Byline Bancorp Inc
NYSE:BY
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Byline Bancorp Inc
Earnings Call Analysis
Q2-2024 Analysis
Byline Bancorp Inc
In the recent earnings call, Byline Bancorp reported net income of $29.7 million, or $0.68 per diluted share, on revenue of approximately $100 million, reflecting a 10% increase year-on-year. The bank's return on assets remained solid at 1.31%, while the return on tangible common equity (ROTCE) was a robust 15.27%, surpassing their equity cost of capital. Operating expenses were well managed at about $53 million despite inflationary pressures, leading to a slight increase in the efficiency ratio to 52%.
Byline Bancorp reported good loan origination activity, with loans increasing by $103 million – a 6.1% annualized growth. This growth was supported by strong performance in their commercial and leasing loan sectors. Although total deposits were flat at $7.3 billion, the management indicated that most deposit outflows observed in Q2 have returned in July, stabilizing the institution’s deposit base at a mix that includes a declining percentage of demand deposits (24% of total deposits).
Net interest income was recorded at $86.5 million, up 1% from the prior quarter. The current net interest margin (NIM) was stable at 3.98%. If loan accretion is excluded, the core NIM expanded by 1 basis point. Management provided guidance for net interest income in Q3 in the range of $85 million to $87 million, noting that any Fed rate cuts could reduce net interest income by approximately $700,000 for each 25 basis point cut.
Nonperforming loans (NPLs) to total loans decreased by 7 basis points to 0.93%, indicating a solid credit quality profile. The bank's management was active in cleaning up balance sheets, targeting a reduction in criticized loans which dropped by $16 million. Charge-offs for the quarter totaled $9.5 million compared to $6.2 million in the previous quarter, with the increase stemming from one specific loan in their acquired portfolio. Management's strategy includes continuing to improve the overall credit quality of their loan portfolios.
The call revealed that Byline's capital levels are strong, with the Common Equity Tier 1 (CET1) ratio rising to 10.84%, nearing their 11% target. Total capital increased to 13.86%. Furthermore, the tangible common equity ratio stood at 8.82%, providing a strong foundation for future growth as they prepare to cross over the $10 billion asset threshold. Looking forward, they anticipate mid-single-digit loan growth and see good opportunities on the commercial side, bolstered by recent market disruptions which could allow them to capture new clients from competitors.
Byline Bancorp is focused on maintaining cost discipline, evidenced by the noninterest expense remaining consistent at about $53.2 million for the quarter. They have consolidated branches, which has helped enhance average deposits per branch to $160 million. Furthermore, they have made key hires in their wealth management team, positions that are expected to enhance service offerings and eventually drive growth in that segment.
Byline Bancorp's earnings call highlighted the bank's solid financial health, effective management of credit quality, and strategic focus on growth amidst competitive banking conditions. The guidance for the upcoming quarter indicates sustained NII performance and credit quality improvements. For investors, this presents an attractive opportunity, particularly as the bank prepares to leverage market disruptions for business expansion. Ensuring a strong capital position and efficient operations will likely underpin Byline's long-term value creation.
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Good morning and welcome to the Byline Bancorp Second Quarter 2024 Earnings Call. My name is Makhai, and I will be your conference operator today. [Operator Instructions] 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.
Thank you, Makhai. 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 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.
Thank you, Brooks. Good morning, everyone, and thanks for joining the call today. With me on the call is our Chairman and CEO, Roberto Horencia; our CFO, Tom Bell; and our Chief Credit Officer, Mark Fucinato.
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?
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 continue 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 2 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 discourse, and we can only hope progress is made quickly towards unity in our country. I mentioned 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 and World Report Best Company 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 these accomplishments.
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 bank in Chicago.
With that, back to you, Alberto.
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 11th anniversary since the recapitalization of a privately held bank here in Chicago at $2.4 billion, and 7 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 3 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. Pretax pre-provision net income was again strong at $46.2 million, and pretax pre-provision ROAA 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 remained 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 points 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-on-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 2 basis points decline and drove net interest income to $86.5 million, up $1 million quarter on 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 nonperforming 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% to 9%. Lastly, we consolidated 2 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.
Thank you, Alberto, and good morning, everyone. Starting with our loan portfolio on Slide 4. 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 $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 2 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 5. 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 tradeoff 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 6. 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 to $87 million range. If the Fed were to cut rates, the impact to NII is illustrated on Slide 6. For every 25 basis point rate cut, the quarterly impact is roughly $700,000, or $2.7 million annually.
Turning to Slide 7. Noninterest 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 to $6 million range for Q3.
Turning to Slide 8. Our noninterest 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 is 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 noninterest expense guidance of $53 million to $55 million.
Turning to slide 9. For your reference, we added additional disclosures on the asset quality slide where we break out government guaranteed and purchase credit deteriorated, PCD. Provision expenses for the quarter came in at $6 million, down from $6.6 million in Q1, primarily driven by 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 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.
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, 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 tradeoff 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 Instructions] The first question is from the line of Nathan Race of Piper Sandler.
It was great to see from a credit perspective some improvement in the office commercial portfolio. I'm just curious what you guys can share that we maybe can't glean from some of the disclosures on Slide 15 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.
Sure. So, I guess to start with your first question or the first part of your question, Nate, you're talking about Slide 16 on the deck?
Yes.
Anything in particular you want us to cover?
No. I was just curious if you could share any other thoughts on what you're seeing across your portfolio that maybe we can't glean from the disclosures provided.
Sure. So, on the office side, I think we can share. So, let's talk about upcoming maturities for the next several quarters. We feel pretty good about where we are in terms of what the pipeline of maturities looks like, both in terms of assets that we've already identified, have already classified, have already specific reserves against, to hopefully be able to move out of the company here over the next several quarters.
And then on the rest of it, we feel very good about where those assets are in terms of renewals and extensions. So, we feel pretty good with what we have coming over the next several quarters, probably into '25, the early part of '25 at this point. So, hopefully that's some additional color on that. And Mark will certainly chime in. As far as the office market, it's really a tale of confluence of factors. 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 other large metropolitan areas. Fortunately, we're not a lender in that space. So, we're 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 Central Business District property. And then, I would say, a new class of urban buildings in newer emerging urban areas, I think those buildings typically are newer, they have much more in terms of amenities, and those are emerging pockets 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.
Yes, Nate, I think we're still in the middle of that movie on office, 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 2 problem loans that really we were fortunate to resolve because somebody wanted to buy them and convert them to multifamily type apartment situations in metro areas.
So, 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, as 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 1.5 year or so.
And Nate, to add to what Mark said there, because I think this is an important distinction, we tend to be very focused 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 properties in anticipation of eventually starting to see when appraisals are done, 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 properties are reacting to higher rates and reacting to current market conditions. So, that's not a surprise for us.
Changing gears, I appreciate Tom's comments around the NII impacts from each 25 basis point cut by the Fed. And just curious, a couple questions: 1, is that under a static analysis? And 2, to what extent or what amount of deposits do you guys feel that can reprice 1-for-1 following each cut? I know it's going to depend on competitive factors.
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 5 months, 5.5 months. So, there is technically a little lag on that, but if the Fed does move in September, that's 2 months down the road for us. So, we're going to have a number of opportunities to reprice quickly, but there will be some lag on the CD book.
Yes. And just speaking 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 what your theoretical replacement cost is today?
The average maturity for the rest of the year is about [ 470 ]. And we're issuing in that average level right now. So, if rates were to cut, then you'd see 25 or 50 basis points lower, depending on what the Fed does.
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 what you're seeing and hearing, and the opportunity set, just given where the total assets stand today, just under $10 billion.
I think in that regard, Nate, from our standpoint, I think things have been pretty steady. There's always been, for lack of a better word, 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 the headwinds a bit that have been there since the Fed started raising rates and AOCI challenges that have been, for some institutions, like an impediment to M&A.
And certainly, when you're talking about the under $100 billion, under $75 billion market, which we are well under that, you don't have a lot of the same regulatory headwinds that you do or that are expected in the higher asset range. So, our sense is probably market activity will likely pick up from where it's been here more recently. So, hopefully, that gives you some color on that, Nate.
Our next question is from Brendan Nosal with Hovde Group.
Just want to start off on the margin here. Nice to see the firming up of 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.
Yes, Brendan, we normally give guidance on NII, and I think you see guidance in the similar range that we slightly higher than last quarter. On the liability side, our costs have pretty much peaked unless there's any additional mix change happening, but I think you're going to see we typically have some home loan bank borrowings at the end of the quarter, which elevates the cash, but other than that, margins should be relatively stable through this process here. Accretion will be declining, so offsetting decretion is just other net interest income from the balance sheet.
Yes, Brendan, if I could add just a touch more to what Tom just said. I think importantly, like Tom mentioned, if you look at the margin ex accretion and you take a look at what happened this quarter, it gives us confidence that look, there's lags, there's repricing that's happening, obviously, between earning assets and rate-bearing liabilities. That said, you saw what happened this quarter with earning asset growth, easily offsetting in the GAAP margin just basically 2 basis points.
So we feel pretty confident in terms of going forward that, call it, noise around the margin ex accretion, plus or minus a couple basis points up or down, we feel pretty good about being able to offset that with earning asset growth thereby pushing net interest income higher.
And the other thing I would just remind you of, 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 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 reminder is January end date, no matter what.
Yes, that's helpful color, and thank you for the reminder on the BTFP drag on the margin currently. Maybe one more for me, moving off to credit quality here. Appreciated the commentary that charge-offs this quarter were tied to intentional cleanup that you guys did. Just curious 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?
Yes. So, if you go back, and I think Tom touched on this on his remarks. I think he made the comment that our capital levels are back to where we were prior to 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 where we were from, 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 rerated that portfolio, that number 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 criticized 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 is similar to what Tom said on capital, that's what we're trying to drive to on the loan portfolio. So, the comments are on charge-offs this quarter, just to give you guys some color. So, yes, the GAAP 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 what we would expect.
So, I think, to answer the second part of your question, we want to get down back to the levels where we were as we reposition that portfolio and redeploy those loans as they become cash into loans being originated by us. So, that's what we're driving towards. We'll continue to provide commentary and color on that going forward, but similar to what the capital point Tom made, we want to do the same thing on the criticized side on the portfolio.
The next question is from Damon DelMonte of KBW.
A question on the securities portfolio. Looks like balances were up this quarter on an average basis. Just 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?
Damon, Tom. Right now, the portfolio is relatively stable. I think it's growing a little bit here. 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. I would point out if you look at period end balances on cash, that was certainly higher, but if you look more at the average for the quarter, the balances were much lower from a cash standpoint. So, sometimes we just stay in cash given the investment rate versus securities, which are certainly at lower levels given the inverted curve. But no real change in strategy at this point from a security standpoint.
Okay. Got it. All right. And then 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?
Yes, I think broadly speaking, Damon, commercial, broadly speaking, not necessarily just C&I 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 we are seeing transactions. There are transactions getting done in the market. 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 going to see more broadly is transaction activity is likely to pick up, which is then going to lead to more financing activity on the CRE side.
And I think for well-understood reasons, I think that's what the CRE market is waiting for, is waiting for 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 that straight conclusion from that comment.
Got it. Okay. And then this was touched on I think before, but from a capital management standpoint, you noted that your TCE ratio is the higher end of your target range. So, any updated thoughts on capital management, whether it be through buybacks or dividends or just focusing on funding organic growth or potentially M&A to get you over the $10 billion level?
Sure. So, first and foremost, continue to fund the balance sheet, continue to focus on organic growth of the company. You heard our comments also in terms 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 to the degree that there are M&A opportunities like we've seen throughout our history, certainly that's something that we want to have the flexibility to participate in. And then secondly and thirdly, certainly, we will look at the dividends and certainly buybacks, we have a program in place, so we'll return capital accordingly.
The next question is from the line of Terry McEvoy with Stephens.
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 noninterest bearing funds? And if not, do you see or do you see those balances bottoming in the back half of this year?
Hi, Terry. Really what we saw is our typical commercial clients that have tax payments and consumer clients. And so, there is some DDA in there. Again, we're not giving -- the guidance on DDA is we think we're in the range of -- it's stabilized in that 24% to 25%. So, most of it is interest-bearing accounts, and we've seen a significant amount of the outflows that happened in Q2 are already back here in July. So, that was the comment around that. So, hope that answers your question.
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 the increase in both rates and balances?
Good question. We had a number of commercial clients that have wanted to earn a higher rate than 0 on their deposits. And so, that's why you see a mix shift part due to DDA into interest bearing and the rate that was paid on that is higher than 0.
The next question is from the line of David Long with Raymond James.
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. And I'm curious as to if you think some of the opportunities that you're getting on the commercial side is coming both on C&I and CRE coming from potentially competitors pulling back and 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?
Yes. So, to take the second part of your question first, 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. And 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 want to focus more up in market and tilt their commercial book to certainly much larger companies, and they start to deemphasize, call it, the type of business that's core to ours, to more traditional Chicago mid-market companies that are privately held 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 carefully managing their risk-weighted asset levels. I think there's something to that as well.
And then lastly, Dave, 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, 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 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 as recently as a year ago are definitely starting to bear fruit. We're seeing good business, good client activity for those bankers as the period of time that passes from when we hire them to nonsolicitation 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 banks that we compete with against frequently, we continue to see them, and they are as competitive as they always have been. So, no change in that regard.
Thank you for your questions today. I will now turn the call back over to Mr. Alberto Paracchini for any closing remarks.
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.
Thank you. This concludes today's call. I would now like to disconnect today's line. You may disconnect.