Byline Bancorp - Q2 2024
July 26, 2024
Transcript
Operator (participant)
My name is Makaya, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question, simply press the star followed by the number one on your telephone. If you would like to withdraw your question, press star and two. If you are listening via speakerphone, please lift your headset prior to asking your question. If you require operator assistance, please press star then zero. Please note, the conference call is being recorded. At this time, I would like to introduce Mr. Brooks Rennie, Head of Investor Relations for Byline Bancorp, to begin the conference call.
Brooks Rennie (Head of Investor Relations)
Thank you, Makaya. Good morning, everyone, and welcome to Byline Bancorp's second quarter 2024 earnings conference call. In accordance with Regulation FD, this call is being recorded and is available via webcast on our investor relations website, along with our earnings release and the corresponding presentation slides. As part of today's call, management may make certain statements that constitute projections, beliefs, or other forward-looking statements regarding future events or the future financial performance of the company. We caution that such statements are subject to certain risks, uncertainties, and other factors that could cause actual results to differ materially from those discussed. The company's risk factors are disclosed and discussed in its SEC filings. In addition, our remarks and slides may reference or contain certain non-GAAP financial measures, which are intended to supplement, but not substitute for, the most directly comparable GAAP measures.
Reconciliation of each non-GAAP financial measure to the comparable GAAP financial measure can be found within the appendix of the earnings release. For additional information about risks and uncertainties, please see the forward-looking statement and non-GAAP financial measures disclosures in the earnings release. As a reminder for investors, this quarter we plan on attending the Raymond James Bank Conference and the Stephens Bank Forum. With that, I would now like to turn the conference call over to Alberto Paracchini, President of Byline Bancorp.
Alberto Paracchini (President)
Thank you, Brooks. Good morning, everyone, and thanks for joining the call today. With me on the call is our Chairman and CEO, Roberto Herencia, our CFO, Tom Bell, and our Chief Credit Officer, Mark Fusinato. Regarding the agenda, I'll start by giving you the highlights for the quarter, followed by Tom, who will cover the financial results. I'll then come back with closing comments before we open the call for questions. As a reminder, you can find the deck on our website, and as always, please refer to the disclaimer at the front. Before we get started, I want to pass the call on to Roberto for some comments. Roberto?
Roberto Herencia (Chairman and CEO)
Thank you, Alberto, and good morning to all. Our performance this quarter, which Alberto and Tom will cover shortly, was once again solid across the board, with strong profitability metrics, several of which continued to rank top quartile among our peer group. We are proud to continue to deliver strong results as we position Byline to cross over the $10 billion threshold and the go-to commercial bank in Chicago. Almost two weeks ago, we all witnessed another assassination attempt in our history. This was a deeply disturbing event and tragedy, no matter how you feel about politics. Clearly, we have a problem with this course, and we can only hope progress is made quickly towards unity in our country.
I mention this because we all want a peaceful and safe convention in our city next month, just as it was in our sister city of Milwaukee a little over a week ago. Talking about unity and community, our organization continues to succeed in attracting and retaining top talent with our latest recognition as a 2024/2025 U.S. News & World Report Best Companies to Work For in the Midwest. This honor, along with last year's Forbes America's Best Small Employers, are a testament to our focus on meaningful employee programs and creating a best-in-class employee culture. Awards like these are a result of us seeking and implementing employee feedback. Congratulations to all our employees on this accomplishment.
Just to reiterate our path and expectations, we believe the Chicago banking market will continue to be disrupted by events ranging from lower interest rates in the horizon, smaller banks getting weaker, mergers between larger banks with headquarters and decision-making moving outside state, as well as management changes and turnover. That disruption fuels our organic growth and our strategy. Being home to the best commercial banking talent continues to shine under those conditions. This is easier said than done. When done well, from having the right credit and risk processes, using the right technology, focus on key people practices, and nurturing a team that can finish each other's sentences, the strategy is unique, differentiated, and hard to replicate. We are optimistic about the future and the value our franchise can deliver to our shareholders.
Of course, it is never a straight line, but we like the trajectory, we like the path we're on, and feel confident we can continue to build out the preeminent commercial banking in Chicago. With that, back to you, Alberto.
Alberto Paracchini (President)
Great. Thank you, Roberto. I'll start by noting that overall, we were pleased with our results and the progress we've made in executing our strategy. We continue to deliver strong operating results and profitability while growing the franchise, building tangible book value per share, and increasing capital flexibility. This past quarter marked the eleventh anniversary since the recapitalization of a privately held bank here in Chicago at $2.4 billion, and seven years since our initial public offering, when our assets totaled $3.3 billion. As we now approach the $10 billion asset mark with our story and results becoming clearer, we believe the long-term value and strength of our franchise will be consistently apparent. Let's move on to page three and jump into the highlights.
For the quarter, we reported net income of $29.7 million, or $0.68 per diluted share on revenue of approximately $100 million, which was up 10% year-on-year. Pre-tax, pre-provision net income was again strong at $46.2 million, and pre-tax pre-provision ROA remained above 200 basis points for the seventh consecutive quarter. Return on assets remained solid at 131 basis points, and ROTCE of 15.27% was comfortably above our equity cost of capital. Expenses remain well managed at approximately $53 million, despite higher inflation and continued cost pressures. The efficiency ratio inched up slightly to 52% for the quarter, but our cost to asset ratio, a better measure of expense discipline, came in at 230 basis points, reflecting a 33 basis point decline from the year ago period.
Turning to the balance sheet, we experienced good loan growth of $103 million or 6.1% annualized, coming from our commercial and leasing loan books. Deposits stood at $7.3 billion and were essentially flat quarter-over-quarter. The mix continued to moderate, with DDAs declining by only 1% to 24% of total deposits. The margin declined slightly to 3.98% from 4% in the previous quarter. That said, earning asset growth more than offset the two basis point decline and drove net interest income to $86.5 million, up $1 million quarter-over-quarter. Fee income, excluding a $2.5 million fair value mark on our servicing asset, remained stable, along with gain on sale income, which was up 9% to $6 million, in line with our target.
Last quarter, we commented that we were focused on actively resolving non-performing credits, and we had a productive quarter in that regard, with NPLs declining 7 basis points to 93 basis points as of quarter end. We saw good resolution activity throughout the quarter on both acquired loans and other loans with specific reserves attached, which led to charge-offs of 56 basis points for the quarter. Other credit trends remained stable, with delinquencies back to more normalized levels and criticized loans declining $16 million from the previous quarter. Provision expense was $6 million, and the allowance remained healthy at 1.45% of total loans. Capital ratios all increased during the quarter, with CET1 and total capital approaching 11% and 14% respectively.
TCE came in at 8.82% and is at the upper end of our targeted range of between 8%-9%. Lastly, we consolidated two branches, bringing our total branch count to 46 and pushing average deposits per branch to about $160 million as of quarter end. With that, I'd like to turn over the call to Tom, who will provide you more detail on our results.
Tom Bell (CFO)
Thank you, Alberto, and good morning, everyone. Starting with our loan portfolio on slide four, we had strong origination activity for the quarter of $300 million, up 14% compared to last quarter. Combined with higher utilization rates and offset by more neutralized payoff activity, our loan portfolio increased to $103 million or 6% annualized to $6.9 billion. Business development activity remained healthy, driven by our commercial and leasing teams. When looking at our loan portfolio over the past year, our CRE concentration to total loans declined by two percentage points from 35% to 33%, and our regulatory commercial real estate ratio remains at a comfortable 171%. As we head into the second half of the year, we expect loan growth to continue in the mid-single digits. Turning to slide five.
Total deposits stood at $7.3 billion, flat from the first quarter, driven by second quarter seasonal outflows and a slight decline in broker deposits. We have already seen most of those outflows come back here in the third quarter. The mix moderated as expected at a decelerating pace linked quarter. On a cycle-to-date basis, deposit betas grew at a slower pace, with total deposits at 49% and interest-bearing deposits at 64%. We continue to believe that the trade-off of funding high-quality relationships at a marginally higher cost remains an attractive long-term strategy in contributing to our net interest income expansion for the quarter. Turning to slide six. Net interest income was $86.5 million for Q2, up 1% from the prior quarter, primarily due to growth in the loan portfolio, offsetting higher interest expense on deposits....
The NIM remained stable at 3.98%. More importantly, if we exclude loan accretion income of 17 basis points, our core NIM expanded 1 basis point linked quarter. Further, if we exclude the term facility trade, our NIM would have been higher by an additional 8 basis points. Earning asset yields increased 4 basis points, driven by higher loan and investment yields. Assuming no rate cuts in Q3, we estimate our net interest income for the quarter in the $85 million-$87 million range. If the Fed were to cut rates, the impact of NII is illustrated on slide six. For every 25 basis point rate cut, the quarterly impact is roughly $700,000 or $2.7 million annually.
Turning to slide seven, non-interest income totaled $12.8 million in the second quarter, which is down approximately $2.6 million linked quarter, primarily driven by a $2.5 million negative fair value mark on the loan servicing asset due to higher prepayments and a fair value adjustment of $390,000 on equity securities. This was partially offset by an increase of $503,000 in net gain on sale of loans due to higher premiums. The volume of unguaranteed loans sold was flat compared to Q1, but the net average premium was 10.1% for Q2, higher than the first quarter, primarily due to mix of loans sold. We are forecasting gain on sale income of $5 million-$6 million range for Q3.
Turning to slide eight, our non-interest expense remained well managed and came in at $53.2 million for the second quarter, down 1% from the prior quarter and in line with Q2 guidance. The decrease was mainly due to branch consolidation charges taken in Q1 and lower occupancy expense, offset by $1 million increase in professional services. We continue to remain disciplined on expense management and maintain our non-interest expense guidance of $53 million-$55 million. Turning to slide nine, for your reference, we added additional disclosures on the asset quality slide, where we break out government-guaranteed and Purchased Credit Deteriorated PCD. Excuse me. Provision expenses for the quarter came in at $6 million, down from $6.6 million in Q1, primarily driven by a lower level of unfunded commitments.
The allowance for credit losses at the end of Q2 was $99.7 million, down 3% from the end of the prior quarter. Net charge-offs ticked up this quarter to $9.5 million, compared to $6.2 million in the previous quarter. The increase is a result of one acquired C&I loan relationship of $4 million that is included in our originated portfolio. NPLs to total loans decreased by 7 basis points to 93 basis points in Q2. If you look at the bottom left graph, you can see excluding the government-guaranteed loans, NPLs were 83 basis points, and NPAs to total assets decreased by 6 basis points to 67 basis points in Q2. Turning to slide 10. For the quarter, the loan-to-deposit ratio ticked up due to loan growth and seasonal deposit outflows.
We continue to focus on growing new deposit relationships, targeting a loan-to-deposit ratio below 90% over time. Our liquidity and capital levels remain ample and continue to provide a strong foundation, which positions us well as we enter the back half of 2024. Moving on to capital on slide 11. Capital levels remain strong and are already above pre-Inland transaction levels. Our CET1 ratio increased 25 basis points from the prior quarter to 10.84%, nearing our 11% target. Our total capital increased by 20 basis points linked quarter to 13.86%. Additionally, the TCE to TA ratio stood at 8.82%, up 6 basis points linked quarter, and excluding the term facility trade, our TCE ratio is approximately 19 basis points higher.
Our tangible book value per share increased 3% linked quarter to $18.84, and is 8.1% higher than last year. We had another solid quarter with strong performance metrics, resulting in an excellent first half of the year. More importantly, we continue to demonstrate our ability to exercise against our strategic priorities. With that, Alberto, back to you.
Alberto Paracchini (President)
Great. Thank you, Tom. While we are pleased with the results for the quarter, we continue to capitalize on opportunities to grow the business. To that end, Byline, we made important additions to our wealth business, including a new Head of Wealth, Chief Investment Officer, Chief Fiduciary Officer, and a senior client advisor. We also strengthened our marketing team with several key hires. We've worked hard to build a platform capable of attracting high-quality talent and remain on the lookout to continue to selectively add talent to the organization. As far as the outlook is concerned, we continue to see good deal flow and pipelines remain overall healthy. As I mentioned last quarter, we continue to find the trade-off of adding attractive business and long-term relationships at marginally higher funding costs in the short run an acceptable one.
We remain well-positioned to take advantage of opportunities in front of us and dedicated to delivering on our promises of providing attractive, long-term intrinsic growth to our stockholders and value to all our stakeholders. Lastly, none of this would be possible without the strong efforts and dedication of our entire Byline team. With that, operator, I'll turn back to you to take questions.
Operator (participant)
Thank you. We will now begin the question and answer session.
...As a reminder, if you would like to ask a question, simply press the star followed by one on your telephone keypad. If you would like to withdraw your question, press star and two. If you are listening via speakerphone, please lift your headset prior to asking your question. The first question is from the line of Nathan Race of Piper Sandler. You may proceed.
Nathan Race (Managing Director and Senior Research Analyst)
Yeah. Hi, everyone. Good morning.
Alberto Paracchini (President)
Good morning, Nathan.
Nathan Race (Managing Director and Senior Research Analyst)
You know, it, it was great to see from a credit perspective, some improvement in the office, commercial portfolio. You know, just curious kind of what you guys can share that we maybe can't glean from some of the disclosures on slides, 16 in the deck. And also just curious to hear your thoughts more broadly on what you're seeing in the Chicagoland office, commercial real estate arena and maybe any residual impacts.
Alberto Paracchini (President)
Sure. So I guess to point on—to start with your first question or the first part of your question, Nate, you're talking about slide 16 on the back?
Mark Fucinato (Chief Credit Officer)
15 and 16.
Nathan Race (Managing Director and Senior Research Analyst)
Yes.
Alberto Paracchini (President)
Anything in particular you want us to cover?
Nathan Race (Managing Director and Senior Research Analyst)
No, I was just curious if you could share any other thoughts on kind of what you're seeing across your portfolio that maybe we can't glean from the disclosures provided?
Alberto Paracchini (President)
Sure. So on the office side, I think we can share, you know, so let's talk about kind of upcoming maturities for the next several quarters. We feel pretty good about where we are in terms of, you know, what the pipeline of maturities looks like, both in terms of, you know, assets that we've already identified, have already classified, have already specific reserves against, to hopefully be able to, to move, you know, out of the company here in the over the next several quarters. Then on the rest of it, we feel very good about where those assets are in terms of, you know, renewals and extensions. So we feel pretty good with what we have coming over the next several quarters, probably into 2025, the early part of 2025 at this point.
So that's, hopefully, that's some additional color, you know, on that. And then Mark will certainly chime in. You know, as far as the office market, it's really a tale of, you know, a confluence of factors. You know, obviously, if you're talking about dated Class B office properties in the central business district, those are going to be very challenging. And I think you're seeing, from different news sources, different CRE, data sources and publications, I think you're seeing that play out not only here in Chicago, but throughout, throughout other large, metropolitan areas. Fortunately, we don't have. We're not a lender in that space, so we're, you know, pretty well-positioned in terms of that dynamic. And I would also point out, I don't think that dynamic is rate-driven.
I think that's just obsolescence of that stock of buildings, and that's something that's been in a gradual decline for some time, dating back before COVID. I think suburban is faring better. I think the work-from-home dynamic tends to impact that a bit more than your typical kind of central business district, you know, property. And then I would say a new class of urban buildings and in newer, emerging urban areas, I think those buildings, you know, typically are newer. They have much more in terms of amenities, and those are, you know, emerging, you know, pockets, you know, within the city. In this case, here in Chicago, I would point you to certainly the West Loop. And I think you've seen office properties in that market, with some exceptions, be pretty resilient.
So, Nate, Mark, I don't know if you want to add additional color to that.
Mark Fucinato (Chief Credit Officer)
Nate, I think we're still in the middle of that movie on office across, probably across the country, maybe across the globe. But at the same time, we are seeing some positive signs, again, selectively, depending on the situation. We had two problem loans that really we were fortunate to resolve because somebody wanted to buy them and convert them to, you know, multifamily-type apartment situations in metro areas. So there's, there's interest in the space, I think. We're not looking to do new office building loans, obviously, on our end, but there is some opportunities, and there is capital available to resolve some of the problems that's out there.
But I still think I said the movie is still half over in terms of what's going to happen, especially regarding appraisals, because the appraisal values now that are coming in, you're starting to see the impact of what's taken place over the last year and a half or so.
Alberto Paracchini (President)
And Nate, to add to what Mark said there, because I think this is an important distinction, we tend to be very focused, you know, from an underwriting standpoint in terms of debt yields, and we tend to be very focused in terms of looking at the reality of properties well ahead of appraisals. So we're thinking about current rent rolls, we're thinking about changing cap rates, we're thinking about the debt yield on property in anticipation of eventually starting to see, you know, when appraisals are done, you know, declines in value. So I guess what I'm trying to say here is, we're not waiting for an appraisal to ultimately reflect that valuations of, you know, properties are reacting to higher rates and reacting to current market conditions. So that's not a surprise, you know, for us.
Mark Fucinato (Chief Credit Officer)
Mm-hmm.
Nathan Race (Managing Director and Senior Research Analyst)
Got it. Makes sense. Very helpful color. Changing gears, I appreciate Tom's comments around the NII impact from each 25 basis point cut by the Fed. You know, just curious, a couple questions. One, is that under a static analysis? And two, to what extent or what amount of deposits do you guys feel that can reprice kind of one for one following each cut? I know it's-
Tom Bell (CFO)
Yeah, hi, Nate.
Nathan Race (Managing Director and Senior Research Analyst)
Gonna depend on competitive factors and such.
Tom Bell (CFO)
Sure. First, it is static, and we did have a ramp scenario as well that you can look at on the slide. As it relates to repricing, there is a significant amount of liabilities that will reprice. Our CD book is roughly five months, five and a half months, so we have I mean, there is technically a little lag on that, but if the Fed does move in September, you know, that's two months kind of down the road for us. So that you know, we're going to have a number of opportunities to reprice quickly, but there will be some lag on the CD book.
Nathan Race (Managing Director and Senior Research Analyst)
Yeah, and just speaking to of that portfolio, Tom, can you just help us in terms of the amount of CDs you have maturing over the next few quarters, what rate that's coming off at, and kind of what your kind of theoretical replacement cost is today?
Tom Bell (CFO)
The average maturity for the rest of the year-
Nathan Race (Managing Director and Senior Research Analyst)
Can you come on your-
Tom Bell (CFO)
Yep. The average maturity for the rest of the year is about 470. And, you know, we're issuing in that average level right now. So if rates were to cut, then it—you'd see 25 or 50 basis points lower, depending on what the Fed does.
Nathan Race (Managing Director and Senior Research Analyst)
Okay, great. And if I could just ask one more on the M&A front. We heard from another Chicagoland institution last week that there's been some increase in chatter lately. So just curious to get your guys' updated perspectives on kind of what you're seeing and hearing and kind of the opportunity set, just given, you know, just given where the total assets stand today, just under $10 billion.
Alberto Paracchini (President)
I think that in that regard, Nate, I think from our standpoint, I think things have been pretty steady. There's always been kind of what, for lack of a better word, is kind of like that underlying chatter going on. I think we suspect, given the back of the rally in rates that we've seen over the last month or so, that's obviously going to impact, you know, kind of the headwinds a bit that have been there since the Fed started raising rates and, you know, AOCI challenges that have been, for some institutions, kind of like an impediment to M&A.
And certainly, when you're talking about the under $100 billion, under kind of $75 billion market, which, you know, we are well under that, I mean, you don't have a lot of the same regulatory headwinds that you do, you know, or that are expected kind of in that in the higher asset range. So our sense is probably, you know, market activity will likely pick up from where it's been here more recently. So hopefully that gives you some color on that, Nate.
Nathan Race (Managing Director and Senior Research Analyst)
Yep, that helps. I appreciate all the color. Thanks, guys.
Tom Bell (CFO)
Thank you.
Alberto Paracchini (President)
You bet.
Operator (participant)
Thank you. Our next question is from Brendan Nosal with Hovde Group. You may proceed.
Brendan Nosal (Director)
Hey, good morning, folks. Hope you're doing well.
Alberto Paracchini (President)
Hey, Brendan.
Tom Bell (CFO)
Hey, Brendan.
Brendan Nosal (Director)
Just wanted to start off on the margin here. You know, nice to see the firming up trends on both the core and reported basis. I guess as we look ahead, given that funding cost metrics were only up by, like, single-digit basis points this quarter, and the overall pace of upward funding cost drift is slowing, just curious to hear your thoughts on how you think the margin trends for the next few quarters. Thanks.
Tom Bell (CFO)
Yeah, Brendan, we normally give guidance on NII, and I think you see guidance kind of in the similar range that we, you know, slightly higher than last quarter. You know, on the liability side, you know, our costs have pretty much peaked unless there's any additional mix change happening. But I think you're going to see, you know, we typically have some Home Loan Bank borrowings at the end of the quarter, which elevates the cash. But other than that, margin should be relatively stable, you know, through this process here. You know, accretion will be declining, so offsetting accretion is just other net interest income from the balance sheet.
Alberto Paracchini (President)
Yeah, Brendan, if I could add just a touch more to what Tom just said. I think importantly, like Tom mentioned, if you look at kind of the margin ex accretion, and you take a look at kind of what happened this quarter, it gives us confidence that, you know, look, there's lags, there's repricing that's happening obviously between, you know, earning assets and rate-bearing liabilities. That said, you saw what happened this quarter with earning asset growth, you know, easily kind of offsetting, you know, in the gap margin, just basically two basis points. We feel pretty confident in terms of going forward, you know, that call it, you know, noise around the margin, X accretion plus or minus a couple basis points off or down.
We feel pretty good about, you know, being able to offset that, with earning asset growth, you know, thereby pushing the, pushing that interest income higher.
Tom Bell (CFO)
And the other thing I would just remind you of, right, the term facility trade is impacting the margin by 8 basis points. That transaction, depending on what the Fed does, could go away sooner. So you'll see actually the margin increase, but maybe not net interest income. So part of why I don't like to give NIM guidance is there are factors that, you know, can, you know, you can have lower net interest income and yet have a margin expand. And I think generally speaking, we'd like to have higher net interest income. And that transaction for your-
Alberto Paracchini (President)
Yeah.
Tom Bell (CFO)
For a reminder, is it, you know, a January end date no matter what?
Brendan Nosal (Director)
Yeah, that, that's helpful color, and thank you for the reminder on the BTFP drag on the margin currently. Maybe one more from me, moving off to credit quality here. Appreciated the commentary that the charge-offs this quarter were tied to intentional cleanup that you guys did. Just kind of curious, you know, how much more cleanup do you think you might have to pursue in the next few quarters? And then any line of sight to what you think charge-offs might end up being as a result and related provisioning needs? Thanks.
Alberto Paracchini (President)
Yeah. So, if you go back, and I think Tom talked. Tom touched on this on his remarks. I think he made the comment that we are back, our capital levels are back to where we were prior to, you know, the acquisition of Inland last year. And I would say on the credit front, that's exactly what we want to drive to, Brendan. So if I look, for instance, at kind of where we were from a, you know, pick a number, but from a criticized loan standpoint, let's say in the 305 basis point range, today, we're closer to 374. So as that number increased after we acquired a loan book, we re-rated that portfolio, that number, you know, probably peaked in March.
That was 404 basis points, so we're down. And I made a comment to that point on my remarks that, you know, credit costs were down about $16 million, so that's a decline of about 30 basis points in that ratio. So we want to get to what we're trying to do, similar to what Tom said on capital, that's what we're trying to drive to, on the loan portfolio. So, the, you know, comments are on charge-offs this quarter, you know, just to give you guys some color. So yeah, the gap figure that we printed was 56 basis points. If you take out that acquisition-related loan, the number would have been closer to 32 basis points, which is a more normalized number, which is kind of what we would expect.
So I think to answer the second part of your question, we want to get down to back to the levels where we were as we kind of reposition that portfolio and redeploy those loans as they become cash into loans being originated by us. So that's kind of what we're driving towards. You know, we'll continue to provide commentary and color on that going forward, but we really, you know, similar to what the capital point Tom made, we want to do the same thing, you know, on the criticized side on that portfolio.
Brendan Nosal (Director)
Yep. Yep. Okay. That's very helpful color. Thank you for taking the questions.
Alberto Paracchini (President)
Thank you.
Operator (participant)
Thank you. The next question is from Damon Del Monte of KBW. You may proceed.
Damon Del Monte (Managing Director)
Hey, good morning, everyone. Hope you're all doing well today.
Alberto Paracchini (President)
Likewise. Thank you.
Damon Del Monte (Managing Director)
Just a question for you on the securities portfolio. It looks like balances were up this quarter on an average basis. Just kind of wondering what the thoughts are going forward. Would you expect to continue to put excess liquidity into securities, or would you use cash flows to fund loan growth?
Tom Bell (CFO)
Hi, Damon, Tom. You know, right now the portfolio is relatively stable. I think it's growing a little bit here. Just again, just given our sensitivity, we'd like to do probably some reduction of sensitivity as we move forward here, but certainly, opportunistically, but also just managing, definitely replacing cash flows. You know, I would point out, you know, if you look at period end balances on cash, that was certainly higher. But if you look more at the average for the quarter, you know, the balances were much lower from a cash standpoint. So sometimes we just stay in cash, given the investment rate versus, you know, securities, which are certainly at lower levels given the inverted curve. But no real change in strategy at this point from a security standpoint.
Damon Del Monte (Managing Director)
Okay. Got it. All right, and then, you know, as far as the loan growth goes, I think you guys said mid-single digit growth here in the back half of the year. Do you expect that to be driven more by the C&I and leasing, side of the lending platform, or do you feel like there's growing demand in commercial real estate?
Alberto Paracchini (President)
... I mean, we're seeing—yeah, I think broadly speaking, Damon, commercial, broadly speaking, not necessarily just C&I, you know, and maybe some of the smaller segments of the commercial business, for example, like business banking and some of the other smaller lines. So yes, I think broadly speaking, commercial, certainly leasing as well. As far as CRE, you know, we are seeing transactions. You know, there are transactions getting done in the market. You know, so it's not like we are not seeing flow there. We are doing real estate transactions as we speak.
I think to your point is, obviously, if rates were to decline here in the coming months, I think what you're gonna see more broadly is transaction activity is likely to pick up, which is then gonna lead to more, you know, financing activity on the CRE side. And I think for well-understood reasons, you know, I think that's kind of what the CRE market is waiting for. Waiting for, you know, a bit of rate relief, and that is likely to spur more activity broadly in the market. So we participate in that, so I think you can draw, you know, that straight conclusion from that comment.
Damon Del Monte (Managing Director)
Got it. Okay. And then this was kinda touched on, I think, before, but, from a capital management standpoint, you noted that, you know, your TCE ratio is kind of the higher end of your range, your target range. So any updated thoughts on capital management, whether it be through buybacks or dividends or just, you know, focusing on funding organic growth or, you know, potentially M&A to get you over the 10 billion level?
Alberto Paracchini (President)
Sure. So first and foremost, continue to fund the balance sheet, continue to focus on, you know, organic growth of the company. You heard our comments also in terms of kind of both Tom and my comments related to both regulatory capital as well as TCE, and we are certainly at the upper end. So I think in terms of priorities outside of organic growth, you know, to the degree that there are M&A opportunities like we've seen, you know, throughout our history, certainly that's something that we wanna have the flexibility to participate in. And then secondly and thirdly, you know, that certainly we will look at the dividend and certainly buybacks. We have a program in place, so we'll return capital, you know, accordingly.
Damon Del Monte (Managing Director)
Got it. Okay, great. I think that's all that I had. Yeah, thank you very much. Appreciate it.
Alberto Paracchini (President)
You bet. Thank you, Damon.
Operator (participant)
Thank you. The next question is from the line of Terry McEvoy with Stephens. You may proceed.
Terry McEvoy (Managing Director and Research Analyst)
Hi, good morning, everybody. Maybe, Tom, just some clarity around your opening comments. You talked about deposit flows coming back on the balance sheet in Q3 so far this quarter. Was that non-interest-bearing funds? If not, where do you see, or do you see those balances bottoming in the back half of this year?
Tom Bell (CFO)
Hi, Terry. Really what we saw is our typical, you know, commercial clients that, you know, have tax payments and consumer clients, and so there is some DDA in there. We don't-- again, we're not giving real. The guidance on DDA is kind of, we think we're in the range of, you know, it's stabilized in that 24%-25%. So most of it's, you know, interest-bearing accounts and, you know, we've seen a significant amount of the outflows that happened in Q2 are already back here in July. So that, that was the comment around that. So hope that answers your question.
Terry McEvoy (Managing Director and Research Analyst)
Yeah. Thanks. And one other small one. I was just looking at the average balance, the increase in interest checking in terms of just rate and yield was up quarter-over-quarter, and balances were up quarter-over-quarter, and it caught my eye, so I wanted to ask the question: Why, why the increase in both rates and balances?
Tom Bell (CFO)
Good question. We had a number of commercial clients that have, you know, wanted to earn a higher rate than zero on their deposits, and so that's why you see kind of a mix shift, part due to DDA into interest-bearing, and the rate that was paid on that is, you know, higher than zero.
Terry McEvoy (Managing Director and Research Analyst)
Perfect. Okay. All my other questions have been asked and answered. Have a nice weekend, everybody.
Tom Bell (CFO)
Thanks, Terry.
Alberto Paracchini (President)
Thank you, Terry.
Operator (participant)
Thank you. The next question is from the line of David Long with Raymond James. You may proceed.
David Long (Managing Director)
Good morning, everyone.
Tom Bell (CFO)
Hey, David.
Alberto Paracchini (President)
Good morning, David.
David Long (Managing Director)
You know, you guys are talking pretty positively about your commercial pipelines right now, and that's not the same that I'm hearing from a lot of other banks here in Chicago. Maybe just overall, what does the competitive landscape look like? Who are you seeing on deals, and how has that changed over the last several months?
Alberto Paracchini (President)
Yeah. So to take the second part of your question first, I mean. We see the same primary competitors that we see in the market daily. We see those players actively trying to compete and win for business. So the dynamics there have not changed. I think, and this kind of just piggybacking on what Roberto said at the start of the call, I think in some cases, particularly as you're talking about institutions that have come into the market, have acquired other institutions, where maybe the strategy is different, where maybe they wanna focus more up in market and, you know, kind of tilt their commercial book to certainly a much larger companies.
And they start to de-emphasize, you know, your, call it, the type of business that's core to ours, you know, to more traditional kind of Chicago, you know, mid-market companies that are privately held, you know, and operate in the general market here. So that, I think, has something to do with it. I still think you also have some remnants of people trying to, particularly the larger regionals and super regionals, particularly those that are approaching or at about 100 billion plus, where they're starting to think or they're still thinking about Basel III implications, and they're managing, carefully managing their risk-weighted asset levels. I think there's something to that as well. And then lastly, David, and I think, and this is just our opinion on this.
As you know, we have added talent over the past several years, and again, pointing or piggybacking to what Roberto stated. In times of market disruptions, you know, we certainly benefit from that. We benefit in terms of the ability to win clients, but also, really importantly, the ability to attract talent that is looking for a platform where they can see the results of their contributions and the results of the organization, and you know, in a way that it also gives them the ability to serve their clients very differently than a larger institution would. So I think that also comes into play. A lot of the hires that we've made, you know, as recently as a year ago, are definitely starting to bear fruit.
We're seeing, you know, good business, you know, good client activity for those bankers as the period of time that passes from when we hire them to non-solicitation periods expiring and so forth. So, I think that's contributing to that as well. But again, to reiterate the first point, in terms of the competitive, you know, banks that we compete with against, frequently, we continue to see them, and they are as competitive as they always, you know, have been. So no change in that regard.
David Long (Managing Director)
Excellent. I appreciate the added color there, Alberto. That's all I had.
Alberto Paracchini (President)
Thanks, Dave.
Operator (participant)
Thank you for your questions today. I will now turn the call back over to Mr. Alberto Paracchini for any closing remarks.
Alberto Paracchini (President)
Okay, great. Thank you, operator, and thank you all for joining the call this morning and your interest in Byline. We look forward to speaking to you again at the end of next quarter. Thank you, and have a great weekend.
Operator (participant)
Thank you. This concludes today's call. I would now like to disconnect today's line. You may disconnect.