Q3 2023 BankUnited Inc Earnings Call
Good day, Thank you for standing by welcome to the Bankunited third quarter 2023 earnings Conference call.
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I would now like to hand, the conference over to your Speaker today, Susan Greenfield Corporate Secretary. Please go ahead. Thank.
Thank you Michele good morning, and thank you for joining us today on our third quarter of 2023 results conference call.
Call. This morning are Raj Singh.
Chairman, President and CEO Leslie <unk>.
Chief Financial Officer, and Tom Cornish.
Before we start I'd like to remind everyone that this call may contain forward looking statements within the meaning of the private.
Private Securities Litigation Reform Act of 1995.
The company's current with respect to.
Yeah.
Sure.
Performance.
Forward looking statements made during this call.
Based on the historical performance of the company.
Or on the Companys current plans.
And expectations.
This forward looking information should not be regarded as a representation by the company in the future.
Plans are.
Our expectations contemplated by the company will be.
Such forward looking statements are subject to various risks and uncertainties.
Sure.
Without limitation.
Relating to the company's operations.
Financial results.
Business.
Gross strategy.
That's impacted by it.
External.
The company's direct control.
Adverse events.
Services industry.
<unk> does not undertake any obligation to publicly update or review any.
Forward looking statements, whether as a result of new information future developments or otherwise a number of important factors could cause actual results to differ materially from those indicated by the forward.
These statements.
Sure.
Information on this.
Okay.
Form 10-K for the year.
Sure.
2022, and then subsequent quarterly report on Form 10-Q, our current reports on form 8-K.
Yeah.
WWE.
Uh huh.
I'd like to turn the call over to Ross.
Thank you Susan welcome everyone. Thank you for joining us for our earnings call.
In preparation for this call are usually ask lastly, like a week before chicken.
Guide me as to what are the things investors are.
Looking for you know what.
One of the hot topics.
So there is some light at the same thing and.
Luckily forwarded me was an email from one of the sell side analysts I think it might have with J P. Morgan.
We're basically saying not not specifically to Oxford generally bank investors are looking for like five or six things that are top of mind. So in my comments I'm going to go straight to those few things and try to answer them.
Worrying that order, mainly inflation deposit stability, both pricing and flows.
Credit trends unrealized losses expense management and the last bullet point was sort of regulatory I mean in brackets.
Israeli applies to larger banks.
I'm going to try and get straight to that rather than regurgitate, what's in our earnings it's been out for a couple of hours you probably have read where the.
The numbers came out but those are the big topics, let's just talk about them correctly.
NIM.
Our NIM.
<unk> by nine basis points from 247 to $2 56.
Just for context, if you go back last quarter, we told you that while our NIM had gone down from first quarter to second quarter second quarter was pretty flat every month was.
47 this quarter, we went up so if you go back from January and looked at now.
<unk> effective March March of April nimble is declining and therefore, the next three months it was flat and now for the three months after that it's gone up so it's great to know.
This curve that I like and I think we.
I can safely predict that this modest improvement will keep happening.
In the next few months.
Stability is the next question.
Again.
This quarter, we grew outside of brokered we grew about $500 billion in deposits and even grow noninterest DDA by little more than $50 million.
Ni DDA to total deposits is stable at about 28%.
I've been asked this question many many times over the course of last two or three years like what do you think the long term run rate sort of debt ratio is where will you will stabilize in terms of.
DVA percentage and I've never been able to answer that question because to be very honest I don't know what.
All of a sudden done where things will stabilize.
Now looking at this data not just for this quarter, but for the last several months are beginning to get confidence in saying that I think we're there or close to being better so.
And if we get another quarter or two updates, which I think we will we will be able to declare that this seems to be the.
The bottoming out on that ratio as well.
They are we say that.
Shoot to actually improve from there to try and get about 30% again over the course of the next few quarters.
What trends quickly net charge offs again very low at seven basis points I think last quarter. They were maybe eight basis points inside of member right.
NPA is on at 40 basis points, if you carve out the SBA guarantee portion that's about 11 basis points Opex 40, so still pretty low.
There were slightly lower than last quarter, but theyre about.
Kind of bouncing around in that region.
Unrealized losses came in at 470, <unk> about 407 I think.
Last quarter, it was a little bit better at $3 73.
Obviously you guys.
It's a function of what's happened to rates, especially in the last few weeks.
Expenses, I think we'd get guided to you that for the second half of the year, we're going to try and keep expenses flat and I think we've pretty much delivered on that.
Let me add a few other things that are not on the regulatory front like I said that E. Mail said it earlier question for larger banks, but I don't really have anything special to report on the regulatory front that you already haven't read in the American banker.
But actually the balance sheet quickly just go over that securities were down to $257 million.
Loans like we said to you, we're taking resi down because we've got no other way to congratulate that was down to 25.
C&I was up a 100 CRE was up 46 overall deposits loans came in down $2 74.
I will make a point that EBIT within CRE.
C&I growth of $100 million, we actually did push out about $300 million roughly of noncore C&I. So if you have not done that would have been much higher we feel like we're getting done what we need to push out in terms of transactional business. So feeling pretty good looking forward.
<unk>, we paid off a little over $800 million.
Brokerage Cds, we paid off a little over $200 million.
Actually <unk> balances now expand lower than they were at the end of last year. So from a balance sheet perspective, we feel pretty good loan to deposit ratio has gone down to 93% from 95 last quarter.
And despite taking the balance sheet down by as much as we have our <unk> was slightly up.
So I'm feeling pretty good about the way the quarter turned out we did build reserves. This quarter ACL was up quite meaningfully to 80 basis points and that's because.
We don't know when a slowdown is coming if it's in a quarter or two or three but it does feel like something will happen there.
<unk> has done a lot to slow the economy down.
And.
Hopefully just a soft landing, but it may be a mild recession and we have to be ready for it. So we did.
Build reserves most of that reserve build was really because of.
The Moody's.
<unk>.
Outlook.
Got worse and when you run it through our numbers that contributor too.
More than half of our provision.
A quick comment on the environment.
Make a statement or two on this I think on the rate side right economy, and regulatory as I'll talk about all three on the rate side.
My personal opinion is I think the fed is done.
Whatever little more they wanted to do I think the market is doing Florida.
And I would be surprised if there is.
Much movement from the fed maybe another move a.
A couple of meetings, but.
It feels like that story is has it affected the economy is still coming along fine, but reading more and more about how the consumer is.
Pretty much done but believe it can be.
The buildup of cash from the pandemic, so we're being very careful and vigilant on on the economy to see any signs of cracking I think eventually we will see some on.
On the regulatory front.
A lot that could happen that we're all reading about it impacts obviously banks and be 102 trillion range a lot more there'll be some trickle down effect for us.
So but on the day to day basis I think.
Everything is fine on the regulatory front I don't think anybody is being unreasonable.
And yes, there will be.
A little more burden on the regulatory front that will all have to deal with but I think it's sometimes a little overplayed.
So with that.
I'm missing anything, but just what do you think that on a piece of paper so.
Fair enough.
It dropped off and lastly, as they are talking through their stuff, but.
Once again, thank you for joining us I'll turn this over to tough great. Thank you Raj.
More follow up on the discussion on deposits in all linked it a bit with our dialogue.
Last quarter, we talked about having a good level of confidence and a strong deposit pipeline.
We saw that come to fruition.
In this quarter with the operating lines of business delivering as Raj said almost $500 million of deposit growth.
That was really across all of our operating businesses. So it was there was great to see that.
<unk> hundred 84, it was the exact number as we look at this quarter and think about what our deposit pipeline looks like it continues to be.
Significantly in kind of in line with what we saw last quarter in executing this strategy are core operating accounts.
In IBD business Treasury management business and so forth so.
Our pipeline overall has not diminished from what it was last quarter, despite bringing on $484 million of new deposits.
In Q3, so we feel good about that.
There is some information in the deck on slide eight our largest deposit vertical.
<unk> used to be the title solutions business with deposits of about $2 8 billion.
As of.
September 30th.
And there is no other real significant concentration within the deposit book.
Talk a little bit more about the loan side.
Consistent with the strategy, we've outlined for you Rajiv declined by 225 million Cree was up about $46 million for the quarter.
The overall outlook for Korea is a little bit more challenging in the market today, we're not seeing as strong a pipeline opportunities of today's interest rate level with cap rate level.
Less deals are making sense so.
We did get $46 million in growth.
Asset category loan category has been relatively flat all year, if you look at where.
We started off the year market conditions remain.
Challenging we're happy with our overall portfolio that we have that new generation right now.
Is not is not easy.
<unk> C&I was up.
$101 million for the quarter.
That number really was a lot better absent.
The push out of non strategic relationships that Raj talked about we had an opportunity to exit in <unk>.
It's about $650 million of commitments for the quarter, which was just slightly less than $300 million.
In <unk> all of these.
We're relationships that.
We're not quarter. Our go forward strategy and generally that you did not either meet the pricing opportunities that we see in the existing market today.
Or any deposit strategy that we're moving forward with so we took the opportunity to exit those in the quarter. If we look at.
Kind of core core I guess would be the best way to say it.
We had actually a terrific quarter in small business lending, we had a terrific quarter in the commercial segment all of those credits that we've talked about are in the corporate banking segment in EBIT that grew after walking away from $650 million.
Commitments, So I think as Raj said, we're well there will be other things like that that will come up and redial to deals that will come up that's probably the largest amount we're going to see every quarter. So we're pipelines in that segment remain.
Very strong across all of our geographic markets and across all of our industry segments. So we feel pretty good about.
The C&I business as a whole across all segments. The franchise equipment municipal finance business continued to trend down modestly in mortgage warehouse lending was down $116 million.
In response to what's happening in the residential mortgage.
Mortgage market as a whole.
Average rate on new production for the quarter was between eight eight and a half for C&I.
Segment, we're seeing generally deal opportunities.
Kind of into Sofa, plus $3 30 kind of range. So thats part of whats happening in this trade off of opportunities, where we have the ability to exit.
<unk> that are significantly less than that in yield and reinvest it in more relationship oriented transactions, where we're currently seeing better yields.
For the crude pipeline what were seeing is yields kind of just slightly under the 8% level.
Just got a little bit of time.
A little bit more on the Cree.
Portfolio, you've got significant detail on slides 12 through 14 in the supplemental deck, but a few overall comments.
Our <unk> portfolio continues to be modest to the overall bank's balance sheet of 23, 5% of loans or create a risk basis total risk based capital was 168%.
Which is well below the regulatory guidance threshold.
To date any potential <unk>.
<unk> that we have any large theyre not really broad across any asset category. They are very specific to a particular loan or a particular sub market.
Timber 30, the weighted average LTV of the credit portfolio was 56% the weighted average debt service coverage ratio was one eight and about 15% of the <unk> portfolio matures over the next 12 months about 8% both matures over the next 12 months and is fixed rate so our maturity schedule.
Over the next 12 months is relatively light.
Specifically to the office sector and we feel good about office overall of the portfolio that we have in particular.
It's $1 8 billion of that $1 eight valued at about 200 million is in traditional medical office.
<unk> facility.
Facility, so that's kind of different than the than the standard office portfolio, but everyone looks at but the total is about one eight with.
$200 million of medical office, the weighted average LTV of the office portfolio was 64% weighted average debt service coverage ratio was one seven as of September 30th.
Detail and they're giving you a breakdown geography wise asset class wise, but as of 930, 95% were pass rated 50.
58% of the office portfolio was in Florida.
Virtually all of that is suburban office, the Florida market and all major.
Metropolitan areas.
10 years to perform very well.
So we feel pretty good about where we are from a Florida perspective. There are some other slides are in 14 that give you some breakdown between Florida and the New York market with respect to the New York State portfolio.
44% of that portfolio is in Manhattan.
Little under $200 million.
Of office exposure in Manhattan.
Properties currently are 95% leased and we only have a 5% rollover in the next.
12 months overall your office portfolio has an 11% rollover in the next 12 months no. When we look at sort of credit quality within the overall <unk> portfolio.
If you look at 12 31, 22, we had $91 million that were rated below pass.
This quarter, we had $90 million so.
Trends have been very stable.
This portfolio.
Watching it closely but we feel very good about the overall <unk> portfolio and good about our office portfolio, given the property's geographic locations and mix between suburban and office, so with that I'll turn it over to Leslie.
Great. Thanks, Tom.
Is to reiterate net income for the quarter was $47 million or <unk> 63 per share in.
Earnings this quarter were impacted by the reserve build.
This quarter.
Great News about the net interest margin up to $2 56 from <unk> 47 last quarter, we're starting to see all of the balance sheet strategy that we've laid out for you in the past getting some traction and having a positive impact on the on demand.
Total, earning asset yields increased from $5 30 to $5 52 with securities going up from $5 19 to $5 48, while the yield on loans went up from $5, 53% to $5 54.
Cost of deposits was up 28 basis points. This compares to a 41 basis point increase last quarter. So we're continuing to see that trend of slowing in the rate of increase of our overall cost of deposits.
Now sits at $2 74.
We also saw the decline in relatively higher priced wholesale finding having a positive impact on the NIM this quarter.
The provision Im sure Youre, all going to ask questions about the provision so I'll try to answer before you ask them.
The provision was $33 million this quarter and the ACL to loans ratio increased from 68 basis points to 80 basis points, even though net charge offs remained very very low the biggest driver of that provision this quarter and the increase in the ACL was the impact of the fee.
Moody's forecast in the model and a slightly less favorable economic outlook in those forecasts, but things that we're really drivers of that.
The biggest one was really the right forecast, which has a little bit higher for longer rate forecast in it than we saw last quarter and there were a couple of other factors as well, but that was the most significant one.
Changes in portfolio composition, a little bit of a bump up in specific reserve.
Some risk rating migration also impacted the reserve and if you look at slide 16, you see a waterfall chart of all the different factors that impacted the reserve this quarter, specifically the Cree office portfolio. The reserve was up 899 basis points compared to 83% at June 30th So a little bit of build there as well.
Last quarter, we provided you some stress testing results we repeated those in the deck. This quarter just in case, you're interested they haven't changed.
Nothing really to say about noninterest income and expense this quarter now raw material or significant trends, there and I think warehouse already mentioned, we would expect.
Non interest expense for Q4 to remain relatively flat again.
All of our capital ratios increased this quarter holding company's second line with 11, 4%.
So format, including <unk> nine 8% at September 30, so very robust capital levels and liquidity remains robust as well there are some details on that in the size that you are interested in with that I will turn it back over to Raj for.
Closing comments I would say that I was very good not interrupting either of you.
Sure.
Okay.
At a time or two but I did not.
Let's let's turn it over for Q&A.
Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby, while we compile our Q&A roster.
Our first question is going to come from the line of will Jones with <unk>. Your line is open. Please go ahead.
Hey, great. Good morning, Thanks for the questions.
Meanwhile.
Hey.
Lastly, I wanted to ask about the reserves you guys are really if you look back over the past four quarter to five.
Really been fairly ability since the end of last year I can appreciate that I've got this quarter was really another macro doesn't bill, but just wanted to confirm that there's really not anything underlying as being in the book that are justified.
I know classifieds and criticized did see a little bit as well, maybe some NPA, but just wanted to a confirm that and just as we think forward just wanted to get your sense on what the messaging is on the provision as we look into next year.
You really like the lion's share reserve build is done from here.
To the extent that yes, well.
Maybe in higher for longer.
Higher for longer scenario.
Moving it is kind of stable that the reserve, but to stay stable or if theres really a higher number in mind that the reserve needs to be yet.
Well.
Not really that we're trying to solve for a number.
Actually joke with the management that would.
Give me a very easy answer to your question. Yes. It is it is seasonal has brought us to this place where.
I joke about this often that.
Economists at Moody's can wake up on the wrong side of the bed impact our P&L in any given quarter, but anything else we do.
So unfortunately that is what we are wedded to so it will depend a lot on what Moody's splits out.
In three months from now.
And what how their outlook changes that that is a big driver now I will say this much that.
<unk>.
Going into a recession or a slowdown.
Painful these.
Build that happened it has the exact mirror opposite effect on the way out so what can feel like pain can feel like.
Okay.
A year down the road.
But who knows if we're not trying to solve for a number that if we can get there by a certain amount of cash that's not what this is purely based on the math that works off of Moody's forecast and I'm not sure. How they were forecasting 60 or 90 days from now.
And.
The other thing I would say the other thing that is having some impact and we will continue to have some impact as we see the portfolio composition should added residential into commercial that you will also see that reserve.
Gradually sales because the commercial portfolio does carrying and you can see in our slides. We showed you the allocation by type of loan. So you will see some gradual reserve build as that portfolio shift continues to happen as well that's the only other thing.
That's going to be great because the portfolio is not exactly.
Overnight exactly but gradually absolutely like that will happen exactly but there's nothing it's not like Oh My gosh, we're seeing travel growing in our portfolio, we better build reserve is not that.
Got you got you that's very helpful not Nancy polls really comments on monster, but.
That's helpful. Thanks, and then.
I wanted to turn to the margin the margin it was great to see inflect this quarter. It really feels like it's a story of <unk>.
Remix on the funding side and that's what's really been partially enabled by some of those great deposit growth you're seeing in <unk>.
Like momentum is continuing there and Raj you mentioned the margin was up each consecutive month of this quarter. Just curious what are the margin ended the quarter, maybe what the margin was in the month of September so so.
I think I don't think Thats, what Raj said no.
Last quarter, we did give you get into the details of month by month I'd, rather not go into to make this a trend.
Nine months can be really partly because one weird thing happens in a month and Youre Annualizing. One month results. So I don't think looking at it moment by month is really very helpful.
We will say that fourth quarter.
<unk>.
And we.
It's.
Monitoring will be modestly up again.
Unless there's something really bizarre that happens in the quarter based on what we're seeing so far it looks like the trajectory will continue it's not going to get to 3% in the next quarter, but it will keep improving from where it is.
Got it okay.
That makes sense.
Yes.
<unk> taken a little more intermediate term sense of to the extent that this.
Deposit pipeline continues to materialize you see maybe.
A little less <unk> in the funding mix going forward and you get some asset repricing that keeps flowing through.
Do you feel like the margin continues to expand like through 2024.
Or do you feel like it.
So I'm under strict orders from Leslie nothing to talk about 2024, because we haven't done it.
Flattening cycle so.
Now it might give you guidance.
We will give you guidance as we always do in January for the full year, but.
Right now, we'll just talk about fourth quarter and.
In terms of what we're trying to do in fourth quarter is not that different from what we're trying to do in third quarter fill optimize the balance sheet grow the right thing <unk> bring down the securities portfolio of growth C&I grow DDA growth total deposits and bring down wholesale borrowings.
We keep doing that margin will fall in the right place.
And.
It should be a good quarter again.
And.
I'll make one point about demand deposit growth I mean, thats, what im actually most excited about we talked to you about our pipeline last quarter. The pipeline is similar to this quarter. We've converted a lot of that a good business, but the net growth in DDA was about little over $50 million. That's a net number right what were very hard for us to predict is.
That fills that James that is happening in our existing deposits where people are moving out from DDA to interest bearing or just using the money for buying things.
That trend is still continuing maybe slightly slower, but it's still continuing and the reason we have on BVA growth is because the new business, we're bringing in this quarter outpaced that of that that natural trend that youre seeing all over the industry by the way. So we're so happy about the pipeline that we have.
Especially in light of a challenging first quarter disclosed if you're able to stand here in October and say that we have a good pipeline in that.
In the last three months, we've actually converted enough of it to produce DDA growth I'm very happy about it.
Great that's very helpful.
No.
Last thing I really just wanted to hit on I know.
The buyback has been big for you guys in the past, we kind of parse that conversation first half of the year.
Naturally given what was going on but it feels like now we've really kind of removed ourselves.
From that.
Kind of disrupt it feels like we're there.
Docs trading today is just a huge opportunity for you guys is there any update on where you stand with the buyback.
Lastly, we talk to the board about it.
Unanimously agreed.
The time was not ready it was maybe six weeks ago Leslie.
Fixed expenses, we will talk to them again and four weeks in mid November .
My bet.
Judgment would be I think it's still early.
Think we need to wait and.
I would probably think about it in the new year.
Not this quarter.
Got it understood. Thanks for the color guys.
Yes.
Thank you and one moment, while we get to our next question.
And our next question is going to come from the line of Graham <expletive> with Piper Sandler. Your line is open. Please go ahead.
Hey, good morning, everybody.
Good morning.
So I just wanted to hit on the loan side of things I saw that you had about $300 million in commercial loans you exited I just wanted to hear a little bit more about your strategic thinking here, what kind of yields around these portfolios are what kind of spread rather if you include the deposit relationship.
You mentioned that there is a little more to do here I'm just wondering what that would look like maybe over the next couple of quarters and how it might impact your overall growth outlook, because if I back. This out the 300 million this quarter looks like balances were actually essentially flat.
So I'm just wondering about the size of the loan portfolio going forward and maybe the overall direction that takes the balance sheet as well.
Let me, let me go sort of.
Loan category by loan category, So revenue is down through 'twenty five.
I expect <unk> to.
Behaved very similarly next quarter or for that matter, even the quarter after that two or three or four quarters.
Because like we've said we're tools as the heavy and taking it down about $200 million or so every quarter sounds like a good.
A good strategy.
C&I was up a $100 million, but that was net of about $300 million that we pushed out as Tom said in his comments, we don't see that kind of a push out happening in the future maybe some here or there that we will exit.
The stuff that we're exiting generally is non deposit transactional business.
Some of them are snakes.
And where we don't really have an expectation that we will be able to get deposits. Sometimes you just do it eventually give outcome, but when we convinced ourselves does not happening at the spread is too tight then what are we doing in that and that's what we've exited so I would say that what we were.
Existing with business put out a year or two years ago.
So for plus 150 to 200 in that range.
The business that we're doing now.
The pipeline that Tom referenced in the C&I space at over 300, So <unk> silver plus 300, $323 30 in that range. So it's a really good time to be writing the paper and the old stuff is that is that is in runoff is meaningfully lower in terms of profitability.
While we grew about $45 $46 million this quarter.
Just looking at the pipeline it doesn't look like it's going to grow given theres not much happening in the CRE world of the.
Transactions. So our best guess is that will probably be flat.
Small business will grow but it doesn't really move the needle that much in terms of the total balance sheet and.
Our commercial finance subs, which is the franchise finance and the equipment leasing business has been running down now for a better part of two or three years and that trend will continue.
So we're in warehouse lending your guess is as good as mine.
Yes.
I always say that cant go any lower utilization, but it keeps surprising me does go down the mortgage market is.
Probably have a one of the toughest years ever in terms of origination volume. So it's very much tied to that if there is a bit of a bit of a pickup.
And it rates turnaround does it feel like they are going to do but if they do turn around a little bit of a refi opportunity it'll grow otherwise we'd walk, but again the numbers are so small that I don't think it really moves the needle at the top of the house.
Yes, I might just add a little bit of detail to that if we look at when you exit there is two kind of timeframe for exiting one is when you have a maturity those are obviously easier to predict.
The second is when you have an event unusual wavy event as a redial, because theres a transaction opportunity or whatnot those are not as easy to predict so.
While I don't think theres going to be too much more of that to the extent that it was.
In Q3.
From a strict maturity perspective, there are situations that could come up.
Existing credits that are not mature, where theres an opportunity to exit because what.
What's really clear as we look through the dynamics of this trade off that we're consistently making.
Making is if you take any.
Large credit in the marketplace, let's say, it's a 50 million dollar deal when we have the opportunity to exit that we can put on 225 million dollar deals in bilateral relationships, which probably at 75 basis points higher.
What we're exiting and comes with deposits and Treasury management business and Thats. The tradeoff worked consistently looking to make okay.
Okay. So all in it kind of sounds like flattish to maybe maybe slightly down loan balances as a whole.
But much more profitable portfolio is that kind of a fair way to look at it right now yes.
Yes, I think over the course of the next quarter yet.
Okay Cool and then I just you mentioned shared national credits in there I just wanted to know what's your All's total SNCC exposure right now as a percentage of of loans.
It's about $4 7 billion in the aggregate based on the strict regulatory definition of a shared national credit.
Yes.
Thomas you provide any more color offline question.
The definition has expanded.
Over the last couple of years, so it can encompass.
Thing from what you might think of as being your traditional shared national credits, which would be.
A multibillion dollar credit.
Led by one of the major banks worth 25 banks in the deal to a deal that we agent as long as the debt stack is more than $100 million. It can be deals. If we would typically be in that are club deals among us and a couple of banks, where we have a significant share of the wallet we might be killed.
Lateral agent, where it might be the Doc agent, we could be at a couple of different positions. We would have part of the depository business. So.
It's a portion of the overall snack business, but it's certainly not the entirety of it in the other parts of it.
We have built syndications capability on both the real estate side and the corporate banking side, we want to syndicated credits were going to be a lead bank in control of the deposit business. So that portion that would be over the $100 million threshold that have three or more banks would be a snake.
And we continue to be interested in club deals, where we like our relationship and have business, but have a certain guideline on how much exposure, we want to take it.
Those deals that's highly desirable business from our perspective, but it would also.
<unk> so as the guidelines have changed over the last.
Few years yeah.
Got to be a bit more careful with this nomenclature than maybe we were a few years ago.
Sure.
Yes, totally understand and again, if you don't have this number but it definitely seems important and much more profitably the lead agent on these deals what what amount of about $4 seven or you guys still you don't all of that we don't have all of that detail available right. Okay.
But some things if I understand yes, absolutely far better to for a variety of bridge items to be the agent.
On the deal because generally the agent gets.
75% of all ancillary business, although in the snack market today.
Everybody wants part of ancillary business and Thats the Big challenge in the sniff market is theres not enough ancillary business to grow around everybody.
Right, Yeah understood and then I guess the last thing I wanted to touch on is just capital in the CET one ratio, maybe including those <unk> losses of nine 8% are you is this the ratio you guys are managing around right now and then is there a specific near term I guess level you guys are looking at.
This tends to be the ratio.
Stakeholders are focused on and interested in so we do pay a lot of attention to it it's not the only one that we look at obviously, we are aware of TCE to Ta and tier one leverage as well.
I think in terms of a target like Ross said I think in the very near term, we're comfortable where we are in.
Well as we go through our capital planning process at year end, we will think through and discussed with the board.
The outlook going forward around target.
Another way that im not Greg.
Today.
No I understand alright, well. Thank you guys I appreciate it.
Thank you and one moment, while we move on to our next question.
Thanks, Good morning.
Morning, John .
Leslie I'm not going to ask you about the 24 margin but.
If you do it well in answering the question is you made a comment about over the course of the next quarter. This trend is going to continue and I don't know if it's for you or Raj, but how long does it take.
To accomplish what you wanted to accomplish on the balance sheet remixing the assets and Remixing the liabilities I hate the term what inning are we in but I'll just ask it how long does it take to get to where you want to go.
I think it will be in a better position to answer that once we go through our year end planning process. So, we'll probably be able to answer that in January .
I think it's safe to say, it's not a one or two quarter effort.
It's going to take some time.
Yes.
So we can expect more of the same essentially I mean, we have to make some assumptions, but yes.
We can expect more of the same overtime, okay in the near term sure yes, yes, okay.
Raj what do you want the balance sheet to look like when you're done.
Well I wanted to do.
You look back on our balance sheet pre pandemic levels and competitive now it looks quite different.
Back to heavy and securities do heavy and gravy.
And.
I think.
Pre pandemic norm is kind of where we want to take it we don't want to pin you down to zero, but we certainly have a lot of work to do in bringing it down to a more reasonable level.
And.
So I think a good guide might be going back to 2018, 19, and taking a look at our mix.
Not just with loans, but also the securities.
I think thats, what we are looking forward with the <unk>.
<unk> out of the balance sheet, obviously, we don't want to go back to 2019, we want to kind of make profits on where we are today at 28% DDA I'd like it to get to 32% 33% DDA.
And I think we can get there overtime.
Okay. Okay. Good.
Anything you'd call out on the noninterest bearing growth this quarter on the <unk>.
<unk>.
Jordan Larry.
Across the franchise just continued progress pursuing that pipeline.
Lots of new relationship wins.
Okay, Okay, I guess thats, what I was getting at as well okay.
And then Tom maybe a question for you last one for me but.
I understand what youre, saying on the commercial office the CRE office portfolio I'm curious if what the discussions are like when these renewals come up.
How difficult are they with your clients and then.
Secondarily is there anything different between what Youre seeing in New York or Florida.
Thanks.
Yes, I would say.
The renewal discussions generally.
As the metrics show the portfolio is performing very well.
So right now there is.
We have seen a couple of opportunities to pay off because people have gone to the MBS market.
There's not big alternative market for office right now I mean, everybody is kind of got what they've got.
There are some small openings here and there.
But generally our renewal conversations are going.
Well because the performance of the properties is generally very good and we know we have strong debt service coverage ratios.
We have strong leases not in every single property, obviously, there's always a couple of the.
Loans that you are looking at that are slightly different but generally the occupancy is very good the lease rollover is manageable, but they have as I said.
Total 12 month lease portfolio rollover is about 11% so.
Conversations generally.
Grow pretty well I mean, our properties in New York.
Don't have that big of a New York Im specifically, referring to Manhattan.
Property in Manhattan.
Half a dozen or so.
<unk>.
The lease rates are in the mid nineties.
Properties have low levels of leverage and are performing well.
They are starting to see.
A gradual return to the office I'm not sure what inning, we're in but we're in the early part of the of the baseball game, but Theyre reporting people are coming back to the offices.
Gradually when were around our office on 57th and Park, there's certainly a lot of people on the street. If you look at ridership on the subways are if you look at the metrics that people are following people were gradually returning back to the office. So.
We're going to see that portfolio gradually be reduced over a period of time through amortization and some <unk>.
Selected.
<unk> to the <unk> MBS market, but.
Okay.
It's fairly stagnant right now, but performing well.
Okay.
And maybe to Florida versus New York is there any material difference I know there is it is all granular but anything there.
Yes, the difference in Florida.
Different Florida is different from New York, and then different markets in Florida are different from different markets in Florida. So sure.
You look at the Miami market in particular, where we do not have any CBD.
<unk>, but the Miami market.
Is extremely strong right now the Palm Beach market is very strong.
Tampa continues to show good strength, particularly in the suburban.
If market area, we have.
And Orlando portfolio, but again, it's not a CBD portfolio, but predominantly in the northern suburban office markets.
All of those continue to perform.
Very well these are typically three or four or five story suburban buildings that house medium sized businesses that are located close to where the employees live.
General trends or people or their office, three or four days, a week and the properties are performing well.
Okay.
Alright, Thank you very nice quarter.
Okay. Thank you.
Thank you everyone alumina as we move on to our next question.
Our next question is going to come from the line of Steven Alexopoulos with Jpmorgan. Your line is open. Please go ahead.
Good morning. This is Janet Lee on for Steve Alexopoulos.
I wanted to go back to reserves for a second and how the higher rate forecast for Moody's is the largest driver of the Belden reserves is this really tied to your assumption that rates higher for longer we will increase the odds of a recession is not tied to our assumption.
The assumption that's embedded in the Moody's economic forecast that we see the model Moody's assumption, yes, Moody's assumption this is tied to higher function, but.
It is certainly tied to the fact that in the model a higher rate environment will put some stress on maturing and repricing loans.
Alone.
Thats the driver needs models are extraordinarily complex, Janet but yes at a high level, that's what's going on there and there are other things that work in there too that was just the one that had the.
The most impact.
Right, Okay, because when I was looking when I was comparing Moody's August and May forecast unemployment assumption hasnt changed through 2025 and not much change in GDP actually at a regional level the trajectory of the unemployment path has changed and I know everybody wants to look at the national unemployment rate nationally.
GDP and correlate to that but these models are just far more complex than that and I can't get into all those details.
Theres a lot go might state my point is theres a lot going on in there. Besides just national unemployment National GDP.
Okay.
Sure.
Your scenario contemplates like local market does not just generic Nash.
Yes, that's how these models work, it's based it's done at the Submarket level, yes.
Okay got it.
And can you remind me what unemployment rate is embedded in your current reserve spin.
Well, it's different in New York and in Florida, It's different in Miami and in Tampa, It's different in so that's a pretty complex question, but it's okay. No overall somewhere in average is somewhere in the low fours.
Okay.
And just following up on on reserves.
Looking at the franchise.
Finance segment are you seeing any stress building in that segment looks like.
But it looks like it's Mark Israeli one loan Janet migrated down to non accrual this quarter and let me put some specific reserve.
And it's a kind of a COVID-19 leftover I would say that just never were able to get their way out.
Okay got it.
And last question on NIM and NII. So is it fair to say like theoretically speaking youll get more benefit from NIM point of view.
Fed cuts rates sooner when considering our portfolio mix or do you get more benefits if rates stay high higher for longer and benefits the fixed asset repricing.
To be honest Janet the most impactful thing is mix by far.
Funding mix and loan mix are far more impactful the balance sheet. The static balance sheet is relatively neutral from an interest rate risk perspective, so mix, how the mix evolves with the thing that really will impact the NIM much more so than what the fed does.
Dave.
EBITDA growth that's why the number one priority in the bank.
Alright, thank you.
Youre welcome.
Thank you and one moment, while we move on to our next question.
Yes. Thank you good morning, good morning, David.
Question Raj Leslie you guys have done a nice job tamping down the level of expense growth.
Anything looming I know you haven't done budgets for next year, but anything that could drive that growth rate materially higher next year are there any.
Pending team lift outs or teams you are targeting.
Could move the needle there materially.
Actually we forgot to mention on this call that.
We did hire a C&I had four Texas. So last quarter I think we told you about CRE business had been launched it took us a little longer than I would have wanted on the C&I front, but a press release on that hiring will be going out in the next day or two.
So outside of that we're always looking.
We did make some.
Good hires.
In April may timeframe.
So theres nothing in particular that jumps out that there is a.
<unk> team or anything, but there are always producers that were bringing in at the same time number we're keeping expenses flat. So there are some people that were changing out as well.
Our focus so much on on deposit growth in DDA growth.
You don't cut that.
<unk>.
Incentive plan may have changed so much that some people may choose to not be here. So I would say theres a little bit of recycling that has happened.
Simply because our priority to solely focus on the right side of the balance sheet. So.
But there isn't any other notable thing to talk about other than the C&I higher debt decided I think this Monday, Tom correct, yes.
Got it I appreciate that color.
We are trying to improve the mix and talent of the people that we have.
I would say.
Thats a constant process of talent management is continuously.
Looking on attracting the right talent and you always will have people that are not.
Meeting whatever standard we've set and also having the discipline to make those mix changes is important.
Got it and then in terms of the deposit success story this quarter curious Raj or Leslie can.
Can you attribute some of that the taxes are you starting to see that.
Contribute to the bottom line and I don't know how did you disclose the dollar amount of the deposit pipeline is though.
Curious where that stood relative to last quarter.
I would say when you look at it.
No.
C&I portfolio in particular, so granular.
Across the board I would I would attribute it more to efforts in certain.
Segments of the loan categories and C&I.
I look at what grew.
For the quarter. We grew what I think is really kind of core parts of our business strategy, which was manufacturing wholesale trade logistics international trade because of the markets that we're in healthcare had nice growth those are really the four segments of the C&I portfolio.
It grew most but it's it's across it's a little bit across the board in every segment that we're in.
We've seen.
Good growth in what I would call our more traditional long term markets.
We are seeing nice growth in the newer markets that we have opened up over the last few years.
Was that also translated to the deposit side in Texas.
No no and typically.
Again back to this word mix that we're using a lot.
When you start off a new office generally their relationships tend to be more loan oriented and over a period of time you are able to then expand what you create.
Reputation in the marketplace you create some critical mass anytime you enter a new market.
It's a multiyear strategy to fully develop that market out and.
Markets that we want to go too.
Our attractive and competitive we have not been able to find any attractive a noncompetitive markets to go to.
Raj just asking me to find one but I can't seem to find one so it takes the right talent and time to build these they tend to build faster on the left hand side of the balance sheet and the right hand side of the balance sheet.
Got it and then one final question Leslie the pickup in special mentioned loans, just curious if there's any segment or industry that you'd call out that drove that increase.
No there really is nothing in particular to call out I think.
This looks to us more like normalization of credit.
Tend to be any particular portfolio segments, where we're seeing signs of travel and the other thing I'll say is that we don't really at this point in time, we don't really see any real loss content in Indiana.
As assets they migrate into special mention.
Got it appreciate the color.
Thank you and one moment for our next question.
And our last question is going to come from the line of Samuel Varga with UBS. Your line is open. Please go ahead.
Daniel Your line may be on mute.
Alright, we will go ahead and I will go ahead and hand, the conference back over to Raj Singh for any firm.
Other remarks.
As always thank you very much for joining us and listening to our story.
We feel pretty good about where the bank is.
And the progress that we've made in a very short period of time and look forward to speaking with you again with a lot more information in in three months until then stay safe. Thank you bye.
This concludes today's conference call. Thank you for participating you may now disconnect.
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