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spk03: Good day. Thank you for standing by. Welcome to the Bank United third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising you that your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised, 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.
spk02: Thank you, Michelle. Good morning, and thank you for joining us today on our third quarter 2023 results conference call. On the call this morning are Raj 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 reflects the company's current views with respect 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 or on the company's current plans, estimates, and expectations. The inclusion 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. 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 condition, business prospects, growth strategy, and liquidity, including as impacted by external circumstances outside the company's to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements. These factors should not be construed as exhaustive. Information on these factors can be found in the company's annual report on Form 10-K for the year ended December 31, 2022, and any subsequent quarterly report on Form 10-Q or current report on Form 8-K, which are available at the SEC's website, www.sec.gov. With that, I'd like to turn the call over to Ross.
spk09: Thank you, Susan. Welcome, everyone. Thank you for joining us for our earnings call. You know, in preparation for this call, I usually ask Leslie like a week before if she can kind of guide me as to what are the things investors are looking for? What are the hot topics? So this time I did the same thing and what Leslie forwarded me was an email from one of the sell side analysts, I think it might have been JP Morgan, with basically saying, not specifically to us, but generally bank investors are looking for like five or six things that are top of mind. So in my comments, I'm going to go straight to those few things and try and answer them. The things were in that order, name inflation, deposit stability, both pricing and flows, uh, credit trends, uh, unrealized losses, expense management. And the last bullet point was, uh, sort of regulatory and in brackets that, uh, this really applies to larger banks. So I'm going to try and get straight to that rather than, you know, regurgitate what's in our earnings. It's been out for a couple of hours. You probably have read where the numbers came out. But if those are the big topics, let's just talk about them directly. NIM, our NIM increased by nine basis points from 247 to 256. Just for context, you know, if you go back, last quarter we told you that While our NIM had gone down from first quarter to second quarter, second quarter was pretty flat. Every month was, you know, 247. This quarter, we went up. So if you go back from January and look to now, Jan to Feb, Feb to March, March to April, NIM was declining. And then for the next three months, it was flat. And now for the three months after that, it's gone up. So it's created a A nice curve that I like and I think we can safely predict that this modest improvement will keep happening in the next few months. Deposit stability is the next question. Again, this quarter we grew, outside of brokered, we grew about $500 million in deposits and even grew non-interest DDA by a little more than $50 million. Our NIDDA to total deposits is stable at about 28%. I've been asked this question many, many times over the course of the last two or three years. What do you think the long-term run rate, that ratio is? Where will you stabilize in terms of DVA percentage? I've never been able to answer that question because, to be very honest, I don't know when all is said and done where things will stabilize. Now, looking at this data, not just for this quarter, but for the last several months, I'm beginning to get confidence in saying that I think we're there or close to being there. So, you know, and if we get another quarter or two of this, which I think we will, we will be able to declare that this seems to be the bottoming out on that ratio as well. And dare we say that, you know, shoot to actually improve from there and try and get about 30% again over the course of the next few quarters. Credit trends, quickly, net charge-offs, again, very low at seven basis points. I think last quarter there were maybe eight basis points, if I remember right. NPAs are at 40 basis points. If you carve out the SBA guarantee portion, that's about 11 basis points off that 40. So still, you know, pretty low. They were slightly lower than that last quarter, but they're about, you know, kind of bouncing around in that region. Unrealized losses came in at 407. That's our AOCI is about 407, I think. And last quarter, it was a little bit better at 373, I think. Now, obviously, that's of what's happened to rates, especially in the last few weeks. Expenses, I think we guided to you that for the second half of the year, we're going to try and keep expenses flat, and I think we pretty much delivered on that. Let me add a few other things which are not, you know, on the regulatory front, like I said, you know, that email said it's really a question for larger banks, but I don't really have anything special to report on the regulatory front that you already haven't read in the American Banker. But that's the balance sheet quickly just to go over that. Securities were down $257 million. Loans, like we said to you, were taking REZI down because we've gotten overweighted in REZI. That was down to 25. CNI was up 100. CRE was up 46. Overall, loans came in down to 74. I will make a point that even within CRE, CNI growth of $100 million, we actually did push out about $300 million roughly. of non-core CNI. So if we had not done that, it would have been much higher. We feel like we're getting done with what we need to push out in terms of the transactional business, so feeling pretty good looking forward. FHLB, we paid off a little over $800 million. Broker CDs, we paid off a little over $200 million. Actually, FHLB balances now stand lower than they were at the end of last year. So from a balance sheet perspective, we feel pretty good. Loan to deposit ratios gone down to 93% from 95 last quarter. And despite taking the balance sheet down as much as we have, our PPNR was slightly up. So I'm feeling pretty good about the way the quarter turned out. We did build reserves this quarter. ACL was up quite meaningfully to 80 basis points. And that's because, you know, We don't know when a slowdown is coming, if it's in a quarter or two or three, but it does feel like something will happen. The Fed has done a lot to slow the economy down and hopefully just a soft landing, but it may be a mild recession and we have to be ready for it. So we did build reserves up. Most of that reserve build was really because of Moody's outlook got worse. And when you run it through our numbers, that contributed to more than half of our provision. Quick comment on the environment. I always make a statement or two on this. I think on the rate side, rate economy and regulatory, I'll talk about all three. On the rate side, my personal opinion is I think the Fed is done. Whatever little more they wanted to do, I think the market is doing for them. And I would be surprised if there is much movement from the Fed. Maybe another move in a couple of meetings, but it feels like that story has inflected. The economy is still coming along fine, but reading more and more about how the consumer is pretty much done depleting the buildup of cash from the pandemic. So we're being very careful and vigilant on the economy to see any signs of cracking. I think eventually we will see some. And on the regulatory front, you know, a lot that is about to happen that we're all reading about, it impacts, obviously, banks in the hundred to trillion range a lot more. There will be some trickle-down effect for us. But on the day-to-day basis, I think everything is fine on the regulatory front. I don't think anybody is being unreasonable. And, yeah, there will be a little more burden on the regulatory front that we'll all have to deal with. but I think it's sometimes a little overplayed. So with that, am I missing anything? No, I just wrote these things down on a piece of paper, so I'll jump in and interrupt Tom and Leslie as they are talking through their stuff. But once again, thank you for joining us. I'll turn this over to Tom. Great. Thank you, Raj.
spk04: A little bit more follow-up on the discussion on deposits, and I'll link it a bit with our dialogue. Last quarter, we talked about having a good level of confidence in a strong deposit pipeline. We saw that come to fruition in this quarter with the operating lines of business delivering, as Rod said, almost $500 million of deposit growth. That was really across all of our operating businesses, so it was It was great to see that. 484 was the exact number. As we look at this quarter and think about what our deposit pipeline looks like, it continues to be significant and kind of in line with what we saw last quarter in executing the strategy of core operating accounts, NIDDA business, treasury management business, and so forth. So our pipeline overall was not diminished from what it was you know, last quarter, despite bringing on $484 million of new deposits during Q3. So we feel good about that. There's some information in the deck on slide eight. Our largest deposit vertical continues to be the title solutions business with deposits of about $2.8 billion as of September the 30th. And there's no other real significant concentration within the deposit book. Talk a little bit more about the loan side. Consistent with the strategy we've outlined for you, Resi declined by $225 million. Cree was up about $46 million for the quarter. The overall outlook for Cree is a little bit more challenging in the market today. We're not seeing as strong of pipeline opportunities at today's interest rate level and cap rate level. Less deals are making sense. We did get $46 million in growth, and, you know, that asset category, loan category has been relatively flat all year if you look at where we started off the year. And, you know, market conditions remain, you know, challenging. We're happy with our overall portfolio that we have. The new generation right now is not easy. As Ryke said, CNI was up, you know, $101 million for the quarter. That number really was a lot better absent the push out of non-strategic relationships that Raj talked about. We had an opportunity to exit in commitments about $650 million of commitments for the quarter, which was just slightly less than 300 million in UPB. All of these were relationships that were not quarter or go forward. strategy and generally they did not either meet the pricing opportunities that we see in the existing market today or any deposit strategy, you know, that we're moving forward with. So we took the opportunity to exit those in the quarter. If we look at kind of core core, I guess would be the best way I would say it. You know, we had actually a terrific quarter in small business lending. We had a terrific quarter And the commercial segment, all of those credits that we talked about are in the corporate banking segment. And even that grew after walking away from $650 million of commitment. So I think, as Rod said, while there will be other things like that that will come up and redials of deals that will come up, that's probably the largest amount we're going to see in a quarter. So pipelines in that segment remain very strong. across all of our geographic markets and across all of our industry segments. So we feel pretty good about the CNI business as a whole across all segments. The franchise equipment, municipal finance business continued to trend down modestly and mortgage warehouse lending was down $116 million in response to what's happening in the residential mortgage market as a whole. Average rate on new production for the quarter was between eight and eight and a half, uh, for CNI, uh, segment for seeing, you know, generally deal opportunities, you know, kind of in the sofa plus three 30 kind of range. So that's part of what's happening in this trade off of opportunities where we have the ability to exit credits that are significantly, you know, less than that in yield and reinvest it in more relationship oriented transactions where we're currently seeing better yields. Uh, For the Cree pipeline, what we're seeing is yields kind of just slightly under the 8% level. Just got a little bit of time, a little bit more on the Cree portfolio. You've got significant detail on slides 12 through 14 in the supplemental deck, but a few overall comments. Our Cree portfolio continues to be modest to the overall bank's balance sheet at 23.5%. of loans or create a risk-based, total risk-based capital is 168%, which is well below the regulatory guidance threshold. To date, any potential, you know, concerns that we have in any loans are not really broad across any asset category. They're very specific to a particular loan or a particular sub-market. As of September the 30th, the weighted average LTV of the CRE portfolio was 56%. The weighted average debt service coverage ratio was 1.8, and about 15% of the CREE portfolio matures in the next 12 months. About 8% both matures in the next 12 months and is fixed rate. So our maturity schedule over the next 12 months is relatively light. You know, specifically to the office sector, and we feel good about office overall, the portfolio that we have in particular, it's 1.8 billion. Of that 1.8 billion, about 200 million is in traditional medical office facilities, so that's kind of different than the standard office portfolio that everyone looks at, but the total is about 1.8 with 200 million in medical office. The weighted average LTV of the office portfolio was 64%. Weighted average debt service coverage ratio was 1.7 as of September the 30th, and you have detail in there giving you a breakdown geography-wise, asset class-wise. But as of 9-30, 95% was pass rated. 58% of the office portfolio is in Florida. Virtually all of that is suburban office. The Florida market in all major metropolitan areas, you know, continues to perform very well. So we feel pretty good about where we are from a Florida perspective. There's some other slides on 14 that give you some breakdown between Florida and the New York market. With respect to the New York state portfolio, 44% of that portfolio is in Manhattan. It's a little under $200 million of office exposure in Manhattan. Our properties currently are 95% leased, and we only have a 5% rollover in the next 12 months. Overall, your office portfolio has an 11%. rollover in the next 12 months. When we look at sort of credit quality within the overall Cree portfolio, if you look at 12-31-22, we had $91 million that were rated below pass. This quarter, we had $90 million. So the credit trends have been very stable in this portfolio, and we're watching it closely, but we feel very good about the overall Cree portfolio and good about our office. portfolio given the properties, geographic locations, and mix between suburban and office. So with that, I'll turn it over to Leslie.
spk12: Great. Thanks, Tom. Just to reiterate, net income for the quarter was $47 million or 63 cents per share, and earnings this quarter were impacted by the reserve bill that we took this quarter. Great news about the net interest margin up to 256 from 247 last quarter. We're starting to see all of the balance sheet strategy that we've laid out for you in the past getting some traction and having a positive impact on the NIN. Total earning asset yields increased from 530 to 552 with securities going up from 519 to 548 while the yield on loans went up from 553 to 554. Cost of deposits was up 28 basis points. This compares to a 41 basis point increase last quarter, so we're continuing to see that trend of slowing in the rate of increase of our overall cost of deposits. It now sits at 274. We also saw the decline in relatively higher-priced wholesale funding having a positive impact on the NIM this quarter. The provision, I'm sure you're all going to ask questions about the provision, so I'll try to answer them before you ask them. The provision was $33 million this quarter, and the ACL to loans ratio increased from 68 basis points to 80 basis points, even though net charge-offs remained very, very low. The biggest driver of the provision this quarter and the increase in the ACL was the impact Moody's forecast in the model and a slightly less favorable economic outlook in those forecasts. The things that were really drivers of that, the biggest one was really the rate forecast, which has a little bit higher for longer rate forecast in it than we saw last quarter. And there were a couple of other factors as well, but that was the most significant one. Changes in portfolio composition, a little bit of a bump up in specific reserves and Some risk rating migration also impacted the reserve. And if you look at slide 16, you see a waterfall chart of all the different factors that impacted the reserve this quarter. Specifically, the CREOSIS portfolio, the reserve was up to 99 basis points compared to 83 at June 30th. So a little bit of build there as well. Last quarter, we provided you some stress testing results. We repeated those in the deck this quarter, just in case you're interested that they haven't changed. Nothing really to say about non-interest income and expense this quarter. No real material or significant trends there. And I think Raj already mentioned that we would expect, you know, non-interest expense for Q4 to remain relatively flat again. All of our capital ratios increased this quarter. Holding company set one with 11.4%. Proforma, including AOCI, 9.8% at September 30th. So very robust capital levels. And liquidity remains robust as well. There are some details on that in the slides if you're interested. And with that, I'll turn it back over to Raj for closing comments.
spk09: I would say that I was very good not interrupting either of you.
spk12: You were.
spk09: I was a bit there for a time or two, but I did not. Let's turn it over for Q&A.
spk03: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again.
spk05: Please stand by while we compile our Q&A roster. Our first question is going to come from the line of Will Jones with KBW.
spk03: Your line is open. Please go ahead.
spk10: Hey, great. Good morning. Thanks for the questions.
spk03: Good morning, Will.
spk10: Hey, so let's see what you guys said. I wanted to ask about the reserves. You know, you guys have really, if you look back over the past four quarters or five, you've really been fairly building since the end of last year. You know, I can appreciate that I got this quarter was, you know, really another macro driven bill, but just wanted to confirm that there's really not anything underlying you're seeing in the book that justifies any of this. I know classifies and criticize did see a little movement as well as maybe some NPAs, but just wanted to confirm that. And just as we think forward, just wanted to get, you know, your sense of what the messaging is on the provision as we look in the next year. Do you really feel like, you know, the lion's share of reserve build is done from here? And, you know, to the extent that, yes, while we may be in higher for longer, you know, a higher for longer scenario, you know, Moody's is, you know, kind of stable that, you know, the reserve would too stay stable or if there's really a higher number in mind that the reserve needs to be at.
spk09: You know, Will, it's not really that we're trying to solve for a number. I actually joke with the management. That was true. I gave you a very easy answer to your question. Yeah, it is. CECL has brought us to this place where, you know, I joke about this often that the economists at Moody's can wake up on the wrong side of the bed and impact our P&L in any given quarter than anything else we do. So unfortunately, that is who we're wedded to. So it will depend a lot on what Moody's puts out in three months from now and how their outlook changes. That is a big driver. Now, I will say this much, that if going into a recession or a slowdown is painful with all these bills that happen, it has the exact opposite effect on the way out. So what can feel like pain can feel like gain a year down the road, but who knows? We're not trying to solve for a number that we can get there by a certain amount of time. That's not what this is. This is purely based on the math that works off of Moody's forecast, and I'm not sure how they'll forecast 60 or 90 days from now.
spk12: You know, the other thing I would say, you know, the other thing that is having some impact and will continue to have some impact as we see the portfolio composition shift out of residential into commercial. You will also see the reserve gradually build because the commercial portfolio does carry, and you can see in our slides, we showed you the allocation by type of loans. So you will see some gradual reserve build as that portfolio shift continues to happen as well. That's the only other thing. That's going to be gradual because the portfolio is not going to change overnight. Exactly.
spk09: But gradually, absolutely right, that will happen.
spk12: Exactly. But there's nothing, it's not like, oh, my gosh, you know, we're seeing trouble brewing in the portfolio. We better build reserves. It's not that. Yeah.
spk10: Gotcha, gotcha. No, that's very helpful. I know the seatbelt is really kind of its own monster, but. That's helpful. Thanks. And then I wanted to turn to the margin. The margin, you know, it was great to see and like this quarter really feels like it was a story of, you know, the remakes on the funding side. And that's what's really been, you know, partially enabled by some of this great deposit growth you're seeing. And, you know, it feels like, you know, momentum is continuing there. And Raj, you mentioned the margin was up, you know, each consecutive month of this quarter. Just curious where the margin ended the quarter, maybe what the margin was in the month of September.
spk12: So, so I think I don't, I think that's what Raj said.
spk09: No. I think last quarter we did give you, get into the details of month-by-month. I'd rather not go into the, you know, make this a trend.
spk12: Month-by-month can be really quirky because if one weird thing happens in a month and you're annualizing a one-month result, so I don't think looking at it month-by-month is really very helpful.
spk09: But we will say that fourth quarter, you know, we think it will be, you know, monitoring will be modestly up again. Unless there's something really bizarre that happens in the quarter, based on what we're seeing so far, it looks like this trajectory will continue. It's not going to get to 3% in the next quarter, but it will keep improving from where it is.
spk10: Gotcha. Okay, that makes sense. And I guess just thinking a little more intermediate term, to the extent that this deposit pipeline continues to materialize, you see maybe... you know, a little less FHLB in the funding mix, you know, moving forward and you get some asset repricing that keeps flowing through, you know, do you feel like the margin, you know, continues to expand like through 2024 or do you feel like it, you know?
spk09: So I'm under strict orders from Leslie not to talk about 2024 because we haven't done it, the whole planning cycle, so. We will give you guidance as we always do in January for the full year, but right now we'll just talk about fourth quarter. In terms of what we're trying to do in fourth quarter, it's not that different from what we're trying to do in third quarter. Still optimize the balance sheet, grow the right things, bring down resi, bring down securities portfolio, grow CNI, grow DDA, grow total deposits, and bring down wholesale borrowings. You know, you keep doing that, margin will fall in the right place. And, you know, it should be a good quarter again. And, you know, I'll make one point about demand-deposit growth. I mean, that's what I'm actually the most excited about. We talked to you about a pipeline last quarter. The pipeline is similar this quarter. We did convert a lot of that to good business. But the net growth in DDA was a little over $50 million. That's the net number. What is very hard for us to predict is that change that is happening in our existing deposits where people are moving out from DDA to interest-bearing or just using the money for buying things, that trend is still continuing. Maybe slightly slower, but it's still continuing. And the reason we have some DDA growth is because the new business we're bringing in this quarter outpaced that natural trend that you're seeing all over the industry, by the way. So we're so happy about the pipeline that we have, especially in light of, you know, what a challenging first quarter this was. To be able to stand here in October and say that we have a good pipeline and that we've, you know, in the last three months, we've actually converted enough of it to produce DDA growth. I'm very happy about it.
spk01: That's very helpful and, you know,
spk10: The last thing I really just wanted to hit on, I know that the buyback has been big for you guys in the past. We kind of paused that conversation in the first half of the year, just naturally given what was going on. But it feels like now we've really kind of removed ourselves from that kind of disruption. It feels like where the stock's trading today is just a huge opportunity for you guys. Is there any update on where you stand with the buyback?
spk09: Last we talked to the board about it and unanimously agreed that the time was not ready yet was maybe six weeks ago, Leslie, right? About six weeks back. We will talk to them again in four weeks in mid-November. My best judgment would be I think it's still early. I think we need to wait and probably think about it in the new year, not this quarter.
spk10: Got it. Understood. Thanks for the color, guys.
spk03: Thank you.
spk05: And one moment while we get to our next question. And our next question is going to come from the line of Graham Dick with Piper Sandler. Your line is open.
spk03: Please go ahead.
spk07: Hey, good morning, everybody. Morning. So I just wanted to hit on the loan side of things. I saw that you had about the $300 million in commercial loans that you exited. I just wanted to hear a little bit more about your strategic thinking here, what kind of yields were on these portfolios, or what kind of spread, rather, if you include the deposit relationship. And then you mentioned that there's a little more to do here. I'm just wondering what that would look like maybe over the next couple of quarters and how it might impact your overall growth outlook. Because if I back this out, the $300 million this quarter, it looks like balances were actually essentially flat So just wondering about the size of the loan portfolio going forward and maybe the overall direction that takes the balance sheet as well.
spk09: Let me go to loan category by loan category. So Rezi was down 225. I expect Rezi to behave very similarly next quarter, for that matter, even the quarter after that, two or three, four quarters. because, like we said, we're too resi-heavy, and taking it down about $200 million or so every quarter sounds like a good strategy. CNI was up $100 million, but that was net up about $300 million that we pushed out. As Tom said in his comments, we don't see that kind of a push-out happening in the future. Maybe some here or there that we will still exit. The stuff that we're exiting generally is non-deposit, you know, transactional business. Some of them are SNICs. And where we don't really have an expectation that, you know, we'll be able to get deposits. Sometimes you just do it and eventually deposits come. But when we convince ourselves it's not happening and spread is too tight, then what are we doing in that? And that's what we've exited. So I would say that what we were exiting was business put on a year or two years ago at spreads of like, you know, SOFR plus 150 to 200 in that range. The business that we're doing now, the pipeline that Tom referenced in the CNI space is over 300. So silver plus 300, 320, 330 in that range. So it's a really good time to be writing your paper. And the old stuff that is being run off is meaningfully lower in terms of profitability. CRE, while we grew about 45, 46 million this quarter, just looking at the pipeline, it doesn't look like it's going to grow given there's not much happening in the CRE world in terms of transactions. So our best guess is it'll probably be flat. Small business will grow, but it doesn't really move the needle that much in terms of the total balance sheet. And our commercial finance subs, which is the franchise finance and the equipment leasing business, has been running down now for a better part of two or three years. That trend will continue. When we're out lending, your guess is mine. I always say this. It can't go any lower than utilization, but it keeps surprising me. It does go down. The mortgage market is probably having one of the toughest years ever in terms of origination volume, so it's very much tied to that. If there's a bit of a pickup in rates turnaround, it doesn't feel like they are going to, but if they do turn around, there's a little bit of a refi opportunity. It'll grow. Otherwise, it won't. But again, the numbers are so small that I don't think it really moves the needle at the top of the house.
spk04: Yeah, I might just add a little bit of detail to that. If we look at when you exit, there's two kind of time frames for exiting. One is when you have a maturity. Those are obviously easier to predict. The second is when you have an event. And usually the event is a redial because there's a transaction opportunity or whatnot. Those are not as easy to predict. While I don't think there's going to be too much more of that to the extent that it was in Q3, from a strict maturity perspective, there are situations that could come up with existing credits that are not maturing where there's an opportunity to exit. Because what's really clear as we look through the dynamics of this trade-off that we're consistently making is if you take any large credit in the marketplace, let's say it's a $50 million deal and we have the opportunity to exit that, we can put on two $25 million deals in bilateral relationships. It's probably at 75 basis points higher than what we're exiting and comes with deposit in treasure management business. And that's the trade-off we're consistently looking to make. Yeah.
spk07: Okay, so all in, it kind of sounds like flattish to maybe slightly down loan balances as a whole, but a much more profitable portfolio. Is that kind of a fair way to look at it right now?
spk12: Yeah, I think over the course of the next quarter, yeah. Okay, cool.
spk07: And then you mentioned shared national credits in there. I just wanted to know, what's your all's total SNCC exposure right now as a percentage of loans?
spk12: It's about $4.7 billion in the aggregate based on the strict, you know, regulatory definition of a shared national credit, which is, Tom, if you want to provide any more questions.
spk04: The definition has expanded a lot, you know, over the last couple of years, so it can encompass anything from what you might think of as being a traditional shared national credit, which would be a a multi-billion dollar credit led by one of the major banks with 25 banks in the deal to a deal that we agent as long as the debt stack is more than $100 million. It can be deals that we would typically be in that are club deals among us and a couple of banks where we have a significant share of the wallet. We might be the collateral agent. We might be the doc agent. We could be in a couple of different positions. We would have part of the depository business. So When you look at kind of a classical shared national credit business, it's a portion of the overall SNCC business, but it's certainly not the entirety of it and the other parts of it. We have built syndications capability on both the real estate side and the corporate banking side. We want to syndicate credits. We want to be a lead bank and control the deposit business. So that portion that would be over the $100 million threshold and have three or more banks would be a SNCC. And we continue to be interested in club deals where we like a relationship and have business, but, you know, have a certain guideline on how much exposure we want to take in those deals. That's highly desirable business from our perspective, but it would also, you know, be a SNCC. So as, as the guidelines have changed over the last few years, you've got to be a bit more careful with this nomenclature than maybe we were a few years ago.
spk07: Yeah, totally understand. And I get if you don't have this number, but it definitely seems important and much more profitable to be the lead agent on these deals. What amount of that 4.7 are you guys the lead on?
spk12: We don't have all of that detail available right now. Yes, absolutely.
spk04: Far better for a variety of reasons to be the agent on the deal because generally the agent gets... 75% of all ancillary business, although in the SNCC market today, everybody wants part of the ancillary business, and that's a big challenge in the SNCC market is there's not enough ancillary business to go around everybody.
spk07: Right. Yeah, understood. And then I guess the last thing I wanted to touch on is just capital and the CET1 ratio, maybe including those AOCI losses of 9.8%. Is this the ratio you guys are managing around right now, and then is there a specific near-term, I guess, level you guys are looking at?
spk12: I mean, I would say this tends to be the ratio that most stakeholders are focused on and interested in, so we do pay a lot of attention to it. It's not the only one that we look at. Obviously, we're aware of TCE to TA and leverage as well. I think in terms of a target, like Raj said, I think in the very near term we're comfortable where we are. And, you know, as we go through our capital planning process at your end, we'll think through and discuss with the board the outlook going forward around targets. Another way of saying I'm not prepared to give that information today. No, I understand.
spk07: All right. Well, thank you, guys. I appreciate it.
spk03: Thank you. And one moment while we move on to our next question. And our next question is going to come from the line of John Arstrom with RBC Capital Markets. Your line is open. Please go ahead.
spk06: Hey, thanks. Good morning.
spk03: Good morning, John.
spk06: Leslie, I'm not going to ask you about the 24 margin, but...
spk12: If you do, I won't answer you.
spk06: The question is that you made a comment about over the course of the next quarter, this trend is going to continue. And I don't know if it's for you or Raj, but how long does it take to accomplish what you want to accomplish on the balance sheet, remixing the assets and remixing the liabilities? I hate the term what ending are we in, but I'll just ask it. How long does it take to get to where you want to go?
spk09: I think we'll be in a better position to answer that once we go through our year-end planning process, so we'll probably be able to answer that in January.
spk12: Yeah, I mean, I think it's safe to say it's not a one- or two-quarter effort. Yeah. You know, it's going to take some time.
spk06: Yeah. So we can expect more of the same, essentially. I mean, we have to make some assumptions, but we can expect more of the same over time. Okay.
spk12: And then your term, sure.
spk09: Yeah.
spk06: Yeah, okay. And, Raj, what do you want the balance sheets to look like when you're done?
spk09: Well, I want to do... If you look back at our balance sheet pre-pandemic levels and compared to now, it looks quite different. It's gotten too heavy in securities, too heavy in resi, and I think the pre-pandemic norm is kind of where we want to take it. We don't want to take resi down to zero, but we certainly have a lot of work to do in bringing it down to a more sort of reasonable level. And so I think a good guide might be going back to 2018-19 and taking a look at our mix, not just with loans but also with securities. I think that's what we're looking for. On the right side of the balance sheet, obviously, we don't want to go back to 2018-19. We want to kind of make progress from where we are today at 28% DDA. I'd like it to get to 32%, 33% DDA. And I think we can get there over time. Okay.
spk06: Okay, good. Anything you'd call out on the non-interest-bearing growth this quarter on the drivers?
spk12: Nothing extraordinary. I think it's just across the franchise, just continued progress pursuing that pipeline.
spk04: Lots of new relationship wins.
spk06: Okay. Yeah, I guess that's what I was getting at as well. Okay. And then, Tom, maybe a question for you, last one for me. But I understand what you're saying on the commercial – the CRE office portfolio. I'm curious what the discussions are like when these renewals come up. How difficult are they with your clients? And then secondarily, is there anything different between what you're seeing in New York and Florida? Thanks.
spk04: Yeah, I would say the renewal discussions generally, as the metrics show, the portfolio is performing very well. So right now there is, you know, we have seen a couple of opportunities pay off because people have gone to the CMBS market. But there's not a big alternative market for office right now. I mean, everybody's kind of got what they got. You know, there's some small openings here and there. But, you know, generally our renewal conversations are going, you know, well because the performance of the properties is generally very good. And we know we have strong debt service coverage ratios. We have strong leases. Not in every single property. Obviously, there's always a couple of the loans that you're looking at that are slightly different. But generally, the occupancy is very good. The lease rollover is manageable. What they have, as I said, the total 12-month lease portfolio rollover is about 11%. So the conversation is generally good. you know, go pretty well. I mean, our properties in New York, you know, we don't have that big of a, you know, I say New York, I'm specifically referring to Manhattan. Our properties in Manhattan, you know, we have, you know, half a dozen or so. The lease rates are, you know, in the mid-90s. The properties have low levels of leverage and are performing well. They're starting to see a gradual return to the office. I'm not sure what ending we're in, but we're in the early part of the baseball game. But they're reporting people are coming back to the offices gradually. When we're around our office on 57th and Park, there's certainly a lot of people in the street. If you look at ridership on the subways, if you look at the metrics that people are following, people are gradually returning back to the office. So we're going to see that portfolio gradually be reduced over a period of time through amortization and some selected movements to the CMBS market. But it's fairly stagnant right now, but performing well.
spk06: Okay. And maybe to Florida versus New York, is there any material difference? I know it's all granular, but anything there?
spk04: Yeah, the difference in Florida is different Florida is different from New York and then different markets in Florida are different from different markets in Florida. So, you know, if you look at, you know, the Miami market in particular, uh, where we do not have any CBD exposure, but the Miami market, um, is extremely strong right now. The Palm beach market's very strong. Uh, Tampa continues to show good strength, particularly in the suburban, you know, market area. We have, um, in Orlando portfolio that again is not a CBD portfolio, but predominantly in the northern suburban office markets. All of those continue to perform very well. These are typically three, four, five-story suburban buildings that house medium-sized businesses that are located close to where the employees live. The general trends are people are in the office three, four days a week, and the properties are performing well.
spk06: Okay. All right. Thank you. Very nice quarter.
spk03: Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Steven Alexopoulos with JP Morgan. Your line is open. Please go ahead.
spk11: Good morning. This is Janet Leon for Steven Alexopoulos. I want to go back to reserves for a second and how the higher rate forecast for Moody's is the largest driver of the build and reserves. Is this really tied to your assumption that rates higher for longer will increase the odds of a recession?
spk12: It's not tied to our assumption. It's the assumption that's embedded in the Moody's economic forecast that we feed the model. Moody's assumption. Yeah, it's Moody's assumption. It's not tied to our assumption. But, you know, it is certainly tied to the fact that in the model, a higher rate environment will put some stress on maturing and repricing loans. And, you know, that's the driver. I mean, these models are extraordinarily complex, Janet. But, yeah, at a high level, that's what's going on there. And there are other things that work in there, too. That was just the one that had the most impact.
spk11: Right. Okay. Because when I was looking, when I was comparing Moody's August and May forecasts, unemployment assumption hasn't changed through 2025 and not much change in GDP. Right.
spk12: Actually, at a regional level, the trajectory of the unemployment path has changed. You know, I know everybody wants to look at the national unemployment rate and national GDP and correlate to that, but these models are just far more complex than that, and I can't get into all those details. It's just, you know, there's a lot going on. My point is there's a lot going on in there besides just national unemployment and national GDP.
spk11: Okay. So your scenario contemplates, like, local markets. It's not just... generic national.
spk12: Yes, that's how our models work. It's done at the submarket level, yes.
spk11: Okay, got it. And can you remind me what unemployment rate is embedded in your current reserves then?
spk12: Well, it's different in New York than in Florida. It's different in Miami than in Tampa. It's different in, you know, so that's a pretty complex question. Okay, no overall. It averages somewhere in the low fours.
spk11: Okay. Okay. And just following up on reserves, looking at the franchise finance segment, are you seeing any stress building in that segment? It looks like it's so low, but it looks like it's more.
spk12: It's really one loan, Janet, that migrated down to non-accrual this quarter and that we put some specific reserves on. And it's kind of a COVID leftover, I would say. They just never were able to dig their way out.
spk11: Okay, got it. And Last question on NIM and NII. So is it fair to say, like, theoretically speaking, you'll get more benefit from NIM point of view if the Fed cuts rates sooner when considering their portfolio mix? Or do you get more benefits if rates stay higher for longer and benefits the fixed asset repricing?
spk12: To be honest, Janet, the most impactful thing is mix by far, by far. Funding mix and loan mix are far more impactful. The balance sheet, the static balance sheet is relatively neutral from an interest rate risk perspective. So mix, how the mix evolves is the thing that really will impact the NIM much more so than what the Fed does or doesn't do.
spk09: Immediate growth. That's why it's the number one priority in the bank. Yeah.
spk03: All right. Thank you.
spk09: You're welcome.
spk03: Thank you. And one moment while we move on to our next question. And our next question is going to come from the line of David Bishop with Hovde Group. Your line is open. Please go ahead.
spk08: Yeah, thank you. Good morning. Good morning, David. Quick question, Raj, Leslie. You guys have done a nice job tamping down the level of expense growth. Anything looming? I know you haven't done budgets for next year, but anything looming that could drive that growth rate materially higher next year? Are there any pending team liftouts or teams you're targeting that could move the needle there materially?
spk09: Actually, we forgot to mention on this call that we did hire a CNI head for Texas. So last quarter, I think we told you about CRE business had been launched. It took us a little longer than I would have wanted on the CNI front, but a press release on that hiring will be going out in the next day or two. So outside of that, we're always looking. We did make some good hires in April, May timeframe. So there's nothing in particular that jumps out that there's a big team or anything, but there are always producers that we're bringing in. At the same time, remember, we're keeping expenses flat. So there are some people that we're changing out as well. Our focus is so much on deposit growth and DDA growth If you don't cut that, you know, your incentive plan may have changed so much that some people may choose to not be here. So I would say there's a little bit of recycling that has happened simply because our priorities are so focused on the right side of the balance sheet. But there isn't any other notable thing to talk about other than the CNI hire that started, I think, this Monday, right, Tom?
spk08: Correct.
spk09: Yeah.
spk08: Got it. Appreciate that.
spk04: We're always consistently trying to improve the mix and talent of the people that we have. I mean, that's a constant process of talent management is, you know, continuously, you know, working on attracting the right talent. And you always will have people that are not, you know, meeting whatever standard we set and also having the discipline to make those mixed changes is important.
spk08: Got it. And then in terms of the deposit success story this quarter, curious Raj or Tom or Leslie, can you attribute some of that to Texas or are you starting to see that contribute to the bottom line? And I don't know, had you disclosed the dollar amount of the deposit pipeline? If so, just curious where that stood relative to last quarter.
spk04: You know, I would say when you look at, it's no, you know, the C&I portfolio in particular is so granular. you know, across the board. I would attribute it more to efforts in certain, you know, segments of the loan categories in CNI. You know, if I look at what grew, you know, for the quarter, we grew, you know, what I think is really kind of core parts of our business strategy, which was manufacturing, wholesale trade, logistics, international trade because of the markets that we're in, Healthcare had nice growth. Those are really the four segments of the CNI portfolio that grew most, but it's a little bit across the board in every segment that we're in. We've seen good growth in what I would call our more traditional long-term markets, and we've seen nice growth in the newer markets that we have opened up over the last few years.
spk08: And was that also translated to the deposit side in Texas?
spk04: No, no. And typically, you know, again, back to this word mix that we're using a lot, when you start off a new office, generally the relationships tend to be more loan oriented. And over a period of time, you're able to then expand what you create, you know, reputation in the marketplace, you create some critical mass, Anytime you enter a new market, it's a multi-year strategy to fully develop that market out. And markets that we want to go to are attractive and competitive. We have not been able to find any attractive and non-competitive markets to go to. Raj keeps asking me to find one, but I can't seem to find one. So it takes the right talent and time to build these. They tend to build faster on the left-hand side of the balance sheet than the right-hand side of the balance sheet.
spk08: Got it. And one final question. Leslie, the pickup in special mention loans, just curious if there's any segments or industries that you'd call out to drive that increase?
spk12: Yeah. No, there really is nothing in particular to call out. I think this looks to us more like normalization of credit. There don't tend to be any particular portfolio segments where we're seeing signs of trouble. And the other thing I'll say is that we don't really, at this point in time, we don't really see any real loss content in any of those assets that migrated to special mention.
spk08: Got it. Appreciate the color.
spk05: Thank you. And one moment for our next question. And our last question is going to come from the line of Samuel Varga with UBS. Your line is open. Please go ahead.
spk01: Samuel, your line may be on mute. All right.
spk03: We will go ahead, and I will go ahead and hand the conference back over to Raj Singh for any further remarks.
spk09: As always, thank you very much for joining us and listening to our story. We feel pretty good about where the bank is and the progress that we've made in a very short period of time. We look forward to speaking with you again with a lot more information in three months. Until then, stay safe. Thank you. Bye.
spk03: this concludes today's conference call thank you for participating you may now disconnect
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