Executive Summary / Key Takeaways

• Byline Bancorp delivered a solid start to 2025, marked by strong profitability metrics, including a PTPP ROAA exceeding 2% for the tenth consecutive quarter, demonstrating consistent operational efficiency despite a volatile macro environment.
• The recent completion and successful integration of the First Security acquisition on April 1, 2025, enhances Byline's scale, deposit base, and market presence, aligning with its strategic goal to become the preeminent commercial bank in Chicago.
• Disciplined balance sheet management is evident in Q1 2025 with growth in loans and deposits, an expanding net interest margin driven by lower funding costs, and strengthening capital ratios, providing ample liquidity and flexibility for future growth and opportunities.
• While navigating macroeconomic uncertainty and specific credit risks, particularly within certain acquired portfolios and the government-guaranteed segment, Byline maintains above-average reserve coverage and a proactive approach to credit management.
• The company's strategic focus on leveraging market disruption to attract talent, invest in technology for efficiency and enhanced client service, and pursue accretive M&A positions it for continued organic and inorganic growth as it prepares to cross the $10 billion asset threshold.

The Chicago Opportunity: Building a Commercial Banking Powerhouse

Byline Bancorp, Inc. operates as a bank holding company primarily through its subsidiary, Byline Bank, a full-service commercial bank deeply rooted in the Chicago metropolitan area and extending into southern Wisconsin. Its core business revolves around serving small and medium-sized businesses, commercial real estate investors, financial sponsors, and consumers through a diversified offering of banking products and services. The company's journey began with the recapitalization of a privately held bank in Chicago in 2013, laying the foundation for its current platform. This was followed by an Initial Public Offering in 2017 and subsequent strategic acquisitions, notably First Evanston in 2018, which bolstered its Commercial and Industrial (C&I) lending capabilities, and Inland Bancorp in 2023, which significantly increased its asset base. The recent completion of the First Security acquisition in April 2025 marks another step in this deliberate expansion strategy.

At the heart of Byline's strategy is the ambition to become the preeminent commercial bank in Chicago. Management views the local market as ripe with opportunity, particularly benefiting from disruption caused by larger bank mergers, potential regulatory shifts, and the ongoing movement of banking talent. Byline aims to capitalize on this environment by attracting high-quality bankers and executing strategic tuck-in acquisitions that enhance its capabilities and market share. This approach is designed to fuel organic growth and differentiate Byline in a competitive landscape.

Central to executing this strategy is the company's investment in the "right technology" and process improvements. While Byline may not possess the sheer scale of technological investment seen at national giants like US Bancorp (USB) or major regional players like PNC Financial Services Group (PNC) and Fifth Third Bancorp (FITB), its focus is on leveraging technology to enable its specific commercial and relationship-based banking model and drive operational efficiency. Investments in areas like digital banking platforms, fintech partnerships (including the expansion of its Payments and Fintech Banking division), and process enhancements are aimed at improving client service, streamlining operations, and enhancing risk management. For instance, prior investments in technology within the government-guaranteed lending business have enabled "much more efficient decision-making and portfolio management," allowing the company to "right-size" this segment for better efficiency. The expansion into embedded finance and modern digital payment solutions through its Fintech Banking division represents a "significant investment" aimed at providing enhanced services to commercial clients. These targeted technological efforts, while not always yielding the same processing speed benchmarks as larger competitors, are intended to support Byline's core strategy of building strong client relationships and operating efficiently within its chosen market segments, contributing to its ability to maintain a competitive cost structure compared to some peers.

In the competitive arena, Byline positions itself as the largest community bank in Chicago below the $10 billion asset threshold. Upon crossing this mark, it will become the largest local publicly traded commercial bank in the $10 billion to $65 billion asset range in the Greater Chicago area. While facing competition from national, regional, and smaller community banks, Byline seeks to differentiate through its local focus, deep market knowledge, ability to attract experienced banking talent, and specialized lending expertise in areas like SBA, equipment leasing, and sponsor finance. This focus on relationship banking and niche markets allows Byline to compete effectively, even against larger institutions that may be managing risk-weighted assets more conservatively or shifting focus upmarket. Compared to peers like KS Bancorp (KSBI), which has shown strong recent growth in its region, Byline's established presence and strategic M&A track record in the Midwest provide a distinct advantage in consolidating the local market.

Performance and Strategic Execution in Focus

Byline's financial performance in the first quarter of 2025 underscores the effectiveness of its strategy and operational discipline. The company reported net income of $28.2 million, or $0.64 per diluted share. While net income saw a modest decrease of $2.2 million compared to the first quarter of 2024, this was primarily attributable to planned increases in non-interest expense (driven by merit increases, higher incentives, and health insurance costs) and a higher provision for credit losses (reflecting loan growth and adjustments to loss rates for government-guaranteed loans). Importantly, the increase in expenses included merger-related costs associated with the First Security acquisition, which are not indicative of core operating trends.

Net interest income remained a key strength, increasing by $2.7 million year-over-year to $88.2 million in Q1 2025. This growth was primarily fueled by a decrease in interest expense on deposits and other borrowings, which more than offset a slight decrease in interest income. The net interest margin expanded by 7 basis points year-over-year to 4.07%, driven by lower rates paid on interest-bearing deposits. The average cost of deposits declined to 2.30% in Q1 2025. This ability to manage funding costs effectively in the current rate environment is a critical driver of profitability. Management's outlook for Q2 2025 net interest income (excluding the First Security impact) is projected to be between $87 million and $89 million, based on the forward curve assuming a 100 basis point decline in Fed funds for the remainder of 2025, indicating an expectation of stable to slightly growing NII despite potential rate cuts.

Non-interest income totaled $14.9 million in Q1 2025. While down slightly from Q1 2024, this included a larger downward revaluation adjustment on loan servicing assets ($1.05 million in Q1 2025 vs. $0.70 million in Q1 2024) due to higher prepayments. Net gains on sales of loans, primarily from the government-guaranteed business, were $4.9 million, slightly lower than $5.5 million in Q1 2024, mainly due to lower sales volume and higher deferred costs. Management forecasts average gain on sale income of $5 million per quarter for 2025, acknowledging typical Q1 seasonality. Fees and service charges on deposits saw an increase, reflecting deposit growth and higher fees. Wealth management and trust income saw a slight decrease but remains an area of strategic investment for future growth.

Non-interest expense totaled $56.4 million in Q1 2025, an increase of $2.6 million year-over-year. As noted, this was primarily due to higher compensation costs and merger-related expenses. Excluding these one-time items, expenses remained well-managed. The efficiency ratio was 53.66% in Q1 2025, reflecting the increase in expenses relative to revenue. Management's guidance for quarterly non-interest expense in 2025 (stand-alone) is expected to trend between $55 million and $57 million, indicating continued focus on cost control while allowing for strategic investments. The effective tax rate for Q1 2025 was 24.6%, and the expected rate for the full year 2025 is between 25% and 27%.

Balance sheet growth in Q1 2025 was solid. Total assets increased by $88.2 million to $9.58 billion. Total loans and leases grew by $137.1 million (2% linked-quarter annualized) to $7.03 billion, driven by increases in the originated commercial and leasing portfolios, offsetting decreases in acquired portfolios. Loan growth is expected to continue in the mid-single-digit range for 2025, supported by healthy pipelines. Total deposits increased by $94.7 million (1.3% linked-quarter annualized) to $7.55 billion, primarily due to growth in interest-bearing accounts like money markets, despite a decrease in non-interest-bearing deposits, which stood at 22.7% of total deposits. Byline continues to focus on growing customer deposits to fund loan growth and reduce reliance on brokered deposits, aiming for a loan-to-deposit ratio below 90% over time.

Asset quality metrics showed improvement in Q1 2025. Non-performing loans (NPLs) decreased by 14 basis points to 0.76% of total loans. Non-performing assets (NPAs) also declined to 0.62% of total assets. Net charge-offs were $6.6 million, or an annualized 0.39% of average loans. While this is within the range of normalized expectations (30-40 bps excluding acquired loan resolutions), management noted that recent loss content has primarily stemmed from the SBA portfolio, which they have been proactively monitoring and managing post-pandemic. The allowance for credit losses (ACL) increased by $2.4 million to $100.4 million, representing a robust 1.43% of total loans, providing above-average reserve coverage. The increase in provision was attributed to loan growth and changes in loss rates for government-guaranteed loans. Criticized and classified loans saw a slight pickup, but management views this as normal quarterly volatility rather than a systemic trend.

Capital levels remain a significant strength. CET1 increased to 11.78%, and the TCE to Tangible Assets ratio reached 9.95% in Q1 2025. These ratios are strong and exceed regulatory requirements, with Byline Bank classified as well-capitalized. Tangible book value per share continued its upward trend, reaching $20.91. This strong capital position provides Byline with significant flexibility to support organic loan growth, absorb potential credit losses, and pursue strategic M&A opportunities. Management's capital priorities remain consistent: support growth first, then M&A, and lastly, return capital to shareholders through dividends and buybacks. The company's available borrowing capacity from the FHLB and FRB stood at a substantial $1.1 billion at quarter-end, further bolstering its liquidity position.

The successful completion and integration of the First Security acquisition on April 1, 2025, is a key strategic achievement. The transaction added approximately $313.4 million in assets and $279.2 million in deposits, enhancing Byline's scale and deposit base. The swift integration, completed within 207 days from announcement, highlights Byline's proven capability in executing and integrating M&A, a critical skill for its growth strategy in the fragmented Chicago market. This acquisition, along with continued organic growth, positions Byline closer to the $10 billion asset threshold. Preparation for this regulatory milestone is well underway, involving investments in people and control functions to meet heightened regulatory expectations, with the formal application of regulations anticipated in late 2026 or early 2027.

Conclusion

Byline Bancorp's first quarter 2025 results demonstrate a franchise executing effectively on its strategic plan amidst a complex operating environment. The company's core investment thesis centers on its ability to leverage disruption in the Chicago market to build a leading commercial bank through disciplined organic growth, strategic talent acquisition, targeted technology investments, and accretive M&A. The successful integration of First Security reinforces its M&A capabilities and strengthens its market position.

While macroeconomic uncertainty, potential interest rate volatility, and specific credit risks in certain portfolios warrant careful monitoring, Byline's strong capital levels, ample liquidity, proactive risk management, and consistent operational profitability (highlighted by its sustained PTPP ROAA above 2%) provide a solid foundation. The company's focus on relationship banking, niche lending expertise, and a growing deposit base positions it well to continue its growth trajectory and enhance shareholder value as it approaches and ultimately crosses the $10 billion asset threshold. Investors should watch for continued progress on loan and deposit growth, the successful realization of synergies from the First Security acquisition, trends in asset quality, and the ongoing build-out of its operational infrastructure to support its larger scale.