the year ended December 31, 2024, the provision for credit losses is comprised of a provision for loan and lease losses of $28.3 million and a recapture of provision for unfunded commitments of $1.2 million. For the year ended December 31, 2023, the provision for credit losses is comprised of a provision for loan and lease losses of $32.2 million and a recapture of provision for unfunded commitments of $567,000. The ACL as a percentage of loans and leases decreased from 1.52% at December 31, 2023 to 1.42% at December 31, 2024.

Non-interest income

Non-interest income was $58.9 million for the year ended December 31, 2024, compared to $56.3 million for the year ended December 31, 2023, an increase of $2.5 million or 4.5%. The increase in non-interest income was primarily due to increases in other non-interest income due to increased swap fee activity and increases in net gains on sales of loans due to higher premiums, offset by lower net loan servicing income.

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

Fees and service charges on deposits represent amounts charged to customers for banking services, such as fees on deposit accounts, and include, but are not limited to, maintenance fees, insufficient fund fees, overdraft protection fees, wire transfer fees, treasury management fees, and other charges. Fees and service charges on deposits were $10.2 million for the year ended December 31, 2024, compared to $9.2 million for the year ended December 31, 2023, an increase of $1.0 million or 10.9%. The increase was a result of growth in deposit balances and from new client acquisitions.

While portions of the loans that we originate are sold and generate gain on sale revenue, servicing rights for the majority of the loans that we sell are retained by us. In exchange for continuing to service loans that have been sold, we receive servicing revenue from

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a portion of the interest cash flow of the loan. We generated $12.9 million and $13.5 million in loan servicing revenue on the sold portion of U.S. government guaranteed loans for the years ended December 31, 2024 and 2023, respectively, a decrease of $598,000 or 4.4%. At December 31, 2024 and 2023, the outstanding balance of U.S. government guaranteed loans serviced was $1.7 billion.

Loan servicing asset revaluation represents net changes in the fair value of our servicing assets. Loan servicing asset revaluation had a downward adjustment of $6.7 million for the year ended December 31, 2024, compared to a downward adjustment of $5.1 million for the year ended December 31, 2023. The variance was primarily driven by the change in fair value of the servicing asset as a result of lower overall balance of loans serviced and higher prepayment speeds.

Net gains on sales of loans were $24.5 million for the year ended December 31, 2024 compared to $22.8 million for the year ended December 31, 2023, an increase of $1.7 million, or 7.6%. The increase in net gains on sales was primarily driven by higher market premiums for U.S. government guaranteed loans. We sold $314.8 million and $348.4 million of U.S. government guaranteed loans during the years ended December 31, 2024 and 2023, respectively.

Wealth management and trust income represents fees charged to customers for investment, trust, and wealth management services and are primarily determined by total assets under administration. Wealth management and trust income was $4.3 million for the year ended December 31, 2024 compared to $4.2 million for the year ended December 31, 2023, an increase of $152,000 or 3.7%, mainly due to increased fees. Assets under administration were $746.5 million and $770.5 million as of December 31, 2024 and 2023, respectively, and include $119.7 million and $165.8 million of money market demand accounts included in interest-bearing deposits on the Consolidated Statements of Financial Condition.

Other non-interest income was $8.7 million for the year ended December 31, 2024 compared to $6.2 million for the year ended December 31, 2023, an increase of $2.5 million or 40.5%. The increase was primarily a result of increased swap fee income, a higher cash surrender value on bank owned life insurance, and increased gains on the sale of leased equipment.

Non-interest expense

We reported non-interest expense for the year ended December 31, 2024 of $218.8 million compared to $209.6 million for the year ended December 31, 2023, an increase of $9.2 million or 4.4%. The increase was primarily due to increased salaries and employee benefits, offset by decreases to data processing expense and impairment charge on assets held for sale.

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

Salaries and employee benefits expense for the year ended December 31, 2024 was $140.1 million compared to $127.0 million for the year ended December 31, 2023, an increase of $13.1 million or 10.3%, primarily a result of a higher salaries mainly due merit increases, higher incentive compensation, and higher equity-based compensation.

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Occupancy expense for the year ended December 31, 2024 was $14.7 million compared to $14.0 million for the year ended December 31, 2023, an increase of $656,000, or 4.7%. The increase was primarily a result of increased depreciation due to acquired branches and increased building maintenance.

Equipment expense for the year ended December 31, 2024 was $4.0 million compared to $4.5 million for the year ended December 31, 2023, a decrease of $461,000 or 10.3%. The decrease was primarily a result of decreases to purchases of technology due to merger-related expenses incurred in 2023, and for repairs and maintenance.

Loan and lease related expenses for the year ended December 31, 2024 were $2.8 million compared to $2.9 million for the year ended December 31, 2023, a decrease of $147,000, or 5.0%. The decrease was due to decreases in expenses related to government guaranteed loans.

Legal, audit and other professional fees for the year ended December 31, 2024 were $13.4 million compared to $12.9 million for the year ended December 31, 2023, an increase of $482,000 or 3.7%. The increase was mainly driven by increased legal fees related to U.S. government guaranteed loans.

Data processing expense for the year ended December 31, 2024 was $16.9 million compared to $19.5 million for the year ended December 31, 2023, a decrease of $2.6 million or 13.5% primarily due to higher expenses in 2023 associated with the Inland acquisition and integration.

Advertising and promotions for the year ended December 31, 2024 were $5.0 million compared to $3.8 million for the year ended December 31, 2023, an increase of $1.2 million, or 31.1%, primarily due to an increase in digital deposit advertising campaigns.

Telecommunications for the year ended December 31, 2024 was $870,000 compared to $1.4 million for the year ended December 31, 2023, a decrease of $577,000 or 39.9%, primarily due to merger-related expenses in 2023 and decreased telecommunication data expenses.

For the years ended December 31, 2024 and 2023, our efficiency ratio was 52.45% and 52.62%, respectively. The improvement in our efficiency ratio was primarily attributable to increased net interest income and non-interest income, offset by an increase in non-interest expense. For the years ended December 31, 2024 and 2023, our adjusted efficiency ratio was 52.24% and 49.61%, respectively. Please refer to the "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" included in Item 7 of this report, for more information on how our adjusted efficiency ratio is calculated.

Income Taxes

Income tax expense was $40.3 million for the year ended December 31, 2024, compared to $37.8 million for the year ended December 31, 2023. The increase in income tax expense was primarily due to increased income before provision for income taxes during 2024.

Our effective tax rate was 25.0% for the year ended December 31, 2024 and 25.9% for the year ended December 31, 2023. The decrease in our effective tax rate was primarily driven by an increase in tax benefit from share-based compensation. We expect our effective tax rate for 2025 to be approximately 25% to 27%.

Financial Condition

Balance sheet analysis

Our total assets increased by $614.6 million, or 6.9%, to $9.5 billion at December 31, 2024, compared to $8.9 billion at December 31, 2023. The increase in total assets includes an increase of $222.5 million, or 3.3%, in loans and leases from $6.7 billion at December 31, 2023 to $6.9 billion at December 31, 2024. Our originated loan and lease portfolio increased by $476.8 million, and our purchased credit deteriorated and acquired non-credit-deteriorated loan and lease portfolio decreased by $254.2 million. The increases in our originated portfolio was mostly attributed to organic loan and lease growth, and the decrease in our acquired portfolio was primarily due to renewals of loans as originated, resolutions of these loans, and charge-offs.

Total liabilities increased by $513.2 million, or 6.5%, to $8.4 billion at December 31, 2024 compared to $7.9 billion at December 31, 2023. The increase is primarily attributed to an increase in total deposits of $281.6 million, or 3.9%, driven by organic growth, as well as a $250.0 million increase in FHLB advances at December 31, 2024.

Investment portfolio

Our investment securities portfolio consists of securities classified as equity and other securities, at fair value, available-for-sale, and held-to-maturity. There were no securities classified as trading in our investment portfolio as of or for the years ended December 31, 2024 and 2023. All available-for sale securities are carried at fair value and may be used for liquidity purposes should

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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 and has an average duration of 4.9 years.

Securities available-for-sale increased $73.2 million, or 5.5%, from $1.3 billion at December 31, 2023 to $1.4 billion at December 31, 2024, primarily due to purchases of residential and commercial mortgage-backed securities, offset by maturities and calls of U.S Treasury Notes and U.S. Government agency bonds.

Our held-to-maturity securities portfolio consists of municipal securities. We carry these securities at amortized cost. Securities held-to-maturity were $605,000 and $1.2 million at December 31, 2024 and 2023, respectively. We evaluated the held to maturity securities in an unrealized loss position for credit losses as of December 31, 2024 and 2023 and determined there were none. In January 2025, we received $605,000 payment in full for the security held-to-maturity outstanding at December 31, 2024.

The fair value of our equity and other securities portfolio was $9.9 million at December 31, 2024, and $8.7 million at December 31, 2023.

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):

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. There were 335 investment securities with unrealized losses at December 31, 2024 totaling $181.7 million. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of their amortized cost basis, which may be at maturity.

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The following table (dollars in thousands) set forth certain information regarding contractual maturities and the weighted average yields of our debt securities as of December 31, 2024. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

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

Total non-taxable securities classified as obligations of states, municipalities and political subdivisions were $53.5 million at December 31, 2024, a decrease of $2.2 million from December 31, 2023.

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 December 31, 2024 and 2023.

Restricted stock

As a member of the Federal Home Loan Bank system, Byline Bank is required to maintain an investment in the capital stock of the FHLB. No market exists for this stock, and it has no quoted market value. The stock is redeemable at par by the FHLB and is, therefore, carried at cost. In addition, Byline Bank owns stock of Bankers’ Bank, which is redeemable at par and carried at cost. As of December 31, 2024 and 2023, we held $27.5 million and $16.3 million, respectively, in FHLB and Bankers’ Bank stock. We evaluate impairment of our investment in FHLB and Bankers’ Bank based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We did not identify any indicators of impairment of FHLB and Bankers’ Bank stock as of December 31, 2024 and 2023.

Loan and lease portfolio

Lending-related income is the most important component of our net interest income and is the main driver of the results of our operations. Total loans and leases at December 31, 2024 and 2023 were $6.9 billion and $6.7 billion, respectively, an increase of $222.5 million or 3.3%. The growth in the originated loan and lease portfolio was primarily driven by increases in commercial and industrial loans and leases, leasing financing receivables, and commercial real estate, as well as renewals of acquired loans that are now reflected with originated loans. Purchased credit deteriorated loans and acquired non-credit-deteriorated loans and leases were $663.0 million at December 31, 2024, a decrease of $254.2 million, compared to $917.3 million at December 31, 2023. The decrease in the purchased credit deteriorated and acquired non-credit-deteriorated loan and lease portfolio was driven by renewals of loans as originated, resolutions of these loans, and charge-offs.

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We strive to maintain a diversified loan and lease portfolio to help reduce the risk inherent in concentration in certain types of collateral. Our exposure to certain industries as of December 31, 2024 represents the following percentages of the portfolio: 36.1% real estate, 12.8% manufacturing, 8.7% finance and insurance, 5.9% wholesale trade, 5.0% other services, and all other industries represent less than 5% of the portfolio or 31.4% of the total loan and lease portfolio. As of December 31, 2024, the loan portfolio included $421.5 million of unguaranteed SBA 7(a) and USDA loans with exposure to the following top three industries: 19.0% retail trade, 13.8% accommodation and food services and 10.0% manufacturing. The following table shows our allocation of originated, purchased credit deteriorated, and acquired non-credit-deteriorated loans and leases as of the dates presented (dollars in thousands):

Loans collateralized by real estate include: commercial real estate, residential real estate, and construction, land development, and other land. In the aggregate, loans collateralized by real estate comprised 51.6% and 53.4% of the total loan and lease portfolio at December 31, 2024 and 2023, respectively.

Commercial Real Estate Loans. Commercial real estate loans, including owner occupied and non-owner occupied, comprised the largest portion of the real estate loan portfolio as of December 31, 2024 and totaled $2.4 billion, or 66.0%, of real estate loans and 34.1% of the total loan and lease portfolio. At December 31, 2023, commercial real estate loans totaled $2.3 billion and comprised 65.0% of real estate loans and 34.7% of the total loan and lease portfolio. Purchased credit deteriorated commercial real estate loans decreased from $137.8 million as of December 31, 2023 to $82.9 million as of December 31, 2024, as a result of the migration of renewed loans to originated, paydowns, resolutions, and charge-offs.

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As part of our risk assessment strategy, we strive to maintain a diversified commercial real estate portfolio, which is reviewed periodically by primary collateral type and geographic location. The following tables present details of our commercial real estate portfolio by collateral type and state (location of the property), as of December 31, 2024:

(1) Represents collateral types that represent less than 1% of the total loan and lease portfolio.

(2) Represents states and territories with less than 1% of the CRE portfolio.

The composition of the CRE loan portfolio remained stable at December 31, 2024 compared to December 31, 2023. Industrial/warehouse, retail/restaurant, and office remain the top three collateral types in the CRE portfolio, and represented 26.8% of total loans and leases held for investment at December 31, 2024 compared to 26.0% at December 31, 2023. We strategically reduced our CRE office portfolio by $19.7 million, or 7.4% during the year ended December 31, 2024. CRE office represents 10.5% of our total CRE portfolio as of December 31, 2024, compared to 11.5% as of December 31, 2023. Geographically, CRE loans in Illinois decreased to 23.1% of total loans and leases held for investment and represented 67.8% of total CRE loans at December 31, 2024, compared to 25.5% of total loans and leases held for investment and 73.5% of total CRE loans at December 31, 2023. CRE loans outside of Illinois comprised 10.9% of total loans and leases held for investment as of December 31, 2024, compared to 9.3% as of December 31, 2023.

Owner occupied CRE loans were $1.4 billion, or 20.0% of our loan and lease portfolio at December 31, 2024, compared to $1.3 billion, or 19.1% of our loan and lease portfolio at December 31, 2023, an increase of $104.3 million, or 8.2%, driven by an $81.3 million increase in retail/restaurant. Non-owner occupied CRE loans were $975.6 million, or 14.1% of our loan and lease portfolio at December 31, 2024, compared to $1.0 billion, or 15.8% of our loan and lease portfolio at December 31, 2023, a decrease of $70.2 million, or 6.7%. The reduction in non-owner occupied CRE included a $52.2 million decrease in office. Non-owner occupied CRE loans were 82.6% and 96.3% of Byline Bank total capital, at December 31, 2024 and 2023, respectively.

At December 31, 2024 and 2023, CRE loan concentration, as defined in the Federal Register to include owner-occupied and non-owner occupied CRE loans, construction land development and other land loans, multifamily property loans, and loans to finance CRE, construction and land development activities (that are not secured by real estate), as a percentage of Byline Bank total capital were

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278.2% and 300.7%, respectively. We have not experienced portfolio concentration shift during the year ended December 31, 2024, nor have we changed our underwriting standards.

Residential real estate loans. Residential real estate loans totaled $726.1 million at December 31, 2024, compared to $719.5 million at December 31, 2023, an increase of $6.6 million or 0.9%. The residential real estate loan portfolio comprised 20.3% and 20.2% of real estate loans as of December 31, 2024 and 2023, respectively, and 10.4% and 10.8% of total loans and leases at December 31, 2024 and 2023, respectively. Purchased credit deteriorated residential real estate loans decreased from $42.5 million as of December 31, 2023 to $30.5 million as of December 31, 2024, or 28.2%. Multifamily real estate loans, included in residential real estate loans, were $429.9 million and $399.3 million, or 36.4% and 36.8% of Byline Bank total capital, at December 31, 2024 and December 31, 2023, respectively.

Construction, land development and other land loans. Construction, land development and other land loans totaled $489.3 million at December 31, 2024 compared to $526.8 million at December 31, 2023, a decrease of $37.6 million or 7.1%. The construction, land development and other land loan portfolio comprised 13.7% and 14.8% of real estate loans as of December 31, 2024 and 2023, respectively, and 7.1% and 7.9% of the total loan and lease portfolio as of December 31, 2024 and 2023, respectively. The construction, land development and other land loan portfolio was 41.3% and 48.4% of Byline Bank total capital, at December 31, 2024 and December 31, 2023, respectively.

Commercial and industrial loans. Commercial and industrial loans totaled $2.6 billion and $2.4 billion at December 31, 2024 and 2023, respectively, an increase of $168.6 million, or 6.9%, primarily due to organic growth. The commercial and industrial loan portfolio comprised 37.9% and 36.6% of the total loan and lease portfolio as of December 31, 2024 and 2023, respectively.

Lease financing receivables comprised 10.4% and 10.0% of the total loan and lease portfolio as of December 31, 2024 and 2023, respectively. Total lease financing receivables were $715.9 million and $665.9 million at December 31, 2024 and 2023, respectively, an increase of $50.1 million, or 7.5%.

Loan and lease portfolio maturities and interest rate sensitivity

The following table shows our loan and lease portfolio by scheduled maturity at December 31, 2024 (dollars in thousands):