Byline Bancorp's Q1 2024 earnings call was a symphony of strength. Robust loan and deposit growth, impressive profitability metrics soaring into the top quartile of their peer group, and even Roberto Herencia's opening tribute to a departing competitor, Mike Scudder, resonated with a sense of confidence and opportunity. But beneath the surface, a seemingly innocuous detail, a mere whisper on the balance sheet, caught my attention: Byline's $200 million borrowing from the Federal Reserve's Bank Term Funding Program (BTFP) in January. While the management team characterized it as a 'zero-risk' opportunity to boost net interest income, I believe it signals a potential liquidity crunch looming in Chicago's commercial real estate market.

The BTFP, you might recall, was resurrected in the wake of the Silicon Valley Bank collapse, aimed at providing banks with emergency liquidity using high-quality assets as collateral. Byline's decision to tap this facility, even at a marginal cost to their net interest margin, suggests a degree of caution, a preemptive move to shore up liquidity amidst a rapidly evolving environment.

Why the concern? Consider the backdrop: Chicago's office vacancy rate hovers near record highs, exceeding 20%. While Byline's direct office exposure is modest, the ripple effects of a struggling office sector extend far beyond troubled landlords. Businesses dependent on office workers, from restaurants to retail, feel the pinch. This, coupled with a potential slowdown in economic activity, could put pressure on commercial borrowers across the board, potentially triggering increased loan demand and a scramble for liquidity.

Byline's proactive move to secure BTFP funding might indicate a foresight into these potential pressures. They see the storm clouds gathering, albeit subtly, and are preparing for a potential downpour.

But here's where things get even more intriguing. Byline's management hasn't explicitly signaled concern about credit quality or a tightening liquidity environment. They've been cautiously optimistic about credit, highlighting stable metrics and expressing confidence in their ability to manage any challenges. However, actions speak louder than words. The BTFP borrowing, when considered alongside the national narrative of rising CRE distress, whispers a different story.

Let's crunch some numbers. Byline's loan-to-deposit ratio has been steadily improving, reaching 92.5% in Q1 2024. But this figure, while healthy on its face, masks a potential vulnerability. A significant portion of their deposit growth has been driven by time deposits, a more expensive and less stable source of funding compared to core deposits. Should deposit growth slow or reverse, Byline, despite their seemingly strong LDR, might face a liquidity squeeze, especially if loan demand picks up.

The BTFP borrowing becomes a preemptive strike, a way to ensure they have the firepower to support existing clients and capitalize on new opportunities should a liquidity crunch materialize. It's a subtle signal, a crack in the otherwise pristine facade of strength, hinting at a brewing storm.

This move should raise eyebrows across the Chicago banking landscape. Is Byline's BTFP borrowing an isolated incident, a testament to their prudent risk management, or is it a canary in the coal mine, a warning signal for other commercial lenders operating in a potentially fragile market? The answer remains to be seen, but one thing is clear: Byline's seemingly insignificant borrowing deserves closer scrutiny, as it could be a harbinger of things to come.

Byline's Net Interest Income (NII) Projections

Byline provided projections for its Net Interest Income (NII), which can be visualized in the following chart. This data is based on market expectations for interest rates and reflects the bank's asset sensitivity.

"Fun Fact: Byline has been a Chicago institution for over a century, founded in 1914 as a small community bank. They've witnessed the city's ups and downs, navigating through economic booms and busts, proving their resilience and adaptability. This history, coupled with their recent performance, suggests they know how to weather a storm. But the BTFP borrowing suggests they see a storm on the horizon, and that should give us all pause."