Q4 2023 BankUnited Inc Earnings Call
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Okay.
Good day, and thank you for standing by and walk through the backyard as financial fourth quarter and fiscal year 2023 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation will be a question and answer session to ask a question during the session need to press star one on your telephone you will then hear an automated message device in your hand is raised to withdraw.
Your question. Please press Star one again, please be advised today's conference is being recorded I would now like to hand, the crops will be a speaker day, Susan Greenfield Corporate Secretary. Please go ahead.
Susan Wright Greenfield: Thank you Kevin good morning, and thank you.
Susan Greenfield: Correct.
Susan Greenfield: Sure.
Susan Greenfield: Okay.
Susan Greenfield: Okay.
I'd like to remind everyone.
Susan Greenfield: 1995.
Susan Greenfield: Correct.
Susan Greenfield: Sure.
Susan Greenfield: Okay.
Susan Greenfield: Yes.
Susan Greenfield: Great.
Susan Greenfield: So as a company.
Correct.
Susan Greenfield: Okay.
Susan Greenfield: We're looking at information.
Susan Greenfield: The company.
Susan Greenfield: Sure.
Susan Greenfield: Okay.
Susan Greenfield: The company will be.
Susan Greenfield: Such forward looking statements are subject to various risks.
Susan Greenfield: Certainties.
Susan Greenfield: Limitation.
Okay.
Okay.
Susan Greenfield: Okay.
Susan Greenfield: Gross strategy.
Susan Greenfield: Okay.
Susan Greenfield: All right.
Direct control.
Susan Greenfield: Bruce.
Susan Greenfield: The company.
Susan Greenfield: Any obligation to publicly update.
Susan Greenfield: Yes.
Susan Greenfield: Okay.
Susan Greenfield: Got it.
Susan Greenfield: Okay.
Actual results.
Susan Greenfield: Okay.
The forward looking statements.
Yeah.
Susan Greenfield: Okay.
Susan Greenfield: Information.
Susan Greenfield: It can be found in the company.
Susan Greenfield: Sure.
Susan Greenfield: Okay.
Susan Greenfield: At December 31st 2022.
Susan Greenfield: Subsequent.
Susan Greenfield: Okay.
Susan Greenfield: Our current report on form.
Susan Greenfield: Which are available.
Susan Greenfield: I'm sorry.
Susan Greenfield: Desktop.
Susan Greenfield: Right.
Susan Greenfield: Yes.
Susan Greenfield: Thank you Susan and good morning, everyone.
Susan Greenfield: Joining us.
The earnings call.
Susan Greenfield: Nine months ago.
Susan Greenfield: Right after March 1st quarter earnings.
Susan Greenfield: For you.
Susan Greenfield: Our short term strategic.
Susan Greenfield: And they are roughly where we've even summarize them by let's say improve the balance sheet data improve the P&L the balance sheet.
Susan Greenfield: On the left side of the balance sheet.
Susan Greenfield: Yes.
Susan Greenfield: The bonds and more C&I and CRE growth the right side of the balance sheet the LIBOR core funding.
Susan Greenfield: Defense DVA.
Susan Greenfield: <unk>.
Susan Wright Greenfield: You did all of that margin would expand.
Susan Wright Greenfield: And of course keep expenses at Jack and credit.
Speaker Change: Front and center.
Speaker Change: Certain times.
Speaker Change: So over the last couple of quarters, we've kind of laid out for you. How we did against those vehicles I am happy to announce the fourth quarter of 2023 was a continuation of that story.
Speaker Change: Deposits grew nicely at $426 million. Despite the fact that includes a couple of hundred million off.
Speaker Change: <unk> coming down so excluding brokered.
Susan Wright Greenfield: Deposits grew $604 million and DDA with GAAP versus seasonal.
Susan Wright Greenfield: Adjustment totally happened in the last two or three days of the quarter.
Susan Wright Greenfield: Average EBITDA would actually down only $28 million.
Susan Wright Greenfield: But we're down more.
Susan Wright Greenfield: And on.
Wholesale funding.
Susan Wright Greenfield: Down a bit.
Susan Wright Greenfield: Last quarter, I think there'll be brokered everything worked out.
And on the left side of the balance sheet, just like last quarter, the loans came down $172 million.
Susan Wright Greenfield: The bonds also came down a 100, but we had growth in our core segment to C&I.
Susan Wright Greenfield: As well I was actually at the <unk>.
Susan Wright Greenfield: Beginning of the quarter ever so seemed like it might be a flat quarter for CRE.
Susan Wright Greenfield: So total between C&I and CRE grew $476 million.
Susan Wright Greenfield: On credit Oh by the way all of this led to margin expansion again.
Susan Wright Greenfield: So margin expanded to 56 last quarter to 260, you have to keep doing this margin will keep expanding to.
Talk about next year.
Susan Wright Greenfield: Can you just go through the rest of the fourth quarter first.
Npa's.
Susan Wright Greenfield: On the credit side.
Susan Wright Greenfield: I picked out.
Susan Wright Greenfield: So 40 basis points to 37 basis points, if you exclude SBA loans, and it's actually a 25 basis points.
In the Haynesville, a place where they are so low.
Susan Wright Greenfield: That will be harder to drive them down the charge offs.
Susan Wright Greenfield: Nine basis points for the year, if you compare that to last year I think.
Susan Wright Greenfield: 22 basis points, if I remember right.
Susan Wright Greenfield: So charge offs for the full year.
Susan Wright Greenfield: Fantastic.
Susan Wright Greenfield: And rebuild reserve again, a little bit this quarter I.
Susan Wright Greenfield: I am sorry, I still keep calling me preserve ACL.
Susan Wright Greenfield: Yeah.
Susan Wright Greenfield: Yes.
Susan Wright Greenfield: 82 basis points was 80 basis points last quarter criticized assets did increase this quarter as you would expect this time in the cycle, but overall credit with charge offs being where they are being where they are at a reserve for ACL being what it is I'm sleeping well at night.
Susan Wright Greenfield: Capital is robust.
Susan Wright Greenfield: Step one is now 11 four.
Susan Wright Greenfield: TCE to Ta also is now at 7% unrealized losses in our securities portfolio grew by over 100 million Bucks.
Susan Wright Greenfield: And <unk> net of tax it pulled back empty.
Susan Wright Greenfield: So liquidity position stayed strong so that's almost become.
Susan Wright Greenfield: A couple of points.
The structure.
Susan Wright Greenfield: So by the way there were a couple of.
Susan Wright Greenfield: Instead of notable items in the P&L, which we highlighted in the earnings release, the FDIC assessment, which you guys knew about.
Susan Wright Greenfield: About $35 million and also we saw some railcars this quarter.
Susan Wright Greenfield: And that was the $65 million charge.
Susan Wright Greenfield: This actually helps us avoid some expenses in the coming quarters.
Susan Wright Greenfield: Which was $6 million is significantly less of the expenses that we avoid.
Susan Wright Greenfield: So all of these railcars some retrofitting expenses, so I'm happy about that as well so.
Susan Wright Greenfield: What are we seeing in the marketplace the marketplace.
Susan Wright Greenfield: I'd say were seeing.
Soft landing wearables, saying sort of the perfect.
Susan Wright Greenfield: Which we're all worried that the fed will never be able to achieve but it might be actually achieving that on main street and we're not seeing a slowdown we're not seeing.
Susan Wright Greenfield: Slowdown or loan demand or in margins, we're not seeing.
Susan Wright Greenfield: Concerns over credit beyond sort of the the day to day concerns that we always have so were seeing a pretty decent economy, especially in Florida were seeing a pretty strong economy.
Susan Wright Greenfield: And I'm beginning to feel more optimistic than you did three months ago.
Susan Wright Greenfield: With that in mind, I would say that.
Susan Wright Greenfield: 24 guidance, what we will say to you is given what we see the economy and the rate environment. It feels like this year. The strategy is going to stay the same by the way. It's been approved the left side of the balance sheet like I, just described which was really over the last couple of quarters. The last three quarters and also improve the right side of the balance sheet. So.
Susan Wright Greenfield: We finished our planning for the year, just a couple of weeks ago.
Susan Wright Greenfield: When it comes out to be a high single digit growth.
Susan Wright Greenfield: In deposits not imploding broker brokerage would actually picked out.
Susan Wright Greenfield: Okay got it and on the lending side to get the.
Susan Wright Greenfield: CRA from high single digits growth rate, we will continue to shrink probably similar to the amount that a shrink this year give or take.
Susan Wright Greenfield: And Ni DDA is where the focus will remain and we'd like to get back over 30%, probably it's hard to say when that will happen, but we're certainly are Gary the whole company up to shoot for that to get back over 30% over time. It may not happen in a year. It may happen in a couple of years, but thats.
Gary Smith: It still will be the most importantly nasal JV.
Gary Smith: Margins should continue to improve.
Gary Smith: The first quarter will probably be flattish give or take one or two basis points, but after that.
Gary Smith: Margin in the semi increase up into all of this year and into next year.
Gary Smith: And expenses will be mid single digits.
Gary Smith: Types of expense growth.
Gary Smith: Are you guys.
Anything else.
Gary Smith: In terms of capital at least the question that will come up with the very first question is on hydro who will answer it so for the time being we stay on the sidelines with share repurchase share repurchases.
Gary Smith: At the February Board meeting, we'll talk about it again with the board I think in the short term, but that's going to be our stand in the medium term it will probably change.
Gary Smith: But we need to see a little more time before we get back into capital.
Gary Smith: Repurchase.
Gary Smith: As a dividend discussion of that is coming up in February and we expect the board to.
To act positively against that.
Gary Smith: With that let me turn it over to by the way.
Gary Smith: The company for the call. So I tend to lose my vocal cords that for a while if I if I speak less it's not because I don't want to I love speaking.
Gary Smith: Jonathan the disclosure after Scott Alright, Leslie I'll turn it over to you.
Leslie: You heard me talk first about okay. Thanks Raj.
So first of all out there.
Leslie: Got a little confused there.
Leslie: I'll start a little bit on the deposit side. So as Raj mentioned, we were up 426 million for the quarter.
Leslie: Non brokered.
Leslie: Total deposits were growing by 604, excluding the non broker fees. The overall pipeline for deposits still continues to look very robust.
Leslie: Our near term pipeline is about $1 billion.
Leslie: Which is heavily dominated by.
Leslie: Operating account business and then DDA business in line with Roger's comments about continuing to emphasize that business that pipeline as it remains strong.
Leslie: For a couple of quarters now and I think it looks very good as we head into the first part of 2024 on the loan side overall loans grew by $277 million for the quarter.
Leslie: Roger outlined consistent with strategy revenue did decline by 172 million Cree was up by $77 million for the quarter, we were happy with that growth with C&I growth across all segments lines.
Geographies specialties was up almost $400 million $399 million.
Roger: For the quarter, so that was an error.
Roger: Excellent quarter for us in the C&I area.
Roger: And.
Roger: Mortgage warehouse was also actually up a bit for the quarter were starting to see some.
Roger: Recovery in that sector as rates trended.
Gary Smith: Down and we saw a bit more activity on the residential side.
Gary Smith: As Roger indicated franchise equipment in our municipal finance were down modestly in those will probably continue to trend in that direction for 2024.
Gary Smith: We're optimistic about the growth.
Gary Smith: Core C&I at Cree.
Gary Smith: For the year, we are I think blessed to be in excellent markets and excellent individual geographies I think we've got great talent groups of people in the right places in the specialties in Florida, the southeast of our office in Dallas now.
Gary Smith: In many parts of the company, we're just seeing very very good.
Gary Smith: Growth opportunities on the C&I side, we have an extremely robust C&I pipeline in all areas of that corporate banking commercial and small business unit. We are seeing just good quality opportunities across the franchise.
Gary Smith: We do think.
Gary Smith: As we look towards the latter part of the year. We did have create growth for the year I think we're pretty well positioned from a Cree perspective.
Gary Smith: As we head into the year given that our.
Gary Smith: Our overall numbers and the free portfolio are fairly modest.
Gary Smith: 23, 6% of total risk based capital.
Yes.
So im sorry total loan.
Gary Smith: 13% of construction on total risk based capital so we've got plenty of opportunities in the future.
Gary Smith: The market now rates, where they are is a bit muted, but also as we talked to clients looking towards the latter half.
Gary Smith: Of the year, we do see.
Gary Smith: Opportunities with clients that have <unk>.
Gary Smith: Capital at play and I think compared to other banks that have.
Much larger Korean construction exposure issues I think we'll be in a good position to selectively take advantage of some good quality opportunities as we get through the second half of the year for RAIT market performs the way it is expected to perform.
Gary Smith: So with that let me spend a few minutes on the <unk> portfolio.
Gary Smith: Also have greater detail in slides 12 through 14 of the supplemental deck, where we've provided additional disclosure so to create portfolio does remain modest at 23, 6% of total loans create a total risk based capital is 169% well below the regulatory guidance threshold.
Gary Smith: At December 31, the weighted average LTV of the Cree portfolio was 56% and a weighted average debt service coverage ratio was one eight up about 16% of the creep portfolio matures in the next 12 months with about 8% matures in the next 12 months or is fixed rate.
Gary Smith: Everybody's favorite topic his office, so let's talk a little bit about office.
Gary Smith: Specifically, we have just a little under $1 8 billion.
Gary Smith: Our office exposure Mitchell.
Gary Smith: The majority of that is in Florida within that a little over $300 million is medical office buildings. So that we think that asset class will perform differently than it has been a much stronger position than kind of office sort of nationwide. So our overall traditional office portfolio is around $1 5 billion during the.
Gary Smith: Quarter, we had payoffs totaling $88 million in the office portfolio.
What had been our largest office loan.
Gary Smith: In the overall portfolio the amount of the senior MBS market at the end of the year. Our total office exposure was down $78 million for the quarter. It was also down to the third quarter by $30 million. So we're down to $108 million in the last two quarters of office exposure, which is significant as a percentage of the overall.
Gary Smith: Consistent with the prior quarter the weighted average LTV of the office portfolio was 65% weighted average debt service coverage ratio was one seven at December 31, we.
Gary Smith: We've provided some of the breakdown of those numbers by geography on slide 12.
Gary Smith: Essentially all of the portfolio was performing at 92% was past rated at December 31.
Gary Smith: Overall, the portfolio continues to perform well as characterized by strong sponsors who are supporting underlying properties generally with low basis.
Gary Smith: And the underlying properties and we do not expect much in the way of loss content from the office portfolio.
Gary Smith: As I mentioned, 60% of the office portfolio is in Florida, where demand the demographics continue to be.
Gary Smith: Generally favorable substantially all of the portfolio is suburban.
Gary Smith: There is some charts on slide 14 that give you. Some further geographic breakdown of Florida, and the New York Tri State portfolios by the sub market just as a side story I was in West Palm Beach last week.
Gary Smith: Joining a private equity client in their office building in downtown West Palm Beach.
Gary Smith: Into the building and could not find a parking space and had to leave the building and go find public parking somewhere else. So I thought that was a pretty good indicator of the health of the office market in that particular.
Gary Smith: Geography that we're in.
Gary Smith: With respect to the New York Tri State portfolio of 42% in Manhattan.
Gary Smith: Which totals approximately $180 million for our Manhattan office portfolio is 96% occupancy and a <unk>.
Gary Smith: Much lease rollover, 3% the remainder is in long island in the boroughs in the surrounding Tri State area.
Gary Smith: Overall rent rollover in the next 12 months is a small portion of the portfolio.
Gary Smith: At 11%.
$146 million of create office were rated below past.
Gary Smith: The 12 31 23. This compares to $90 million at $93 23, an increase of $56 million.
Gary Smith: Most of this increase is a result of tenants vacating space.
Gary Smith: Some buildings, which is putting pressure at least temporarily on cash flows and increased insurance costs and interest rate cost a part of it. There is most office buildings today. There is a phenomenon even if you re lease the space you have a concessionary period of time and generally unless it's a very short period of time.
90 days or less we don't count that cash flow, even if we have an investment grade tenant signed up to replace that so we are seeing some of this turnover in the portfolio and we will work through.
Gary Smith: It's a this.
Leslie: With that I'll turn it over to Leslie for more details on the quarter. Okay. Thanks, Tom.
Leslie N. Lunak: Net income from the $28 million or 27 cents per share obviously impacted by the FDIC special assessment.
$35 $4 million pre tax we also have sold or in some cases entered into agreements to sell some railcars at BMT or a loss of $6 5 million.
Leslie N. Lunak: Compares to a gain of $4 $2 million on similar transactions last quarter. So you see a $10 million swing.
Leslie N. Lunak: Net income quarter over quarter, and it's pretty much all related team. It does railcar sales there may be some more of this over the next few quarters that we don't expected to net out.
Leslie N. Lunak: The carrier in the aggregate in terms of gains and losses, although it could be lumpy.
Gary Smith: And then with $2 60 for the quarter compared to 256 last quarter, earning asset yield went up from 552% to <unk> 70.
Gary Smith: Securities increased from 548 to 573, there were some coupon resets in there some of these things only reset quarterly or annually and we're still seeing coupon resets.
Gary Smith: And some retrospective accounting adjustments the yield on loans was up from $5 54 to <unk> 69 cost of deposits was up 22 basis points to 296 al.
Gary Smith: Given that that 22 point 22 basis point increase this quarter compares to the 28 basis point increase last quarter and for the last several quarters now we've seen that rate of increase slow quarter over quarter, which is a good sign.
Gary Smith: Average cost of debt hlv. His answers are pretty much flat, but average balances were down almost $500 million and that also contributed positively to the margin.
Gary Smith: A little bit more about 2024 guidance following up on what Raj said, we do expect the NIM to expand overall in 2024, although Q1 will likely be flattish maybe down a little maybe up a little.
Rajinder P. Singh: I don't want to say I know theres lot of curiosity about this NIM expand the forecasted margin expansion.
Rajinder P. Singh: As a result of what we're doing on the balance sheet.
Rajinder P. Singh: As a result.
Rajinder P. Singh: Sure.
Rajinder P. Singh: The transformation that work that we're getting on both the left side and the right side of the balance sheet and actually doesn't have much at all to deal with whether there's two customer recap.
Rajinder P. Singh: We know.
Rajinder P. Singh: That's not going to change that take care of a static balance sheet is pretty neutral its very very modestly asset sensitive and hopefully the balance sheet as authentic as static and that's what's going to drive.
Rajinder P. Singh: And as balance sheet composition.
Rajinder P. Singh: That does our forecast does have for cuts and then one each quarter, but that's not really the driver.
Gary Smith: And we've seen in getting into the high case.
2024.
Gary Smith: We're projecting a mid single digit increase in net interest income along with the increase in the NIM, even though we expect the total balance sheet to remain relatively flat.
Gary Smith: Okay.
Gary Smith: Hi, there.
Good day, and thank you for standing by. Welcome to the Bank United Financial fourth quarter and fiscal year 2023 earnings call. At this time, all participants are in a listen-only mode.
Gary Smith: This quarter with $19 million in the ACL to loan ratio increased from 80 to 82 basis points.
After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Susan Greenfield, Corporate Secretary. Please go ahead.
The ratio of ACL to nonperforming loans increased to $1 68 per $1 43 in the main drivers of this quarters provision included commercial production and the Remixing in the portfolio and some increase in criticized classified assets. There is a waterfall chart in the deck that shows you all the things that drove the change in duty territory this quarter.
Susan Wright Greenfield: Thank you, Kevin. Good morning, and thank you for joining us today. On the call this morning are Rob Singh, our Chairman, President, and CEO; Leslie Lunak, our Chief Financial Officer; and Tom Cornish, our Chief Operating Officer. Before we start, I'd like to remind everyone that this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect the company's current views, and I expect to, among other things, future events and financial performance. Any forward-looking statements made during this call are based on the historical performance of the company, and its subsidiaries are on the company's current plans at Dementor. The conclusion of this forward-looking information should not be regarded as a representation by the company that the future plans, estimates, or expectations contemplated by the company will be achieved.
Gary Smith: For 2024, we do expect <unk> to continue to build as a percentage of the portfolio and the portfolio composition shift more towards.
Gary Smith: Commercial versus residential allowed within the commercial loan obviously generally carry higher reserves.
Gary Smith: The other thing I'd make a point of saying is our credit reserve is almost three times, our historical lifetime through the cycle loss rate.
Gary Smith: I guess, particularly with respect to Opex, we're looking in a different world now than we have been historically, but that is a lot of cushion.
Gary Smith: Noninterest income and expense, we already talked about the FDIC special assessment in the railcar sale the increase in comp compared to the prior quarter, we're very happy about because it is related to the impact of the increase in our stock price on the value of Rsum PSU Awards. So we don't waste a way I don't think Theres anything else of note to talk about non interest income.
Gary Smith: Stan.
Susan Wright Greenfield: Such forward-looking statements are subject to various risks and uncertainties and assumptions, including without limitations. Those relating to the company's operations, financial results, financial conditions, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's direct control, such as adverse events impacting the financial statements. The company 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, for the notes indicated by These factors should not be construed as exhaustion. Information on these factors can be found in
Stan: <unk> was low this quarter, mainly because of state RTP through apps.
Stan: The outsized impact they have on the ETR in the quarter, where we had a pretax earnings number is a little lower excluding any discrete items I would expect the ETR for next year to be around 25%.
Stan: That's all I had I'll turn it over to Raj.
Rajinder P. Singh: Any closing remarks.
Rajinder P. Singh: Terrific.
Rajinder P. Singh: Given where we're coming from over the last few months.
Rajinder P. Singh: This is a pretty good place.
Rajinder P. Singh: The progress that we've made.
Rajinder P. Singh: Couple that with the momentum I'm seeing in the business and.
Rajinder P. Singh: And the health of the economy, which we don't control, but we're certainly very grateful for.
Rajinder P. Singh: And the impacts on our bottom line, so when I look to 2024.
Rajinder P. Singh: I haven't felt this optimistic in quite some time, so it's a good place to start the year.
Susan Wright Greenfield: Thank you all for joining us today. The annual report on Form 10-K for the year ended December 31st, 2022, and any subsequent quarterly report on Form 10-Q or current report on Form 10-K, are available on the website www.sccdex.org. And with that, I'd like to turn the call over to Brock. Thank you, Susan. Good morning, everyone, and thank you for joining us for the earnings report. About nine months ago, right after March Madness, at the first quarter earnings, we kind of laid out for you what our short-term strategic imperatives are. And they're roughly where, you know, we need to summarize them by saying improve the balance sheet, then improve the P&L, and improve the balance sheet, maybe. On the left side of the balance sheet, you know, it relied less on real estate and bonds and more on C&I and CRE growth.
Speaker Change: Open this up for Q&A.
Speaker Change: Simply put we do it.
Speaker Change: Just on the operating operator, we're ready for Q&A. Thank you, ladies and gentlemen, if you have a question or comment at this time. Please press star one on your telephone. If your question has been answered you assume with yourself from the queue. Please press star one again, we will pause for a moment, while we compile our Q&A roster.
Our first question comes from will Jones with <unk>. Your line is open.
Speaker Change: Hey, great good morning, guys.
Speaker Change: Morning Bill.
Bill: So I wanted to just start that back on the margin guidance, let's say that that was really great color you gave.
Bill: Macquarie.
Bill: Did the margin really benefiting more of the balance sheet composition. This go round as opposed to that.
Brock: The right side of the balance sheet relied more on core funding, defending DDA, and if you did all that, margin would expand, and of course, keep expenses in check, and keep credit front and center, given that we're in uncertain times. So over the last couple of quarters, we kind of laid out for you how we did against those data goals. I'm happy to announce that the fourth quarter of 2023 was the continuation of that story.
Bill: What rates given forward, but I guess the question is.
Bill: The loan side and process changes and you guys have really done a lot of heavy lifting on the deposit side is the lift is really coming from.
Susan Wright Greenfield: The more one or the other or.
Susan Wright Greenfield: A combination of both.
Thomas M. Cornish: This is Tom.
Thomas M. Cornish: Pretty good.
Thomas M. Cornish: Yes, I mean, we haven't we can't tell you mathematically like what part of it comes from lot better together vessel work needs to be on both sides.
Brock: Deposits grew nicely, $426 million, despite the fact that it includes a couple of hundred million. Thank you very much for joining us for this session on the FHLB Brokered. We're going to be talking about the FHLB Brokered coming down, so excluding the FHLB Brokered, our deposits grew $604 million. NIDDA was down for seasonal adjustment.
And.
Thomas M. Cornish: The common that Leslie made about the fed moves.
Leslie N. Lunak: The numbers, we just use whatever the forward curve was which was four cuts when they could cancel them right.
Leslie N. Lunak: Actually a month ago and it will put veterans that are on our budget.
Leslie N. Lunak: But.
Gary Smith: If it is two cuts of creek as a forecast of five record it doesn't really matter.
Gary Smith: The balance sheet structure right now about the company really out of the Illinois Basin.
Brock: It literally happened in the last two or three days of the quarter. Wholesale funding came down as it did last quarter. FHLB Brokered, everything was down.
Gary Smith: No doubt hadn't cuts or something else something silly like old could raise rates for more tighter.
Gary Smith: Then it will be a different thing, but we didn't.
Brock: And on the left side of the balance sheet, just like last quarter, RESI loans came down $172 million. The bonds also came down 100, but we had growth in our core segments CNI and CRE as well. I was actually at the beginning of the quarter thinking it might be a flat quarter for CRE, but it also improved, so total between CNI and CRE, $476 million on credit. Oh, by the way, you know, all of this led to margin expansion again. So it expanded from $2.56 last quarter. This is the summary area. NPAs, you know, on the credit side, NPAs tick down from 40 basis points to 37 basis points, and if you exclude SBA loans, then it's actually a 25 basis point. Thank you for watching.
Gary Smith: Extra cutter cooler laxity Adobe matter the guidance, we're giving.
Gary Smith: <unk>.
Gary Smith: It has more to do with our ability to keep doing what we've done over the last three quarters and I will say will the expansion that you've seen over the last couple of quarters have been more related to funding mix, but going forward, we're really starting to get some good traction on the C&I increase core growth. So I think it's telling compelling form line on the other assets Airlines there.
Gary Smith: Yes.
Susan Wright Greenfield: We think both sides are important.
Susan Wright Greenfield: But just in terms of the loan remix you guys are doing rolling off <unk>.
Gary Smith: Adding on C&I and CRE.
Where do you see that tradeoff in yields on our portfolio as you kind of roll off some lower yielding stuff and then add on this.
Gary Smith: Some of the newer loans I mean today well the C&I increase that was coming on around eight give or take down maybe a little more in the resi stuff that's rolling off.
Folio has an average yield in the mid three seven.
Brock: So charge-offs for the full year have been, you know, I've had to have... And we built reserve again a little bit this quarter. I'm sorry, I still keep calling it reserve. I mean ACL. Everyone knows what you mean.
Gary Smith: Pick up and we're also seeing by the way even still in I don't know how long this will last but at least for now.
Gary Smith: The spreads that we're putting on new commercial production are wider than the spreads on commercial loans that are rolling off even if it's all floating rate product and some of that is market conditions and some of that is that we're just doing a slightly different kind of business. It moved away from some of the snake pit.
Speaker Change: Yeah, so 82 basis points; it was 80 basis points last quarter. Criticized absence didn't reach this quarter, as you would expect this time in the cycle. But overall, on credit, with charge-offs being where they are, NPAs being where they are, and our reserve, or ACL, being where it is, I'm sleeping very well. Capital is robust, SEC 1 is now 11-4, and TCE to TA is also now at 7-4. Unrealized losses in the securities portfolio improved by over $100 million, and the AOCI net of tax improved by 15%. So, I'm not a mickleredy position in Spain strong, so that's all.
Gary Smith: We are doing and more bilateral relationship based business that also tends to come on at a little bit lighter spreads if you will.
Gary Smith: Look for example look this year, where we finished out if you looked at every core lending group.
Corporate commercial small business and Cree the eternal spreads that we measure each group for the entire year finished with better spreads than they did in 2022. So we see incremental margin improvement in each of our lending teams to all of that is happening.
Gary Smith: And Thats, what the pipeline looks like at that point, maybe expect will come back later, but.
Gary Smith: We don't see that yet.
Gary Smith: Okay.
Gary Smith: That makes sense.
Speaker Change: And Raj I'll ask because I feel like.
Speaker Change: This is an important moment for you guys. It feels like there's quite a bit of optimism as to where the margins go.
Speaker Change: So, by the way, there were a couple of sort of notable items in the P&L, which we highlighted in the article, the FDIC assessment, which, you know, you guys all knew about, about $35 million. And also, we sold some rail cars this quarter, and that was a $6.5 million charge. This actually helps us avoid some expenses in the coming quarters, you know, which the $6.5 million is significantly less than the expenses that we would avoid if we were not sold. So I'm happy about that as well. So,
Speaker Change: The end of the year. It feels like this is really one of the first year.
Speaker Change: While that you guys are kind of maybe pulling back a little bit on expense growth.
Speaker Change: Is this the year, where we start to see some operating leverage really play out, especially in the back half of 2024.
Yes.
Yeah.
Gary Smith: I know in terms of expenses and operating leverage I'd, rather keep that through.
The revenue side that from the expense side.
Gary Smith: We have done a fairly large expense takeout exercise just before the pandemic.
Gary Smith: I will tell you that something you cannot do every couple of years, otherwise, we won't really have much left.
Speaker Change: What are we seeing in the marketplace? The marketplace, dare I say, we're seeing a soft landing. We're seeing the perfect thing, which we're all worried that the Fed will never be able to achieve, but it might actually be achieving that. On Main Street, we're not seeing a slowdown.
Gary Smith: So you really have to invest so we are going to invest in our markets.
Gary Smith: Core markets and the new work that we have.
Gary Smith: Talk to you about over the last couple of years.
Gary Smith: And.
Gary Smith: Operating leverage should really come from expanding margin.
Speaker Change: We're not seeing a slowdown either in loan demand or in margins, you know, concerns in the loans, you know, beyond sort of... The day-to-day concerns that we always have. So we're seeing a pretty decent economy, especially in Florida; we're seeing a pretty strong economy and are beginning to feel more optimistic than, you know, even three months ago. With that in mind, I would say that, for 2024 guidance, what we would say to you is... Given what we see, the economy and the rate environment, it feels like this year, the strategy is gonna stay the same, by the way. It's to improve the left side of the balance sheet, as I just described, we've been doing over the last couple of quarters, the last three quarters, and also improve the right side of the balance sheet.
Gary Smith: A couple of World Cup talk to you about growing the total balance sheet is well it may not be in the next two or three quarters.
Gary Smith: The facility.
Gary Smith: <unk> balance sheet is the story.
Gary Smith: Sure.
Gary Smith: Leslie is kicking me under the table because im not supposed to talk about 2025.
Leslie N. Lunak: But if I was to take a wild guess I would say that 2025 and beyond.
Gary Smith: I think if you go back to the normal world of growing the balance sheet, rather hits transforming it.
Gary Smith: Yes, okay.
Great color last quick one from me the gains and losses that you guys.
Gary Smith: Selling operating lease equipment.
Is that ordinary course of business for you guys or where those are really kind of more onetime.
Gary Smith: I think we are.
Speaker Change: So we finished our planning for the year just a couple of weeks ago, and what it comes out to is the high significance of growth in deposits, not including brokers. So brokers would actually want to take down the high signal digit growth, RESDI will continue to shrink, probably similar to the amount that it shrank this year, if it were taken, and NIDDA is where the focus will be. And we'd like NIDDA to get back over 30% probably. It's hard to say when that'll happen, but we certainly are gearing the whole company up to shoot for that, to get back over 30% over time. It may not happen in a year; it may happen in a couple of years, but that will still be the most important thing we'll be changing.
Gary Smith: We're trying to pare down on asset classes. We don't think are core to the future of our business. So you'll probably see some more of that over the course of the next several quarters.
I wouldn't call it one time, but it's not something we've done forever either.
Gary Smith: Expect to see some more of that although it will be lumpy I don't expect it to be.
Gary Smith: Net net the carrier grade of course of the next year.
Gary Smith: So all else equal I mean, maybe maybe that lease financing business, maybe it's not.
Gary Smith: We don't see.
Gary Smith: Much growth there.
Gary Smith: Christina.
Gary Smith: No.
Gary Smith: It's been shrinking for the last three years it will continue to shrink the growth will come from.
Gary Smith: Our core footprint of C&I CRE small business not from the what we call the PFG, which is the bridge finance.
Speaker Change: Margins should continue to improve. I mean, the first quarter will probably be flattish, give or take one or two basis points, but after that, there is a steady increase up into all of this year and beyond. And expenses will be mixed single digits in terms of expenses. You can fill in the numbers if I want. And in terms of capital, at least, you know, this is a question that will come up, the very first question; I might as well answer it. So for the time being, we stay on the sidelines and discuss share repurchase at the February board meeting.
Gary Smith: Based on such as franchise and at the corporate side both of those businesses, we had them in right now.
Gary Smith: Yes, if you went back three years ago, our <unk> would have been $2 billion today to about $650 million.
Gary Smith: So I wont ground, yes.
Gary Smith: Okay Super helpful. Thank you guys. Thank.
Gary Smith: Thank you.
One moment for our next question.
Gary Smith: Our next question comes from Tim more Brazilian with Wells Fargo. Your line is open.
Gary Smith: Hi, good morning.
Gary Smith: Mike.
Gary Smith: Good morning, looking at deposit beta assumptions I'm, just wondering what your expectations are here over the next couple of quarters, assuming no rate cuts in the immediate near term how much additional beds there.
Speaker Change: We'll talk about it again with the board. I think, in the short term, that's going to be our stand. In the medium term, it will probably change, but we need to see a little more time before we get back into capital repurchase. There is a different discussion that is coming up in February, and I do expect that. With that, let me turn it over to, by the way, I'm recovering from a cold, so I tend to lose my vocal cords after a while, so if I speak less, it's not because I don't want to; I'd love to, just for the disabled. Leslie, I'll turn it over to you.
Gary Smith: That data is over kind of <unk> and then I'm just curious as to what your expectation is for deposit betas on the way down and if the competitive Florida market might increase that lag effect on betas on the way down or if you think the floor.
Deposits are going to reprice similar to what you might see elsewhere.
Mike: I'll address that at a high level I mean, theres a lot of very granular modeling that goes on there and I'm not going to try to dive into all the details of the data through the cycle. Thus far has been about 54, we're still modeling high <unk> in the aggregate by the time repricing up stop.
Leslie N. Lunak: I'll start a little bit on the deposit side. So, as Raj mentioned, we're up $426 million for the quarter in non-brokered total deposits, both growing by $604 million excluding the non-brokered piece. The overall pipeline for deposits still continues to look very robust.
Gary Smith: As far as on the way down.
Gary Smith: While I think will be quite proactive in bringing deposit costs down as rates come down you have to remember that on the way up the.
Gary Smith: The marginal cost when rates are coming down the marginal cost.
Leslie N. Lunak: Our near-term pipeline is about a billion dollars, which is heavily dominated by operating account business and NIDDA business, in line with Raj's comments about continuing to emphasize that business. That pipeline has remained strong for a couple of quarters now, and I think it looks very good as we head into the first part of 2024. On the loan side, overall loans grew by $277 million for the quarter. However, as Raj outlined, consistent with the strategy, Resi did decline by $172 million. Cree was up by $77 million for the quarter. We were happy with that growth and the C&I growth across all segments and lines. Geography Specialties was up almost $400 million; $399 million for the corridor.
Gary Smith: New business is going to be higher than the market total cost of the backlog itself.
On the way up.
Gary Smith: Maybe not so much the backhaul side on the way down you are getting at the marginal cost of newspaper and still being a little bit higher than the cost of the backlog against the cost of the backup doesn't equal a marginal cost. So in the aggregate when you look at it altogether because of that phenomenon and alternative vehicles slower.
Gary Smith: We do have one more quarter of CDP private significant re pricing, which is the quarter. We're in right now.
Gary Smith: So after that when we look at our CD maturity.
Gary Smith: So it just drops off pretty significantly after March.
Gary Smith: Last quarter for <unk>.
Gary Smith: It was pretty big this quarter has also begun and then second quarter is very very small.
Leslie N. Lunak: So that was an excellent corridor for us in the CNI area. Mortgage Warehouse was also up a bit for the quarter. We're starting to see some recovery in that sector as rates trended down, and we saw a bit more activity on the residential side. As Raj indicated, franchise equipment and admissible finance were down modestly, and those will probably continue to trend in that direction for 2024. We're optimistic about the growth of Core CNI and CRE for the year. We are, I think, blessed to be in excellent markets and excellent individual geographies.
Gary Smith: Through the rest of the year and so that's one element of that.
Gary Smith: The second element, obviously as new money that is coming in compared to where the average book back book is today, new money is still coming in pretty high.
Gary Smith: Fed cuts.
Gary Smith: But the existing book repricing should start to basically.
Gary Smith: Yes.
Gary Smith: That should all of that should be over and above the knee.
Gary Smith: Four weeks.
Gary Smith: Great.
Gary Smith: And then rich CD repricing phenomenon is one of the reasons, we didn't guide to margin expansion in the first quarter.
Gary Smith: Got it that makes sense and then.
It's encouraging to hear that.
Leslie N. Lunak: I think we've got, you know, great talent, groups of people in the right places and the right specialties in Florida, the southeast, our office in Dallas now. In many parts of the company, we're just seeing very, very good growth opportunities on the CNI side. We have an extremely robust.
Non interest bearing migration and <unk> was more seasonal in nature I'm wondering do you think that the excess liquidity and the risk of kind of additional noninterest bearing flight has done here and if that's the case can you maybe just talk us through what the seasonal factors are throughout the <unk>.
Leslie N. Lunak: C&I pipeline in all areas of that corporate banking commercial and the small business unit, we're seeing just good quality opportunities across the franchise. We do think, as we look towards the latter part of the year, we did achieve Cree growth for the year. I think we're pretty well positioned from a Cree perspective as we head into the year, given that our overall numbers in the Cree portfolio are fairly modest at 23.6% of total risk-based capital of one, of loans, sorry, total loans, and 13% of construction on total risk-based capital. So we've got plenty of opportunities in the future.
Gary Smith: Course of the year and how those balances should move along with that.
Gary Smith: Yes.
Our title business is.
Gary Smith: <unk> is growing very nicely and we're very happy with it.
Gary Smith: Sure.
Gary Smith: That's where most of that seasonality is coming brokerage basically mortgage origination mortgage banking related deposits.
Gary Smith: They do.
Gary Smith: A follow up Kurt P routine cycle Theyre, all this week or in the middle of the month in middle of the quarter. It always stronger months at quarter end with one exception, which is year over year and that business.
Gary Smith: Shutdown and there is very little activity Nobody's closing of mortgage.
Gary Smith: Over three fourths of close to it so.
Leslie N. Lunak: The market now, at rates where they are, is a bit muted. But you know, also, as we talked to clients looking towards the latter half of the year, we do see opportunities with clients that have capital at play, and I think compared to other banks that have, you know, much larger Cree and construction exposure issues, I think we'll be in a good position to selectively take advantage of some good quality opportunities as we get to the second half of the year if the rate market performs the way it's expected to So with that, let me spend a few minutes on the CRE portfolio. You also have greater detail in slides 12 through 14 of the supplemental deck, where we've provided additional disclosure. So the CRE portfolio does remain modest at 23.6% of total loans. CRE to total risk-based capital is 169%, well below the regulatory guidance threshold.
Gary Smith: We've looked back over the last three years very closely at this data as we see the same trend last September and et cetera, before it's just a little more pronounced as the business has gotten bigger. So so that will start building up summer is when the business is the hottest and do things build up over time.
Gary Smith: But also within a month within a quarter, we see that particularly that will be and that will be.
Gary Smith: Have a pretty good handle around it so most of that happened in.
Gary Smith: In that business.
There was a little bit of outflow from some accounts, but I would call that sort of AD hoc and stuff like that happens sub factor inflows and outflows, but I'd say, 75% of that outflow is really was a mortgage related and it happened pretty late in the quarter.
Gary Smith: Which is why the average now.
Gary Smith: Hardly any change.
Gary Smith: And balances with them.
Gary Smith: With significant irregular December 31st phenomenon.
Leslie N. Lunak: At December 31st, the weighted average LTV of the Cree portfolio was 56%, and the weighted average debt service coverage ratio was 1.80. About 16% of the Cree portfolio matures in the next 12 months, and about 8% matures in the next 12 months at its fixed rate. Everybody's favorite topic is office space, so let's talk a little bit about office space.
Gary Smith: Got it and then just a couple.
Gary Smith: CRE related questions it looks like.
Gary Smith: Office, LTE ticked up a little bit quarter over quarter in New York.
Gary Smith: Maybe just talk us through some recent re appraisals that you've had in New York, primarily Manhattan.
Gary Smith: What youre seeing as far as our plenty migration. So on the sales there a couple of things about that some of that re appraisals. Some of that is modeled because when we don't have a new appraisal.
Leslie N. Lunak: Specifically, we have just a little under $1.8 billion of office exposure, the majority of that is in Florida. Within that, a little over $300 million is medical office buildings, so we think that asset class will perform differently. It is in a much stronger position than any kind of office, sort of nationwide.
Gary Smith: Our model is actually take commercial property forecast at the sunlight detailed submarket lateral length and adjust the LTV. So some of that is model and some of that is actually a reappraisal Tom.
Thomas M. Cornish: Yes, I would say are when you say New York City if everybody.
Leslie N. Lunak: So our overall traditional office portfolio is around 1.5 billion. During the quarter, we had payoffs totaling 88 million in the office portfolio, including what had been our largest office loan in the overall portfolio that went to the CMBS market at the end of the year. Our total office exposure was down $78 million for the quarter.
Thomas M. Cornish: Specific remains.
Thomas M. Cornish: In Manhattan.
Thomas M. Cornish: Number of office loans, we have in Manhattan is fairly it's a fairly small number it's about 12 loans.
In total the only.
Thomas M. Cornish: The only maturities that we have seen actually paid off.
Leslie N. Lunak: It was also down in the third quarter by $30 million, so we're down to $108 million in the last two quarters of office exposure, which is significant as a percentage of the overall. Consistent with the prior quarter, the weighted average LTVA of the office portfolio was 65 percent, and the weighted average debt service coverage ratio was 1.7 at December 31st.
Thomas M. Cornish: So we were not looking at.
Thomas M. Cornish: New appraisals and I would say.
Thomas M. Cornish: The information we're here.
Anecdotally not related to our specific portfolio because we just don't have a large enough sample we didn't have enough maturities to say that.
Gary Smith: I'd say, its largely growing deployed towards valuations being down.
Gary Smith: Maybe 20% something in that kind of range credits.
Leslie N. Lunak: We've provided some of the breakdown of those numbers by geography on slide 12. Substantially all of the portfolio was performing, and 92 percent was pass rated as of December 31st. Overall, the portfolio continues to perform well. It is characterized by strong sponsors who are supporting underlying properties, generally with a low basis in the underlying properties, and we do not expect much in the way of lost content from the office portfolio. As I mentioned, 60% of the office portfolio is in Florida, where demand and demographics continue to be generally favorable, and substantially all of the portfolio is suburban. There are some charts on slide 14 that give you some further geographic breakdown of Florida and the New York tri-state portfolios by the sub-market. Just as a side story, I was in West Palm Beach last week visiting a private equity client in their office building in downtown West Palm Beach. I pulled into the building and could not find a parking space and had to leave the building and go find public parking somewhere else.
Gary Smith: Much also a building by building.
Gary Smith: Issuer, depending upon the occupancy.
Gary Smith: Debt service coverage and debt yields.
Gary Smith: And that building there is not like all real estate.
Gary Smith: It's building by building.
But in general those are the kinds of valuation changes, we're hearing in the market, but given our fairly limited portfolio and lack of maturities. We don't have a whole base of information.
Gary Smith: Internally to grow off.
And I would say.
Gary Smith: The Ltvs remained very strong a lot of.
Gary Smith: <unk>.
Susan Wright Greenfield: Great and then just lastly in New York City multifamily what portion if any is rent regulated and what portion is 2019, our earlier vintage.
Susan Wright Greenfield: $121 million worth of New York City rent regulated exposure.
Susan Wright Greenfield: Significant at this point.
Susan Wright Greenfield: Thanks.
Susan Wright Greenfield: Great.
Thank you.
Susan Wright Greenfield: Yes, I would also come back on the loan to value. We're shooting New York loan to values are important but also investor basis in the property is extremely important and when you have.
Susan Wright Greenfield: Our client base.
As a traditional generational owned.
Leslie N. Lunak: So I thought that was a pretty good indicator of the health of the office market in that particular geography that we're in. With respect to the New York tri-state portfolio, 42% is in Manhattan, which totals approximately $180 million. Our Manhattan office portfolio has 96% occupancy and a 12-month lease rollover of 3%. The remainder is on Long Island, in the boroughs, and the surrounding tri-state area.
<unk> client base and win a lot of these buildings were acquired.
Susan Wright Greenfield: At extremely low valuations the tax basis issue matters a lot in terms of how they support buildings, if theres any short term.
Susan Wright Greenfield: Swings in occupancy and debt service coverage ratios and things of that nature.
Susan Wright Greenfield: Great. Thank you for that color.
Speaker Change: One of them before our next question.
Speaker Change: Yes.
Leslie N. Lunak: Overall, rent rollover in the next 12 months is a small portion of the portfolio at 11%. $146 million of Cree office space was rated below pass, at 1231.23. This compares to $90 million at 930.23, an increase of $56 million. Most of this increase is a result of tenants vacating space. In some buildings, this is putting pressure, at least temporarily, on cash flows, and increased insurance costs and interest rate costs are part of it. In most office buildings today, there is a phenomenon, even if you re-lease, and Jeffrey Hosch. Thank you all again for joining me. With that, I'll turn it over to Leslie for more details on the quarter. So net income from the quarter was $20.8 million or $0.27 per share, obviously impacted by the FDIC special assessment. That was $35.4 million pre-tax. We also sold or, in some cases, entered into agreements to sell some rail cars at BFG for a loss of $6.5 million.
Speaker Change: Our next question comes from David Rochester of Compass point Your line is open.
Speaker Change: Hey, good morning, guys.
Speaker Change: Good morning.
Just a point of clarification on the expense guide that's off of.
Speaker Change: This ex the FDIC special or is that including that.
Speaker Change: Excluding alright.
Speaker Change: Yes, thank you for making that okay sure I just want to make sure.
Speaker Change: And on the margin guide that sounded great in terms of the high twos I was hoping you could maybe put some finer parameters around that because high twos can be.
Speaker Change: Pretty decent range pretty big range, I know and I'm, a little bit hesitant to do that because there are just so many factors.
Speaker Change: Could.
Speaker Change: Yes.
Speaker Change: Could move that a few basis points in one direction or the other.
Speaker Change: The cell.
Speaker Change: We're a little hesitant to give you a point estimate because whatever point estimate gave me a is going to be wrong.
Susan Wright Greenfield: Yes, so whatever gets you to mid singles on NII.
Susan Wright Greenfield: Yes, yes, okay.
Susan Wright Greenfield: Just on the railcar sales it sounded like.
Susan Wright Greenfield: You may have some more of those coming is the bulk of that book under water. At this point. If you could just maybe make a comment on that and then what about the sales means for that income stream going forward. What's a good run rate on that go into the first quarter the.
Leslie N. Lunak: That compares to a gain of $4.2 million on similar transactions last quarter, so you see a pretty big $10 million swing in the fee income quarter over quarter, but it's pretty much all related to those rail car sales. There may be some more of this over the next few quarters, but we don't expect it to net out anything material in the aggregate. Shabbat shalom.
Susan Wright Greenfield: The income stream is going to come down, but the associated expenses are going to come down as well.
Susan Wright Greenfield: Bottom line Thats going to be a positive.
Susan Wright Greenfield: And that depreciation of operating lease equipment will come down as well and there are other expenses that you don't see because they're not broken out in the P&L of writing that business that are kind of come down sell that fee income line will come down net net this will be at those to the bottom line I.
Leslie N. Lunak: The number of employees was 260 for the quarter compared to 256 last quarter. Earnings Asset Yields went up from $552 to $570. The Yield on Securities increased from $548 to $573.
Susan Wright Greenfield: I would agree with that.
Gary Smith: So in terms of the magnitude you guys are expecting there I mean should that get cut in half over the next year. How are you thinking about the trend out the fee income line will decline.
Gary Smith: Eight $9 million a quarter okay.
Gary Smith: And maybe one last one.
Gary Smith: You already addressed this on the buybacks.
Leslie N. Lunak: There were some coupon resets in there. Some of these things only reset quarterly or annually, so we're still seeing coupon resets filtered through the portfolio and some retrospective accounting. The yield on loans was up from $554 to $569, and the cost of deposits was up 22 basis points to 296.
Gary Smith: Yes, it seems like Youre speaking positively about loan growth C&I and CRE outlook is positive and Youre talking about a soft landing credit trends are contained.
Gary Smith: Why not take advantage of the discount to tangible here why you still have it.
Gary Smith: Okay.
Gary Smith: Maybe I misspeak too conservative.
Gary Smith: I still feel there is more time, that's needed to go past that still a possibility of a recession or a slowdown.
Leslie N. Lunak: I'll mention that that 22 basis point increase this quarter compares to a 28 basis point increase last quarter. So for the last several quarters now, we've seen that rate of increase slow down quarter over quarter, which is good. The average cost of SHLB advances was pretty much flat, but the average balance was down almost $500 million, and that also contributed positively to the budget.
Gary Smith: I think this is.
I would rather deploy capital honestly.
Gary Smith: We added to loan growth I know, we're not talking about total growth.
Gary Smith: Year at much into next year, we are thinking about that.
Gary Smith: Even the bond portfolio are an example of which we've been shrinking at some point this year it will stop tricky.
Gary Smith: So overall, we're also gearing for balance sheet growth.
Peter It's David.
And also looking at.
Peter: Certainly the system, so put that altogether in the very short term.
Leslie N. Lunak: A little bit more about 2024 guidance, following up on what Raj said, we do expect NIM to expand overall in 2024, although Q1 will likely be flattish, maybe down a little, maybe up a little. I do want to say, I know there's a lot of curiosity about this, the forecasted NIM expansion is a result of what we're doing on the balance, a transformation that will work that we're doing on both the left side and the right side of the balance sheet. It actually doesn't have much at all to do with whether there's two cuts, three cuts, six cuts, you know, that that's not going to change the picture.
David Rochester: I think it will stay on the sidelines, but I don't want to speak for the board eventually the boards decision, but we do have this as a discussion point at every board meeting starting in February we have that on the agenda to discuss.
David Rochester: My guess is they will.
Gary Smith: We have deferred.
Gary Smith: Probably the second half of the year.
Gary Smith: But.
Gary Smith: We can change and we do actively discussed at every board meeting.
I wanted to come back on one point on your railcar question as it related to the comment about underwater it's not so much.
Gary Smith: Were underwater from a residual to NOL.
Kind of analysis perspective, it's that these.
Gary Smith: Assets will require future investment to continue to keep them marketable and this is not us.
Leslie N. Lunak: The static balance sheet is pretty neutral. It's very, very modestly asset sensitive, but hopefully, the balance sheet isn't going to be static, and that's what's going to drive it. The NIM is balance sheet composition, not what the Fed does.
Gary Smith: Line.
We are going to be in the long run so when we have opportunities that we can.
Gary Smith: Continue to move out of these sums.
Leslie N. Lunak: Our forecast does have four cuts in it, one each quarter, but that's not really the driver. You'll see men getting into the high twos by the end of the show, for We're projecting a mid-single-digit increase in net interest income along, And then, even though we expect the total balance sheet to remain relatively flat. In addition, this quarter, with $19 million in the ACL-to-loans ratio increased from 80 to 82. The ratio of the ACO to non-performing loans increased to 160 from 142.
Gary Smith: Sometimes relatively small gains sometimes relatively small losses it fits their long term strategy of the company.
Gary Smith: Okay great.
Gary Smith: Sounds good thanks, guys.
Gary Smith: <unk> next question.
Gary Smith: Our next question comes from Jon Atkin with RBC. Your line is open.
Gary Smith: Hey, good morning.
Gary Smith: Great.
Speaker Change: I think David had all my questions just aligned right up but I do have a few more.
Speaker Change: Yeah.
Speaker Change: How much more is that are due on the residential run off Raj you alluded to it there might be similar so question. One is do we assume down another.
Leslie N. Lunak: And the main drivers of this quarter's provision included commercial production and the remixing of the portfolio and some increase in criticized classified assets. There's a waterfall chart in the deck that shows you all the things that drove the change in the reserve for the quarter. I would say for 2024, we do expect the ACL to continue to build as a percentage of the portfolio as the composition shifts more toward commercial versus residential loans, and the commercial loans obviously generally carry higher. The other thing I would make a point of saying is our pre-reserve is almost three times our historical lifetime through cycle loss rate. I understand that, particularly with respect to office, we're living in a little bit different world now than we We've already talked about the FDIC special assessment and the rail car sale. The increase in comp compared to the prior quarter is something we're very happy about because it's related to the impact of the increase in our stock price on the value of RSU and PSU awards. So we don't wish that away.
Speaker Change: I guess I'm, a little under 1 billion and then how long does this continue to go I think.
Gary Smith: You should expect this year, seven or 800 million more this year.
Gary Smith: We're not giving guidance for next year, but I think that trend is.
Sort of.
Gary Smith: We'll kind of.
Gary Smith: Afternoon.
Gary Smith: I still think we're way over allocated to raffi.
Gary Smith: Despite it being a very safe assets.
Gary Smith: The yield and the spread so.
Gary Smith: Yes, I think we've got something I forget the exact number this year, but it'll be a similar number 20.
Gary Smith: 'twenty three.
Gary Smith: It'll be a similar number of 24.
Have you ever shared an optimal percentage for Rajiv.
Gary Smith: Kind of what it used to be before.
Gary Smith: So I think there is a way to Gulf couple of years ago.
Gary Smith: Alright.
Gary Smith: Okay.
Gary Smith: Okay. Good.
Gary Smith: You referenced the 30% is where you'd like noninterest bearing to go and I think the term you used was gearing up.
Gary Smith: To get back there how do you do that what is the strategy to do that.
Gary Smith: Well.
How much time do you have.
Gary Smith: No magic one.
Gary Smith: We were over 30%.
Gary Smith: <unk>, obviously that was in a very different.
Leslie N. Lunak: I don't think there's anything else of note to talk about the non-interest income. The ETR was low this quarter mainly because of state RTP true-ups, you know, the outsized impact they have on the ETR in a quarter where the pre-tax findings numbers are a little lower. And excluding any discreet items, I would expect the ETR for next year to be around 25.5. That's all I have.
Gary Smith: Monetary environment that we're in today, but.
Gary Smith: At the beginning of the year, we often can come up with sort of slowly going for the company sort of rallied behavior when the company rallied behind it.
Gary Smith: Point with the idea of.
David Rochester: Putting that up I'd say, that's what we got to deal with so there's no magic to it to 30% mix effect. If we were at 30% to 33% in Idaho, certainly commercial banks that are even higher than that we should strive for at <unk> capital. So.
Gary Smith: But there isn't a sort of.
Gary Smith: Well thought out sort of logic as to why you get there.
Leslie N. Lunak: I'll turn it over to Raj for any closing remarks he wants to make. So listen, you know... Given where we're coming from over the last few months, the progress that we've made... And I couple that with the momentum I'm seeing in the business and the health of the economy, which we don't control, but we're certainly very grateful for, and Edmund Banks is our bottom line. So when I look at 2024, I haven't felt this out yet. This is a good place to start the year. I'll open this up for Q&A. Operator, we're ready to...
Gary Smith: What we will say is the pipeline that we now track.
Gary Smith: The closer you are if anything after the company with the Treasury pipeline account by account, which we spend hours every week focusing on is pretty decent very robust.
Gary Smith: And that gives me the confidence to say that I think that is.
Gary Smith: Attainable goal it may not happen in the next two or three quarters, but it will certainly.
Gary Smith: <unk>, which we can achieve in the next couple of years.
Gary Smith: I would add to that since them generally in the middle of the battle.
Raj: Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 11 on your telephone. If your question has been answered, or you wish to move yourself from the queue, please press star 11 again.
Gary Smith: Yes.
Gary Smith: But it kind of comes down to three things number one you have to have the right talent in the right places who are driving value at the client level and can make people change from X bank to our bank.
Gary Smith: You have to be focused on market segments.
Raj: We'll pause for a moment while we compile our Q&A roster. Our first question comes from Will Jones with KBW. Your line is open. Hey, great. Good morning, guys. Good morning.
Gary Smith: That car predominantly more deposit rich and others.
Gary Smith: There are some industries that drive significant deposits and some that don't so we have over the last few years I'll put our strategy.
Will Jones: Asa, so I wanted to just start back on the margin guidance. Let's say that was really great color you gave just in terms of, you know, did the margin really benefit any more from the balance sheet composition that's gone around as opposed to, you know, what rates do moving forward. But I guess the question is, you know, the loan side is in the process of changing. You guys have really done a lot of heavy lifting on the deposit side. Is the lift really coming from, you know, more one or the other, or is it a combination of both?
Gary Smith: It can be very focused on the types of industries, where you do tend to drive significant deposit levels and the third is just back to something Roger alluded to is intense focus on it yes, you do have to pick your spots.
Roger: Just on the LTE, where the money is where the industry does that go in and actually look at where the pain points are in those industries and those are the spot that's really and it generally takes a multi year effort to solve those pain points through a combination of technology and process and then you hit the market.
Speaker Change: This is an important brief. We can't tell you mathematically what part of it comes from one side or the other, but work needs to be done on both sides, and the comment that Leslie made about the Fed. We didn't make an extra cut or two or less; it doesn't really matter.
Roger: Altogether wanted to share that.
Roger: The formula for success doesn't happen in the year a lot of these things take multiple years.
Roger: But when they do work out.
Roger: It's hard for people to replicate.
Roger: And how does the business have been built and things in the pipeline.
Speaker Change: It has more to do with our ability to keep doing what we've done in the last 20 years. And I will say, Will, the expansion that you've seen over the last couple quarters has been more related to funding. But going forward, we're really starting to get some good traction on the C&I and Creed core growth. Yeah, no. I think both sides are important.
Roger: We're working on even now that we don't talk about openly but it's too early to talk about them, but they are about solving those pain points that bigger banks or even subtype banks our size.
Just not focused on.
Roger: And we do.
Roger: If you're a football fan that's four yards into a cloud of dust every day.
Roger: Okay.
Roger: My photos three yards, but I'll give you four Tom.
Speaker Change: But just in terms of the loan remix you guys are doing, you know, rolling off Resi and adding on C&I and CRE. But where do you see that trade-off in yields on a portfolio as you kind of roll off some lower yielding stuff and then add on some of the newer loans? I mean, today, well, the C&I increase that was coming around, Marte, and the rest of the stuff that's rolling off is, I mean, the Resi portfolio has an average yield in the mid-30s. And we're also seeing, by the way, even still, and I don't know how long this will last, but at least for now... The spreads that we're putting on new commercial production are wider than the spreads on commercial loans that are rolling off, even if they're off-loading rate products.
Roger: Matt.
Roger: Okay, you are better than the Dolphins with Libra mill.
Roger: Through it all Brian that's what I should say, yes.
Roger: Just one more.
Im on slide six it's interesting I'm looking at 16 and 17, those two slides because obviously the economic forecasts have a huge impact on the reserves.
Roger: For the year, but you actually have a little better economic forecast, but im.
Roger: Certainly met risk migration, a risk migration and specific reserves is that.
Roger: Mix or is that.
Roger: True risk migration or what's behind that build and then.
Roger: Material, but bill do you expect for this going forward as the mix changes.
Are you seeing there this quarter corresponds to the to the increase that you saw in criticized classified assets.
Speaker Change: And some of that is market conditions, and some of that is that we're just doing a slightly different kind of work, more bilateral relationships. If you look, for example, at this year, where we finished out, if you looked at every core lending group, corporate, commercial, small business, and Cree, the internal spreads that we measure each group for the entire year finished with better spreads than they did in 2022.
Roger: One environmentally specific reason there.
Roger: It was material enough to go into details about.
Roger: Thank you Hal.
Roger: It's hard to say where that goes in the future to be honest with you I think credit is normalizing.
Roger: NPL levels are very low net charge off rates are very low and I think across the industry, we're seeing some normalization of credit.
Speaker Change: So we see, you know, incremental margin improvement in each of the lending teams. All of that is happening. And that's what the pipeline looks like, you know. At some point, maybe the spreads will come back tighter, but we don't see that yet. Yeah, okay. That makes sense. And Raj, I'll ask because I feel like this is, you know, an important moment for you guys.
Roger: I think we will continue to see that there is nothing for US is were not losing sleep over credit that you will continue to see some normalization of credit total product.
Roger: But it also includes the ship.
Roger: The next column.
Roger: Yes, I think in general.
As the C&I CRE builds and revenue you should expect the 82 basis points all else equal it.
Roger: Yes, because we just against C&I, we have higher yes, if nothing else happens if everything else stayed constant in terms of the economy and specific reserves and risk rating and all of that the reserve will still go up because of the composition will shift.
Raj: It feels like there's quite a bit of optimism as to where the margin could go by the end of the year. It feels like this is, you know, really one of the first years in a while that you guys are kind of maybe pulling back a little bit on expense growth. Is this the year where we start to see some operating leverage really play out, especially in the back half of 2024? You know, I know in terms of expenses and operating leverage, I'd rather achieve that through, you know, the revenue side rather than through the expense side. We had done a fairly large expense takeout exercise just before the pandemic. And I'll tell you that, you know, something you cannot do every couple of years; otherwise, you won't really have much luck.
Roger: Yes.
Roger: I mean, you can see right now we are at 153% reserve on C&I point over 9% return on residential.
Roger: Yes.
Roger: Okay.
Roger: Very well disciplined and thought process around risk weighted yes, and we risk rate loans, what they are at this exact moment output.
Roger: We think there'll be six months from now.
Roger: If you have if you have a building that.
Roger: It loses the tenant and you have a new lease in place from an investment grade company, but the cash flow does not start to kick in.
Roger: Six months week greater based upon the cash flow today, not the cash flow six months from now so that will change we will see some of that happen, but we risk rate I think very conservatively and appropriately.
Speaker Change: So you really have to invest, so we are continuing to invest in the markets, our core markets and the new markets that we have, you know, talked to you about over the last couple of years, and Operating Leverage should really come from expanding markets. At some point, we'll come talk to you about growing a full balance sheet as well. It may not be in the next two, three quarters because it's still a transforming balance sheet story, but you know, Leslie is kicking me at the table because I'm not supposed to talk about 2025, but if I were to take a wild guess, I would say that in 2025 and beyond, I think we go back to the normal world of growing the balance sheet rather than just trying to grow it. Yeah, okay. Great color,
Roger: Okay, alright, thanks for the help I appreciate it all.
Roger: One moment for our next question.
Your next question comes from Ben <unk> with Citi. Your line is open.
Hey, good morning.
Roger: Good morning, guys.
Roger: Just wanted to circle back I know, it's thrown around a lot of guidance and the ranges I just wanted to confirm I have everything correct, so kind of mid single digits.
Roger: Yes.
Roger: Expenses mid single digit growth.
Roger: Core numbers, let's call. It just around 600 give or take on the full year 'twenty three.
Roger: You said.
Speaker Change: Last quick one for me, the gains and losses that you guys see, you know, selling operating lease equipment. Is that an ordinary course of business for you guys, or were those really kind of more one-time things?
Roger: Lease finance should be around $9 million a quarter roughly.
Roger: Right.
Roger: Okay.
Roger: So is it fair to call. It around 28, 21 ish on a normalized basis.
Roger: 2021 line Im sorry.
Roger: Oh Im sorry for total noninterest income.
Speaker Change: I think we are. We're trying to pare down on asset classes that we don't think are core to the future of our business, so you'll probably see some more of that over the course of the next several quarters. I wouldn't call it a one-time thing, but it's not something we've done forever either, but you should expect to see some more of that, although it'll be lumpy. NetNet material.
Roger: Alright.
Roger: No I think you'll see a slight trend up in deposit service charges and fees on the back of Ni DDA growth I gave you the number for lease income.
Roger: Probably the other.
Roger: We will trend up a little bit too.
Roger: I don't have that number right in my head.
Roger: Yes sounds good I think I got most of the guidance right.
Roger: So when you guys to think from the kind of one being a philosophical perspective.
Roger: You said you guys are getting a little bit better rate, especially on even floating rate are you.
Roger: Potentially increasing credit risk.
Speaker Change: Rochester, it's all equal. I mean, maybe maybe that lease finance and business maybe it's not. You know, we don't see, you know, much growth there, you know, for the foreseeable. No, it should shrink. It's been shrinking for the last three years, and it will continue to shrink. The growth will come from. This is our core footprint business, CNICRE, not from what we call the. We have Yeah, if you went back three years ago, our UPB would have been $2 billion. Today, it's about $650 million, for now. Okay, well, that's super helpful.
Roger: Yes.
Roger: The other lenders backing out that gives you that better yield than if they come back and the odds are that probably will start with rate which is.
Kind of annoying from a competitive perspective is that embedded in some of your guidance that rates probably will come down if the economy is better than expected.
Roger: I think it is.
Roger: Everything to do with the fact that.
Roger: Ed it's shrinking the amount of money in the system.
So.
There is.
Roger: The cost of money has gone up spreads are wider for that by the way that weighed on the deposit side too so.
Gary Smith: We're just kind of the conduit to pass that on to the.
Speaker Change: Thank you, guys. One moment for our next question. Our next question comes from Timur Braziler with Wells Fargo. Your line is open. Hi, good morning.
Gary Smith: The borrowers the same credit same risk rating same names.
Gary Smith: I think that is coming up for renewal you will get wider spectrum. This market about 18 months ago.
Gary Smith: So it is not about that we're.
Timur F. Braziler: Looking at deposit beta assumptions. I'm just wondering what your expectations are here over the next couple of quarters, assuming no rate cuts in the immediate near term, how much additional creep is there on deposit betas over kind of 1Q, 2Q. And then I'm just curious as to what your expectation is for deposit betas on the way down, and if the competitive Florida market might increase that lag effect on betas on the way down, or if you think the Florida deposits are going to reprice similar to what you might see elsewhere. I'll address that at a high level. I mean, there's a lot of very granular modeling that goes on there, and I'm not going to try to dive into all the details of it.
Going down the credit spectrum. It is at the market in a different place than it was competitively or left for borrowing.
Gary Smith: A year ago.
Gary Smith: That's what is driving wider spreads, but like I said, we are also paid up on deposit side Thats why if it is only on the lending side that were getting wider spreads on deposits was in the happy lately.
Gary Smith: Half ago modular way a wider.
Gary Smith: That's not the case.
Gary Smith: So now it's all about brand selection of its all about the market dynamics.
Gary Smith: With less competition.
Timur F. Braziler: The beta through the cycle thus far has been about 54. We're still modeling high 50s in the aggregate by the time repricing up stops, as far as on the way down. While I think we'll be quite proactive in bringing deposit costs down as rates come down, you have to remember that on the way up... The Marginal Costs of New Businesses. We do have one more quarter. Yeah. Yeah. Yeah. Yeah. Yeah.
Gary Smith: Got it okay.
Gary Smith: That's fair and then when you're thinking about.
Gary Smith: Kind of a holistic approach to expenses.
Gary Smith: I know there is some there is a cadence to kind of a seasonality in some areas, it's more pronounced than others.
Gary Smith: I'm just curious if you can.
Gary Smith: Quarter to quarter electric whereby at the high point, b or restructure or anything about the back half the year.
Don't really try to provide quarter by quarter guidance I don't know when certain things are going to hit the P&L and you typically have a little bit higher payroll expense in the first quarter, everybody does because of the frontloading of payroll taxes, and 401K contributions in HSA seating and all of those things, but beyond that we don't spend a lot of time.
Timur F. Braziler: After that, when we look at our CD maturities... So it just drops off pretty significantly after that. Last quarter, the fourth quarter was pretty big, and this quarter is also big. But the second quarter is really, really small.
David Rochester: Im trying to figure out which quarter expenses are going to hit the P&L.
David Rochester: Alright Thats fair.
David Rochester: Appreciate it thanks, Chris.
David Rochester: One moment for our next question.
Timur F. Braziler: So that's that's one element of it, but I think the second element is obviously new money that is coming into Beartown, where the average book, black book, is today. New money is still coming in pretty high to look at cuts. But the existing book repricing should start to, that should be over in about, you know maybe, And that receipt repricing phenomenon is one of the reasons we didn't guide to March. Got it.
David Rochester: Our next question comes from Stephen <unk> with Jpmorgan. Your line is open.
David Rochester: Hi, Good morning, this is Alex Lau on for Steve.
David Rochester: Hey, Alan how are you.
Alan: Hi, good.
Starting off with the margin how much was the impact of CD repricing to the NIM in the fourth quarter and what can we expect for the first quarter also what were the rates of the old TD is running off and the new rates that Cds are coming on it. Thank you.
Speaker Change: That makes sense. And then, you know, it's encouraging to hear that non-interest-bearing migration in 4Q was more seasonal in nature. I'm wondering, do you think that the excess liquidity and the risk of kind of additional non-interest-bearing flight are done here? And if that's the case, can you maybe just talk us through what the seasonal factors are throughout the course of the year and how those balances should move along with that?
Half of all of those details in front of me for the fourth quarter I know there is a little bit shy of $1 billion coming due in the first quarter and it's probably going to reprice up on average by about 50 basis points.
In terms of new money coming in it.
David Rochester: I don't recall exactly where the pricing is right now, but I do know that we backed off on deposit pricing on the CD pricing right around Thanksgiving.
Speaker Change: I mean, our title business has grown very nicely, and we're very happy with it. It is, you know, that's where most of that seasonality is. This is basically a mortgage banking related business... And they follow a pretty routine cycle. They're always weaker in the middle of the month, middle of the quarter.
So.
David Rochester: And we may have done an extra twice.
David Rochester: Right after Thanksgiving.
David Rochester: Once again in December.
We did get we.
We did lower meaningfully what are.
Speaker Change: They're always stronger at month end and quarter end, with one exception, which is year end. Year end, that business kind of shuts down, and there's very little activity. Nobody's closing a mortgage on December 31st or close to it.
David Rochester: Promotional rates were for 12 months with Audi, which is sort of our lead product.
David Rochester: But I don't have the exact numbers in front of me.
David Rochester: But I don't remember, making those decisions sector.
David Rochester: Yes, hi quarters, I think is where we are.
David Rochester: Got it. Thank you for the color moving on to deposits, which business segments are industry did you see the growth of the 600 million in non broker deposits in the quarter and what level of rate are you paying on these new deposits and how much of this is new DBA.
Speaker Change: So we've looked back over the last three years very closely at this data, and we see the same trend last December and the December before. It's just a little more pronounced as the business has gotten bigger. So the bagels start building up, you know; summer is when business is the hottest. But also, within a month and a quarter, we see that cyclicality. Thank you for this, which is why I have to have it now.
David Rochester: Yes, I would say if you look at the deposit growth that was it was pretty much across every business line. So it would be it's across all segments it would be.
Speaker Change: It's going to be hard to get any change, but it will be cleared and balanced. This is a regular December 31st. Got it. And then there are just a couple CRE-related questions. It looks like office LTVs ticked up a little bit quarter over quarter in New York. Maybe you could talk us through some recent reappraisals that you've had in New York, primarily Manhattan, and what you're seeing as far as LTV migration on the tail there. Let me say a couple things about that. Some of that reappraisal, some of that is modeled because when we don't have a new appraisal, we, you know, our models actually take commercial property forecasts at the sub-market, detailed sub-market level and adjust the LTVs. So some of that is modeled, and some of that is actually reappraisals. Yeah, I would say, you know, when you say New York City, everybody obviously specifically means Manhattan. You know, the number of office loans we have in Manhattan is fairly, it's a fairly small number. It's about 12 loans. In total, the only maturities that we've seen actually paid off, so we were not looking at new appraisals.
David Rochester: I wouldn't have the detail in front of me to give you like an sic code by sic code breakdown of what industry segments. It was but it was pretty broadly based.
David Rochester: Across kind of all lines of business, which is what we're seeing from whats in the pipeline when we look at it.
David Rochester: Hundreds of opportunities across all of our business units.
Right.
David Rochester: Great and can you also comment on your ability to convert those treasury deposit pipelines in the fourth quarter and has this ability to convert and improving with customers who are willing to move balances now March madness as close to a year ago now.
David Rochester: Yes, I would say when we track the pipeline through various stages I would say our pull through rates.
David Rochester: Once we get to proposal rate are pretty high for my kind of historic viewpoint, I mean normally when we look at the pipeline once we make a proposal generally our pull through rate is probably in the 80% range. So obviously before proposal when something is in dialogue.
Gary Smith: Then it's less but once we get the proposal stage our realization rate is pretty high.
By the way somebody just texted me.
Speaker Change: And I would say the information we hear, kind of anecdotally, not related to our specific portfolio because we didn't have a large enough sample and didn't have enough majorities. I just wanted to say that. I would say it's largely going to point towards valuations being down, you know, maybe 20% or something in that kind of range, but it's, it's very much also a building by building issue, depending upon the occupancy and, and that service coverage and debt yields and things in that building. It's not like all real estate, you know; it's building by building. In general, those are the kinds of valuation changes we're hearing in the market, but given our fairly limited portfolio and lack of maturities, we don't have a whole base of information internally to go off. Very strong, it's a lot. And then, just lastly, New York City multifamily, what portion, if any, is rent regulated?
Gary Smith: Our team 12 month CD prices Rfps, four 5% and we have a nine month promo at 5% that's been delayed for the last few weeks.
Gary Smith: Okay.
Gary Smith: Great. Thank you for that.
Gary Smith: And then just one last question what are your expectations for the efficiency ratio to trend in 2024, and when do you think that this ratio can get back to the historical call. It low 50% range. Thanks.
Gary Smith: Probably not that focused on the efficiency ratio to be honest, we're more focused on the expenses to assets and those types of things I think our guidance is in the mid single digit increase in expenses.
Gary Smith: We really don't spend a lot of time thinking about the efficiency ratio.
Gary Smith: Yes.
Gary Smith: Thank you for taking my questions.
Gary Smith: Yes.
Great.
Gary Smith: It is now my colleagues to that the rate environment is going to affect that.
Gary Smith: Balance sheet transformation.
We'd rather just focus on.
Gary Smith: The components, yes.
Gary Smith: Got it thank you.
Gary Smith: One of them before our next question.
Speaker Change: And what portion is 2019 or earlier vintage? We have $121 million worth of New York City rent regulated. Thank you. Yeah, I'd also come back on the loan-to-value issue in New York. Loan-to-values are important, but also the investor basis in the property is extremely important. And when you have, you know, our client base is a traditional generational owned client base. And when a lot of these buildings were acquired at extremely low valuations, the tax basis issue matters a lot in terms of how it supports buildings, if there are any short-term swings in occupancy and debt service coverage ratios and things of that nature.
Speaker Change: Our next question comes from Zachary Westwood with UBS. Your line is open.
Hi, everyone, it's Zach on for Brody.
Zachary Westwood: One of my questions have been answered, but just had a couple of quick ones related to the margin.
Zachary Westwood: The securities yields you guys had some nice increases in that over the next over the past three quarters I was just curious what's driving that and what's the trajectory look like over the next couple of quarters.
Okay. Thanks.
Zachary Westwood: Driving it is coupon rate increases for the most part that's probably about Don so the trajectory is probably more likely down.
Zachary Westwood: Particularly if we get rate cuts.
Zachary Westwood: Got it thanks for that and then.
Zachary Westwood: The deposit costs of $4 20 spot rate.
Zachary Westwood: How do you expect that trend over the first half of the year.
Speaker Change: Great. Thank you for that, Colin. One moment for our next question. Our next question comes from David Rochester with Compass Point. Your line is open.
Zachary Westwood: Next quarter, it's going to be up.
Zachary Westwood: We are still with us.
Zachary Westwood: Got the CD repricing at.
Zachary Westwood: At any rate cuts.
Zachary Westwood: The forward curve constant fruition, it will start trending down over the back half of the year, maybe as soon as the second quarter depending.
David Rochester: Hey, good morning, guys. Just a point of clarification on the expense guide. Is that off of Expenses X, the FDIC special, or is it including that? Excluding it, right? Yeah, thank you for making that point. Okay, sure. I just want to make sure.
Zachary Westwood: Awesome I appreciate it.
Zachary Westwood: And im not showing any further question at this time I would like to turn the call back over to Raj for any closing remarks.
David Rochester: And on the margin guide, that sounded great in terms of the high twos. I was hoping you could maybe put some finer parameters around that, because high twos can be a pretty decent range, pretty big range. I know, and I'm a little bit hesitant to do that, because there are just so many factors. You could cut, could move that by a few basic points in one direction or the other.
Zachary Westwood: I'll close by saying.
Zachary Westwood: Clearly.
Zachary Westwood: The difficult 2023.
We are starting the year 2024, and a very positive note.
Zachary Westwood: The business is maybe it's got momentum in all the right places that we worked so hard on in the economy.
The things that we don't control or also.
Favoring us, especially in the buckets of where it so all that gives me.
David Rochester: So, I'm a little ahead of myself. I'm going to give you a point estimate because whatever point estimate I give you is going to be wrong. Gosh, what gets you to mid-singles on NII?
Zachary Westwood: A lot of hope for what 2024 weeks.
Zachary Westwood: Until a lot of work for us to do.
Zachary Westwood: And but the team is energized.
Zachary Westwood: To hit the road.
Speaker Change: Yeah, yep. Okay. And just on the rail car sales, it sounded like you may have some more of those coming. Is the bulk of that book underwater at this point?
Zachary Westwood: A building.
Zachary Westwood: Through 2024.
Zachary Westwood: Thank you all for joining us.
Zachary Westwood: If you have any questions of course, you can reach me Leslie directly.
Zachary Westwood: We'll talk to you otherwise get in three months. Thank you.
Speaker Change: Could you just maybe make a comment on that? And then what do all the sales mean for that income stream going forward? What's a good run rate on that going into the first quarter?
Zachary Westwood: Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Speaker Change: The income stream is going to come down, but the associated expenses are going to come down as well. And that's the bottom line. That's going to be a positive. I know you don't. Thanks for watching, and please subscribe.
Speaker Change: Yeah, I would agree with that. Gotcha. In terms of the magnitude you guys are expecting there, I mean, should that get cut in half over the next year? Or how are you thinking about the trend down? The fee income line will probably run from.8 to $9 million. Okay. And maybe one last one.
Zachary Westwood: Okay.
Zachary Westwood: [music].
Zachary Westwood: Okay.
Zachary Westwood: Okay.
Zachary Westwood: Sure.
Zachary Westwood: [music].
Speaker Change: I know you already addressed this on the buybacks. It seems like you're speaking positively about loan growth. You know, the C&I and CRE outlook is positive. You're talking about a soft landing, credit trends are contained. You know, why not take advantage of the discount to tangible here while you still have it?
Speaker Change: Maybe I'm just being too conservative, but I kind of still feel there's more time that... There's still a possibility of a recession or a slowdown. I think that's just... I'd rather deploy the capital, honestly, into low growth. I know we're not talking about total growth, but overall, we're also gearing for balance sheet growth in the coming years and also looking at, you know, it's two lots of. So put that all together in the very short term. I think we'll stay on the sidelines, but I don't want to speak for the entry of the board's decision, but we do have this as a discussion point at every board meeting starting in February. We have that on the agenda again.
Speaker Change: My guess is they will probably defer it into probably... We can change. We do actively discuss it every day. I wanted to come back on one point on your rail car question as it related to the comment about being underwater. It's not so much that we're underwater from a residual to NLV kind of analysis perspective.
Speaker Change: It's that, you know, these assets will require future investment to continue to keep them marketable, and this is not a business line that we want to be in for the long run. So when we have opportunities that we can, you know, continue to move out of these, you know, sometimes relatively small gains, sometimes relatively small losses, it fits the long-term strategy of the company. Great. Sounds good.
Speaker Change: Thanks, guys. One moment for our next question. Our next question comes from Jon Arfstrom with RBC. Your line is open. Hey, good morning.
Jon Glenn Arfstrom: I think Dave had all my questions just lined right up, but I do have a few more. How much more is there to do in the residential runoff? I mean Raj, you alluded to it, it might be similar. Question one is, do we assume down another, you know, five, I guess a little under a billion and how long does this continue to go on. I think you should expect 7-800 million more this year and we're not going to give guidance for next year, but I think that trend is going to continue. So, you know. We'll kind of continue because I still think we're way over allocated to residents, despite it being a very safe asset. So, yeah, I think we did something. I forget the exact number this year, but it'll be a similar number in 2020, and it'll be a similar number. True.
Jon Glenn Arfstrom: Have you ever shared an optimal percentage for Resi? I'd say, you know, kind of what it used to be before the pandemic. So I think there's a way to go for a couple of years while we wait. Okay. Okay, good. You referenced the 30% is where you'd like non-interest bearing to go, and I think the term you used was gearing up to get back there. How do you do that?
Jon Glenn Arfstrom: What is the strategy to do that? Well, grind it out. How much time do you have? No magic wand.
Jon Glenn Arfstrom: Yeah, grind it out. We were over 30% a couple of years ago, but obviously, that was different. Thank you all for joining us. I hope you enjoyed it.
Jon Glenn Arfstrom: We'll see you next time. Bye. You know, at the beginning of the year, we often come up with sort of a slogan. So Raleigh, behind me, one of the companies, Raleigh, joined with the idea of, you know, pulling that up and saying, you know, that's what we got to do. So there's no magic to it.
Jon Glenn Arfstrom: If we were at 32-33%, and I know certainly commercial banks that are even higher than that, we should strive for a 3-handle. So, but that isn't a sort of a well thought out sort of logic to this why you get there. What we will say is the pipeline that we now extract hours every week focusing on. Thank you for listening. Have a great day. There you go, Bob. And that gives me the confidence to say that I think that is an attainable goal. It may not happen in the next two or three quarters, but it will certainly... Thank you for watching. This is something we should be achieving. I would add to that since I'm generally in the middle of the battle every day, you know, it kind of comes down to three things.
Jon Glenn Arfstrom: Number one, you have to have the right talent in the right places who are driving value at the client level and can make people change from X bank to our bank. You have to be focused on market segments that are predominantly more deposit rich than others. You know, there are some industries that drive significant deposits and some that don't. So we have, you know, over the last few years altered our strategy to be very focused on the types of industries where you do tend to drive significant deposit levels. And the third is just back to something Raj had alluded to, which is intense focus on it. You do have to pick your spots based on where the money is and where the industry is. Then go in and actually look at where the pain points are in those industries and those roles as well, and it generally takes a multi-year effort to solve those, and then when you hit the market, you're able to gather.
Speaker Change: Yeah. Yeah. Yeah. Spend The Formula for... happening in a year, a lot. Oh yeah. But when they do work out, it's hard for people to run.
Speaker Change: That's how it was to target, and our team from the pipeline. We're working on it even now that we don't talk about it openly because it's too early, but they are about solving those pain points.,, If you're a football fan, it's four yards in the cloud of dust every day. Yeah, okay. I thought it was three yards, but I'll give you four, Tom.
Speaker Change: I'm better than that. Yeah, okay, you're better than that. The dolphins, they run.
Speaker Change: They throw, they don't run, is what I should say. Yeah. Just one more on slide six. It's interesting looking at 16 and 17, those two slides, because obviously the economic forecast had a huge impact on the reserves for the year, but you actually have a slightly better economic forecast. But I'm kind of circling that risk migration and specific reserves. Is that mix, or is that true risk migration, or what's behind that build, and then what material of a build do you expect for this going forward as the mix changes?
Speaker Change: Yeah, what you see there this quarter corresponds to the increase that you saw in criticized classified assets and one loan that we put a specific reserve on that's not really material enough to go into details about. You know. It's hard to say where that goes in the future, to be honest with you. I think credit is normalizing. NPL levels are very low, net charge-off rates are very low, and I think across the industry, we're seeing some normalization of credit, and I think we'll continue to see that there's nothing like for us as we're not losing sleep over credit, but you will continue to see some normalization of credit, so there'll probably be a little bit of that, but it also includes the ship problem that Yeah, yeah, as the CNI builds, CRE builds, and REPU adds up, you should expect the 82 basis points, all of them being equal. It will go up.
Speaker Change: Yeah, because we just, you know, against CNI, we have higher... Yeah, if nothing else happens, if everything else stays constant... in terms of the economy, I mean, you can see right now we've got a 1.53% reserve on C&I and a 0.09% reserve on residential. I would say we have a very well-disciplined and thought process around risk rating, and we risk rate loans based on what they are at this exact moment, not what we think they'll be six months from now. And if you have a building that loses a tenant and you have a new lease in place from an investment-grade company, but the cash flow does not start to kick in for six months, we grade it based So that would change.
Speaker Change: We'll see some of that happen, but we risk rate, I think, very conservatively, and a daughter. Okay. All right. Thanks for the help.
Speaker Change: I appreciate it all. One moment for our next question. Your next question comes from Ben Gerlinger with Citi. Your line is open. Hey, good morning, everyone.
Ben Gerlinger: Morning, good. I just wanted to circle back, I know I've thrown out a lot of guidance and ranges, but I just wanted to confirm I had everything correct, so kind of mid-single digits on NII, expenses, mid single digit growth off of the core numbers, let's call it just around 600. Give or take on the full year 23. And Leslie, I think you said lease finance should be around $9 million a quarter, roughly. Okay, so roughly, is it fair to call it around 20, 21-ish on a normalized basis? 2021, what? Oh, sorry. For total non-inter, I don't know. I think you'll see a slight trend up in deposit service charges and fees on the back of NIDDA growth that gave you the number for lease income. Probably the other one will trend up a little bit too. I don't have that number right in my head.
Leslie N. Lunak: Yeah, no big deal. Okay, sounds good. I think I felt like I got most of the guidance right. So when you guys just think from the kind of lending and philosophical perspective, he said you guys are getting a little bit better rate, especially on even floating rates. Are you potentially introducing credit risk?
Leslie N. Lunak: Or is it just other lenders backing out that gives you that better yield? And if they come back in, the odds are they probably will start with a raise, which is kind of annoying from a competitive perspective, but is that embedded in some of your guidance that rates probably will come down if the economy is better than expected? I think it has everything to do with the fact that fat is shrinking, the amount of money, and so the cost of money has gone up, and strikes are wider for that reason.
Leslie N. Lunak: By the way, they're wider on the deposit side too. So, you know, we're just kind of the conduit to pass that on. So it is not about that we're... going down the credit spectrum. It is that the market. Please see the complete disclaimer at https://sites.google.com for the Left 4-4 Borrowing.
Leslie N. Lunak: That's what is driving wider spreads. But like I said, we're also up on the deposit side. That's why if it was only on the lending side that we're getting wider spreads and deposits were in a happy place like a year and a half ago, our margin would be way wider. That's not the case, so now it's not about credit selection; it's all about, Gotcha. Okay, that's, that's fair. And then when you think about kind of the holistic approach to expenses, um, I know there's some, there's a cadence kind of with the seasonality, and some years it's more pronounced than others. I'm just curious if you kind of...
Speaker Change: Quarter-to-quarter, where might the high point be, or how do we structure anything about the back half of the year? We don't really try to provide quarter-by-quarter guidance. I don't know when certain things are going to hit the P&L. You typically have a little bit higher payroll expense in the first quarter. Everybody does because of the front load, payroll taxes, 401k contributions, HSA spending, and all of those things, but beyond that, we don't spend a lot of time trying to figure out which quarter it's in.
Speaker Change: All right, let's start. I appreciate it. One moment for our next question. Our next question comes from Steven Alexopoulos with J.P. Morgan. Your line is open. Hi, good morning. This is Alex Lau on behalf of Steve.
Alex Lau: Hey Alan, how are you? Hi, good. Starting off with the margin, how much was the impact of CD repricing on the NIM in the fourth quarter, and what can we expect for the first quarter? Also, what were the rates of the old CDs running off and the new rates that CDs were coming on at? Thank you. I don't have all of those details in front of me for the fourth quarter. I know there's a little bit shy of a billion dollars coming due in the first quarter, and that's probably going to reprice up on average by that. When it comes to new money coming in, and I...
Alan: I don't recall exactly where the pricing is right now, but I do know that we backed off on the deposit pricing, on the CD pricing, right around So, and we may have done it actually twice, right after Thanksgiving, and then once again. So, we did get, we did lower, meaningfully, what are... I got it. Thank you for the color.
Alan: Moving on to deposits. Which business segments or industries did you see the growth of the 600 million in non-broker deposits in the quarter? And what level or rate are you paying on these new deposits? And how much of this is new DDA?
Speaker Change: Yeah, I would say if you look at the deposit growth, it was pretty much across every business line. So it'd be, you know, across all segments, it would be, I wouldn't have the detail in front of me to give you a sick code by sick code breakdown of what industry segments it was, but it was pretty broadly based across, you know, kind of all lines of business, which is what we're seeing from what's in the pipeline when we look at it. You know, I mean, there are hundreds of opportunities across all of our Great And can you also comment on your ability to convert those Treasury deposit pipelines in the fourth quarter? And has this ability to convert been improving with customers more willing to move balances now that March Madness is close to a year ago?
Speaker Change: Thanks. Yeah, I would say when we track the pipeline through various stages, I would say our pull-through rate, You know, once we get to the proposal rate, or pretty high, from my kind of historical viewpoint. I mean, normally when we look at the pipeline, once we make a proposal, generally, our pull-through rate is probably in the 80% range. So, you know, obviously, before the proposal, when something is in dialogue, you know, then it's less.
Speaker Change: But once we get to the proposal stage, our realization rate's pretty high. By the way, somebody just texted me, "We are 12 months, nine-month promo. Great, thank you for that." And then just one last question. What are your expectations for the efficiency ratio to trend in 2024? And when do you think that this ratio can get back to the historical, call it low, 50% range? Thanks. We're probably not that focused on the efficiency ratio, to be honest. We're more focused on, you know, expenses to assets and those types of things. I think our guidance is a mid-single-digit increase. We don't spend a lot of time thinking about these things. Thank you for taking my questions. Yeah, not the efficiency ratio.
Speaker Change: There are just so many components to that. You know, the rate environment is going to affect that; the, you know, balance sheet transformation is going to affect that, so we'd rather just focus on the components. Got it. Thank you. One moment for our next question. The next question comes from Zachary Westerlund with UBS. Your line is open. Hi everyone. It's Zach on for Brody.
Zachary Westerlund: Most of my questions have been answered, but I just had a couple quick ones related to the margin. The securities yield, you guys have had some nice increases in that over the next three quarters. I was just curious, what's driving that? And like, what's the trajectory looking like over the next couple quarters? I think what's been driving it is the coupon rating.
Zachary Westerlund: For the most part, that's probably about done, so the trajectory is probably more likely. Got it. Thanks for that. And then on the deposit cost, the 420 spot rate, how do you expect that to trend over the first half of the year? I think next quarter it's going to be up, you know, because we're still, We've got the CD repricing, we still haven't had any rate cuts. Yeah, when the forward curve comes to fruition, it'll start trending down.
Zachary Westerlund: Awesome, appreciate it. I'm not showing any further questions at this time. I'd like to turn the call back over to Raj for any closing remarks. You know, I'll close by saying... After a fairly difficult 2023, starting the year 2024.
Raj: Thank you all for joining us. We hope you enjoyed the event. We look forward to seeing you next time. Events that we don't control are also favored. So, all that gives me hope. There's a lot of hope for what 2024 will bring.
Raj: Thank you. Thank you. Thank you. I'm energized to hit the road. Thank you all for joining us. If you have any questions, of course, you can reach me, Leslie. We'll talk to you otherwise. Well, ladies and gentlemen, this does conclude today's presentation. You may now disconnect. Have a wonderful day. Thanks for watching!